Daily Economic Update: October 3, 2023

Maybe the quote above was in reference to the Fed's inflation fight?  Speaking of the Fed, in an effort to stem the losses on their bond holdings they have decided to expand operations into the social media influencer sphere on Instagram https://www.instagram.com/federalreserveboard/  I'm sure Powell will be a successful influencer.

Yields are once again higher with the 2Y at 5.11% and the 10Y at 4.70%.  The USD continues to climb. USD-JPY flirting with 150. The Fedspeak yesterday from the likes of Bowman, Barr and Mester sounded nearly unanimously centered on the higher for longer rate path. 

U.S. manufacturing data yesterday was also stronger than expected with employment strong and the prices paid component showing some relief.  However, with respect to the prices paid, the ISM report notes that higher energy prices could affect that data point going forward.  Timothy Fiore, the Chair of the Institute for Supply Management's Manufacturing Business Survey Committee added in the report: "More importantly, the share of sector GDP registering a composite PMI® calculation at or below 45 percent — a good barometer of overall manufacturing weakness — was 6 percent in September, compared to 15 percent in August and 25 percent in July, a clear positive,” 

On the day ahead it's Bostic speaking and the JOLTS data as highlights.  Overnight the Royal Bank of Australia held their cash rate at 4.1%.

XTOD: MLB Wild Card Get-in Prices (Game 1) 

3 pm ET: Rangers @ Rays: $33 

4:30 pm ET: Blue Jays @ Twins: $7 

7:00 pm ET: Diamondbacks @ Brewers: $22 

8:00 pm ET: Marlins @ Phillies: $199

XTOD: Fed's Mester Says One More Rate Hike Likely, Then Hold For Some Time

XTOD: Dear author. We need to talk. Please review the last several decades and you will see stronger economic growth occurring when interest rates were higher than they are today.  The ZIRP era brought us useless innovations like Bored Ape NFTs. But it also led to world-changing innovation, says 

@karlbykarlsmith  via  opinion...Truly promising innovations will attract capital. They always do. And with higher rates, they won’t have to compete with all those idiotic “innovations”  that have been able to attract investment dollars because of ZIRP...Low productivity, wealth inequality, increased corporate concentration, excessive leverage, financial instability, rampant speculation - these are all enabled by ultra low rates.  Happy to send you the studies if you’d like...Is it worth tolerating all these negative side effects, just to make it easier for some unspecified, theoretical “moon shot” to get capital?...Boosting the attractiveness of tech investments and enriching the prospects of venture capitalists are not part of the Fed’s mandate.

XTOD: When Fed was remitting hundreds of billions to Federal budget from its portfolio earnings, it was counted as revenues to the budget. Now that the Fed is running a loss and shelling out huge interest payments to banks on cash deposits, it does not count as expenditures to the budget. Magic accounting that doesn’t conform to GAAP rules. 

XTOD: United Airlines would save $80 million a year if the average passenger weight falls by 10 pounds

XTOD: The USD is strong due to 1) relative yield spreads and 2) relative energy balances. 

Even if monetary policy makes a U-turn, policy-makers can't change the ongoing imbalances in the energy space, and a weaker USD seems very unlikely from here.

XTOD: I don't really know what my equity view is right now. Seasonals are raging bullish but this chart gives me pause.  I am generally not a huge fan of the inverted yield curve as a predictor of recession because it doesn’t include a timing factor and therefore ends up costing people much money as they position way too early for the inevitable recession. 

A potentially somewhat better timing indicator is when there is a bear steepening during a period of yield curve inversion. This next chart shows those occasions in blue and US recessions in red. 

You can see the blue bars have generally been pretty terrible times to own stocks. The signal in April 1999 was early, but the signal timing in 1990 and 2007 was excellent. Small sample size, obviously. No call to action here, it’s just something to think about and it’s an offset to a bullish seasonal risky asset view. The ongoing collapse in gold is a bit of a yellow flag with regard to current liquidity conditions, too.

