Category Inflation

Fed Can Keep Raising w/Core CPI 4.8% YoY 

The market celebrated the June monthly CPI data. Headline CPI came in at just 3.0% YoY - and Core CPI fell to 4.8% YoY. Good news. However, with Core CPI still more than 2x the Fed's target - expect them to raise rates again at the end of the month. However, what surprises me is the market believes the war with inflation is basically done. Is it? I think that is presumptuous. The fight with Core inflation will be a long one. If correct, the Fed may not need to keep raising rates aggressively - however are likely hold them there until their objective is met.

Some Things Just Take Time

This week we received the latest monthly payrolls data. US employers added 209K jobs - a little lower than expected. However, the job market appears robust. One metric that deserves closer inspection are weekly hours worked. That is trending lower and could be a precursor to what's ahead. From my perspective, what we're seeing is the "Fed lag" effect of higher rates slowly tighten its vice. But these things take time and we may not see the full effects on the labor market for another 6-12 months (at a guess).

‘Higher for Longer’ after May Core PCE

May's print for Core PCE came in 4.6% YoY - still well above the Fed's objective of 2.0%. However, mainstream were quick to label the report as 'lackluster'. Why? Here's the thing - Core PCE has hardly changed the past few months. It dipped in May to 4.62%, from April (4.68%), but was above March (4.61%), and was exactly where it had been in December (4.62%). Put another way - we have made no ground since December - and yet it was now somehow 'lackluster'. But it gets better: core services inflation (without energy services) rose by 5.4% in May YoY. It was fractionally lower than April (5.5%) - but equal to what we see in both March and December (5.4%). Similar to Core PCE - it too is stuck in a tight range for 5 consecutive months. What does all this mean? Simple: rates will be higher for longer and markets don't get it.

Why Is it Different This Time?

Whenever history looks like repeating - it's worth asking what's different this time? I say that because the past is never a guarantee of what's ahead. Put another way, if you are making decisions on that basis, you might be suffering from "confirmation bias". And that can be a blind spot. My (possible) blind spot is I think a recession is more than likely within the next 12 months. As such, I am only willing to put about 65% of my portfolio in risk assets. If I felt a recession was not likely - I would meaningfully increase my exposure. My bias is to lean into historical data (and leading indicators) which have reliably predicted recessions in the past. That feels logical. But I could be wrong.

Skip, Pause, Hike or Pivot

It's Fed week. What will the world's most watched central bank do? A surprise hike like Canada and Australia? Unlikely. Maybe time to hit the pause button and take a look around? That's what markets are pricing in. Or will this be a 'hawkish skip' implying their work is not yet done? From mine, if we see Core CPI anything above 5.0% this week - the Fed will tell us their work is not done. Here's the thing: markets are trading back at levels before the Fed commenced their 500 bps of rate hikes. What's more, we find Core PCE still above 5.0%; unemployment well below 4.0%; and wage inflation above 4.0%? What is to stop the Fed from finishing the job? Whilst they are likely to pause - there are more hikes ahead

Could $1.1 Trillion in ‘T-Bills’ Suck Out Liquidity?

Over the weekend, financial media reported a deal in principle to raise the debt ceiling. Based on all reports, the deal sets a two-year spending cap, kicking in October 1. Now if Washington DC agrees to at least slow its spending - they're likely to be doing it during an economic slowdown. And this could have a near-term impact on economic growth and the valuations of risk assets. What's more, if Treasury are permitted to issue $1.1 Trillion in fresh T-bills - what will that do to liquidity? Will banks deposits start looking for a (higher return) home?

Ignore the Debt Ceiling Noise

Mainstream media remain fixated on 'debt ceiling' negotiations - warning of a "financial catastrophe" if this doesn't get done. This is the 78th time we have hit the so-called debt ceiling. And how many defaults has there been? Zero. A deal will get done. And if we are presented with a sell-off in markets - then it represents an opportunity.

Should We Cheer the Latest Inflation Report?

April Consumer Price Inflation (CPI) headline came in at 4.9% - its lowest level since Feb 21. However, Core CPI was 5.5%. As we know the Fed are more focused on Core. Here's what the Fed will be watching - it's all about labor and shelter.

Pop then Drop! Green Light for Fed Hike

Investors cheered the news of a slightly lower than expected CPI print from March. However, Core Inflation exceeded expectations and actually increased. That's important - as that's what the Fed are focused on. Here's the thing: with Core inflation running at 5.6% YoY - don't expect cuts anytime soon. It's almost 3x the Fed's target. Yes inflation is cooling - slowly - but not where the Fed need it to be. From mine, you can lock in another 25 bps for May 2nd. Bond markets see that. Equities are yet to get the memo

Yields Plunge – The Signal It’s Sending

Bond yields are falling. And fast. The question is why? In short, the bond market is now pricing in a recession. It sees growth stalling... and believes the Fed will embark on rate cuts in the second half. But have equities got the memo? Not yet. They are trading at close to 19x forward earnings... as big tech drags it higher. From mine, I think the market feels vulnerable here.