It hit 5 already, you could leave early... jobless claims once again proved you can't get fired (not career advice - you definitely can get fired - and probably for reading this while you should be working) and anyway I mean 5 handle on the 10Y. The 10Y did cross 5% in the evening yesterday, but is now back down 4-5bps to 4.95%. The 2Y is also lower, yielding ~5.16%. Reuters reports that "The yield on the benchmark 10-year Treasury...has risen by 30 basis points this week - marking its biggest weekly rise since April 2022." (JPM research calls the WTD change 35.9bp...guess it matters what you call the open and close). The next bond market watch is for the un-inversion of the 2s10s curve.
The prospect additional spending associated with Biden's Presidential address may have helped pushed yields higher last evening. The USD:JPY also hit 150 last evening, despite Japanese inflation coming in at its lowest level in a year at 3%
There is no economic data today.
If you missed it yesterday, Powell was viewed as "dovish". Powell gave a nod to 'long and variable lags' and the idea that the bond market is doing tightening for them, a premise that seems somewhat shaky or at least predicated on the Fed being a credible actor. In his opening remarks Powell said the following:
- " inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal"
- "the labor market is gradually cooling"
- "the record suggests that a sustainable return to our 2 percent inflation goal is likely to require a period of below-trend growth and some further softening in labor market conditions"
- "The stance of policy is restrictive, meaning that tight policy is putting downward pressure on economic activity and inflation. Given the fast pace of the tightening, there may still be meaningful tightening in the pipeline"
- "Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening. We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy."
In the Q&A he hit on some of the following - along with my commentary in red:
- economy may be less interest rate sensitive - this one bothers me because those long-dated fixed rate liabilities are someone else's assets, hasn't Powell seen everyone complaining about bond losses on bank balance sheets?
- there's no precision in our understanding of lags, because forward guidance means markets should anticipate moves - I think I agree with Powell here, but isn't he saying that long and variable lags don't exist? Or is this all a "sticky price" thing?
- he seemed to hit on aging population and the good old Bernanke 'global savings glut' and uncertainty over long run growth - still no clue what the neutral rate is
- David Westin repeatedly tried to ask Powell what his hypothesis is around how rates impact the economy and what his sense is of the neutral rate. - I'm not sure if Powell's answers basically implied he's some sort of market monetarist now, we'll know things are working when we see things working
- tails are really wide, but they happen more regularly than they should - Powell sounds like Nassim Taleb now
- longer term yields are not being driven about expectation of higher inflation or about shorter-term policy moves, so it's really term premiums and potentially bets on higher growth, as well as deficits and QT
- Powell talks about how long term yields impact financial conditions which impacts economic activity, hiring and inflations - Powell then hits on whether the change in longer yields is endogenous (dependent upon the Fed following through). MS Research hit on this here
- Does Powell consider fiscal policy when setting monetary policy? - Powell calls the fiscal path unsustainable, I sensed tears from Stephanie Kelton. Good to know the Fed doesn't believe their at risk of fiscal dominance, I can rest easy now.
- Powell says higher bond yields literally works by tightening financial conditions, as long as yields are rising for reasons other than those that they are expecting the Fed will be doing something, then they are tightening conditions and that's what the Fed is trying to achieve - seems a little circular, but sure
- Most of the inflation wasn't from the Phillips curve it was the collision of strong demand and constrained supply - classic, supply and demand intersects at price, well played
XTOD: Powell: "We don't focus on fiscal policy." Sure, for now. However, an "unsustainable (debt) path" can lead to fiscal dominance where the Fed is forced to keep the U.S. government solvent, gives up control of the price level, and becomes one with fiscal policy.
XTOD: I love the new way of baseball….where the pitcher is dominating and they go to the bullpen to see if one of those guys can pitch as good as the starter!
XTOD: Powell engages in a little trash-talk to kick off the game of chicken that Sargent and Wallace envisioned.
XTOD: Focusing on stable prices require fiscal policy to be consistent with that goal. On the other hand, what else could he say? He is trying to do his job
XTOD: [not a tweet, but I won't tell you what twitter tells me comes after "Hot Girl Summer" for the fall moniker...maybe you'll get a different answer]
XTOD: The year is 2027. Tens of trillions of sov bonds have been added to CB balance sheets around world. A summit is held in which CBs forgive the debt owed by their respective Govs. S&P, Fitch & Moody's immediately upgrade the Sov ratings. Fintwit freaks out and says it isn't fair.
XTOD:.....I estimate from about 35% to about 50%. A hot war in another part of the world, like the ones in Ukraine and in Gaza, with the US playing a role like it is playing in the other two wars, would strain the US in classic ways that caused other past empires to become weakened by being over-extended, which would be another notable step toward a more global war.
XTOD: your kidney can go for like $300k and you only need one to survive
god gave us all startup capital. you just have to want it bad enough
XTOD: Cash has ZERO upside, ZERO convexity and a 💯 Reinvestment risk.Just saying.
XTOD: It’s true the classic 60/40 stock-bond portfolio had a bad 2022, but that doesn’t make it a bad long-term strategy. A 60/40 portfolio “reduces the probability” of a large loss, it does not eliminate losses. If you were told anything else, you were told in error.
XTOD: If you have a 2.9% mortgage locked in, I have one piece of advice for you:
Refinance at 8% right now
The higher rate will motivate you to grind harder, and you'll end up becoming much wealthier in the long run
https://x.com/DavidBeckworth/status/1715107370748072016?s=20
https://x.com/Dempster46/status/1715133721412567109?s=20
https://x.com/HannoLustig/status/1715110557085560846?s=20
https://x.com/Francesco_Bia/status/1715127672072699915?s=20
https://x.com/SantiagoAuFund/status/1715119691725676608?s=20
https://x.com/RayDalio/status/1715127832807096501?s=20
https://x.com/araghougassian/status/1714921891709022591?s=20
https://x.com/INArteCarloDoss/status/1715082259944911165?s=20
https://x.com/Rick_Ferri/status/1714998454831780006?s=20
https://x.com/huntercoldcalls/status/1715033564536856950?s=20
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