Daily Economic Update: September 30, 2024

Happy last day before we start the 4th quarter.  On Friday, PCE data was waeker than expected in the MoM core at 0.13%, yet the YoY rate increased to 2.7%. I'm not sure it mattered as markets seem much more focused on Chinese stimulus and labor markets for the moment, where the focus will shift to this Friday's job's report. 

We ended the week with Atlanta Fed's GDPnow estimate for 3Q2024 revised up to 3.1%.  The NY Fed nowcast is in general agreement at 2.99%.  Stocks in general agreement that things aren't bad (or maybe they just believe in the Fed put).  The 2Y is 3.57% and the 10Y at 3.75%.

Away from markets you have historic flooding as a result of Helene and continued dismantlement of Hezbollah leadership by Israel.  Not top of mind for many is the fact that Oct.1 starts the resumption of normal collections, late fees, reporting to credit agencies, etc. for student loans. 

On an unrealted note, if you're looking for a perhaps under the radar podcast on AI, I thought this podcast with Edward Chancellor and Marathon Asset Management was interesting https://shows.acast.com/66acfe26e65b9fd5b02a0fcd/66b22e2fec20c36e8ebf8542

Monday: Fedspeak, including Powell

Tue: Constructing spending, JOLTS, ISM mfg.  VP debate

Wed: ADP, moar Fedpseak

Thur: Jobless claims, factory orders, durable goods, ISM services

Fri: Jobs Day in 'merica

XTOD: What the core PCE price index looks like as of August 2024

12-month rate: 2.7% (up from 2.6% in June and July)
6-month annualized rate: 2.4% (lowest since Dec)
3-month annualized rate: 2.1%

What the headline PCE price index looks like as of August 202

12-month rate: 2.2% (lowest since Feb 2021)

6-month annualized rate: 1.9% (lowest since Sep 2020)

3-month annualized rate: 1.5%

XTOD: I think about this often, living in a tech transplant-centric area  On a given weekday, I see moms and dads shopping together, at the gym for 9 am yoga, walking dogs at 10 am, picking up kids from school at 3 pm…etc   Part of me celebrates that we’ve unlocked this level of work/life balance  It’s an enormous quality of life booster for working parents with kids  But part of me also fears this is “too good to be true”  Perhaps a number of these jobs are disposable, or at the very least, transferable overseas  Perhaps some of these couples are semi-retired, living off a wealth effect that may dwindle away in a stock market correction, or if inflation relentlessly drives cost of living higher Time will tell.

XTOD: Google breached the mindshare moat w a spartan web page that was fast - and an AOL deal that raised awareness - kids started “googling”.  And then it was over.  Technology is required but not sufficient - mindshare is lightening in a bottle that triggers network effects.  💥

XTOD: And these foreign interests trying to cash in on big city real estate development are just following the example set by our own home-grown developers who've been bribing mayors, inspectors, and local politicians for decades to build "luxury" developments that charge obscene rents

XTOD: Modern life rewards distraction and consumption. But fulfillment comes from focus and simplicity. Reclaim your time. Reclaim your health. Reclaim your life. 

Daily Economic Update: September 27, 2024

China continues with stimulus. AI stocks (sans Supermicro Computer) continue to have legs and overall everything is perceived as bullish for equities.  Powell didn't say anything about monetary policy, so that was that. 

On the data front, you still can't get fired with jobless claims at a 4 month low, this despite constant headlines about layoffs (so maybe they'll make it to claims eventually).  Pending home sales slightly higher than expected, Durable Goods orders held up and 2Q GDP was confirmed at 3% and most of the revisions to previously reported growth estimates were positive.  The 7Y auction solid.

Away from data there is still war, there is the threat of East coast port strikes next week and Mayor Adams was indicted (if he goes to jail will he be in the same jail as Diddy and SBF?)

On the day ahead it's PCE Day!  

XTOD: These BEA revisions seem material. A common recession narrative has been GDP would "catch down" to weaker GDI, and that low savings rate indicated consumer stress. But today it was GDI revised significantly higher due to greater interest income, leading to higher savings rate.

XTOD: Revised GDP for Q2, the more interesting news is in the revisions which go back the last five years.  Notably: Remember the debate over whether there was a recession in 2022 because of two quarters in a row of negative growth? Well, one of those quarters was revised to positive.  https://pbs.twimg.com/media/GYZ446XbIAAi_3S?format=png&name=small

XTOD: The $NVDA bull & bear case summarized in 2 minutes by Zuck.  It is that simple.  https://x.com/i/status/1839304406938038624

XTOD:  The game of football is officially broken.   NIL, transfer portal, 6th year seniors, high school kids being offered money to play college ball or transferring 2-3 times between freshmen - senior year in high school, youth select travel teams, personal trainers making more money than Bill Gates from training 9 year olds how to run routes. We are just chasing after the wind. Good luck catching it.  

Football was once built on the foundation of commitment, grit, finish what you start no matter the cost. 

We should apologize now to future employers, wives, and children for the young men that are learning to quit or leave when things are difficult or times get tough.

XTOD (READ the full thread if interested) : A #Refinance Solicitation: True story from a client call yesterday.  "They told me I'd save about $300 per month and it would only cost me $1,219. Sounds like a good deal to me! Can you tell me what you can offer before I proceed with them?"   The Devil is in the details! https://x.com/AdvisorJohn/status/1839347434612498864

XTOD: Clarity comes from subtraction, not addition.  Remove the noise, the distractions, and the unnecessary.  What truly matters will emerge.

Daily Economic Update: September 26, 2024

So long Apple Vision Pro, hello Meta Orion.  I wrote this in augmented reality.  I, like Sam Altman, have been lobbying the government in hope that we can further build out our electric grid so that we have electricity available to power data centers so AI can do a better job writing this blog. 

Mortgage refinancings surge 20%.  Sales of new homes in August were lower than July, but better than expected. If they give first time homebuyers more money prices will go____?

Putin talking about potentially using nukes. Israel preparing for ground ops in Lebanon. A Hurricane in the gulf.  Possible strikes at ports. Stocks near all-time highs (yes they were down slightly).

5Y auction was on the screws at 3.591% with decent internals, but no uptick in demand.  The long end of the curve continues to sell off post last week's FOMC.  The 2Y is at 3.56% and the 10Y at 3.79%.

Today we get updates to GDP, GDI, including revisions to data going back something like 5 years.  Durable goods data,  Powell at 9:20am and the 7Y auction at 1pm.

XTOD: A trader has placed the single biggest ever trade in SOFR futures today 🤯 Why? No idea.

XTOD: It is fascinating that yimbyism started with sensible democrats (as the problem is so much worse in places like sf), but then republicans rather than say great, you discovered property rights and markets, let’s get this done, moved to reflexive opposition.

XTOD: In the future, I think this era is going to be looked at critically in this regard. The ratio of attention that market participants have to give to the Fed, and the amount of communication that the Fed gives to the market on a regular basis, has kind of reached banana land.

XTOD: Almost one third of our life is spent at work.  But only 20% of people are passionate about their jobs.  This is one of the key reasons why:  45% of people have not felt true happiness for more than 2 years.   25% don't know, or have forgotten, what it means to feel happy.