Daily Economic Update: October 2, 2023

October, the month best know for: (a) The Panic of 1907 (also a good book), (b) Black Thursday, October 24, 1929, and (c) Black Monday (also a Showtime comedy), October 19, 1987....Ok, maybe it's best known for Oktoberfest or Halloween or pumpkin flavored lattes, or MLB Playoffs or something else, but here's to October's, lets hope not to make negative history.  September ended with the Atlanta Fed's GDP Now 3Q GDP estimate of 4.9% and the NY Fed GDP  Nowcast at 2.1% further evidencing the divergence in interpretation of the economy's performance.  This October starts with the government shutdown averted, for now at least, UAW still on strike and the prospect of a Kaiser Permanente healthcare strike, and the resumption of student loan payments.  Yields are up ~5-6bps to start the day, the 2Y is 5.10%, the 10Y is 4.62%.

On the day ahead it's ISM manufacturing data, construction spending and a Powell speech. The highlights of the week will likely be on the labor front with the JOLTS report Tuesday and Jobs report Friday.  There is also plenty of Fedspeak.

On the week:

Tues: JOLTS

Wed: ADP Employment, ISM services

Thur: Jobless claims

Fri: Jobs Day

In full disclosure, this author is not an Orioles fan, but any team that goes from 100 losses to 100 wins in a two year span deserves some credit.  In honor of the Orioles making the playoffs for the first time since 2016 and because their now injured closer had one of the best walkouts in all of baseball this year, for the month of October I'll be starting each post with an epigraph (see quote at top of post) from the HBO series The Wire.  There are plenty of business and leadership lessons one can learn from the series.

Speaking of business and leadership, the CNBC appearance by Barry Sternlicht of Starwood Capital Group on Friday is worth a listen.  Barry hits on the tug-of-war between Congressional spending and the Fed's inflation fight, discussing the "deficit out of control".  Maybe Barry believes in the Hamilton Norm? And the risk of fiscal dominance: "he's going to have to [go back to QE]".  If its true that our fiscal largesse is a problem (shh...don't tell Stephanie Kelton), many think it's inevitable that Powell will be forced to lower rates.  But maybe Powell will heed my favorite advice to central banker's courtesy of Peter Stella: “I define central bank independence in one sentence, it's the ability to raise interest rates when the Treasury doesn't want you to. And the Treasury almost never wants you to, because of the cost of the debt.” which might force political leaders to find other solutions.

Friday's PCE seemed to fall into the goldilocks reading camp, but NY Fed's Williams indicated rates should remain high for a long time: "My current assessment is that we are at, or near, the peak level of the target range for the federal funds rate. I expect we will need to maintain a restrictive stance of monetary policy for some time to fully restore balance to demand and supply and bring inflation back to our 2 percent longer-run goal."  He used the analogy of layers of an onion and that the inner layer of inflation, including shelter and services, will continue to be the most challenging.

Economist Brad DeLong had a good substack post discussing both the PCE read as well as the recent expert commentary on the risk of continued rising yields.  He concludes his post as follows: "if either BlackRock or JPMC actually thought that 10-Year Treasuries were going to 7% with any confidence, they would have and would have told customers and clients to take positions and the 10-Year Treasury would already be at 7%. It isn’t.  There may well be more inflationary shocks in our future. But it really looks like the shocks in our past—the reopening-bottleneck shock, the fiscal insurance against a return to secular stagnation shock, and the Putin attack on Ukraine shock—are now in our past. And, right now, the ocean looks remarkably calm again."

XTOD: If someone asks you to define "chutzpah," you no longer need to say "like when a guy who killed his parents asks for clemency because he's an orphan." 

You can say, "like private equity providing loan-shark liquidity to investors in illiquid PE funds."

XTOD: We talk and write a lot about all the bad ways the pandemic hit the economy. We should talk more abt the surge in entrepreneurship it unleashed — reversing a decades-long decline.   It’s not a mirage. 

XTOD: important point here: these systems are much better at doing tasks than jobs.  and giving people better tools to do their work faster often leads to qualitative changes in what they can do.  (of course, over the long run, we expect these systems will be able to do all of some of today's jobs and aren't trying to hide the ball on that. confident we will find new and much better jobs when that happens!)

