while WE slept: USTs under pressure as Santa PAUSE; "Could Trump be Deflationary?"
Good morning … Everything moving along swimingly THEN JPOW speaks, stocks go down, 2yy go UP and long bonds go down …
… The economy is not sending any signals that we need to be in a hurry to lower rates …
-JPOW yesterday (p4 of THIS PDF)
… Said another way, perhaps rate cuts are NOT whatever the doctor ordered and now being interpreted as INflationary? Dare I say / ask if they (cuts) are MORE ‘flationary than, say, Trump?
The official target rate is 4.50% - 4.75% and it seems there’s still a December CUT CONsensus (62.4% via CMEs FedWatch Tool BUT … worth noting ‘the market’ was pricing in nearly an 80% chance of a cut BEFORE JPOW) … here’s one iteration of that information available to those of us without a Terminal License (WIRP) via CME, I present, the reintroduction of Santa PAUSE
…AND … with that, a Santa PAUSE is makin’ a comeback …
10s HOLDING the (T)line noted HERE yesterday … given a chance to look at WEEKLY charts when the day is done might provide some further insight. For now, though I’ll move right along and first, on the data …
ZH: PPI Unexpectedly Prints Hotter Than Expected Across The Board
ZH: Initial Jobless Claims Drop To The Lowest In 6 Months
… this paved way for JPOW …
ZH: Watch Live: Fed Chair Powell Warns "Bumpy Path" Ahead For Inflation, 'No Hurry' To Lower Rates
CalculatedRISK: Fed Chair Powell: No "signals that we need to be in a hurry to lower rates"
From Fed Chair Powell: Economic Outlook. Excerpt:
The recent performance of our economy has been remarkably good, by far the best of any major economy in the world. Economic output grew by more than 3 percent last year and is expanding at a stout 2.5 percent rate so far this year. ... The labor market remains in solid condition, having cooled off from the significantly overheated conditions of a couple of years ago, and is now by many metrics back to more normal levels that are consistent with our employment mandate.
...
We are moving policy over time to a more neutral setting. But the path for getting there is not preset. In considering additional adjustments to the target range for the federal funds rate, we will carefully assess incoming data, the evolving outlook, and the balance of risks. The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully. Ultimately, the path of the policy rate will depend on how the incoming data and the economic outlook evolve.
emphasis added
… and so, by days end, the impact OF these less dovish remarks were, well …
ZH: Fed Accompli Fail: Powell Pontification Prompts Puke In Stocks & Bonds
…Instead, as PPI confirmed today after CPI yesterday, it is 'burning and raging at the dying of the light' of the Biden/Harris days...
Powell's remarks sent rate-cut expectations notably lower - December less than 50-50 now...
… measurable…AND moving on with little to nothing really at all to add, here is a snapshot OF USTs as of 648a:
… and for some MORE of the news you might be able to use…
IGMs Press Picks: November 15 th 2024
NEWSQUAWK: US Market Open: DXY on the backfoot & crude sells off after constructive ceasefire advancements … USTs are under pressure in a continuation of the price action seen following a hawkish-leaning Powell; Gilts bid after the UK’s downbeat GDP metrics … USTs are under slight pressure as markets continue to digest the hawkish tone from Powell. As it stands, USTs have climbed above the overnight low at 109-06, and currently sits below its session high at 109-16+. Yields are currently firmer across the curve with the short-end leading after the Fed Chair. US Retail Sales and Fed speak is due.
PiQ Overnight News Roundup: Nov 15, 2024
Reuters Morning Bid: Fed draws veil over post-election easing
Finviz (for everything else I might have overlooked …)
Moving from some of the news to some of THE VIEWS you might be able to use… here’s SOME of what Global Wall St is sayin’ …
… with PPI now known, PCE estimates can be formed …
BARCAP: October core PCE estimated at 0.28% m/m
Our translation of this week's October CPI and PPI estimates points to a 0.28% m/m (2.8% y/y) rise in core PCE prices and a 0.25% m/m increase (2.3% y/y) for the headline index. Our Q4/Q4 forecast for 2024 core PCE moves up to 2.9%, 0.3pp higher than the median FOMC projection in the September SEP.
… We revise our Q4/Q4 core PCE forecast higher, to 2.9% after penciling in our updated October estimate. We were already forecasting a "strong" 2.8% Q4/Q4 (2.84%) prior to this week's inflation data, and with the data being hotter than expected, particularly PPI, it tips the Q4/Q4 estimate to round up to 2.9%, 0.3pp higher than the FOMC's median projection in the September Summary of Economic Projections (SEP). The bar to end the year even at 2.8% Q4/Q4 appears somewhat high to us, requiring a minimum monthly run rate of 0.17% m/m in both November and December. While we see scope for some softening in core CPI inflation in November, we think there could be potential headwinds from financial services PPI, which tends to correlate quite closely with asset returns, including in the equity market.