XTOD: Do It Your Way  You do your best work and have the most fun when you’re not burdened by fear that someone else thinks you’re doing it wrong. 

https://collabfund.com/blog/your-way-is-the-only-way/

Daily Economic Update: September 25, 2024

China eases, cutting their RRR by 50bps which should open up over $140bln in new loans.  Chinese authorities also cut certain repo and mortgage rates by 20bps, while making some regulator changes to spur demand for homes and stocks.  Elsewhere in Asia, BoJ talked tough on inflation and the Aussie central bank held rates at 4.35% for the 7th straight meeting, so far abstaining from the rate cutting frenzy as they remain vigilant against inflation risk.

Stateside, the Conference Board's Confidence data dissappointed with an uptick in recession probability and a worsening "labor differential".  Not in most of the headlines, the survey also showed an uptick in inflation expectations for the next 12-months to 5.2%.

In fedspeak, Bowman, AKA 'the dissenter', expressed concern that the Fed's fight against inflation may stall and that the neutral rate may be much higher than it was pre-pandemic.  She also expressed concerns around geopolitical risk related to supply chain disruptions and fiscal policy as creating upside risk to inflation.  She didn't seem overly concerned about labor markets, but noted the cooling.

Stocks at all-time highs again, led by tech.  Caroline Ellison going to jail for 2 years.  The 2Y auction was 'meh', but probably as expected with yields having fallen as much as they had recently.  Closing the day, the  2Y at 3.54% and 10Y  at 3.74%.    Witht the 2s10s uninverted are you betting on a further steepening?  Bill Gross provides some context see XTOD down below.

XTOD: The trends in China are really quite worrying.  This isn't a crash like scenario where demand will suddenly be destroyed and intl markets will drawdown. It isn't 2015.  But I'm afraid China is in a decaying spiral that is getting impossible to climb out of.

XTOD: R.I.P. inverted yield curves. 

XTOD: Yield curve trades working well   Would not add here — due for a few weeks rest but last 25 years 2/10 curve avg — 107  Now — 18

XTOD: Almost everything is noise. A tiny fraction of things are enormously valuable. They are hidden many layers below the surface.

Daily Economic Update: September 24, 2024

Euro area PMI's were weak, while U.S. PMI's were solid with services leading the way.  

In Fed land, Bostic supported 50bps because he was convinced inflation was sustainably heading back to target while risk to employment were increasing.  Bostic's full speech is here.   

Kashkari was also out with an essay in support of cutting 50bps, largely echoing Bostic's view and like Bostic emphasizing that policy remains restrictive, but that they view the balance of risk as having shifted.   Kashkari does not rule out that the neutral rate may be structurally higher.  Kashkari then also asks how might the Fed be surprised and of course hits on largely the same two questions I posed in my kinda a FOMC recap.  Those questions are: (1) could the economy be closer to recession than we think and (2) could inflation be reignited.  Positing that he doesn't see much risk that either of those are major risk at present.  He also doesn't rule out the inevitable "shocks".   Overall he is very much in the "soft landing" camp and that there is no need to move too fast with rate cuts. You can find Kashkari's essay here.

If you want to go full dove, Goolsbee comments would lead you to believe rates should probably be zero.

The Fedspeak reminded me of what I wrote at the start of the year:

I have no clue what views will be right in 2024, but I'm going to guess that the advice Paul Volcker left in his 2018 biography, "Keeping At It", may not be entirely lost on JPOW.  That advice is: "A lesson from my career is that such successes [in maintaining low inflation] can carry the seeds of its own destruction. I've watched country after country, faced with damaging inflation, fight to restore stability.  Then, with victory in sight, the authorities relax and accept a "little inflation" in the hope of stimulating further growth, only to se the process resume all over again."

Clearly the Fed believes inflation is nearly or completely beat, but I guess we'll see.  Don't worry there are only like a dozen more Fed appearances this week.

Either way stocks hit new highs, so did Gold and bond yields rose a little.  The 2Y was 3.59% and the 10Y 3.75% as the 2s10s curve continued to steepen.

On the day ahead it's home sales and the 2Y auction.

XTOD: Chinese policy makers keep running into the issue that lower rates and more programs to lend to the private sector aren't the solution to a debt deleveraging.   That's b/c it's not a supply or price of credit problem. Its an asset price & demand problem.

XTOD: A visualisation of why the fees you pay, matter: https://pbs.twimg.com/media/GYLcllYakAIgh9P?format=jpg&name=900x900

XTOD: "...just 86 stocks accounted for half of the total stock market wealth creation over this 90-year period...less than half of the stocks in the universe generated any returns for investors...only 42% earned more than risk-free Treasuries over the entire period...less than 4% of the thousands of stocks in this universe accounted for virtually all of the market gains. Harvey D Shapiro Henrik Bessembinder 

@barronsonline .  there are no words for how important this Shapiro essay is...

XTOD: Retirement starts when you stop sacrificing today for some imaginary tomorrow. 

You retire by saving up enough money, becoming a monk, or by finding work that feels like play to you.

Daily Economic Update: September 23, 2024

From: 'The Devil's Financial Dictionary" by Jason Zweig

The irony of maintaining a daily economic update blog while firmly believing it is best to ignore all of the noise and false stimuli is not lost on me. If you’re paying attention it’s the message of this blog that you can’t predict the future and it's a waste of time to focus on the noise or "what the world looked like ten minutes ago."

"the "short-term crowd" responds constantly to "false stimuli" whether it's the latest economic data point or the trivial news that a company has beaten analysts' expectations.  "You need to be wired not to believe the bullshit, to not be listening."  - William Green discussing and quoting Nick Sleep (if you don't know who Nick Sleep is google Nomad Partners investment letters)

 "All of humanity's problems stem from man's inability to sit quietly in a room" - Blaise Pascal

Speaking of noise, on Friday, Fed Governor Waller said he saw inflation falling much faster than he anticipated, which pushed him into the 50bp camp, while dissenting Fed Governor Bowman released this statement which included: "Although it is important to recognize that there has been meaningful progress on lowering inflation, while core inflation remains around or above 2.5 percent, I see the risk that the Committee's larger policy action could be interpreted as a premature declaration of victory on our price stability mandate." as she argued in favor of a 25bp cut which "would also avoid unnecessarily stoking demand."  Speaking of demand, nothing is stopping demand for AI as we're firing up nuclear reactors to power data centers.

We ended the week with equities at or near all-time highs and with the 10Y ~10bps higher than it was prior to the FOMC meeting, trading near 3.75%.   The 2Y yield at 3.60% is little changed from pre-FOMC.  The geopolitical situation looks no better than it was with Israel and Hezbollah firing rockets.  The only situation worse than geopolitics might be Diddy's.

On the week ahead PCE will be in focus along with PMI's and talk from Fed officials like Powell.

Mon: Flash PMI's, Fedspeak

Tue: Home prices, 2Y Auction

Wed: New Home Sales, 5Y Auction

Thur: Durable Goods, 2Q Final GDP, Jobless Claims, Powell, Pending home Sales, 7Y Auction

Fri: PCE & Income, UofM final

XTOD: Why indeed! To recognize market imperfections, even serious ones, is one thing; but to claim, in light of experience, that governments are generally better able than the market system is to husband scarce resources, you have to be a moron, or a fiend, or both.