XTOD: Duane “Keffe D” Davis, the man who admitted to being in the car used to gun down Tupac Shakur in 1996, was arrested and indicted Friday in Las Vegas for the murder of the legendary rapper, according to multiple sources.

Daily Economic Update: September 29, 2023

U.S. yields start this Friday with the 10Y some 15+ bps off yesterday's high of 4.68%, now trading around 4.53% and the 2Y is also down to start the day trading at 5.04%.  Despite a strong jobless claims data point yesterday and a weak 7Y auction, late day Fedspeak from Barkin and Goolsbee which leaned dovish were able to help sentiment with stocks improving. We've got people like Dalio, Fink and Ackman all in the yields go higher camp.

 EU inflation data out this morning showed inflation falling below estimates at a headline of 4.2% v. estimates for 4.5%.  The BoJ bought some bonds overnight and 

All attention will be the Fed's preferred inflation measure PCE this morning, as well as personal income and spending and the UoM survey of how consumers feel about gas prices.

In this endless barrage of economic data, speeches and forecast, it leaves one to wonder just how much is noise and where exactly is the signal.  For example, we have some serious divergences in the Atlanta Fed's GDPNow, the NY Fed's GDP Nowcast and private forecasters models of Q3 GDP.  We have other divergences in estimates of the neutral rate of interest, R*, and so on.

On the topic of R*, I was reading "The Stars Our Destination: An Update for our R* Model" by Lubik and Matthes in which the authors attempt to address the differences in the Richmond Fed's estimate of R* which is above 2%, and the NY Fed's estimate which is below 1%.  Perhaps the biggest takeaway is just how difficult it is to estimate R* and therefore the stance of monetary policy. 

This had me thinking about a conversation on Simon Sinek's podcast "A Bit Of Optimism" with guest Robert Greene .  Beginning around the 27:30 mark Greene begins discussing the fluidity and complexity of life and how in all this complete flux "our brains freeze them into these little snapshots..into good, bad, moral, evil, etc...and it is stupidity..it leads to stupid ideas on politics [and by extension policies]."  Greene goes on to state the source of human stupidity is a belief in certainty. It's worth a listen, perhaps more so, for those in charge of fiscal and monetary policy and all the voices on social media platforms who tell you exactly how the economy or markets are going to play out over the short or long run futures.  And yes, I know the Fed, use models that are "dynamic" and "stochastic" therefore recognizing elements of randomness or uncertainty.  A criticism by some is that these models fail to fully capture the complex and adaptive behaviors of the economy.  

Given the uncertainty and the bombardment of noise in the current economic environment, I was reminded of two quotes in the famous wall street book "Where Are the Customers' Yachts?" by Fred Schwed: "In this case, the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter's consciousness" and "For one thing, customers have an unfortunate habit of asking about the financial future.  Now if you do someone the signal honor of asking him a difficult question, you may be assured that you will get a detailed answer.  Rarely will it be the most difficult of all answers-"I don't know".

In all the complexity there was a great FT article on a recent JPM Research piece by Jan Loeys, who seems to be keeping it real https://www.ft.com/content/651cc7a4-27e3-4026-9381-76421a0203bb

Anyway, I wouldn't spend your Friday and weekend worrying about the economy, in a few years you're going to be walking around in Ray-Ban smart glasses from Meta or Apple's Vision Pro in complete bliss.

XTOD: Cocktail waitresses turned realtors learning about the Fed for the first time this week

XTOD: As we travel southwest across higherer for longerer island waving to @BillAckman

 and @real_bill_gross   along the way. Nice call guys. We will come to a crossroads.  To the south lies "Old Normal" continent where Jamie lives.  The new DSR available to clients of DS Read has a map

XTOD: The probability of another rate hike is deflating, especially for a November hike (green). 

Is this why yields are shooting higher? If the Fed is no longer going to be vigilant about fighting inflation, then US Treasuries are a sell.

XTOD: “Inflation still needs to come down. But we also can’t lose sight of the fact that the Fed has the chance to achieve something quite rare in the history of central banks—to defeat inflation without tanking the economy."