We retain our baseline call for a 25bp cut in the December FOMC meeting, but think it remains a close call, with risks increasingly skewing towards a likely pause. Core inflation has been elevated recently, with core CPI posting a 0.3% m/m increase for the third consecutive month, and core PCE poised to post a 0.3% increase for the second month running. This could potentially raise concerns within the FOMC about the progress on disinflation. In addition, data on activity and labor markets have also been stronger than the FOMC's median projections in the September SEP. That said, the FOMC will get to see one more payroll, CPI and PPI report before it meets in December…
… same shop on stocks …
BARCAP: U.S. Equity Strategy: Food for Thought: A Stock Picker's Market Ahead
Sector return dispersion is elevated, even more so than it was after Trump's first Presidential election win. Dispersion could stay high if equities follow Trump 1.0's road map as a reaction to policy shifts from the outgoing administration, making it more of a stock (and sector) picker's market.
… here’s an interesting chartpack from German bank with a catchy / timely title and one slide in particular caught my attention …
DB: Trump and capital markets
Will resilient bond yields under Trump hinder M&A deals? Higher short-end yields could result in more M&A when the Fed cuts. However, we expect M&A to improve regardless of the yield level (assuming yields remain <5%)
…finally, dr Bond Vigilante …
Yardeni: Trump 2.0 Supercharges Our Stay Home Investment Strategy
… Lo and behold, Fed Chair Jerome Powell in prepared remarks for a speech [starts at 19:00] to business leaders in Dallas today said that, "the economy is not sending any signals that we need to be in a hurry to lower rates." Suddenly, he seems to agree with us that the economy is "remarkably good" and the labor market "remains in solid condition." He also acknowledged, "Inflation is running much closer to our 2 percent longer-run goal, but it is not there yet." By Jove, that sounds like our no-más case for rate cuts!
The prospect of higher tariffs under Trump 2.0 may also be boosting the greenback. But the case remains that investing in other developed economies, like those in the Eurozone and Japan, is simply not as compelling. US bonds offer higher yields (chart). US profits growth also stands out.
… And from Global Wall Street inbox TO the WWW …
First, on gasoline prices ahead of the holidays …
AAA: Rinse and Repeat - Will Another Hurricane Enter the Gulf?
WASHINGTON, D.C. (November 14, 2024)—The national average for a gallon of gas is now less than a dime away from dipping below $3 for the first time since May of 2021. But the possible formation of a new hurricane in the Gulf of Mexico could delay or even temporarily reverse the decline in pump prices. Since last week, the national average dropped two cents to $3.08.
NEXT up from an official of the Federal Reserve where the assumption is (at least by reading the title … so, clickbait?) is that a better-balanced economy is forthcoming … an excerpt, then
FRB of Dallas President Lorie K. Logan on the FOMC's strategic path forward in a better-balanced economy
…Uncertainty about the neutral interest rate
Uncertainty about the neutral interest rate presents the opposite risk. Besides examining broad financial conditions, economists often consider whether monetary policy is boosting or slowing growth and inflation by comparing the policy rate to a theoretical level, the neutral rate or r-star, that would represent neither a headwind nor a tailwind. That neutral rate is notoriously uncertain and difficult to measure. But you can get a sense for it from economic fundamentals, models, surveys and market prices.A strategy of repeatedly lowering the fed funds target range toward a more neutral level relies on confidence that the neutral level is materially lower than where rates are now. When I look at the available evidence, though, I see substantial signs that the neutral rate has increased in recent years, and some hints that it could be very close to where the fed funds rate is now.
Structural changes in the economy, such as the energy transition and advances in artificial intelligence, are prime drivers. These developments are fueling strong investment demand and potential increases in productivity. When you all, as energy experts, see a new LNG plant, a solar farm or a data center under construction, you perhaps see sources of energy supply and demand. As a monetary policymaker, I certainly see how these projects change the energy landscape, but what I also see—what you’ll perhaps see after today—is higher investment and a higher neutral rate.
Importantly, uncertainty about the neutral rate has also risen, perhaps because the structural changes in the economy are relatively recent and will take time to fully assess. The FOMC’s own projections display the uncertainty. Four times a year, we release our projections for the fed funds rate as well as unemployment, inflation and GDP growth. Around the FOMC table, participants’ projections for the longer-run fed funds rate now vary by more than 1 percentage point, compared with a spread about half as wide two years ago.
Economists employ a range of models to try to estimate the neutral rate. Like estimates from policymakers and from market participants who fill out surveys, the output of these models ranges widely. Among widely consulted models, point estimates of the neutral real interest rate currently range from 0.74 percent to 2.60 percent. Adding in the 2 percent inflation target, those figures correspond to a neutral fed funds rate of 2.74 to 4.60 percent. Following last week’s rate cut, the fed funds rate stands today at 4.58 percent, right at the top of that range.
