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Disinflation Back on Track?

This Week·        

  • 10T: 4.47%
    • German Bund: 2.58%·        
  • 2T: 4.95%·        
  • SOFR 5.31%·        
  • Term SOFR 5.33%·        
  • FOMC Meeting Minutes
    • Many concerns over stubborn inflation with various members mentioning they would tighten policy further if deemed appropriate·        
  • Fed Speeches
    • Bostic: “We’re not past the worry point in terms of inflation getting back to our target”
    • Waller: Needs “several more months” of good inflation data before backing rate cuts, but does not expect the FOMC to hike again
    • Collins: Expects to see gradual, continued disinflation, but thinks it’s going to take longer than originally thought 


April Inflation Time! 

The doozy this week is obviously Core PCE. Consensus forecast is for a repeat of last month’s 2.8% print, but note that the Cleveland Fed’s Inflation Nowcast is predicting a rounded up 2.7%. A year ago, it was 4.8%. 



If it comes in at 2.8%, then the average through the first four months of the year would be 2.84%. I am still in the lead on the JMo wager, but not by as much as I would have thought. Remember, I believe the second half of this year could see Core PCE actually rise as we measure vs last year’s rapidly falling numbers (this is called “base effect”), so I was counting on a lead to help offset that rebound.  

Perhaps more important would be the monthly reading, where the consensus forecast is 0.2%, for an annualized 2.4%. That matches the Inflation Nowcast rounded down prediction of 0.23%. 

I also highlighted the monthly CPI number because it is shockingly low. Remember, all the inflation reacceleration fuss in Q1 was over CPI, not Core PCE. If Q1 was an aberration and the monthly numbers annualize at 1.2%, would we see a drop in rates just as aggressively as we saw the surge? The next CPI print is 3 weeks off, but it’s something to keep an eye on. 




Since Services inflation is the primary culprit of slower than anticipated progress, it will be interesting to see how that component comes out. Dr Anna Wong, Bloomberg’s Chief US Economist, forecasts a monthly print of 0.26%, down from last month’s 0.39%. This would be a great sign for continued, albeit slower, inflation progress. 

Here’s the biggest blocker to cuts…financial conditions. While still in restrictive territory, they’ve eased considerably even as Fed Funds and SOFR were peaking. This easing really gained steam with Powell’s December pivot, which I believe he regrets.

How can the Fed cut if markets rally aggressively at the mere suggestion of one?

One thing to keep in mind about Financial Conditions readings is that they are based on market inputs, not economic inputs. For example, stocks at all-time highs suggest conditions are accommodative. But if stocks are owned by the top 10% of earners, and those same people are the only ones with helicopter money left, is it really an accurate reflection of the overall economy?




I think Powell believes inflation will continue to moderate and his worry is shifting to jobs. He has mentioned the potential for an “unexpected weakening” of labor markets as the primary reason the Fed would cut faster than expected. Here’s the thing – he didn’t need to say that. He could have just kept beating the drum that the labor market is doing great and slowly coming into balance. But for three consecutive meetings in a row, he has used that phrase.

The Beveridge Curve measures job openings vs unemployment rate. Generally, as the labor market cools you would expect the line to move down and to the right. Openings drop (down) and unemployment goes up (right).

For the first time ever, openings have dropped (down) without unemployment increasing (right). I’ve highlighted that vertical drop. Powell’s concern is that the relationship returns to normal and the line shifts to the right, meaning unemployment is increasing.



I don’t think we have another GFC on our hands, but here’s a reminder of how unemployment behaved during that time.

May 2007          4.4% (right before Bear Stearns hedge fund went under, the Fed cut in September)

May 2008          5.4% (Bear Stearns went under for good, the Fed had cut 6 times including a 75bps cut)

May 2009          9.3%      

Unemployment tends to surge, not to gently move up. But it also surges because something breaks. I think Powell would love to cut a few times to avoid breaking stuff.

What might break? I’m glad you asked…


Bank Term Funding Program 

A month ago, I highlighted that the emergency Term Funding Program was paying down nicely. This is a good sign for the overall health of the banking sector as the banks that borrowed money were repaying as expected. Good news.

Then a funny thing happened – the balance stopped dropping as much as it should. This suggests that banks reborrowed before the program ended, resetting the one year maturity on the loan. The delta between where the balance should be and where it actually stands is $25B.

Any chance banks borrowed to buy some time to manage their real estate portfolios?




The September FOMC meeting has 50/50 shot of a cut, and this week’s Core PCE will be instrumental in which direction that trends. 

The Fed wants several months of good inflation data. While I discount Q1, they don’t seem to be. That means this week’s inflation print might be month 1 of 3 that they want to see before a cut. If that’s right, June inflation, released in July, would be month 3.  

The July Core PCE release is Friday the 26th, while the July meeting is Wednesday the 31st. That means they will have first half 2024 inflation data in hand walking into that meeting. I think the market is underestimating the possibility of a July cut (10% currently). 

But I also think the T10 is going to be rangebound until inflation or jobs provide an excuse to break out. Like the Fed, the market probably wants to see several consecutive months of data illustrating a trend. This week’s Core PCE will move the 10T, but barring a shock the response is likely to be muted (<10bps).

Low end: 4.35%, then 4.12%

High end: 4.75%, then 5.00%


The Week Ahead

Tons ‘o data, with Core PCE on Friday obviously being the headliner. But that’s not all.

Q1 GDP (revision) on Thursday is likely to show a lower GDP than initially reported. Nearly all Q1 data has been revised downward (who knew Q1 data was extra sensitive to seasonal adjustments?), so when you add all those up to get GDP, the laws of math say GDP will move lower. As a reminder, it initially came in at 1.6%, and consensus forecast is a revision lower to 1.4%. That’s an annualized number, so not exactly gangbuster growth.

Also, keep an eye out on consumer data. The whole “consumer resiliency” argument is showing cracks. Personal income is expected to grow just 0.2% (vs last month’s 0.5%) and retail sales just 0.4% (vs last month’s 0.8%).

Last but not least, the Fed Beige Book provides anecdotal evidence from the regional banks about what they are seeing and hearing in their districts.