XTOD: Revised picture for GDP is the same as the old picture for GDP: real GDP is basically just about where you would have expected if there had been no COVID/policy response to COVID.

XTOD: The U.S. economy is showing signs of another Global Financial Crisis warns JP Morgan strategist Marko Kolanovic who urges investors to be in cash

XTOD: Thank You Big Fiscal

XTOD: "Bank of England plans permanent lending facility for non-banks"

XTOD: In an era of TikTok investing dominated by short-term monkeys, narratives change to match the price movement. 

Eg This week’s narrative: “The sell-off was attributed to the the US government losing control of the bond market. Parallels with 1987 are inevitable.” Aka IT’S SO OVER

Next week’s likely narrative: “The equity sell-off was attributed to JP Morgan’s collar and was a mere technicality.  The bond sell-off was attributed to a couple of hedge funds using leverage irresponsibly and they have now unwound their positions.” Aka WE ARE SO BACK

And I’ll be here to fade each and every one of these narratives. After all: Bears get killed, Bulls get killed, shrubs photosynthesize 

Daily Economic Update: September 28, 2023

Yields continued to rise and the curve continues to 'disinvert' as well as bear steepen.  Yesterday's stronger than expected durable goods order data seemed to further embolden the higher for longer view.  Oil continues to be high with crude over $93/bb on weak inventories. The 10Y is now over 4.60 at 4.63% and the 2Y down slightly, back to 4.13%.  The rapid rise in yields, continued rise in oil and the stronger dollar continues to pressure equities. Steven Ricchiuto of Mizuho Securities was great on Bloomberg Surveillance yesterday (see 2hr 5m mark) when he said in regards to the Fed's inflation fight: "this particular Chairman doesn't have this clout..you have a situation where the political economist vs. the academic economist are winning" and as it relates to rates: "the Fed is willing to play games..at least some of them are...with the 2% target....no one is going to believe 2%..so the reality is long term rates move higher..as long term rates move higher inflation expectations become unanchored..the Fed then has to address the situation..I think they'll take action to address the situation."

Today we'll get the final read of GDP as well as revisions to prior GDP measures as well as jobless claims and a 7Y auction.  At 4pm today Powell addresses teachers in a town hall style format and Goolsbee and Cook on the mic as well.  Across the pond there is inflation data with Spanish data already coming in over expectations.  We'll see if German inflation data comes in as weak as expected given the soft German state inflation readings.  In the meantime German 10Y yields are at new highs at 2.91%.  China Evergrande is suspended again, this time after its chairman was placed under police surveillance.

XTOD:  Amid concerns over cellphone addiction, China proposes limiting screen time to a maximum of two hours a day for children, enforcing a ban on use between 10 pm and 6 am

XTOD: Do you think our friends at the  @federalreserve  realize how close we are to another event a la December 2018? The flight of bank deposits from the outer branches of the depository tree is stunning. Double digit rates of change.

XTOD: Bank deposit rates are still lagging benchmark interest rates, via Barclays. 

If you haven't shopped around for higher savings rates, then you are not doing your part to improve the effective transmission of monetary policy and Pablo is judging you.

XTOD: A government shutdown could blindfold a "data dependent" Federal Reserve. 

Shutdowns in 1996 (21 days) and 2013 (16 days) delayed inflation and employment reports by two or more weeks.

XTOD: COSTCO CEO said "I've gotten a couple of calls that people have seen online that we've been selling gold - 1 ounce gold bars, yes, and when we load them on the site, they're typically gone within a few hours and we limit two per member."

XTOD: "Entropy is the law by which physical systems inevitably become more disordered over time. A similar sort of financial entropy has built up in our system, as fiat credit can only move in one direction (higher) without the whole highly leveraged system collapsing. Meanwhile, the system ... tends to incentivize politicians and voters to keep making promises that, once the numbers really begin to hit hard, aren’t maintainable as originally intended; the difference is just printed. The present has been persistently improved at the cost of the future."

