Morning Roundup

By Mark Masterson on June 13, 2024

Good morning,

Below are the news items moving markets today:

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Executive Summary:

Yesterdays inflation (CPI) came in light.

• U.S. MAY CPI INFLATION RISES 3.3% Y/Y; EST. 3.4%; PREV. 3.4%

Today’s inflation (PPI) also came in light…..

• May PPI inflation was unchanged, at 2.2%, below expectations of 2.5%.
• Core PPI inflation fell to 2.3%, below expectations of 2.4%.
• This ends the first 3 consecutive monthly increase in PPI inflation since April 2022.

The jobs data was also weaker than expected this morning….

• Jobless claims come in at 242K vs expectation of 225K
• *HIGHEST SINCE AUGUST 2023

The above data points will continue the theme of slowing economic growth and modestly lower inflation.  Both of those provide some cover for the Fed to potentially cut rates sooner rather than later.

About the Fed…..The rest of the day yesterday was dominated by the Fed and Powell’s comments.

Interesting that the Fed’s latest projections now show median expectation for one 25 bp cut in 2024, down from three in March forecast.

So – they are pushing back rate cuts.

Here is the summary of the Fed’s meeting yesterday:

1. Fed leaves rates unchanged for 7th straight meeting

2. Officials raise 2024 inflation forecast from 2.4% to 2.6%

3. Median forecasts shows just 1 rate cut in 2024

4. Median forecast shows 100 bps of rate cuts in 2025

5. Fed says inflation has eased “but remains elevated”

6. Median 2024 Core PCE inflation estimate up from 2.6% to 2.8%

There were some modest surprises such as rate cut expectations for 2024 being cut down from 3 to 1, but rate cut expectations in 2025 increased from 3 to 4 offsetting part of this shift.

There is no consensus at the Fed today…..

• FED PROJECTIONS SHOW 4 OF 19 OFFICIALS SAW NO RATE CUT IN 2024; 7 SAW 1 CUT; 8 SAW 2 CUTS.

Here are Powell’s comments on various topics…….

Economy

• FED: THE ECONOMY CONTINUES TO EXPAND AT SOLID PACE, JOB GAINS REMAIN STRONG, UNEMPLOYMENT RATE REMAINS LOW.
• POWELL: WE DON’T HAVE HIGH CONFIDENCE IN FORECASTS
• Fed’s Powell: If jobs are to weaken unexpectedly, the Fed is ready to respond.
• POWELL: THERE IS AN ARGUMENT THAT PAYROLLS MAY BE A BIT OVERSTATED

Interest rates

• FOMC MEDIAN FORECAST SHOWS 100 BPS RATE CUTS IN ’25 VS 75 BPS
• FED: DOES NOT EXPECT IT WILL BE APPROPRIATE TO REDUCE POLICY TARGET RANGE UNTIL GAINING GREATER CONFIDENCE INFLATION IS MOVING SUSTAINABLY TOWARD 2%.
• Powell: “If the economy remains solid and inflation persists we’re prepared to maintain the current target rate”
• POWELL: EVERYONE ON FOMC AGREES POLICY WILL BE DATA-DEPENDENT
• FED’S JEROME POWELL JUST SAID:- NOBODY HAS RATE HIKES AS THEIR BASE CASE
• Powell asked what would the actual impact of 1-2 cuts this year.
• He said: “that’s not how we look at it. The whole rate path matters. When we cut, we expect financial conditions to loosen & market will price in what it prices in [i.e more cuts]”
• Powell: “The goal is not to wait for things to break…then fix them”

Inflation

• FED: INFLATION HAS EASED OVER THE PAST YEAR BUT REMAINS ELEVATED.
• Fed’s Powell: We will need to see more good data to bolster confidence on inflation. So far this year we have not got greater confidence on inflation in order to cut.
• Per today’s CPI report, Powell noted that recent inflation readings “have eased somewhat”
• Fed’s Powell:If you’re at 2.6, 2.7% PCE inflation, that’s good place

Financial conditions

• Powell says “restrictive stance” of monetary policy will be retained to reduce inflationary pressures

Banks

• Powell: The banking system is strong, well capitalized, and seems to be in good shape

While Powell feels good about the economy, many Americans don’t.  There is a disconnect between what people are feeling, and the reality of the data.

