Congrats Raphael – you just made our September 19th webinar!
He said that, with a straight face, on August 28th - just 22 days before the next Fed meeting.
This Week
- 10T: 3.91%
- 2T: 3.92%
- That’s right, we are about 1bp away from uninverting
- Unfortunately, an uninversion signals the start of the recession
- SOFR 5.33%
- Term SOFR 5.20%
- Remember, Term SOFR prices in the Fed move once we are withing 30 days of the meeting because it’s a one month contract
- Durable Goods printed: 9.9% vs 5.0% expected
- GDP printed at 3.0% vs 2.8% expected
- ·PCE Inflation Data
- Core m/m: 0.2% as expected
- Core y/y: 2.6% vs 2.7% expected
- Personal Income: 0.3% vs 0.2% expected
- Personal Spending: 0.5% as expected
- UGA reminded everyone why they were the real national champs last year
Inflation
JMo’s getting cranky.
Through 7 months, Core PCE is averaging 2.74%. He only needs it to average 3.36% through year end to win our wager…
More importantly, for the third straight print the monthly inflation print was 0.2%. Economists would take that, annualize it, and arrive at 2.04% for a solid understanding of the current inflation environment. We are at 2%.
Just in case you still don’t believe me, the Penn State Alternative Inflation Index (blue) remains below 2% and is just waiting for the government stats to catch up (red). If you’re still focused on inflation and think the Fed needs to keep rates at current levels because it’s at 2.6% instead of 2.0%, you’re going to cost millions of Americans jobs.
Don’t feel bad for JMo. Had he bothered reading any one of a dozen newsletters over the last year, he would have been less likely to bully me into the wager. Plus, he’s been in southeast industrial for the last 20 years. He’s doing ok.
Is it too early to start wondering if inflation was…gulp…transitory?
If the Fed Cuts, Will the Economy Take Off Again?
No. Don’t confuse markets with the economy.
Markets are a Labor Day teenager on a jet ski, darting back and forth around the lake.
The economy is a giant Maersk tanker motoring across the Atlantic.
Everyone we speak with say there’s been a flood of refis kicked off over the last month. The concern is that there’s this pent-up demand that will surge when the Fed cuts and they may end up having to hike again.
But that’s just a math equation. Real estate transactions have been in a deep freeze for over a year because the math doesn’t math, not because underlying fundamentals were terrible.
Rates drop, the math works again, and refis spike. That’s got nothing to do with the underlying economy.
Cutting rates isn’t pressing on the gas pedal, it’s easing off the brakes.
The Fed is still applying the brakes as long as Fed Funds is above the neutral rate.
Now, we don’t know what neutral is. The Fed thinks 2.80%, while I think 3.25% is entirely possible. But either way, it’s far below current levels.
“But GDP came out at 3% last week!”
Sure, but keep in mind that the savings rate is at 2008 levels, meaning consumers are depleting the bank account to keep up spending habits. Plus, GDP gets revised for years.
From Bloomberg’s Anna Wong, “Our analysis has shown that on the eve of the 2001 and 2008 recessions, GDP growth also was reported at 2%-3% - only to see large downward revisions over the years.”
Large downward revisions? I swear I’ve heard that somewhere else…
Friday Jobs Report – The Fed is Cutting No Matter What
Before the yen carry trade unwind, last month’s job report was the catalyst for the sharp drop in rates and sudden pick up in rate cut expectations.
We now know the non-farm payroll gains from March ’23 to March ’24, despite being revised down 10 out of 12 months, were still overstated by 818k jobs. That’s 68k per month.
The last three months have averaged gains of 170k. But if you knock 68k jobs off that, it’s just 102k jobs gained each month. How would the narrative around the job market be different with 100k per month trend instead of a 170k per month trend? JMo is the guy that bases his talking points off the 170k. Don’t be JMo.
Markets will keep that in mind when the jobs headlines come out. With a consensus of 165k, that implies around 100k.
Would a 300k print change the Fed’s mind? Sorry Raphel, not at this point. But the market would back out at least two cuts over the next 18 months and fixed rates/cap prices would jump.
Given the lack of trust around NFP, the market is likely more focused on the Unemployment Rate, which jumped to 4.3% last month. Consensus is for a slight improvement to 4.2%.
I suspect as long as it comes out at 4.3% or lower, the Fed will be locked into a 25bps cut.
But if it comes out at 4.4% or more, the odds of a 50bps cut will spike.
The Week Ahead
Markets have all eyes on Friday’s labor data, but we actually have a few main events before that.
Tuesday’s ISM Manufacturing data is better indicator of current manufacturing momentum.
Wednesday’s Beige Book is likely going to reveal pessimism among businesses. Powell puts a lot of stock in this report and I’ve personally heard Fed economists cite this as evidence as to why the economy is so strong…will be interesting to see how much weak sentiment might change Fed thinking.
Wednesday also brings another Bank of Canada rate cut, and inflation hasn’t suddenly spiked there (or in other countries) just because they’ve initiated an easing cycle.
Wednesday also brings my favorite report, JOLTS! Not only are companies slow to pull free online job postings, they post jobs just to collect resumes.
And most importantly, the NFL kicks off Thursday night.