XTOD: I went deep into the FTC’s massive antitrust complaint against Amazon, explaining how the retail giant imposes a vast economy-wide hidden tax using Amazon Prime and anti-discounting provisions. https://www.thebignewsletter.com/p/the-ftc-sues-to-break-up-amazon-over

XTOD: I hate to break it to everyone but this is the worst ERP in 22 years… you are guaranteed to lose money in equities over a medium term horizon. Risks are much higher than in any other point in the last 22 years with QT, high real rates, margin squeeze, inventory unwind, risk of fiscal retrenchment, etc…

But you are not compensated for these risks

XTOD: Yesterday, OFAC designated an Ethereum address linked to the Sinaloa cartel that dealt in both Tether and USDC stablecoins. Circle quickly blacklisted it. Crickets from Tether, though.

XTOD: Last year an investor purchased a Target in Portland for $16,000,000 and a 4.25% CAP. 

Yesterday it was announced that due to crime and theft they are closing this location down and 2 others in Portland.   What's the lesson here?  In my opinion the largest under-appreciated risk currently in the RE market has to do with the municipality and states that you invest in.

Daily Economic Update: September 27, 2023

Yields have fallen off YTD highs the 10Y is down ~5bps but remains above 4.50% while the 2Y is down to 5.06%.  Markets continue to monitor the possibility of a government shutdown which some are pegging odds of a shutdown at 90%. Yesterday's consumer confidence and new home data didn't seem to help sentiment with stocks falling again, now off 7% from July highs.  If you're in the camp that the Fed should cut rates sooner rather than later, data out of Brazil (a central bank that has begun cuts) yesterday showed inflation rising for the second straight month hitting 5% YoY. On the day ahead in the U.S. it's durable goods data and 5Y note auction.

Given the recent sell-off in Treasuries, I've been thinking more about the "Hamilton Norm", a topic I had first learned about through economist Eric Leeper.  I was reminded of the topic yesterday, when author and investor Mark Higgins stated the following in a substack post: "In 1790, Alexander Hamilton warned Congress that the true secret of rendering a nation’s credit immortal was to ensure that “the creation of public debt should always be accompanied with the means of extinguishment.”⁵ During the nation’s first 175 years, the U.S. adhered to this principle, and public debt was issued in large quantities only during times of emergency, such as the War of 1812, Civil War, and the two World Wars."  Have we violated the norm and does it matter?

I found the recent Macro Musing podcast hosted by David Beckworth and featuring former KC Fed President Thomas Hoenig to be pretty interesting, especially Hoenig's retelling of the events leading to the GFC.  Hoenig: Then we go and we have the great financial crisis. We lowered rates from 2001, 2002, all the way down to… it was above 5%, all the way down to 1%, and people were using their homes as ATMs. Greenspan even referred to that. They were refinancing at these lower interest rates, taking the money out, spending it, life was good. They increased their leverage, their debt. Bankers and the public took the bait, low interest rates. Then we got inflation started, went up to 3%, 4%, close to 5% and so the Fed, what did they do? The increased rates from 1% to 5.25% over the two-year period. 2006, they stopped. When did the crisis really blow up? Over two years later, [it was] called Lehman Brothers. And so, they blamed it on the bankers. They took the bait, low interest rates, do it. Get the loans out there. Housing is great. You can finance it forever. Interest rates are going to stay low forever. We had a crisis and we blamed it on the bankers. We get the Dodd-Frank.