XTOD: "Nobody believes this, but Charlie Munger and I have been buying stocks and business for 50 years. In that entire time, we've never had a discussion of macroeconomic factors in making a decision as to whether to buy, or sell a business — buy a business, or buy or sell securities. 

We just — it just doesn't get into it — our consideration. 

And if I were buying a farm, I would not be thinking about what the Fed was going to do. If I were buying an apartment house, if I were buying a business outright I wouldn't do it. 

So, when I buy a piece of a wonderful business, say Coca-Cola or American Express, it is not a matter of consideration. So Charlie and I will talk about the business. We will not get into discussions about the Fed, or — or Government."  - Warren Buffett

XTOD: This is how the world works. The stupid ones can never break free of the apparent complexity. Haruki Murakami

XTOD: “So, Cheryl, it’s called a freak-off, and Diddy asked me if I could bring the whale head and, well, things got out of hand.”

XTOD: Jamie Dimon has doubts about a "soft landing":“I hope it’s true, but I’m also more skeptical that inflation is going to go away so easily.” It´s gone already!  https://pbs.twimg.com/media/GX80emHXIAAiMdd?format=jpg&name=900x900

XTOD: "Success on Wall Street was getting the most money. Success for us was having the best life." - Ed Thorp

Daily Economic Update: September 20, 2024

One programming note, I'm old enough to remember all of the fear-mongering around the urgent need to cut interest rates to save off the all but certain recession back in early 2023, back when rates were at an upper bound of 4.50%.  That's all.  

Now almost 20 months later, markets are europhic over a 50bp cut to an upper bound of 5.00%.  I guess people changed their minds.  Equity indexes at new all time highs.  The yield curve steepens with 2Y at 3.62% and the 10Y at 3.75%.

Yesterday the BOE held rates at 5% while downgrading growth and upgrading near term inflation. Recall services inflation just printed a 5 handle in the UK. 

Stateside, initial jobless claims fell to a 4 month low.  Home prices hit a new high as sales fall and the Philly Fed Mfg index surprised to the upside. Not the usual data prints in an economy that is materially slowing.   Internationally the Middle East remains risky with the potential for escalation between Isreal and Hezbollah.

I asked David Beckworth's macromuse bot, an AI trained on the transcripts of all of his interviews on MacroMusings podcast, why a lowering of interest rates might help a weakening employment picture without leading to a rise in inflation.  The response (edited for brevity):

Lowering interest rates can help prevent a weakening in employment without risking a rise in inflation through several key mechanisms. First, lower interest rates can stimulate aggregate demand, boosting economic activity and employment. This is because lower rates make borrowing and spending cheaper for households and businesses....others caution that the Fed's Flexible Average Inflation Targeting (FAIT) framework made the central bank reluctant to raise rates until employment had fully recovered and the Fed should consider a more symmetric framework that is less tied to employment outcomes. 

Additionally, depending on the natural rate of unemployment, which may have risen temporarily due to pandemic-era dynamics, lowering rates could help bring more workers back into the labor force without necessarily stoking high inflation, as the unemployment rate may be above its new, higher natural level.

Ultimately ChatGPT agreed with the theory that timing rate cuts to when there is "slack" in the labor market coupled with a continued anchoring of inflation expectations and no perceived issues on the supply side can lead to a lowering of policy rates without running much risk of stoking inflation.

It's Friday, we get the BoJ overnight after the time of this writing.

XTOD: JP Morgan 3 days ago: “Stock won’t do much for the next decade”  JP Morgan today: “Expect a face ripping +15% rally from here”  Ok then.

XTOD: Ex-Kansas City Fed chief sees renewed inflation risk after large rate cut http://reut.rs/3MQFj7p

XTOD: 10 year treasury belongs at 3.75 based on dot plots and 2.5 % inflation  Stick with yield curve 2/5 steepner  I like mtge reits (NLY AGNC DX)  And mlps (WES)

XTOD: “Part of the game of investing is to 'come into your own.' You must find some way that perfectly fits your personality.”  — Li Lu

XTOD: “The most difficult thing is the decision to act. The rest is merely tenacity. The fears are paper tigers. You can do anything you decide to do. You can act to change and control your life; and the procedure, the process, is its own reward.”​ — Amelia Earhart

Daily Economic Update: September 19, 2024 (Kind of a FOMC Recap?)

We know the Fed cut 50bps and are "forecasting" another 50bps of cuts this year and another 100 next year.  We also know there was a Governor dissent for the first time since 2005.  Powell stressed greater confidence in inflation reaching target, no one asked if the Fed's FAIT (flexible average inflation targetting) should be symmetrical, and that Powell believes labor markets are no longer a source of inflation.  The median dots show a Fed that sees unemployment rising in the face if falling rates even as inflation slowly returns to target.  Powell said something about the possibility of the neutral rate being higher.  I don't recall much discussion about fiscal policy and overall the Fed will make decisions on the basis of the evolution of the economy. 

I didn't write a FOMC Recap for this one.  If I had written a recap, I might have focused on a Howard Marks concept I wrote about earlier in the week that he calls "the perversity of risk".  Conceptually it is the paradox that risk is highest when market participants perceive it to be the lowest.  Under that paradox there are two initial questions I think are worth considering following the FOMC meeting today: (1) is the Fed too confident about the risk surrounding inflation?  and (2) are investors too confident about macroeconomic risk in general as they bid stocks and bonds both to recent highs?  In regards to the second question are investors actually too complacent in the risk related to employment. With regards to both of these questions, I have no answers, only more questions.

If I were to have written a recap, I'd probably stick with some themes from Marks writings and try to think about how they apply to monetary policy and the current stance of the Fed's policy.   Marks says "Not trying to maximize is an important component in preparing for what life throws at you...".  I might try to discern if the 50bp cut is an attempt not to maximize the fight against inflation, or whether it's actually a 'mistake' in the Fed trying to maximize employment.  I might try to think about whether a 50bp cut leads to a less fragile economic outlook, one that will be more resilient to shocks, or whether it creates vulnerabilities to positive shocks that spur reignite inflation. 

Ultimately if I were to write an FOMC recap, I might borrow thinking from William Green's book "Richer, Wiser, Happier" and his chapter about Marks titled "Everything Changes".   I might talk about Marks thinking around impermenance.  About how we can't predict the future, not only do we don't know what will happen, often we don't even know what could happen.  About how we shouldn't cling to things that we know can't last.  About thinking in terms of preparation rather than prediction.  About discipline rather than biases and emotion.  About how we shouldn't waste our time trying to predict interest rates, inflation, growth, or other things that are influenced by so many factors with randomness.  About how investor psychology historically creates cycles.  About looking at things in terms of "Where's the mstake?"  And about "bearing risk intelligently while never forgetting about the possibility of an unpleasant outcome."

I think I'd write something about that and conclude it with a statement simply saying "I don't know."  

If you were to have written a FOMC recap what would you write?

Twitter/X Thoughts of the Day will return tomorrow.

Daily Economic Update: September 18, 2024

FOMC day is upon us all, WWPD?  We'll see what the Powell Rangers are up to later this afternoon.  The focus will clearly be on whether the cut is 25bps or 50bps and secondarily on "the Dots".  The rest will be about how they discuss "risk management" and perhaps even a nod to r* estimates.  We'll know more in a few hours.  I'm sure there might also be a question or two around cutting rates ahead of the election thrown in there. 

