In another data point that dashes rate cut hopes, the Employment Cost Index data from the BLS showed wages and benefits rising at the fastest pace in the last 3 months and rising at a 4.2% pace YoY from last March. The 2Y closes the month back above 5% while stocks finished the month on a down note to close out a losing month, the first since last October. To start the month of May, the 2Y is 5.05% and the 10Y is 4.68%. With the curve flattening yet again, is anyone willing to trade a steepener here?
May starts on a busy note with the details of Treasury issuance, JOLTS, ISM Manufacturing and of course, the FOMC decision. While you wait for Powell, you're welcome to peruse my previous FOMC recaps here.
As for the FOMC meeting, we all know the data hasn't inspired the kind of confidence a 'data dependent' Fed desires before initiating rate cuts. Recent Fedspeak following the last FOMC meeting all point to H4L, but it will be interesting to see if any there is anything new as it relates to how the Fed views the categories that are most responsible for the 'sticky' inflation. Secondly, will there be any questions about the 'neutral rate' given both stubborn inflation and strong growth? Remember when Powell spoke at J-Hole and how the Fed was navigating by the stars? And remember how nobody has any clue exactly how to measure R-Star?
XTOD: Overlapping Generations macro says old retired people sell their assets to buy labour services (and things produced with those labour services) from the working young. A (demographic) labour shortage means asset prices fall, relative to wages. I'm not seeing it. Yet Plus: the prices of "long" assets (houses, equities, etc.,) should fall in anticipation of that future (predictable) labour shortage.
I'm not seeing that either. Yet. I don't know why, either. Yet.
XTOD: It's fair to say that Yellen-JPOW have failed. They clearly wanted to curb the deficit not through spending (politically impossible in an election year), but through lower inflation => lower rates, lower cost of debt, lower deficit => lower cost of debt etc... This is not happening and they need a plan B.
They need it urgently because the cost of debt is spiraling totally out of control.
XTOD: This morning’s ECI and housing price inflation figures confirm what I have suspected and feared. Inflation is not securely trending to target levels. Note that the ECI has accelerated from previous quarterly, semi-annual and annual levels. I suspect it has been understating labor cost inflation of late because of reduced work requirements associated with WFH.
The home price inflation figures are also cause for concern that shelter inflation is not durably declining. With higher interest rates and higher unit prices, rents will at some point reaccelerate.
Note, that as many have pointed out, bottlenecks have been easing over the last year or so reducing inflation momentum. This will not be forever and given geopolitics may reverse.
Financial conditions are now loose by historical standards. All reasons why the
@FederalReserve is in a treacherous environment, should have been more careful about easing signals and now should be very cautious about possible rate cutting.
XTOD: "Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things you only hoped for." — Epicurus
https://x.com/MacRoweNick/status/1785302281711181967
https://x.com/INArteCarloDoss/status/1785332909777338680
https://x.com/LHSummers/status/1785316161384595776
https://x.com/tferriss/status/1785271898252734943
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