Hoenig: Now we’re at today, what do we do? We have a pandemic. I understand we put money in there for the immediate crisis, but then we have the CARES Act. That was an immediate crisis. We had the Reconciliation Act in late 2020. That was another two trillion, so two trillion plus two trillion. Then we had the Recovery Act, another two trillion. Then the Fed, every month from March 2020 through 2020 and into 2021, printed money at the rate of $120 billion in new reserves every month. Interest rates were kept at zero and guess what? The banks took the bait. They were handed this, we have loans out at 3%. We have commercial real estate. We have Treasuries on people's balance sheets because they're risk-free, right? They're risk free, so they load up on that stuff. Suddenly, we have 9% inflation, and the Fed gets [inaudible]. They raise rates from 0% basically to 5.5% today in less than two years. So, in March, we have a banking crisis......I remind people that we're a year and a half into the tightening phase. The great financial crisis was two years in the tightening phase, and then two years before the crisis really erupted. We're early in this process, folks. Get ready. We're just getting into it now. Now, I could be wrong. I have been in the past. I could tell you that, but if I am, I will be humbly willing to accept it, but I don't think so.....We put $8 trillion into the economy over what we were projecting to do in three years. God help us if it wasn’t strong. It doesn't make sense. Are we going to continue to print money and do this, so we have inflation and inflation takes care of the problem? I don't think so. I'm not at all saying that we're going to have a soft landing. I could be wrong, understood. I'm willing to accept that risk.

XTOD: May 1986: Top Gun 1 released   Oct 1987: Black Monday Crash   May 2022: Top Gun 2 released  Oct 2023: Black Monday Crash 2? 

XTOD: i was told that rising bond yields were bad for stocks and falling yields were good for stocks  i'd like to speak with the manager

XTOD: The manager is away buying stocks. Will return shortly.

XTOD: People keep piling into $TLT, another $750m this wk, amazing, can't recall an ETF taking in so much money ($16b, #2 overall) while being down so much and so consistently (esp when you can get just as much yield w no duration risk).  Also happened w $KWEB but smaller scale.

XTOD: Please see my new essay on monetary policy https://www.minneapolisfed.org/article/2023/policy-has-tightened-a-lot-is-it-enough-a-second-update

XTOD: Who tricked everyone into thinking that travel is the most fun thing you can do in life? When I'm taking a trip, maybe 25% of it is actually fun   The rest of it is logistics, packing, checkins/outs, spending stupid money, running out of clothes, crowds, lines, airports, etc

XTOD: Here’s a great little anecdote Kurt Vonnegut relayed at Joe Heller's funeral:  Joseph Heller, an important and funny writer now dead, and I were at a party given by a billionaire on Shelter Island. 
I said, “Joe, how does it make you feel to know that our host only yesterday may have made more money than your novel ‘Catch-22’ has earned in its entire history?” 
And Joe said, “I’ve got something he can never have.” 
And I said, “What on earth could that be, Joe?” 
And Joe said, “... Enough.”

Daily Economic Update: September 26, 2023

Yield curve bear steepening continues as the 2's10's curve is down to 60bps inverted with the 2Y at 5.12% and the 10Y at 4.51%. The dollar bull run continues as Yen hits YTD weakness against he dollar.  Yields continue to weigh on stocks. Jamie Dimon warning that the U.S. economy can't handle 7% yields and that any move higher in yields from here is going to be more painful then moving from 3% to 5%.
Fed officials give no signs of capitulating as Kashkari and Goolsbee both cited inflation being the biggest risk the Fed currently faces. The Government shutdown watch continues as Moody's warns a shutdown could lead to a loss of their Aaa rating (Fitch and S&P both have previously downgraded U.S. debt).  We'll see how markets digest the 2Y note auction today.  Also on the slate are consumer confidence data, sales of new homes and Richmond Fed business activity.

If shutdowns, strikes and student loan payments aren’t enough, add the “child care cliff” to the list.

XTOD: from Deutsche Bank --  10-year Treasury yields have averaged 4.5% in 233 years of data we're back to normal baybee

XTOD: "What's common throughout crises is that systemic crises are crises of 'money'—a breakdown in something functioning as money."

XTOD: As a curve trader (mostly), I tend to view UST price action through that prism, but this isn't about leveraged curve guys.   This is real money dumping duration.  Duration risk is BACK

XTOD: Spent some time thinking about bonds today.

* Price action is miserable. 1 out of 10.

* Blew through all technical levels.

* Impervious to bullish data.

* Have not yet reached climactic selling.

* Fundamentals of issuance and inflation persist

Probably what is need is a "shock" payroll or CPI number.  Or else sentiment becomes so one-sided that there is no one left to sell.  Either way, probably a bit more downside.

