Daily Economic Update: May 23, 2024

Stocks fell (in the normal trading, but NVIDIA reported after hours), yields rose as FOMC Minutes (meeting ended May 1, 2024), skewed hawkish, see bullets below, but the TLDR is perhaps best summarized by these two statements: (1) "many participants commented on their uncertainty about the degree of restrictiveness. These participants saw this uncertainty as coming from the possibility that high interest rates may be having smaller effects than in the past, that longer-run equilibrium interest rates may be higher than previously thought, or that the level of potential output may be lower than estimated and (2) Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.

And did anyone else think that the fact that the Staff expects inflation to fall back to 2% by 2026 to be a bit of a long timeline?

NVIDIA beat across the board and announced a 10 for 1 stock split effective June 7th.  Snowflake earnings appeared to be really good too.  AI continues to appear to be an unstoppable force or something. 

Across the pond PM Sunak is calling for elections July 4th.  

Add Bird Flu to 'risk to your outlook'.

On the day ahead it's jobless claims and flash PMI's.

FOMC Minutes Recap - probably worth skipping to XTOD's

• Financial Markets and OMO:
• data pointed to inflation being more persistent than previously expected 
• the rise in longer term yields appeared to be due to higher real rates and higher risk premium
• short-term inflation expectations rose, but longer-term inflation expectations were well anchored
• reserves remained abundant
• Staff Review of Economic Situation
• good growth, slowing inflation and better balance in labor markets
• Staff Review of Financial Situation
• recapped market data, mentioned geopolitical situations
• credit remained available despite some tightening of conditions but noted that credit standards continued to tighten for CRE
• the Staff characterized the vulnerabilities of the financial system due to high asset prices as 'elevated'
• Staff Economic Outlook
• The economy was expected to maintain its high rate of resource utilization over the next few years, with projected output growth roughly similar to the staff's estimate of potential growth. The unemployment rate was expected to edge down slightly over 2024 as labor market functioning improved further, and to remain roughly steady thereafter.
• PCE inflation was expected to be close to 2% by 2026
• The Staff cited upside risk to inflation and downside risk to growth
• Participants Views 
• some debate over the impact of seasonal patterns and the impact of volatile categories had outsized impact on inflation readings vs. the view that inflation increases had been broad based
• attuned to inflation risks and still expect that inflation would return to 2% over the medium term, taking longer than previously thought
• some discussion of new leases at lower rents ultimately passing through to lower inflation
• despite participants noting some positive factors that could lower inflation, 'Several participants commented that growth of aggregate demand would likely have to slow from its strong pace in recent quarters for inflation to move sustainably toward the Committee's goal'
• Discussion of the impact of immigration on wages and growth
• Discussion/disagreement on productivity, with some believing recent productivity growth will not persist, while others believing it will be sustained in light of things like AI
• Noted the dichotomy of how lower income households were being hit hard by higher rates while wealthy households appeared to be benefiting from easy financial conditions
• Overall attuned to how higher rates could impact financial stability, but believed that other tools should be used to combat financial stability risky without impact policy rates
• many participants commented on their uncertainty about the degree of restrictiveness. These participants saw this uncertainty as coming from the possibility that high interest rates may be having smaller effects than in the past, that longer-run equilibrium interest rates may be higher than previously thought, or that the level of potential output may be lower than estimated.
• Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate. Committee Policy Actions

XTOD: The minutes not only made mention of "various" participants willing to consider hikes, they also removed the sentence below about rates being at their peak.

XTOD: Great work Mike Wilson

XTOD: Imagine believing you're running a restrictive monetary with stock markets liquidity goosed up to 188% market cap to GDP.

XTOD: "Commodities protect against structurally higher inflation and diversify better than bonds. A portfolio with 40% exposure to commodities outperformed a traditional 60/40 mix with less downside risk."  - BofA

XTOD: Question: What if I don’t want to wait for the monthly CPI release to see what inflation’s up to? Answer: Look at the price changes specifically for sugar and sweets, which are closely correlated with overall CPI https://ow.ly/l43H50RPoyv

XTOD: Investing in yourself is the key to achieving financial freedom.  Whether it's learning new skills, starting a side hustle, or taking care of your physical and mental health, investing in yourself has the highest ROI.

https://x.com/pdacosta/status/1793352911059128688

https://x.com/zerohedge/status/1793352370081935659

https://x.com/NorthmanTrader/status/1793350001155862930

https://x.com/WinfieldSmart/status/1793038742371918057

https://x.com/stlouisfed/status/1793032824578007155

https://x.com/joyofcompoundin/status/1793092391332614626