So retail sales coming in better than expected and really showing no major weakness.  The headline retail sales rose 0.1% MoM against an expectation of a decline of 0.2%, while the "core" (ex autos, gaso, and building materials) rose 0.3% matching expectations.  Nonetheless, the most important retail sales print of your lifetime apparently settled nothing in the Fed rate cut debate. The new narrative is that whatever decision the Fed makes around 25 or 50 that there will be some dissent.

Away from retail sales, industrail production beat expectations, rising much more than forecast helped by motor vehicle assemblies.  Following both data releases the Atlanta Fed GDP now is estimating 3% real GDP for Q3, up from 2.5%.  That certainly doesn't scream recession, but who knows.

Then there's the possibility of war between Isreal and Hezbollah following the alleged Isreali attack on Hezbollah pagers yesterday which reportedly injured 4,000.

As we had into the FOMC decision we have stocks at/near all-time highs, a 10Y ~3.65% and a 2Y ~3.60%.  

XTOD: 14 months since last @federalreserve  rate hike. Longest in history was 15 months into the eye of the Great Recession.

XTOD: The Fed faces a finely balanced set of considerations over whether to cut by 25 or 50 basis points at its meeting that begins today.   The case for 50 comes down to what Fed officials call risk management but what might be thought of as regret minimization. Per former Dallas Fed President Rob Kaplan, if you cut 50 here and you think the Fed will need to cut again after that, you are unlikely to regret such a cut even if the economy chugs along between now and your next meeting. But if you cut 25 and things worsen a lot in the coming weeks, you'll feel bigger regret as you'll be behind the curve. 

The case for 25 boils down to some combination of 1) process issues (i.e., 50 will signal something more urgent; there's an election soon; communications were not explicit enough about 50 in the run-up to this meeting), 2) a view that the economy is doing just fine and will continue to do so with more gradual reductions, and 3) that because financial conditions are easy (in part because markets expect the Fed to deliver a string of cuts), igniting risk assets could make it harder to finish the inflation fight. 

There is a gift link to the full article here:

 https://wsj.com/economy/central-banking/fed-interest-rate-cut-size-79a238ca?st=QvUaSC&reflink=desktopwebshare_permalink

XTOD: A Major Incident has happened this morning across Lebanon, leaving between 1,500 and 2,000 Senior Members of Hezbollah and other Iranian-Linked Individuals in Critical Condition, following some kind of Hack causing Encrypted Pagers used by the Organization to all Simultaneously Explode.

XTOD: "Too much capital availability makes money flow to the wrong places."  — Howard Marks

XTOD: The key to compounding is to get started.

XTOD: You don't have to be special to be successful.    Ordinary people can do extraordinary things by choosing to be what most people are unwilling to be: consistent, hardworking, patient, and determined.  Simple, but not easy.

XTOD: As you get older, you’ll realize that a $30,000 watch and a $30 watch both tell the same time.

A Gucci wallet and a Target wallet hold the same amount of money.

A $10,000,000 house and a $100,000 house host the same loneliness.

A Ford will also drive you as far as a Bentley.

True happiness is not found in materialistic things, it comes from the love and laughter found with each other.

Stay humble… the holes dug for us in the ground are all the same size.

Daily Economic Update: September 17, 2024

It's interesting to look back at what we were talking about a year ago. Does anyone even remember the UAW strike and how that would be inflationary?  Funny that the Boeing strike isn't painted in the same light.  And then go look at the September 2023 meeting (recap here). That was the first meeting following the last rate hike.  We had 2Y yields around 5% (compared to 3.56% now) and the 10Y yield around 4.30% (compared to 3.52% now).   At the time of that meeting, the median dot showed one more hike in 2023 and removed two cuts from 2024, effectively projecting just 50bps in cuts for all of 2024 at the time.  Obviously new data changed the views as 2024 progressed, but if monetary policy didn't change, must it have been "shocks" to the economy that caused the sudden slowing?  Or was it that estimates of the "long and variable lags" were wrong in 2023? Or was it the elusive r* (neutral rate) was missestimated?  Supply chains?  China's weakness?  Or none of the above? Or some combination of the above?

I'm all in favor of the mantra "When the facts change, I change my mind."  In this case the fact is the unemployment rate has moved up 40bps while the core PCE rate has moved down 90bps despite a first quarter scare. Other facts could include stocks near all-time highs (the wealth channel), credit spreads remaining tight and inflation remaining above target.  Nonetheless, Governor Jefferson told me in 2023 that 

"high interest rates raise the incentive to save, which in turn dampens consumer spending on interest rate-sensitive expenditures, like housing and automobiles, and slows businesses' investment in new equipment. The decrease in spending decreases the overall demand for goods and services in the economy, thereby reducing the demand/supply imbalances we have seen, and, consequently, reduce inflationary pressures. As a result, the inflation rate should fall back toward 2 percent, the FOMC's inflation rate target."

Should we assume rate cuts are going to spur more spending on housing and autos and businesses will invest more in equipment following the cut?  What will that do to inflation now?

Do you really know? I don't. 

People smarter than me advocate 50bps. Claudia Sahm call for a 50bp cut in an aptly titled post “Fifty”. Paul Krugman agrees. The crux of the argument is that inflation is on pace to reach target, shelter is a lagging indicator and that the labor market is weakening quickly, so why not start big as we’re obviously running very tight policy.

Other smart people, like Torsten Slok of Apollo seem to feel differently.  Take a look at some of the indicators on slide 7 of their deck.  These counter arguments, which  center on the possibility that the fight with inflation hasn’t definitely been won and that there is weak if any evidence that further loosening on monetary won’t risk reigniting inflation via the standard doctrine that it will increase spending, output, the wealth channel and ultimately inflation. 

Either way, the market seems to be leaning a little more towards 50bps, despite Liz Warren wanting 75bps.

Anyway on the day ahead it's retail sales, industrial production and capacity utlization.

XTOD: Yet even a 50-point cut would leave the Fed funds rate 300 basis points above pre-pandemic. How can this be justified? The main answer seems to be that the economy isn't in a recession (yet). But this looks like a variant on Milton Friedman's fool in the shower — the guy who alternately freezes and scalds himself because he's too data-dependent In this case the water is getting cooler but it's still tolerable — and the Fed is waiting to adjust the taps until it turns ice-cold.  Maybe it's PTSD from the unexpected inflation of 2021-22, but it's still a big mistake 

XTOD: STANLEY DRUCKENMILLER JUST NOW ON RATE CUTS: 

“I don’t care if they go 25 or 50, I really don’t. But I can’t help but point out that right after inflation was 9% with rates at zero they went 25bp. Where were all the Wall Street cheerleaders calling for 50 because real rates are too high? The asymmetry in their narrative is striking.”

XTOD: There is zero upside for the Fed to allow this level of dovishness in STIR, Equity multiples, corporate, mortgage, and municipal rates, weakness in USD, strength in precious metals, energy, and industrial commodities.   Zero need and zero upside to ease anywhere near as priced.