XTOD: As of Sept. 22, the daily trade-weighted U.S. dollar index was measuring 117.2, the highest level since mid-March (January 2006=100). Track the trend using FRED

XTOD: Sen. Menendez says at press conference implies cash  seized at his home was withdrawn over 30 years "from my personal savings account, which I have kept for emergencies and because of the history of my family facing confiscation in Cuba."

XTOD: Bob Menendez had $480,000 of cash in his closet. He could have been earning $26,400 per year risk free with T-Bills at 5.5%.   Lesson: Bob needs to fire his financial advisor.

XTOD: Four engineers get into a car. The car won’t start.    

Mechanical engineer: it’s a broken starter.   

Electrical engineer: dead battery.  

Chemical engineer: impurities in the gasoline.   

IT engineer: hey guys, I have an idea how about we all get out of the car and get back in.

XTOD: It’s been over a year since Kim Kardashian announced her private equity firm through a massive PR campaign and there are still zero deal announcements

Daily Economic Update: September 25, 2023

With major central bank decisions in the rearview, markets can shift their focus to the impending government shutdown and ramifications of the ongoing UAW strike.  Speaking of strikes, the Hollywood writers appear to reach a deal with studios, while actors remain on the sidelines. 

Friday's Fedspeak seemed hawkish to me, with Governor Bowman stating: "inflation is still too high, and I expect it will likely be appropriate for the Committee to raise rates further and hold them at a restrictive level for some time to return inflation to our 2 percent goal in a timely way."  We'll get plenty of Fedspeak this week as well.

The 2Y is 5.12%  the 10Y is 4.50% to start the week and stocks will look to try to come back following losses not seen since March.

Probably the biggest item this week is GDP as well as the BEA's revisions to the National Economic Accounts, some of the revisions will go back to 2013 and will include some new PCE metrics.
In China news, more issues in the property sector, which at this stage just seem like recycled headlines.

On the week ahead:

Today: Dallas Fed Mfg Index, Fedspeak
Tue: Home price data, consumer confidence, new home sales, 2Y note auction, more Fedspeak
Wed:  Durable goods, 3Y note auction
Thur: Final look at 2Q GDP, jobless claims and pending home sales, 7Y auction,more Fedspeak, including Powell at 4pm
Fri: PCE and spending data, UofM survey of consumers

XTOD: Concert tickets are hard enough to get, you shouldn’t have to pay surprise service fees on top of that.  My Administration is working to crack down on those junk fees, so you know what you are paying for up front.

XTOD: Good luck getting your car repaired:  Auto worker strikes now expanding to *38* parts and distribution locations across 20 states.  This feels like a movie.

XTOD: This research dovetails with other research that ultralow rates in wake of global financial crisis benefited largest firms, which invested and got so far ahead of small & midsized firms they became in author’s words lazy monopsonies.
Problem. The reverse of QE with current reductions in Federal Reserve’s balance sheet and increased volatility in the Treasury bond market does not mean we stop crowding out other investment. Could very well see the more crowding out due to fiscal situation and political brinkmanship. Dumpster fire.

XTOD (side note if their track record is like the Fed's economist, you might see this as a sign to short Amazon): "Amazon has hired more than 150 PhD economists, making it the largest employer in the field behind the Federal Reserve...according to...Amazon itself, integrating economists has been critical to the company’s phenomenal growth in e-commerce."

XTOD: JPMorgan’s estimates for what’s driven the Treasury selloff: overwhelmingly, the improving growth outlook and a reassessment of the long term interest rate outlook.

XTOD: What cannot be overlooked is that when you are speaking Portuguese ala 2013-16, you should expect a weak growth->no growth->negative growth environment in real terms, but hot positive nominal growth (like Brazil cycling 8% nominal GDP with 12% inflation)……and yet the screwy part is that real rates on govt debt blow out anyway *across the curve* … this is the market’s natural way of pushing back on Fiscal Dominance… it’s a primary defense mechanism.....then you should consider that maybe instead of “bonds are a no-brainer, just look at all that premium,” you should think of it as the bond market’s Lorena Bobbitt reaction moment to persistent abuse, and the beginning of a bigger pushback against Fiscal Dominance....Markets stop panicking when politicians start panicking. I think the bond market is about to send a very loud, panicky message to DC that fiscal incontinence has consequences that don’t need to be dressed up in fancy arcana like “R*” and “expectations.”

