I was in LA for meetings this week. About 5 minutes into one of those meetings, Tom said, “Wait, are you the Rate Guy?!”
“Ummm…yeah.”
“Holy shit! I didn’t know that’s who we were meeting with! Guys – we are in the presence of a celebrity!”
“I get it. Pretty underwhelming when you meet me in person, right?”
“Well, to be fair you’re a lot funnier on the podcast…”
Maybe that’s why I wasn’t invited to Jackson Hole again this year. I really wanted to be there for Jay $’s last selfie as Fed Chair.
This Week This Afternoon
Jackson Hole
Powell’s speech was more dovish than I expected. In particular, the one that stood out to me was, “The slowdown in the job market is much larger than previously believed.” And by previously, he meant just last month.
Other key comments that led rates to dropping and stocks surging.
That’s about as much of a signal that we will ever get from a Fed Chair. He did add that stability of the unemployment rate allows the Fed to proceed carefully, so a cut isn’t a done deal.
Also, on a much lower NFP print each month, “The breakeven rate has moved sharply lower because of immigration policies.” Basically, the unemployment rate may not tick up if we’re only adding 35k jobs a month.
He added that the effect of tariffs is “now clearly visible” and “the effects of tariffs is set to accumulate in the coming months,” but that the effect of tariffs “will be relatively short lived."
I think he’s sending signals that the labor market will take priority if Americans start losing jobs.
Random thought of the day for the JMo inflation hawk crowd…what effect do interest rates have on tariff-induced inflation?
Rates
With apologies to Atlanta Fed President Bostic, the Fed isn’t cutting just once this year. He said that last week and I couldn’t disagree more strongly.
SMBC’s research team highlighted that there is no precedent for a single cut. Once they cut, they generally cut at least 75bps. This is even true outside of recessions. In other words, if they only needed to cut once, they simply wouldn’t cut.
The T2 is down to 3.68%, within spitting distance of the low this year of 3.60% on 4/30. If we break 3.5%, it will be a new low since the Fed started hiking in March 2022. This is all good news for caps, but it should be noted most of the rate volatility is front end loaded.
Here’s a technical analysis chart from the Bloomberg Rates Strategy team. The T10 has traded within a tight band for the last 4 months, 4.20% - 4.60%. Don’t assume a cut in September means the T10 will breakout to the downside – that cut is already priced in. To me, there’s one thing that pushes the T10 sub-4% in the next month and that is the jobs report in early September.
The Week Ahead
I return to 100 degree temps and 100% humidity, appreciating what those insane CA taxes are buying you…
Lots of Fed speeches to massage the message Powell delivered.
Plus, Core PCE on Thursday. If it comes in hotter than expected, I could see rates rebounding.