XTOD: Everyone knows these long hours aren’t healthy, so why hasn’t anything changed? Are banks indifferent to employee welfare or simply inefficient? The answer is more nuanced https://on.ft.com/3MKIyNI

XTOD: AMAZON TELLS STAFF TO RETURN TO OFFICE FIVE DAYS A WEEK

*AMAZON CEO: 'HAVING FEWER MANAGERS WILL REMOVE LAYERS' 

Kudos to $AMZN leadership building on recent success by getting even more fit.  Flatter is faster.  Leaner is better. 

XTOD: As a rule, whatever you need to optimize, don't do. 2/Hint: when in a car, I take the fastest route; when walking I pick the most scenic route; when cycling I take the longest route. Allora: I avoid cars if I can and when I can.

Daily Economic Update: September 16, 2024

FOMC week is upon us.  People are seemingly up in arms that there is true uncertainty around whether the Fed will cut 25 or 50bps. Is this the slow end of a form of "forward guidance"?  There's still a chance that Nikileaks puts out another piece cementing either 25 or 50 ahead of the Wednesday decision.   Anyway it's a big central bank week with Fed, BoE and BoJ. The 2Y is 3.57% and the 10Y is 3.65%.

Where do things stand (economically speaking) going into the meeting?  Well I think that very much depends on your narrative, but one thing we can probably all agree on is our economy is currently doing better than China's where stocks and bond yields are hitting new lows and even there manipulated data doesn't look great.  Stateside, last week ended with stocks on a 5 day winning streak and are back near all-time highs. The UofM sentiment was above expectations and at a 4 month high.  The survey showed a continued decline in inflation expecations 1 year out, but showed an increase in inflation expectations in the 5-10 year horizon.  Of course, it's largely a survey about politics and gas prices, so who knows what it means. 

Whatever the news flow, your time is still better spent reading this summary of Howard Marks recent video "How to think about risk" (you should watch the video).  

Or, reading this article, "False Profits" from Jason Zweig about often promoted trading strategies. 

Or, watching all the episodes of Industry while reading Matt Levine talk about investment bank analyst hours being a "floor, not a cap" which formerly "was “it’s about 100 hours a week, unless you need to work more,” and the new standard is “it’s 80 hours a week, unless you need to work more” and how AI will potentially be "making junior bankers’ lives easier in the short term, but undermining their development in the long term: They won’t learn, at a deep level, what drives returns on an LBO, because the AI does all the math for them. The apprenticeship model will break down."

Outside of the financial news there was another Trump assassination attempt, which is an apt reminder of risks in general and about election risk in the specific. 

On the week ahead: 

Mon: Empire St. Mfg survey

Tue: Retail Sales, Industrial Production and Capacity Utilization

Wed: Building Permits, Housing Starts and FOMC

Thu: BoE, jobless claims, existing home sales

Fri: BoJ

XTOD: Cashier at trader Joe's asked me what I do (I leave it at finance), and then asked if he should buy calls ahead of the rate cut.

XTOD: I get it that people lost money betting into the blackout period only to get rug pulled under their feet by Timmy, but I think this is a better place for FOMC. I don’t really get all the talk about them having absolutely to guide more to shift the odds of 25 bp or 50 bp into certainty. 

They probably have odds exactly where they want them and they will now turn a decision that was fully priced into one that will carry a signal. 

They will either out-dove or out-hawk the 50% and in that their decision carries important signaling vs being just a fully priced ritual where everyone second guesses small language tweaks. 

I hope this is a structural shift in their communication going forward. Market needs to be kept on it’s toes.

XTOD: 7/ On risk management grounds, a half point cut is easy to correct for if inflation stays stubborn or the economy takes off; just don't cut again. A quarter point cut is harder to correct for if real data weaken further; it leaves the Fed further behind the curve.  8/ Probably the best argument for a quarter vs half is that when the Fed starts a new cycle, it usually starts small, because it likes the optionality a drawn-out series of small moves provides. (Brainard principle: when uncertain, move slowly.)

XTOD: The short-term crowd is always too distracted to notice the long-term crowd slowly compounding.   An investor obsessing over daily economic data misses the big picture. A teenager chasing fleeting popularity neglects to develop genuine interests and skills. A co-worker stops paying attention to the details to chase attention. All chase false stimuli at the cost of lasting value.  

Never try to win the moment at the expense of the decade.

XTOD: The need for certainty is the greatest disease the mind faces.

XTOD: There are a thousand different ways that you can "find a niche" and exploit it to make a ton of money, and yet not get any closer to living out your calling

Daily Economic Update: September 13, 2024

ECB cut their deposit rate by 25bps as expected to 3.50% while also cutting their growth forecast through 2026 and showing somewhat sticky inflation in their forecast, noting base effects.  There were also 60bp cuts to the main refinancing rate and marginal lending rate in what was viewed as a technical change necessary to reduce the premium banks pay to borrow relative to what they earn on deposits at the ECB.  Markets are pricing in a possible pause at their next meeting. 

Stateside PPI showed higher core PPI than expected and inital claims were relatively benign.  Yields rose a little more and stocks continued to rally.  The 2Y is 3.66% and the 10Y is 3.69%

Also making the news was that Berkshire Hathaway's Vice Chair Ajit Jain sold half his stake in the company, which of course leads to a ton of speculation as to why?

As I probably remind readers every few weeks, following day to day data is largely a waste of time because the shelf life on this data is so short, it's immediately replaced by the next most important thing (like next week's retail sales) and we frequently fall for noise and completely miss the signal.  We also fail to develop any good filters.  What information do you actually need to better determine if your investment or decision will help reach your goals for it over the horizon.  If you don't know what's important, the qualitative, you can get trapped in the noise.

I posted this back on January 17, 2023:

"providing you with a stream of data and opinion is a business, a business predicated on a demand by investors (including speculators) to be told by someone else what to do (credit to Ben Graham's writing for this phrase).  The incentives are such that adding noise, complexity and a constant pressure to do something is part of the business. 

Morgan Hounsel wrote about this in a blog post Trying Too Hard in which he tells the story of Jon Stewart interviewing CNBC's Jim Cramer:  "Years ago Jon Stewart interviewed Jim Cramer. When pressed on CNBC content that ranged from contradictory to inane, Cramer said, “Look, we’ve got 17 hours of live TV a day to do.” Stewart responded, “Maybe you can cut down on that.” He’s right. But if you’re in the TV business, you can’t."

Anyway, enjoy your Friday and the UofM sentiment.  Listen to Howard Mark's in XTOD below.

XTOD: One of the most interesting things the PPI tracks that the CPI doesn't is retail markups. Retail markup growth has slowed considerably & this has been a contributor to disinflation. In August in particular, growth in grocery markups fell to 0.7% YY, the slowest in 3 years.

XTOD: A masterclass by Howard Marks on how to think about risk.

https://youtu.be/WXQBUSryfdM?si=rmI9woorI_QpTrWq

XTOD: "Great leaders have streak of unorthodoxy. They’re creative innovators.” https://pbs.twimg.com/media/GO6pO3EXUAAZBBm?format=jpg&name=medium

XTOD: Most people wait too long to go into action, generally out of fear.  They want more money or better circumstances.   You must go the opposite direction and move before you think you are ready.

XTOD: Intelligence without courage leads to anxiety because you will spend your time overthinking instead of acting, taking risks, improving your life.