Now, I don’t know which estimate is right. Time will tell as the economy evolves and we see how much of a headwind or tailwind the policy stance generates. But when policymakers look at mid-range estimates that suggest there’s meaningful room to cut before reaching neutral, I think we should recall the technique of a ship captain whose depth finder might mistake mud for water. If we cut too far, past neutral, inflation could reaccelerate and the FOMC could need to reverse direction. In these uncertain but potentially very shallow waters, I believe it’s best to proceed with caution.
… and here’s a question that NOBODY is asking / answering …
Discipline Funds: Could Trump be Deflationary?
The baseline assumption from markets in the aftermath of the Trump victory is that the economy will be modestly more inflationary than otherwise expected. But what if the market has this one exactly wrong? What if Trump could be more deflationary than not? That’s the conclusion I am now considering, as I mentioned to Oliver Renick in an interview today on Schwab TV (watch here). Here’s the logic.
First, Trump’s first term was not remotely inflationary. In the pre-Covid years headline PCE inflation averaged just 1.7%. That’s despite persistent worries about tax cuts, deficits and tariffs. It just never materialized.
Second, I suspect that the worries over Trump’s tariffs are overblown. Trump is an expert negotiator and what better tool could he use than the threat of tariffs? We saw this consistently during his first term where he would visit domestic companies and foreign countries with threats of tariffs. We never got the full scope of tariffs that he often threatened and he used them mostly as a negotiating tool. I think we’re on the verge of something similar here.
Third, it’s looking like Trump could take a hatchet to government employment and regulations. These are meaningful deflationary policy moves. Vivek Ramaswamy has said that there’s 1-2MM government jobs that are low hanging fruit. That’s a lot of jobs. Will they actually cut that many? If they cut 1MM government jobs that would reduce payrolls by 83K jobs per month over a year. Heck even if they don’t cut any jobs we know that the tailwind of government jobs is gone.
Over the last 3 years the government accounted for 1.5MM jobs. That’s 42K jobs per month. If you back out government jobs from the last 6 months of payroll reports you end up with an average of 100K jobs per month. Last month’s report would have been -30K jobs without government employment.
Importantly, the U1 rate, people unemployed for 15+ months, has been ticking higher for the last 6 months. This is a sign of slack in the labor market as people remain unemployed for longer. So we’re not going to see all these government jobs get absorbed quickly by the private sector.
This is a big deal, especially when you consider that the Fed is increasingly concerned about the state of the labor market. So, going forward you have to assume at least a modest headwind to payroll reports. If they actually cut 1-2MM jobs then you’re looking at a very significant headwind to payrolls, growth and inflation.
When you add it all together I don’t think it’s such a sure thing that inflation is likely to move higher under Trump. In fact, using the baseline assumption from Trump’s first term and the potential for government employment cuts I think the baseline assumption is that Trump could end up being more disinflationary or deflationary than many expect.
… Here’s a weekly note from a shop far, far away and one with an interesting visual reiterating how longer-term rates are tied TO prognostications about the r* concept …
NORDEA: Macro & Markets: Back to black?
Expectations for another era of Trumponomics have boosted US yields and the dollar, while downside risks have increased in the Euro area due to the collapse of the German coalition government. Further divergence looks likely.
… We see more upside potential for US bond yields, though we still tend to think such moves could be driven more by higher risk premia due to inflation and debt worries rather than genuine expectations of faster real growth. Trump’s policies also continue to support a stronger dollar, we think. We do not think Trump will seriously consider weakening the Fed’s independence, but stories on that theme appear to be gaining traction and can thus also contribute to higher risk premia. That said, as the end to Chair Powell’s term looms in 2026, Trump will get to nominate a new Chair, so he will have some chance to shape the Fed’s policy merely through the traditional route of presidents nominating Fed Governors and Chairs.
Recent US CPI data confirmed inflation momentum was on the rise already before Trump’s victory. Alarm bells do not seem to be ringing in the markets yet, and given that the Fed’s preferred inflation measure, the core PCE price index, has so far pointed to somewhat more moderate price pressures, another rate cut at the Fed’s December meeting continues to look likely. It is not a given, however. Chair Powell commented just this week that the Fed is not in a hurry to cut rates, as the strong economy gives the Fed the ability to assess the decisions carefully.
Rise in longer US yields in line with changes in short pricing
Also US inflation expectations risen
… finally, more on PPI …
WolfST: After More Up-Revisions, “Core” PPI & “Core Services” PPI Inflation Get Much Worse, Accelerating All Year
But goods prices are relatively tame. Energy prices plunge.
… THAT is all for now. Off to the day job…