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
https://x.com/ecommerceshares/status/1836780555242725716
https://x.com/Reuters/status/1836884288739930589
https://x.com/real_bill_gross/status/1836483610641060112
https://x.com/InvestingCanons/status/1836405772147630145
https://x.com/tferriss/status/1836401927417971006
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