I take one week off and the world falls apart?! Trump calls Powell a loser and a knucklehead, says he’s going to fire him, then backs off. Mohammed El-Erian calls for Powell to resign to preserve Fed independence. Then Trump and Powell, in comically large hard hats, debate the cost overruns on live TV.
To top it all off, Theo Huxtable died in a tragic drowning accident. Then Ozzy. Then Hulk. Brutal week for my childhood nostalgia. I played Black Sabbath, broke out the Wrestlemania gear, and reminisced about that time Bill Cosby gave a hilarious commencement speech at my graduation before…well…you know…
And because it was my first weekend at home in six weeks I, leaned into the nostalgia by watching Happy Gilmore 2 (better than I expected). Travis Kelce was better in it than he was in the Super Bowl (burn!). I continued my nostalgic journey by rewatching the Penn State upset of Miami in the January 2, 1987 Fiesta Bowl (yeah, I actually did that). Here’s a graphic from the broadcast highlighting the NFL playoff game that weekend. This probably looks like an AI-generated joke to a lot of football fans under the age of 35.
That month, inflation was 1.4%, Fed Funds was 6%, the T10 was 7%, and NFP was 305k. Here’s Trump telling Powell to make America great again like it was in 1987…before his six corporate bankruptcies.
Fear not - I’m back! But don’t thank me yet. This week has an entire month’s worth of data points and events:
Tuesday - Consumer Confidence
Wednesday – FOMC meeting and GDP
Thursday – Core PCE
Friday - Jobs and the August 1 tariff deadline
Although the purple tie is a given at this point, I wonder if it’s time to start wagering on whether Powell wears a hard hat at his press conference.
Last Week This Morning
- 10T: 4.42%
- 2T: 3.87%
- SOFR: 4.34%
- Term SOFR: 4.36%
- Treasury investors have significantly increased their purchases of US Treasurys, net buying $146B in May, the highest since August 2022, according to Laureline Renaud-Chatelain, Senior Fixed Income Strategist
- CPI Inflation Data
- CPI m/m: 0.3% as expected
- CPI y/y: 2.7% vs 2.6% expected
- Core CPI m/m: 0.2% vs 0.3% expected
- Core CPI y/y: 2.9% as expected
- PPI Inflation Data
- PPI m/m: 0.0% vs 0.2% expected
- PPI y/y: 2.3% vs 2.5% expected
- Core PPI m/m: 0.0% vs 0.2% expected
- Core PPI y/y: 2.6% vs 2.7% expected
- Retail Sales: 0.6% vs 0.1% expected
- Fed Speeches
- Fed Collins: “…continued overall solid economic conditions enable the Fed to take the time to carefully assess the wide range of incoming data.”
- Fed Logan: “My base case is that we’ll need to keep interest rates modestly restrictive for some time to complete the work of returning inflation sustainably to the 2% target.”
- Fed Hammack: “I don't see a need to really reduce unless we see material weakening on the labor side.”
- Fed Kugler: “With the unemployment rate still at historically low levels, elevated short-run inflation expectations, goods inflation rising due to the upward pressure from tariffs, I find it appropriate to hold our policy rate at the current level for some time."
- Fed Waller: “I believe we should cut the policy rate at our meeting in two weeks.”
I think Consumer Confidence will show a nice rebound. It feels like the worst is behind us and the tax cuts have been made permanent. But I’m also not sure it matters with so many other critical things looming over the week. Let’s tackle them individually.
GDP (Q2) – Wednesday morning
The consensus forecast is for a dramatic rebound from last quarter’s -0.5% to 2.4%. Just like I told you to ignore last quarter’s weakness, you can ignore this quarter’s strength. It’s quirks resulting from pulling forward imports to avoid tariffs.
You heard it here first – don’t overreact to a strong GDP Wednesday morning.
FOMC Meeting – Wednesday afternoon
Obviously, the Fed is not cutting. And this is an “off” meeting where they do not update their forecasts. That means Powell’s press conference is all that matters.
I just don’t see him providing many hints about September. Inflation from tariffs is taking longer to show up in the data than expected, but don’t think that means it’s not coming.
Dr Joel Prakken wrote a short but insightful piece helping to explain the delay (Prakken). Key takeaways:
- Front-loaded imports: Importers rushed shipments early in the year to avoid tariffs, temporarily inflating inventories and delaying price pass-through.
- Bonded warehouses: Importers are deferring customs release (and thus tariff payments) by storing goods duty-free for up to 5 years.
- Delayed payments: Legal uncertainty around tariffs has led to slower remittance of duties.
- Effective tariff rate lagging: It’s only up ~7 points vs. the 17.5-point jump in the statutory rate—suggesting much of the cost impact is still hidden.
With so much uncertainty, coupled with a labor market that appears to be hanging in there, why would Powell suggest a cut in September? He won’t.
Unfortunately, the longer it takes for inflation to show up, the longer it takes to get to the other side, and the longer the Fed is on hold.
The September meeting has a 64% chance of a cut, with a 64% chance of Fed Funds below 4% by year end.
Core PCE – Thursday morning
This comes out the day after the Fed meeting, but there’s a good chance they have an advanced look when voting on rates. Plus, economists have enough from the CPI/PPI releases last week to more precisely project Core PCE.
Core PCE y/y is forecasted to remain steady at 2.7%, but monthly Core PCE is expected to accelerate from 0.2% to 0.3%.
Rate reactions will be driven by deviations from expectations.
Jobs – Friday morning
Who cares?
Seriously, we have enough evidence to know we shouldn’t react to the initial print. Consensus forecast is 109k, but if you want to win your office pool, you need to add 50k to that. Guess 159k-ish because it will be two months before the BLS revises it down to 109k.
After these revisions, the average monthly NFP gain this year is just 130k.
Two years ago, it was 256k and was described as “resilience”. If your pay was cut in half, would you describe it as resilient?
The unemployment rate is expected to tick up slightly from 4.1% to 4.2%. This is not a red flag, nor is it reassurance that the labor market is going gangbusters. I think 4% is the new “full employment” (as opposed to 5%) given how the labor force participation rate has changed since covid.
Tariff Deadline 8/1 – Friday
I have no clue what to expect. If you do, you’re probably an AI model (here) or an uninformed interest rate observer (here).
Week Ahead
Vol will be up this week, driving up cap pricing. Treasurys will remain range-bound barring an outlier data print.
Get your hard hats out, it’s gonna be a crazy week. RIP kings and one prince.