XTOD: When there is an opportunity, I do not hit. It hits all by itself.

Daily Economic Update: September 12, 2024

Yesterday CPI came in mostly in line with a bit higher than expected core reading.  CPI Core came in at 0.3% MoM v. 0.2% est.  Rents rising more than expected was a bit of a surprise to most, with OER hitting its highest pace since January.  Of course some of the narrative is that housing inflation doesn't really matter, it’s backwards looking, so we should strip this stuff out.  In an event, unless something crazy comes about with PPI, seems hard to see the 50bp cut.

In Fed news Bostic violated some trading policies, but what else is new at the Fed. His defense was o was just tracking the Pelosi portfolio.

Stocks were falling until NVDIA wasn't.  Yields rose.  The 2Y was volatile but rose to 3.66% and the 10Y to 3.67%

ECB rate decision, PPI and Jobless claims on the day ahead.

XTOD: J Powell called supercore CPI "the most important category for understanding the future evolution of core inflation." Yet, he's going ahead with cuts with supercore CPI at over 4.5%. Bottom line in soft-landing there's no reason to own bonds.

XTOD: A lone bonfire ignites on H4L Island

XTOD: Three possible explanations for the painful meltdown in commodities:

- Global growth is slowing hard

- China has hit a brick wall

- Someone (a trading house? A large hedge fund? An investment bank?…) has funded large commodity trades with JPY borrowing and is now being “tapped on the shoulder”

The recent strong daily correlation between the JPY and the oil price leads me to believe that it is the latter…

XTOD: You’re not consuming content; you’re being consumed by a medium

XTOD: This is one of Charlie Munger’s favorite biographies and one of my favorite paragraphs in the book: "Success in life is being a good husband, a good father and you end up being a second father to hundreds of other men and women.

Last night I attended a wedding of a young man from our office.This young man told me that two men had influenced his life, his father and me.  That’s worth more than money."

Daily Economic Update: September 11, 2024

 

As a reminder of what's important see above. That said it is the most important CPI print since the last one.  Riding on this one might be the fate of a 25 v. 50bp cut at the upcoming FOMC meeting next week. The closely watched components of the report are likely to be shelter (duh), but also the same recent faves around autos and auto insurance. Going into it we have the 2Y at ~3.60% and the 10Y at ~3.64%.  Seemed like demand for the 3Y Treasury was solid given a record Bid-to-Cover.

Speaking of inflation, oil prices are getting smoked with crude falling to $66/bbl (from over $80 not to long ago) despite wars and a hurricane as analyst believe global demand is weak. I guess that might mean something for inflation at some point, or not.

I wrote this before the debate so you'll have to find interesting commentary elsewhere. 

XTOD: “The economics profession has become insular and status-obsessed, and not focused enough on making a positive impact on the world.”  https://t.co/rdfbzef8aE

XTOD: Commute to NY City This Morning: Distance: 19.1 miles  Door to Door: 2 hours, 47 minutes!

XTOD: An ETF for private credit, which is inherently supposed to be away from public marks?

We truly are in the Golden Age of Private Credit.

XTOD: August NFIB Small Business Optimism Index Declines by Most in 2 Years (-2.7%) to 91.2

Particularly outsized declines in the net share of firms reporting positive earnings trends (down to -37% from 30% in July), expecting higher sales (-18% vs -9% prior), expect better economy (-13% vs -7%). 

Other notable declines include the net share of firms planning to hire (13% vs 15%), higher selling prices (20% vs 22%), and plans to increase inventory (-1% vs 2%)  The uncertainty index also rose to 92 from 90,  its highest level since the peak of the pandemic.   I’ll dig in more later, but the rather large and broad-based deterioration in small businesses confidence aligns with the downbeat August Beige Book.

XTOD: US Treasury says Yellen tests positive for COVID, working from home http://reut.rs/3XOoBw5

XTOD: Better to be out of a trade, wishing you were in it, than in a trade, wishing you were out of it.

XTOD: Dear Fed, please pay attention to the markets! Stocks tumbling, 10-year yield now at 3.65% as oil plunges to $65 per barrel & gasoline tumbles to $1.86 per gallon. Whatever CPI and PPI show, they are lagging indicators. Markets lead. Stick the soft landing with a half-point cut!

XTOD: By far the best measure of success I’ve found is how pleasant the passage of time feels to you.

Daily Economic Update: September 10, 2024

 The NY Fed's Survey of Consumer Expectations showed generally stable views around employment and inflation, with some increase in the 3-year ahead inflation expectations.  Of course expectations and how consumers form expectations, how they impact prices, etc. is an area for economist to debate.  The other point in the survey that is making the rounds is that the average perceived probability of consumers missing a debt payment increased to its highest level since April 2020.

Stocks rallied as bonds were relatively unchanged.  Inventory data was generally a non-event.  Speaking of events, Apple had one.  I think I still have an iPhone 12 or something.

Over in Europe, former ECB Head Draghi reminded Europeans that they are over regulated and under productive. In a 400 page report he calls for spending to make Europe innovative amongst other remedies for the "slow agony" that is European economics.

If you're looking for something to read, you know I like to write about the difference between risk and uncertainty (you can find some of it here).  I thought this article was a good read on the topic https://www.bankeronwheels.com/are-you-overconfident-in-predicting-equity-risk/

Debate is the highlight of the day.

XTOD: Today’s data out of China will add to worries about the underlying health of the world’s second largest economy. The across-the-board downward misses on the price data are consistent with other metrics, suggesting that the combination of weak consumption and investment risks developing into a vicious cycle that would also complicate the authorities’ ability to implement structural reforms.

XTOD: Never underestimate Wall Street's willingness and ability to meet investors' want for extreme leverage...https://pbs.twimg.com/media/GXDA59JWIAcYmDZ?format=jpg&name=900x900

XTOD: What stage of the market cycle is it when people are making Nvidia purses?

XTOD: He died doing what he loved most: Shorting Treasuries and making up monetary policy conspiracies

XTOD: Springfield, Ohio, police say there are no reports of pet being stolen or eaten in Springfield, Ohio (by Haitians or anyone else).

XTOD: IN CONSTRUCTION  Human beings are only healthy when they are still in construction (intellectually). Aging starts when they become a self-museum.

Daily Economic Update: September 9, 2024

Headline payrolls worse than expected at +142K vs. 160K estimate while average hourly earnings came in at 0.4% MoM and 3.8% YoY, both stronger than expected.  The unemployment rate also fell back to 4.2% as expected.  Waller and Williams both indicated they are ready to cut, citing concerns about labor markets, but neither seemed quite ready to go 50bps at this upcomng meeting.  Of course things could change with CPI this week, but the Fed is on blackout so we won't really know.

Friday was a tough day for stocks with major indexes down solidly lead by tech.  Bonds rallied, with the 2Y down to 3.65% and the 10Y at 3.70%.

In the blogosphere, John Cochrane with one of his first post in a while, again asks whether we actually know how or if higher interest rates lower inflation.  This time he hopes to explain why this is true in a simpler, more intuitive way.

