I missed last week’s newsletter because we hosted about 20 people for the high school graduation of our youngest. We are officially empty nesters. It’s weird. We’ve had a kid in school for over 20 years.
I, for one, am stoked. I can think of ways to fill that time (or do nothing at all…). The Real Boss™ has already discovered 5 new hobbies she’s dragging me into.
Last Week This Morning
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10T: 4.48% (yes it can go down, too!)
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2T: 4.09%
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SOFR: 3.60%
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Term SOFR: 3.63%
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Existing Home Sales: 4.17mm vs 4.04mm expected
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CPI up significantly over last month, but as forecasted so the market exhaled a bit
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PPI higher than expected
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UMich Consumer Sentiment: 48.9 vs 46.0 expected
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The ECB hiked 25bps
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A begrudging congrats to the Knicks, what a post season run
A Belated Note on the Jobs Report
Other than our son actually finishing high school, the biggest shock of the week was how strong NFP came out.
I’ve been beating the jobs drum recently about two things:
- The “breakeven” job gain is much lower because of immigration policies, so when you see a gain of just 30k it might be a decent number.
- The unemployment rate survey is a much better indicator of the labor market right now, so look past NFP.
So my question is…If the monthly breakeven is truly somewhere between 0-30k, and we are averaging 188k so far this year…how come the unemployment rate isn’t dropping?
I don’t know what to make of it other than it’s confusing. It’s possible the labor market is reaccelerating. We have a lot of fiscal tailwinds this year and historically payrolls bottom out 18 months after the first cut, which was March.
Then again, full-time employment fell 79k last month. And just 9% of small businesses expect to hire in the next 3 months, the lowest reading since spring 2020. And the NY Fed survey on job losses is rising. And…you get it.
The labor market picture remains fuzzy.
Has Inflation Peaked?
The Fed tries to look through commodity shocks while monitoring the knock-on effects since oil is so prevalent in the economy. Claudia Sahm pointed out that just 34% of CPI is running hot – all energy related. The last time CPI hit 4%, it was much broader based with 75% of CPI components overheated.
Inflation swaps are down a full point since their peak a month ago. The market thinks inflation has peaked.
FOMC Meeting – Warsh’s First Meeting
The only question that really matters: what color will his tie be? Powell wore exclusively purple, let’s see if Warsh mixes it up. The betting pool will be crazy at the office…because we like to party.
I’ll be watching to see how he handles questions. Powell became adept at dodging questions, but there were some instances early on when he stumbled.
I think Warsh will say he loves messy debate, but that’s really just because that’s the hand he was dealt. He’ll signal more wait and see from the Fed, so I suspect it will be boring.
We will, however, get an updated Summary of Economic Projections (SEP aka blue dots). That’s the part of the meeting that anonymously forecasts Fed Funds, inflation, unemployment, and GDP. I wonder how many of those that projected cuts by year end will still do so? How many might now expect cuts? And is that legit or just tough talk to keep inflation expectations reined in?
Traders Betting on Hikes
According to Bloomberg’s Edward Bolingbroke, trades are piling into leveraged short positions (rates higher) at a staggering level.
December Fed Funds futures show a hike is more likely than no change. I think of FF probabilities a bit like oil futures. They are a best guess at any given moment, but not a great guidepost when things can change so dramatically so quickly.
I still don’t think the Fed hikes this year. If Warsh can get past his opposition to forward guidance, he can let Fed-speak do the dirty work. Plus, are we sure there’s no economic damage from the whole Iran mess?
The Week Ahead
Iran and Fed meeting, duh.
Congrats again to the Knicks. Enjoy the parade. With his exceptional acting, is Brunson more likely to move to Hollywood or take on Broadway?
