Turns out, just because the kids move out of the house doesn’t mean you’re done raising them. It’s probably better I didn’t know that.
I got to spend Friday night helping our two boys in San Diego navigate the complexities of…a shared bathroom. Never mind that they shared one growing up. Or that we pay for everything. I heard a lot of “I should get to” or “He’s not…” and “I’m entitled to…”
The gist of my message back to them: “If you spent half as much time trying to be not poor as you do arguing, I wouldn’t be dealing with you guys right now.”
Then I summoned my inner Colonel Jessup. “That single bathroom isn’t yours or yours, it’s mine. I am letting you both borrow it. I would rather you just say thank you and go on your way. Otherwise, I suggest you get a job and pay for your own. Either way, I don’t give a d*mn what you think you are entitled to!”
After I got off the phone with them, The Real Boss™ looked at me lovingly and said, “Technically…that bathroom is mine…”
Last Week This Morning
- 10T: 4.31%
- 2T: 3.82%
- SOFR: 4.39%
- Term SOFR: 4.33%
- JOLTs Jobs report: 7.2mm actual vs. 7.5mm expected
- GDP: -0.3% actual vs. -0.2% expected
- Personal spending better than expected
- Core PCE: 2.6% as expected
- m/m: 0.0% actual vs. 0.1% expected
- NFP: 177k actual vs. 138k expected
- Last month’s revised down by 43k
- Unemployment Rate: 4.2% as expected
- The number of people making the minimum payment on credit cards just hit an all-time high, while 48% of Americans using Buy Now Pay Later for basic necessities
- Warren – if you need help putting that $347B of cash to work, give me a shout
GDP and Inflation
The negative GDP print alone isn’t a sign we are headed for a recession. Imports spiked as everyone rushed to buy ahead of tariffs, so it’s a mathematical quirk rather than a strong signal.
Keep in mind that the 'D' in GDP stands for 'Domestic,' meaning it's designed to measure only what's produced within the country's borders. When we measure total spending by consumers, businesses, and the government, that spending includes money spent on imported goods. Since imports represent production from other countries, their value is not counted in GDP. This adjustment ensures the final GDP figure accurately reflects only the value created domestically.
There is no doubt growth is slowing, but slow growth is different than contraction. The Atlanta Fed GDPNow is projecting Q2 GDP at 1.1%. “After this morning’s releases from the US Census Bureau and the Institute for Supply Management, the nowcast of second-quarter real personal consumption expenditures growth and real private fixed investment growth fell from 3.3 percent and 1.4 percent, respectively, to 1.9 percent and -0.7 percent.” Not good, but not contraction, either.
Lost in all the noise last week was the great inflation report. With tariffs on deck, backward looking inflation readings can be treated with a healthy dose of “who cares?”, but I think Powell welcomes any help he can get right now.
Core PCE came in at 2.6%, down from 2.8%. More importantly, the monthly print came in at 0.0%. Literally 0.0%. That’s the lowest reading since April 2020 – five full years.
Powell has to be thinking, “Bruh...seriously? I finally land the plane and you set the terminal on fire?”
Stagployment
I know the 177k looks strong, but last month’s number was revised lower by 43k. We’ve seen this pattern every month for the last two years. If Friday’s NFP had instead been 134k, would we all be so confident in labor market resiliency?
Also, it’s a bit like the positive inflation report – is it going to matter in a month?
I think the labor market is stuck. Not strong enough to give the all clear, not weak enough to panic and start cutting rates.
Job openings have fallen back to pre-pandemic levels.
Hiring is as slow as it has ever been.
But slower hiring isn’t the same as layoffs. Layoffs dropped over the last month from 1.78mm to 1.56mm. That’s a good thing.
The unemployment rate hung in there at 4.2%, which is good news. But keep in mind that using the Feb 2020 participation rate would put the UR at 5.5%. Still good, but not crazy strong.
As Bloomberg's Chief US Economist Anna Wong noted, "The data points to a labor market at stall speed." Aka, Stagployment.
Now introduce a giant shock.
I sent this graph in early 2020 - China Manufacturing. It was so dramatic that I basically dismissed it. I literally didn’t know how to process it.
We’ve never seen a tariff shock like this before, so I don’t have a clue what to expect. Mohammed El-Erian, "Markets are underestimating the depth and duration of this trade reset.”
Regardless of how this ultimately plays out, I struggle to see how a shock of this magnitude coupled with unprecedented uncertainty results in a stronger economy.
I am certain, however, that it always comes back to consumer spending. Right now, that is holding up. But if the labor market rolls over? Does Stagployment turn into mass layoffs? I hope not – I need two boys to get jobs first!
Fed Meeting – Wednesday
Recall my analogy of positive real rates as braking action on the economy. A 2.6% Core PCE and a 4.3% Fed Funds implies 1.7% of braking action. That gives them room to absorb higher inflation without needing to hike.
With the dark cloud of inflation hanging over their heads, the Fed will wait until they see actual weakness in the labor market before they cut. The market has a 50% chance of a cut in June, which is absurd to me. Why cut when everyone is focused on the strong NFP? The only way that happens is if the next jobs report comes out deeply negative (like -100k or 4.5% unemployment).
The market also has a full 1.00% of cuts priced in by year end. That makes sense to me, but only because I believe we will see quite a bit of economic deterioration over the next six months. But as The Real Boss™ likes to point out, I’m wrong a lot. If we don’t slow down and inflation concerns continue, it will be less.
With this being an “off” meeting where the Fed does not update eco projections, Powell’s press conference is the only way for the market to decipher signals. I think he will walk a fine line, on guard for rising inflation/inflation expectations while being sensitive to labor market weakness. Friday’s job report gives him some cover fire to be hawkish on inflation. I don’t think he’ll have that luxury at the June meeting.
O/U number of questions about how Trump is demanding Powell lower rates? Also, Powell’s tie will definitely be purple. We bet on his tie color every FOMC meeting and I can’t remember the last time his tie wasn’t purple. I need to lay 10:1 for any other color to get any action…
The Week Ahead
Tariff news, the Fed meeting Wednesday, and the million Fed speeches on Thursday and Friday are the only things that matter this week.
From the Department of “Getting Old Sucks” this would be the nicest compliment someone could pay me right now.
Maybe if I had the body of a 40 year old, I could stay up late enough to make fun of Luka’s conditioning.
Thank goodness Fed meetings don’t tip off at 10pm Eastern.