In a post titled Monetary ignorance, monetary transmission, and a great time for macroeconomics he starts by discussing the standard narrative, "The Fed raises interest rates. Higher interest rates slowly lower spending, output, and hence employment over the course of several months or years. Lower output and employment slowly bring down inflation, over the course of additional months or years. So, raising interest rates lowers inflation, with a “long and variable” lag. “Monetary transmission” complications build on this basic story. They spell out channels by which higher interest rates lower different categories of spending, or how lower output and employment affect inflation." and goes onto do the following:

• That none of the standard economic models actually work like that, they either get inflation to fall immediately or they don't get falling inflation with rising interest rates alone.
• Monetarism is not a theory about how the Fed or other central banks control inflation, because they don't control the money supply.  At least monetarism has the "right sign", it says higher money growth causes inflation.
• Firsherian, the Fisher equation, tries to solve the monetarist challenges by focusing on interest rates, not money, except the story it tells is that higher interest rates lead to higher inflation (in the long-run).  It, like New Keynesian models, have the "wrong sign".
• Current New Keynesian models also all show that higher interest rates lead to higher inflation in the long-run (the Fisher equation is part of these models), it has the "wrong sign".  Yes, sticky prices may help in the short-run, but to tell the standard story, Cochrane believes the standard current model doesn't produce the result without help from fiscal.
• "To get inflation today πt to jump down, new-Keynesian theorists assume that in addition to setting the interest rate that we see, the Fed makes a threat: If unexpected inflation doesn’t go where the Fed wants it to go, the Fed will blow up the economy with hyperinflation or hyper deflation. Adding a rule that nature abhors a hyperinflation or deflation, the Fed then “selects” one of the many possible equilibria, one of the many values for unexpected inflation. This additional “equilibrium selection policy” can give us the unexpected disinflation at time t."
• Cochrane believes that "the Fed’s interest rate target sets expected inflation, fiscal policy sets unexpected inflation. To get the decline of inflation in the left hand panel, we pair the interest rate rise with a fiscal contraction."

"The central story of how interest rates lower inflation is that the Fed threatens to blow up the economy in order to get us to jump to a different equilibrium. If you said that out loud, you wouldn’t get invited back to Jackson Hole either, though equations of papers at Jackson Hole say it all the time."

I'll leave it there, beause Cochrane's post is really long, maybe I'll do a part two (but maybe not), but it's an interesting read because it challenges you to try to actually understand the theories that many pundits use to describe the process by which the Fed's rate decisions determine inflation. 

On the week ahead, CPI, UofM, Treasury Auctions are the highlights of the week ahead

Monday: Inventories

Tuesday: Small business optimism, 3Y Auctions

Wednesday: CPI, 10Y auction

Thursday: PPI, jobless claims, 30Y Auction

Friday: UofM

XTOD: The new PE investor in the Miami Dolphins sitting Tyreek Hill down and telling him to stop fucking around with the police because it’ll impact his fund’s IRR  https://pbs.twimg.com/media/GW-LFe1WIAAx_wV?format=jpg&name=900x900

XTOD: The August jobs report wasn’t bad enough to seal a 50 bps rate cut as the Fed’s next move but wasn’t good enough to lead officials to rule it out on Friday. Officials kept their options open when they spoke on Friday, neither making an affirmative case for a larger cut nor closing the door on it. That’s making this a close call at their meeting later this month—one that in all likelihood gets decided by Powell.  One option would be to conclude that softer hiring since the Fed’s last meeting, in late July, justifies the 50 bps cut. Fed officials held rates steady on July 31 but might have cut by 25 bps at that time if they had known about weak jobs numbers that were released two days later. After another so-so employment report for August, the Fed would have followed with another 25 bps in Sept. 

A second option would be to cut by 25 in September, and then to signal several more cuts are likely to follow when officials produce quarterly economic projections that will be released at the meeting. 

https://wsj.com/economy/jobs/jobs-report-august-unemployment-economy-b869cf39?st=mrwl4etl263o105&reflink=article_copyURL_share

XTOD: "When I was 47, I was having a difficult year for a variety of reasons and Warren [Buffett] sat me down and said look, when I was 47 I thought my life was over. Susie had left me, and I had already accomplished everything I thought was worthwhile as an investor. Berkshire, as far as I knew, was at its peak. And to my surprise, my life kept getting more and more interesting since, and most of the really important things I've done happened after I was 47 and thought my life was over." - Alice Schroeder (Buffett's biographer)

XTOD: Nassim Taleb(@nntaleb) says that LLMs deliver the most likely explanation on the web and that it is impossible to make money shooting for the most likely explanations.

https://xkmato.com/#are-llms-just-chatty-calculators https://x.com/XKMato/status/1832035882372645095/photo/1

XTOD: "Most people don't stop enough and think hard enough about their priorities and focusing on the problems that are the most worthwhile for them to try to solve. And they operate on a kind of first-come, first-serve basis when it comes to their time." — Daniel Ek, CEO of Spotify (

@eldsjal

) 

Daily Economic Update: September 6, 2024

 Jobs Day in 'merica. If you didn't make it into work today because you were out late watching football or because you're getting an early start on the weekend, or traveled to Brazil for Packers v. Eagles, it's a Jobs Friday nonetheless. 

While we all obsess over the data this week, you likely missed the true highlight of the week, which was Matt Levine's Money Stuff titled: "Hedge Funds Help Companies Hedge" which might have created history by being the first somewhat mainstream piece about the topic of Deal Contingent hedging.  I mean sure Risk.net and some other publications may have covered this subject from time to time, but this was something.

Yesterday's data was mixed.  You had the notoriously volatile ADP employment data which was weak, showing the lowest number of jobs added since 2021.  Then you had jobless claims coming in better than expected, some mixed data on productivity and wages and finally ISM services coming in better than expected with strong new orders and some rising prices.  I think services is what we mostly do in 'merica, so that's good.   Put it all together and I guess we're in a phase where companies aren't really hiring, but they also really aren't firing either.  As Joe Weisenthal of BBG put it the other morning:

"But right now, we're in a "low hiring, low firing mode" as Richmond Fed President Tom Barkin put it in a recent interview. He added that this is unlikely to persist very long. One of the two is likely to pick up. And with the number of job openings falling as much as it as, that obviously increases the concern that the low hiring component is not likely to reverse soon."

I guess we'll see what the Jobs numbers show today and what Waller and Williams have to say later, from there markets might adjust the betting line on 25bps or 50bps at the upcoming FOMC Meeting.

XTOD: As we head toward another key jobs figure, it’s clear the Fed has ignored vital labor market data for months. In my latest piece, What This Job Market Really Means, I explore the intersection of jobs and economic trends as "Something is rotten in the state of Main Street."  https://prinsights.substack.com/p/what-this-job-market-really-means

XTOD: You gotta laugh - or cry - at the fact that hundreds of finance professionals (am not talking about clueless Twitter grifters trying to make a living by conning retail investors, but actual strategists, economists,…sell and buy-side) who for months on no end could not figure that layoffs are the last piece of the puzzle. That’s why bear markets exist. They cleanse the system from incompetence.

XTOD: The Internet can be a tool of social control just as easily as it can be a tool of misinformation. That's why I still listen to Madison and Jefferson, because what they warned about - states seeking tyrannical power - is still a threat, maybe even moreso now.

