At a volleyball tournament in Phoenix, you get an abbreviated newsletter this week. Visiting Phoenix in January is as dangerous as visiting Penn State in September. “I can totally see us living here…” during that one month the weather is perfect.
On Sunday, The Real Boss™ was decked out in her Bears gear. Going down the escalator, we passed another woman on the up escalator also rocking Bears gear. Sarah yells, “Bear down!”
The woman looks her right in the eye and says with all the snark she could muster, “Actually, I’m a Packers fan and I am just wearing this to support my husband.”
And that’s all you need to know about why everyone hates Packers fans.
Last Week This Morning
10T: 4.22%·
2T: 3.48%·
SOFR: 3.66%·
Term SOFR: 3.67%·
CPI:
Core m/m: 0.3% actual vs 0.2% expected
Core y/y: 2.6% actual vs 2.7% expected
Headline m/m: 0.3% as expected
Headline y/y: 2.7% as expected
Inflation Shmlation
OK, maybe I forced that a bit but if you thought the November benign inflation data was flukey because of the government shut down, the December report that was released on Friday reinforced it.
Tariff-induced inflation peaked in October. While the official CPI came in at 2.7%, more sophisticated measures suggest it will continue heading lower. Truflation shows CPI at 1.74%.
Here’s the Penn State Core PCE Alternative Inflation Index. Lots of improvement since they fired Franklin.
Inflation is not a pressing concern right now.
FOMC Chair Odds
Rates popped on Friday because of Trump. During a speech at a White House event, he mentioned the leading candidate for the FOMC Chair.
"I see Kevin's in the audience, and I just want to thank you. You were fantastic on television today. I actually want to keep you where you are, if you want to know the truth," Trump said.
Betting market odds on Hassett promptly plunged, while yes man Warsh’s odds surged. Rates popped on the likelihood the next Fed Chair will push rates lower and reintroduce inflation.
We were supposed to know the Fed Chair nominee by year-end. The fact that we haven’t, coupled with Trump’s comments Friday, makes me think Hassett wasn’t providing the necessary assurances to Trump about lower rates.
I think BlackRock’s Rick Rieder is a dark horse candidate. I’ve seen him on Bloomberg a few times and was impressed. I have also enjoyed the Chair not being an economist by trade. Fed economists are fantastic, so why not have the head be someone with real world experience that can lean on those economists? I think that’s part of the reason why Powell has been successful.
On Wednesday, the Supreme Court hears arguments in Trump v Cook. This is far more important to the rate path this year than who the next Fed Chair is, but the ruling isn’t expected until May/June.
Remember, the Fed Chair must come from the Board of Governors. That means:
It is someone already on the Board like Waller or Bowman
And if it’s one of them, the voting totals don’t change
They must be on the board by May
The only term expiring between now and then is Stephen Miran, who is already voting for rate cuts. If Warsh replaces him, the voting totals don’t change
If the Supreme Court allows for Cook’s ouster, Trump appoints her replacement with a yes man. That actually changes a vote.
In May, if Powell leaves the Board, Trump appoints his replacement with a yes man. That actually changes a vote.
But by bullying Powell, Trump shot himself in the foot and increased the odds that Powell chooses to stick around. That could cost him a vote for lower rates.
If Trump gets his way, the back half of the year could see a Fed stacked with lower rate proponents. But Powell is digging in and preparing to go to war.
Rates
The Fed isn’t cutting next week, but we will get two more jobs reports before the next meeting. Those reports will dictate front-end rate movements in Q1.
JPM is now calling for no cuts in 2026 and the next move to be a hike in Q3 2027. Trump responded by saying he’s suing JPM in the coming weeks. What a time to be alive.
The T10 is rangebound, which is a good thing for underwriting real estate deals. Trump is trying to apply downward pressure on yields by having Fannie/Freddie buy MBS, but shooting himself in the foot left and right with socialist policies.
The Supreme Court (I never remember them being mentioned this often in a rates newsletter) is also expected to rule on tariffs…but they were already supposed to do that twice by now so who knows.
From the excellent research team at SMBC, “Assuming the IEEPA tariffs are reversed and the Treasury can replace between 25-50% of the revenue through other trade measures we estimate 10y yields could rise by 30bps.” That would put the T10 at 4.5%.
The next two resistance levels are 4.35% and 4.49%, the exact opposite of what Trump is aiming for.
The Week Ahead
On Thursday, Q4 GDP is expected to come in hot. The Atlanta Fed GDPNow projects an insane 5.3%. Expect a lot of White House chatter about the strength of the economy, but keep in mind a lot of this is just a result of a drop in imports. Haver Analytics suggests GDP is really about 2.5% (GDP Will Be Off).