Writing from the Outer Banks and learned today that Jamie Dimon said this a few days ago…
Last Week This Morning
First Real Look at Inflation Pass Through
It might not be the Fed’s preferred measure, but Tuesday brings the first CPI report that is expected to reflect the initial wave of tariffs. Headline CPI is expected to climb from 2.8% to 2.9%. Keep in mind that CPI is generally 0.5% higher than PCE, so high 2%s for CPI is roughly low 2%s for PCE.
The monthly data will be more important. Headline monthly inflation is expected to jump from 0.1% to 0.3%. That means 0.2% would undershoot expectations, and rates might fall. But 0.4% or more could cause rates to pop.
Bloomberg’s Ana Wong published three potential scenarios (base, higher, lower). I’m including the entire table below, but here are the parts I think you care about the most.
Core PCE
GDP
Think about that for a moment…the base case is GDP down 1.9% and inflation up 1.1%. And despite all the deadline extensions, tariffs are already up 11% since Trump took office. I’m not sure they move much lower than that even if a bunch of trade deals are struck.
SMBC’s research team also suggests Core PCE reaching 3.4% this quarter. How does the Fed cut rates in the face of that surge?
The IMF published a paper investigating the relationship between fiscal/debt to GDP ratios (1). It’s intense, so I will summarize my key takeaways.
In healthy fiscal environments, there is little correlation between 10yr yields reactions to debt/fiscal to GDP ratios.
But in an unhealthy fiscal environment, the 10yr reacts more and more with each deterioration to debt/fiscal to GDP ratios and this matters more than underlying economic data.
Unless Congress bends the debt curve, the 10-year Treasury is likely stuck with a 4-handle as the floor and a 5-handle in sight whenever growth or inflation pops. Raise your hand if you can think of something that might cause inflation to pop…I don’t think that will happen, but I’ve been known to be wrong a time or two…
But because I’m a silver lining kind of guy, I’ll take you out with some positive news. From that same SMBC forecast, they put the T10 at 4% this quarter…
Random Thought of the Day
Last month I wrote that the market was overestimating the impact of a Trump-appointed Fed Chair since rate votes are a simple majority of the Committee.
I wonder if QE is easier politically to get behind than rate cuts? Lots of people can get the concept of cutting rates, but something as nuanced as QE?
I’m not sure they would call it QE, but I bet they can figure out a backdoor way to re-initiate QE. Buy Treasurys to push yields down to spark the housing market…which helps consumer sentiment…and sells our house faster…
Operation Twist? Buy the long end and sell the front end so the balance sheet doesn’t grow? Talk about what a great investment a 4.5% T10 is…how could they disguise it? They need to dress it up and sell it to the public…wait…I got it!
Bond Buying Baby!
The real BBB!
Week Ahead
CPI on Tuesday plus obviously tariffs.