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Good News is Bad News Again

July 7, 2019

I don’t see what the big deal is about a citizenship test.  I think everyone should have to pass one in order to become and, more importantly, remain, a US citizen.  My problem lies with the questions.  Who cares if you can identify which person in a multiple-choice question did not sign the Constitution?  I want real world questions.  Is it ok to eat fish in a small confined space around others?  After how many sniffles should you be obligated to at least try to blow your nose?  Stuff like that.

Here’s my initial test, which should help quickly identify which candidates are serious about being Americans.

  1. When driving in the left lane of a highway, you notice cars passing you on the right. You should:
    1. Ignore them
    2. Speed up so they can’t pass you – they have offended your honor
    3. “Left” is a construct of capitalism and therefore I cannot answer this question
    4. Get the %!bp&$ out of the left lane, it’s a passing lane
  2. True or False – After you’ve loaded up the groceries into your car, the cart can be left wherever it is most convenient for you.
  3. You are in a public place and your child is throwing a temper tantrum. You should:
    1. Repeatedly threaten them with discipline but don’t actually do anything
    2. Ignore them, no one else can hear them because you exist in a bubble
    3. Discipline them on the spot, firmly if need be
    4. Encourage them to continue to express themselves freely
  4. True or False – Participation trophies prepare kids today for the real world.
  5. True or False – Your American Airlines flight is late again. It is reasonable for the airline to ask you to remain seated so those with a tight connection can deplane first because whatever your plans are can’t be as important as making a connecting flight and helping to enable American Airlines to compensate for their own inability to remain on schedule.
  6. True or False – Cycling enthusiasts should be able to claim to have the same rights as cars when it suits them, but then sail right past those same cars while they are waiting at a red light.
  7. You receive a work call while seated on a plane. You:
    1. Decline the call, then email or text that person indicating you will call right back once you have privacy
    2. Take the call because you are important and people only call you for important stuff
    3. Ensure those around you can hear the details of the call, particularly the confidential info of a publicly traded company, because the guy behind you can’t possibly work in finance, too.
    4. Put on speaker so everyone can hear how important you are
  8. Please complete the following sentence: Student loans should be forgiven because ______________
  9. True or False – Everyone is soooo excited to watch the video of the fireworks you posted to Facebook on July 4th.
  10. True or false – Everyone is entitled to a minimum living wage and free healthcare because those that work hard just do it for fun and enjoy sharing the benefits of their efforts with everyone else.

 

Last Week This Morning

  • 10 Year Treasury spent most of the week below 2.00% before jumping after Friday’s strong job report and closing out the week at 2.05%
    • German bund broke -0.40% before closing the week out at -0.37%
    • Japan 10yr at -0.16%
  • 2 Year Treasury spent most of the week around 1.75% before jumping to 1.86% on Friday
  • LIBOR at 2.37% and SOFR at 2.56%
    • Despite the strong job report, the market still has the odds of a 25bps cut at the July meeting at 100%
    • The market is pricing in 90bps of cuts over the next twelve months
  • The economy added 224k jobs last month vs forecasted gain of 160k
  • The unemployment rate ticked up slightly to 3.7%
  • Average hourly earnings (inflation) came in slightly lower than expected at 3.1%
  • Stocks slid on the disappointing news that the job market is still strong
  • Trump plans to nominate Judy Shelton and Christopher Waller to the Fed vacancies
  • Former IMF head Christine Lagarde was nominated to take over the ECB when Draghi’s term expires in October

 

Good News is Bad News Again

The job report came in much stronger than expected, 224k vs 160k, with the unemployment rate ticking up slightly to 3.7% on the back of an increase to the participation rate.  Perhaps the most underreported aspect of the print was that the number of full-time workers spiked 453k, compared to the net 218k full-time jobs lost in 2019 prior to this report.

Stocks sold off and rates spiked as markets immediately assumed the Fed couldn’t cut as much as had been priced in.  I don’t think the job report changes the likelihood of a rate cut later this month, and neither does the market because it still has a 100% probability of a cut on July 31st.  But it does take a 50bps cut off the table.

Friday’s strong report also helps make up for last month’s surprisingly weak number, 72k.  The Q2 monthly average now stands at 171k vs Q1 monthly average of 174k.

These averages are down from the Q1 2018 monthly average of 228k, and Q2 2018 monthly average of 243k.

While the market interpreted Friday’s report as strong, it also suggests that the longer-term trend is a slowdown to the pace of hiring.   Last year only had one month below 175k jobs, while so far this year we’ve already had three months below that level (including two below 75k).

If there is any chance the Fed won’t be cutting rates at the end of the month, it will start sending signals ASAP.  In general, once market odds of a rate change are over 70% the market is in agreement with what the Fed ultimately ends up doing.

If Powell doesn’t start sending signals this week that the Fed may not cut, it means they are definitely cutting this month.

 

Humphrey-Hawkins Testimony

Powell testifies to Congress on Wednesday and Thursday this week as part of the Fed Chair’s semi-annual testimony, usually referred to as Humphrey-Hawkins testimony.   This is largely a scripted affair, with Powell kicking off each day with the exact same statement.  The Q&A, however, does offer some potential for market reaction.

Thursday’s CPI report could throw a monkey wrench into his testimony.  Last month showed a 1.8% increase in CPI, but this month’s release is forecasted to fall to 1.6%.

Powell has a challenging task ahead.  Not only does he need to keep his job, Fed-speak is an incredibly powerful market driver.  A slight misstep can send shockwaves through financial markets.

Since Powell’s January 4th conference where he first suggested the Fed might not hike and would consider an early stop to balance sheet normalization, rates are down 0.75%.  And the Fed hasn’t actually done anything yet!

And look how much financial conditions have eased with the mere implication of rate cuts.

Source: Bloomberg Finance, LP

Removing the word “patient” from the last FOMC statement led the market to believe three rate cuts are coming in the next year.

Fed-speak is just as powerful as actual monetary policy.  While Powell’s testimony this week will be carefully choreographed to avoid market disruptions, a word here or there can have an outsized impact.

Tiger Woods used to say you couldn’t win the Masters on Thursday or Friday, but you could lose it.  This week’s testimony has the same feel.  Powell won’t tell Congress the Fed will be cutting rates, but if he isn’t dovish enough the market could puke.

 

Fed Still Tightening

Lost in all this talk of rate cuts is the fact that the Fed is still tightening.   Balance sheet normalization isn’t set to end until September, so the Fed is still allowing more than $30B in bond holdings to roll off each month.  Last month experienced the biggest drop since normalization began, with the maximum allowable Treasury reduction of $15B and another $23B in MBS.  The balance sheet is at its lowest level since 2013.

At that pace, the Fed will come up short of its goal of reaching $3.5T.  So either the goal will change or the pace will increase over the near-term, which would only tighten conditions more.

Source: Bloomberg Finance, LP

 

Week Ahead

Powell’s semi-annual testimony to Congress, developments on China, and a ton of inflation data should all make headlines.

Greek PM (and socialist) Tsipras is likely to lose Tuesday’s election.  Greeks voted him into office four years ago and it turned out socialism didn’t work!  Cue shocked face.

Most importantly, the US Women’s Soccer Team will be spending the week celebrating its fourth World Cup title in what was one of the most exciting soccer tournaments I’ve ever watched.  I know soccer won’t displace football here, but the NFL could learn something from a running clock and fewer commercials. And maybe, just maybe, the president can avoid picking a fight with the #nastygirls that just drop-kicked the rest of the world.

 


Click to Open: The Pensford Letter PDF


 

Pensford