Category Fed Reserve

The Inflation Puzzle: ‘Services’ Remain Sticky

In a perfect world, inflation should be boring. Boring is good. However, when you inject an additional $6+ Trillion into the economy with far fewer goods being produced, inflation becomes a story. Last month's inflation report showed headline (and core) CPI ticked higher. However, what caught my eye was "supercore" inflation - something the Fed says is a good predictor of future prices. Suerpcore is services inflation less shelter. This was up 4.4% YoY - also moving higher. The reason: pressures with wage growth - which remains around 4.7% YoY

Fed’s Task in Changing Times

How aggressive can the Fed be in the coming months? The economic data doesn't suggest a material slowdown - surprising to the upside in most cases. Therefore, are markets pricing in too many rate cuts? Maybe... longer-term yields are rallying post rate cuts. What's this mean?

Will Investors be Emboldened by Fed Easing?

Are stocks headed for a melt-up with the Fed set to ease rates over the next 12+ months? It could seem that way as stocks continue to print new highs as the 'soft landing' script firms. And whilst there might be further upside - the environment echoes a lot of what we experienced from the mid 1990's. For example, at the time we had expanding growth, low inflation with aggressive easing from the Fed. What's more, investors were very bullish on the promise of the internet - set to deliver powerful productivity gains. Stock multiples continued to expand as the S&P 500 delivered strong double-digit gains not seen in decades. Today conditions feel similar.

10-Yr Yield Rallies… as ‘Bear Steepener’ Warns

After the Fed initiated its easing cycle with a jumbo cut (50 bps) - the soft landing script kicked into full gear. Markets roared higher as they price in strong economic growth in the months and years ahead. And who knows - maybe that's what we get? But have you noticed what we've seen with bonds post the Fed - especially the long end? Those yields have been rising - not falling. The closely watched benchmark US 10-year yield for example is up 17 basis points (where one basis point equals 0.01%.) That wasn't Powell's plan.

Did Powell Send a Mixed Message?

Today the Fed delivered what the market expected - ushering in the start of a new easing cycle with a bang. 50 basis points. It was the kind of bang we saw in 2001, 2007 and 2020. Earlier this week, market's were pricing in the possibility of a 50 bps as high as 70%. They were right. But despite this, the market closed lower. My guess is the market is not aligned with the so-called "dot plot"...

Don’t Bet on 50 Bps for Sept.

Do we have a 'good, solid' economy or one that's at risk of a recession? Is the employment market robust or one that's slowing sharply? Should the Fed cut 50 basis points or 25? And if 50... why? These are not easy questions to answer - as you can make the case either way (pending your lens). Regardless, the popular narrative is one favoring a soft-landing. Jay Powell echoed this sentiment with a victory lap at Jackson Hole. Former Fed Chair Janet Yellen supported this thesis over the weekend...

Thoughts on the Rest of the Year

Over the past year or so - one of the key investment themes has been "bad news is good news". Bad news implied the Fed was more likely to cut rates. For example, after the market incorrectly assumed we would see 6 or 7 rate cuts at the start of the year - the Fed have finally come to the table. In other words, the economic risks (to growth) are sufficient enough for the Fed to act. This is important. What happens during this transition is "bad news is no longer good news". History shows us when economic conditions worsen during an easing cycle - stocks perform poorly. Therefore, the market's primary concern now is whether the Fed has waited too long?

Powell Takes a Victory Lap

Fed Chair Powell didn't disappoint at Jackson Hole - giving the market what it wanted to hear... rate cuts are coming. All that remains how many and by when? That's not something Powell was ever going to offer (why remove optionality) - but the market is willing to bet we receive at least three cuts by year's end. All eyes now turn to two major economic reports: (i) PCE due Aug 6 and (ii) Aug nonfarm payrolls due Sep 6. For e.g., if Augusts payrolls are similar to June's (where only 114K jobs were added) - we could see the Fed cut rates 50 bps come Sept. What signal will that send to the market?

It’s Not Only Falling Inflation & Growth Risks Driving Rate Cuts

As inflation continues to moderate and the employment picture weakens - markets are trying to gauge just how much the central bank will move. A 25 basis point (bps) cut for September is now a 100% probability according to CME Group’s FedWatch tool. There's a 63.5% chance of a 25 bps cut; and 36.5% of a 50 bps cut. Markets clearly want 50 bps... but they also know that very rarely is there just "only one rate cut". This post explores the relationship between debt growth (across all sectors) and the overall trend for interest rates. It's a relationship which is not often discussed - but would be remiss of investors to ignore.

Market Rallies on ‘Strong’ Retail Sales / Soft Landing

This week we received advanced retail sales for the month of July. From mine, this is one of the more important data points - as it sheds light on what we see with the relative health of the consumer. With spending making up 70% of GDP - any signs of slowing serve as a warning. Advanced retail sales accelerated 1.08% on the month - adjusted for seasonality but not inflation. Economists had been looking for a 0.3% increase MoM. However, June sales were revised to a decline of 0.2% after initially being reported as flat. As regular readers will know, it's virtually impossible to glean anything from a nominal data point when viewed month-over-month. And whilst the media (and stock market) could not get over how 'strong' the data was - I would warn against jumping to conclusions.