• 56% of Americans believe we are in a recession, according to a Harris poll.  Meanwhile, GDP grown for 7 straight quarters.
• Also, 49% of Americans believe that the S&P 500 is down for the year.  Meanwhile, the S&P 500 is at an all time high.

Perhaps its because the data and reality are not quite in sync.

For example, while CPI inflation is at 3.3%, inflation is much higher in many basic necessities:

1. Car Insurance Inflation: 20.3%

2. Transportation Inflation: 10.5%

3. Hospital Services Inflation: 7.2%

4. Car Repair Inflation: 7.2%

5. Electricity Inflation: 5.9%

6. Homeowner Inflation: 5.7%

7. Rent Inflation: 5.3%

8. Food Away From Home Inflation: 4.0%

The Kobeissi Letter 6 12 24

Keep in mind, inflation has been above 3% for 38 consecutive months now – and inflation continues to build on multiple years of already inflated prices.

Compounding inflation is destroying consumer confidence as over 50% of US adults believe we are in a recession.

But – have no fear.  Janet Yellen was out in force this morning and she says……

• YELLEN: BELIEVES INFLATION WILL CONTINUE TO COME DOWN

She also said……

• *U.S. TREASURY SECRETARY YELLEN: WE ARE CREATING JOBS AT A VERY RAPID PACE

Yes, but what kind of jobs.

The data below shows that government jobs are exploding higher…..

Fred.com 6 13 24

One more comment from Yellen this morning……

Treasury Secretary Janet Yellen says US debt load is in a “reasonable place” if it remains at current levels relative to GDP.

Ok – fair enough.  But perhaps someone should remind her that under her watch US debt is rising by $1 trillion every 100 days.

More below….

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Articles of Interest:

• Central banks:
  • Fed now projects one rate cut in 2024 from three previously (Bloomberg, Reuters)
  • Powell sends mixed interest rate signal (FT); wary of past mistakes, Fed takes it time (link, NY Times)
• Markets:
  • Traders push up odds of September Fed rate cut following May US CPI report (Bloomberg)
  • Benign US inflation could be a positive signal for large swathes of the stock market (Reuters)
  • Roaring Kitty’s Gill may have sold some of his recently-disclosed options position in the company, strategists say (Reuters, CNBC)
  • Japan funds sell most amount of foreign debt in nine years amid central bank policy shift (Bloomberg)
• Geopolitics:
  • Biden administration extremely concerned about risk of all-out war between Israel and Hezbollah (Axios)
  • Blinken says Hamas seeks unworkable changes to ceasefire plan; Hamas denies proposing new ideas (FT, Reuters)
  • As expected, US expands Russia sanctions to undercut its war machine, targeting chips sent via China (Reuters)
  • G7 leaders to agree on funding Ukraine with profits generated from frozen Russian assets (Bloomberg)

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Charts of the day:

Taking a look at the most important charts in the world this morning……

No – it is not NVDA, nor gold, nor any stock index.

It’s the 10 year treasury yield and the US dollar.

First – bond yields……

They have been declining recently.  The weaker economic data and slower inflation have helped.

Lower yields are a good thing for markets generally.

Can it continue?

Taking a step back and looking at the 10 year yield over the past two years shows we are at a very important juncture.

We are resting on support.

If it can fall through that, it may have follow through to the downside.

Again – if the data keeps coming in on the lighter side – I’d expect the 10 year treasury yield to keep moving lower over time.

The dollar has just been a mess.

Its been in a sideways churn for more than a year now.  See below.

Essentially, the currencies are just taking turns moving against each other based on how their central bank postures.

The ECB pushes the Euro lower when they are more dovish than the Fed – which in turn pushes the dollar higher.

The opposite is also true.

The dollar direction is to be determined.  I suspect yields are more important at the moment.

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Quote of the day:

“Receive without pride, let go without attachment.”

— Marcus Aurelius