Happy Mother’s Day!
That might be the most awkward tweet since The Rock’s Black Adam tweet in 2022…
Last Week This Morning
10T: 4.35%
2T: 3.88%
SOFR: 3.60%
Term SOFR: 3.63%
Non Farm Payrolls: 115k vs 65k expected
Unemployment Rate: 4.3% as expected
U-Mich Consumer Sentiment at all-time low
Those Jobs Tho!
Another good report on the surface of it. The unemployment rate held steady at 4.3%, and I put a lot more weight in this than NFP right now. It climbed from 3.4% to 4.4% over the course of 18 months but has been in a narrow band for a year now. We might not be hiring, but we aren’t firing, either.
The NFP headline was once again impressive, but we all know it will be revised down next month. More importantly, full time workers fell by 424k while part time workers increased by 123k. Multiple job holders increased by 77k.
Peter Berezin again highlighted that we’ve never had a deterioration in labor market conditions like this without a recession.
As long as the labor market hangs in there, the Fed has some room to talk tough on inflation.
What Gives?
If those headline jobs reports are to be trusted, why is Consumer Sentiment at the lowest on record? Worse than covid or the GFC. In fact, the last measure of sentiment that was almost this weak was 1980 after years of double digit inflation, huge unemployment, and a Jimmy Carter presidency.
From the Kobeissi Letter, “The ratio of US leading to coincident economic indicators is now down to 0.84, matching the 2008 Financial Crisis low. This comes as the Leading Economic Index (LEI) fell -0.6% MoM in March, posting its 7th monthly decline out of the last 8.
Whirlpool CFO says appliance demand hasn't been this low since the "great financial crisis."
Kraft Heinz CEO Steve Callihane warns that most people are “literally running out of money at the end of the month.
”Something’s amiss and I don’t know what it is.
Inflation This Week
CPI comes out this week and even grandma in central PA knows it will come in hot. It’s expected to come in at 3.7%, a level last seen in mid-2023 as the rate hikes were cooling things down. Even tariffs only got it up to 3.5%.
Inflation expectations matter more to the Fed than current inflation. If public perception reflects a more permanent shift to 3% instead of 2%, they are more likely to hike. Here’s one year forward inflation expectations. We briefly touched these levels last year after Liberation Day, but then receded. If that happens this year, no hikes. But if expectations keep climbing like they did in 2021, the Fed will have to do something. “Donnie, listen, I know I promised I would lower rates but…” Kevin Warsh.
There is a caveat…Core PCE might exclude oil, but it does reflect things like data center demand. Saturday’s PIMCO report, "AI infrastructure demand plus energy-related supply constraints tied to the Iran conflict could make inflation more persistent.”
Rates
I do not believe the next move is a hike, but since the FOMC is a simple majority I can see a hike with Warsh dissenting and telling Trump, “Look, I got outvoted!” The market has a 55% chance of a hike within the next year.
The Fed should be able to talk tough and get the desired reaction without having to actually hike. You’re seeing that already with more chatter from Fed officials saying the next move could be lower or higher. If inflation persists, they might start saying aloud, “Geeee…I guess maybe we should be looking at one or two hikes” and then sitting back to see what happens.
The 10 Year Treasury is trickier. Economic damage from the Iranian conflict will take time to show up in the data, which would be the sort of thing to push yields lower. But for now, the market is focused on the inflationary impacts.
We finished the week right in the middle of the current technical range, 4.20% - 4.45%.
For what it’s worth, Trump has a tendency to change course when the T10 gets around 4.5%. First wave of tariffs, threatening to fire Powell, 25% tariffs on Mexico and Canada…now we wait to see how he handles Iran as the T10 threatens to run to 4.60%.
The Week Ahead
CPI on Tuesday is gonna be ugly. The market has 3.7% priced in, a big pop from last month’s 3.3%. If it comes in above that, expect the T10 to test 4.45%.
Lots of Fed speeches and I expect more and more to make comments about the possibility of a hike just to rein in expectations.