XTOD: The federal government is an insurance company with an army. You can’t make major spending cuts without slashing Social Security, Medicare and Medicaid and/or weakening national defense

XTOD: For many of the most successful investors I've interviewed, the freedom to construct a life that aligns authentically with their passions and peculiarities may be the single greatest luxury that money can buy." —from the Epilogue of "Richer, Wiser, Happier"

Daily Economic Update: September 5, 2024

Job Openings continued to decline in another sign of labor softening. Hiring, layoffs and quits all rose slightly, but overall, these measures look like they are back to pre-pandemic levels.  The Fed Beige book also featured some commentary indicative of a slowing labor market.

Bonds rallied with yields falling on the data, causing the 2s10s curve to finally uninvert, if only you had traded a duration neutral or bull steepener.  We still have Jobs Friday on the come.  As it stands were back to slightly inverted with 2Y at 3.77% and 10Y at 3.76%.

With the 10Y fliring with 1Y lows, should I get a job processing mortgage refis? Is that a wave that's coming?

Meanwhile the financial malaise in China continues on, remember things like the collapse of China Evergrande and the like used to make headlines, now as China sinks further into a debt and export fueled funk, you barely hear a whimper.

But let’s face it all of this pales in the face of the start of another NFL season. Sports sometimes is a good reminder that what you think might or should happen, doesn’t always happen, something unexpected can cause a change in fortunes.  It's called uncertainty.  Or this quote from a recent NY Fed Liberty Street article: 

"professional forecasters cannot really predict what kind of uncertainty regime will materialize in the future, but they seem to have a good grasp of what regime we are in at the moment."

On the day ahead it's jobless claims, ADP employment and ISM Services. 

XTOD: In sum:  Labor market in decent shape but a little looser than would be ideal and the trend is towards further loosening. With inflation getting closer to target any further loosening is unnecessary and something Powell has rightly said he would act to prevent.

XTOD: WSJ: Harris plans to propose a less drastic increase in the top capital-gains tax rate than outlined by Biden. Her advisers believe a more modest increase could encourage investment in entrepreneurship & access to capital for small businesses https://wsj.com/politics/policy/kamala-harris-to-pare-back-bidens-capital-gains-tax-proposal-14c537b1 via @WSJ

XTOD: Some statistics: Saudi oil production is today lower than 20 years ago. Oil prices, adjusted by inflation, are the same as in 2004.  Saudi population has increased >50% in the last 20 years.

XTOD: US Households now have 42% of their financial assets in stocks. That's the highest percentage on record with data going back to 1952.https://creativeplanning.com/charlie

XTOD: Lack of market concern for geopolitics is astounding. Red Sea chaos, Türkiye in BRICS, Iran attack, Libya, Russia, China... changing world order. Some investors referred to it as “simulation” - when perception of the world is different from reality

XTOD: You can never invite the wind, but you must leave the window open…

Daily Economic Update: September 4, 2024

ISM mfg came in below estimates with declining new orders and employment, while also showing rising prices.  Wait that sounds like stagflation, right?  Yields fell and stocks sold off as markets decided they care about manufacturing in the U.S. or they sold off because it's September and it's all just seasonal.  NVIDIA gettng more DOJ attention probably doesn't help either.   The 2Y ended at 3.87% and the 10Y at 3.84%, both near recent lows and both just not willing to uninvert.

Cam Harvey, a Duke finance professor, who in some ways popularized talking about Yield Curve inversions was recently on a CFA podcast, I didn't listen, but someone wrote a nice summary .  Anyway, the point is he still believes this portends recession.

The Atlanta Fed GDPNow is back at 2.0%, down from 2.5%, but you'd take 2% real growth with 5 handle rates all things considered.

Over in Asia add Japan and China's tit for tat over chips to your list of things to have to pretend to read about.

Back to labor in forcus with JOLTS today.

XTOD: "An inverted yield curve is no longer a reliable sign of a recession in the new monetary system of ample reserves and where the core money-market instrument is repo...." 

@LondonSW

XTOD: Why haven’t recent rate increases slowed the economy more?  Higher policy rates haven’t passed through to the rates paid by private firms and households as much as usual.  

This Economic Bulletin has more: https://bit.ly/3YOVE3Q

XTOD: Risk assets have rallied back to their highs, gold likewise, Fed cuts baked in at the ATH, history doesn't repeat but it'll be interesting to see how we deviate from the 2007 September flight path. I still believe Fed cuts are slow, slow and then really friggin fast because something always cracks when real rates are 3% or more for an extended period.

XTOD: Stock market bull Tom Lee said today on CNBC:  “I think a 7-10% pullback can happen over the next 8 weeks, but it would be a situation to buy the dip” ... "It's a strong market... Don't think we've seen the tops for 2024."

XTOD: At this stage in my career, I really only want to work on things that are educational and don't contribute to the din. Like if you acted on the information in one of my articles and presentations and I never saw you again, you'd be OK.    Kind of like this. https://t.co/6OQTupOAay

XTOD: “In my whole life, I’ve never succeeded much in what I wasn’t interested in. So I don’t think you're going to succeed if what you’re doing all day doesn’t interest you."  — Charlie Munger

Daily Economic Update: September 3, 2024

I don't know about you but I already forgot about last week's data and last Friday's PCE.  So I guess in honor of Oasis reuniting we won't look back in anger, not that PCE was dissappointing and personal income hung in there, so nothing to be angry about.  Nonetheless we'll turn our attention to labor market data as the headlining act this week. 

Speaking of labor:

"If a workman's wages be sufficient to enable him comfortably to support himself, his wife, and his children, he will find it easy, if he be a sensible man, to practice thrift, and he will not fail, by cutting down expenses, to put by some little savings and thus secure a modest source of income. Nature itself would urge him to this. We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." - excerpt from Rerum Novarum, Encyclical of Pope Leo XIII on Capital and Labor, May 15, 1891

I think we already forgot about R-Star and all that's left is now whether Jobs data is going to mean 25 or 50bps of rate cuts.

We shouldn't forget about geopolitics and upcoming elections. 

On the week ahead:

Tuesday: S&P mfg pmi, ISM mfg, construction spending

Wed.: JOLTS, factory orders, durable goods

Thur: ADP, jobless claims, ISM services

Fri: Jobs Day, Williams and Waller

XTOD: It’s so commonplace to see stuff like this now. You should see this for what it really is, an attack on civilization and prosperity. Misery is not virtuous. We are not here for managed decline. Don’t fall for it. Civilization and prosperity are good, actually. We are going to win

XTOD: “I'm not terribly affected by the fact that the crowds are agreeing with me or disagreeing with me. I'll do whatever my own sense tells me. The trick is simply to sit and think.”  — Warren Buffett

XTOD: Most people don’t lack talent or intelligence, they lack faith in themselves, they lack a clear vision of who they want to be, they lack the patience to follow through their long-term goals.

XTOD: Now is the time to stop drifting and wake up—to assess yourself, the people around you, and the direction in which you are headed in as cold and brutal a light as possible.  Without fear.

XTOD: “A majority of life’s errors are caused by forgetting what one is really trying to do.”  — Charlie Munger

XTOD: It was always an awkward moment when someone needed the red bat.

“Yeah, Timmy, you can play but you gotta use the red bat.”

“But I wanna use the yellow bat like everybody else.”

“Motherfucker, you went 0-for-46 yesterday. The yellow bat is no longer an option for you.”

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