College football is back! Unfortunately, one of my meetings last week was with a diehard Michigan fan, who walked in wearing a ring bigger than his head (tough given his football allegiance). Here’s the ring he got for back-to-back Big 10 Championships. He said the natty ring hasn’t arrived yet, but I think it’s because deep down he knows Georgia was the real champ. Kudos for the self-awareness.
Despite our differences, we agreed on three things:
- Ohio State is THE worst
- Penn State will go 10-2, make the playoffs, promptly lose, and reward Franklin with another contract
- Jim Harbaugh is a dirty cheating lying khaki-wearing nitwit
Well, two out of three ain’t bad…which is about the same ratio of plays Michigan stole from opponents over the last five years…
This Week
- 10T: 3.80%
- 2T: 3.91%
- SOFR 5.31%
- Term SOFR 5.28%
- Fed Speeches
- Fed Chairman Powell – The time has come for policy to adjust
- Harker – Ready to cut; need more data to determine the size
- Daly – Time to consider adjusting the policy rate
- Kashkari – Weaker job market opens the door for September rate cut
- FOMC Minutes – If data continues to come in at expected, it would likely be appropriate to ease policy at the next meeting
- Non-Farm Payrolls Annual revision -818k
- NASA asking Space X to rescue its stranded astronauts from Boeing is like asking Pensford to untangle your 19 corridors on the same loan someone else recommended…
Jackson Hole
Welp, that was more dovish than I expected.
“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Not only did Powell confirm a cut is coming next month, he signaled an openness to 50bps.
I think 50bps is entirely dependent on next week’s labor report. I think 25bps is far and away the most likely scenario (maybe 90%?), but if unemployment climbs to 4.4% or more 50bps is on the table.
Dr. Anna Wong, Bloomberg Chief US Economist (and my favorite) noted that sometimes what isn’t said is just as important. She pointed out that Powell did not use the words “gradual” or “methodical” during his comments. In fact, he didn’t say the risks between labor and inflation are “balanced”, but instead that the risks have “changed.”
Remember, rates at current levels apply a certain amount of braking action on the economy. Just because the wheels haven’t fallen off yet doesn’t mean the Fed shouldn’t start easing off the brakes.
The only argument for not cutting is you believe 5.25%-5.50% is the new neutral rate.
The Fed believes neutral is 2.8%. I’m more like 3.0% - 3.25%, but I base that on nothing more than “I think it’s higher than it used to be”. Mohamad El-Erian is > 4% (which I think is much too high). But even this state school kid can recognize all of those are well below current levels. That means lots of cuts.
Cutting rates isn’t pressing on the gas pedal. It’s easing off the brakes.
If a 2.80% Fed Funds is “coasting”, the Fed might cut faster than expected to get off the brakes.
Jobs - Quality is Everyone’s Responsibility
You ever see one of these stickers on a factory floor?
That quote is from Edwards Deming, the godfather of quality control. Japan adopted his techniques in the 1980s, which helped their auto industry leapfrog ours.
Non-Farm Payrolls were revised down by 818k from March ’23-’24. That’s 68k per month on top of the downward revisions we already experienced each month after the initial print. That’s 5x the normal revision.
I don’t believe in the conspiracy theories that the government is intentionally misleading us because I just don’t believe they’re that competent. Instead, I believe the constant revisions are the result of terrible response rates. These government surveys used to have 70% response rates and now have 30% response rates.
In January, I blamed us, not the statisticians, for falling for the headlines month after month. Fool me once, shame on you. Fool me 13x, shame on me.
The poor statisticians are just doing their job. It’s on us to read past the media headlines. If you had, you would have known a big revision was coming. In fact, Bloomberg’s Wong also noted that the QCEW implies a 958k downward revision, meaning the BLS revision might still be overstating the job market strength.
If you don’t think the Fed should be cutting yet, how much of that feeling is based on a false belief in an overheated labor market? If each month had come in 68k lower, how much different would the headlines have been? How much differently might you feel today?
Oh, guess who the US Census Bureau and BLS turned to help develop their sampling techniques for data creation?
Edwards Deming.
I bet he would be the first to warn about reading too much into statistical samples with a 30% response rate. Quality is everyone’s responsibility.
Friday - Core PCE
Core PCE is forecasted to come in at 2.7%, an increase from last month’s 2.6% print. Don’t freak out – that’s the base effect of comparing a current number to a rapidly falling number a year ago.
The market will be more focused on the monthly number. Consensus forecast is for a 0.2%, which would translate into a 2.04% annualized Core PCE if you combine it with the most recent monthly prints.
June 0.18%
May 0.13%
A crazy outlier one way or the other might influence the Fed’s decision of 25bps or 50bps, but I think the labor report next week will carry far more weight in that decision.
The Week Ahead
Big week ahead of the holiday weekend with GDP and PCE data to end the week, taking us into college football.