XTOD: Almost all fiscal rules are silly.  Governments can't bind themselves and historically have struggled to when they tried.  Part of the reason is that it's too tempting to break them.  Part of the reason it's too tempting is that at some point they become a bad policy.  Some exceptions are:  don't try to finance government expenditure to any significant degree with seigniorage.  The consequences of wildly disregarding that are so bad that we managed to encode that in laws, even constitutions, and stick to it.

Daily Economic Update: September 22, 2023

Officially the last Friday of summer. Yields in the U.S. are down slightly after rising solidly all week, the 2Y is down a bp to 5.14% and the 10Y is relatively unchanged at 4.48% (after touching 4.50%). Overnight, the BoJ held their benchmark rate at -0.10%, leaving their 10Y yield band unchanged at 0.0% with a cap of 1.0%.  The Yen is weaker, with USD-JPY at 148.20, near one year weakness for the Yen.  Yesterday the BoE paused in a split vote and UK yields have trended lower across their curve as investors bet they've seen a peak in UK rates.  The dollar continues to be king, especially against the Euro where data has skewed weaker than expected. Overall yields continued to march higher, hitting new cycle highs and weighing on stocks, especially the Nasdaq.  I guess market participants realized you do have to discount future cash flows (even if some of those cash flows might be make believe) back to present value at higher rates.  When I see rates hitting the highest since 2007, I can't help but think of the events that transpired that year and into 2008 as the GFC took hold.  It's light on the data front with only S&P PMI's today and of course the slew of Fed speak will begin. We also have a noon deadline for the UAW to expand their strikes.

JPM research note by Joyce Chang had some interesting bullet points in their update to their 10 strategic investment themes, here are a few highlights:

• The 10Y real UST yield just crossed 2%, moving rapidly to our medium-term target of 2.5%, but can easily overshoot as markets are becoming quite worried about an inappropriately large US deficit. The US is starting to lose its exceptional funding ability as it is now having to pay a significant term premium. The fixed income asset class has in turn again become competitive versus stocks, with the US Agg indicating a 5%+ return this coming decade, against 7.0% on US equities.
• The Great Moderation is no longer. We retain the view that central banks will not change their official inflation targets but will over time be challenged by competing demands to keep economies at full employment and protect their governments from the growing power of bond vigilantes.
• There will be no abrupt de-globalization, de-dollarization, or US-China rupture, but instead there will be a slow diversification of financial and economic exposures, particularly in sectors crucial to national security. This is currently showing up most vividly in foreign outflows from China, helped by growing pessimism about long-term growth in China.

XTOD: Kendall Roy to take over News Corp

XTOD: The revival of the multibillion-dollar spy network, known as the Integrated Undersea Surveillance System, includes upgrading and expanding a network of underwater acoustic spy cables which are hidden in secret locations on the ocean floor

XTOD: To say that wages can't go up because productivity isn't rising may have the causality backwards. Productivity rose most quickly in the US when its wages were the highest in the world and its manufacturers were protected, either by very high tariffs (before WW2) or by the need of the world to import US capital (between WW2 and the 1970s). That is why American businesses during this time benefitted from surging domestic demand and invested so heavily in improving productivity. Wages during this time surged.  Since the 1970s, however, rather than lower unit labor costs by investing in productivity-enhancing technology, US businesses could do so much more easily and effectively by relocating production into a country that wanted to turbocharge growth by subsidizing manufacturing and logistics at the expense of households. This might have been acceptable had It just been small developing countries that did so, but with the participation of countries like Japan, South Korea, China, Germany and other Europeans, the cost has become too high.

XTOD: #Bonds are getting killed and the bloodbath is just getting started. The 10-year Treasury yield is 4.48%, the highest since Oct. of 2007. The 30-year, fixed-rate #mortgage should hit 8% next week. Next year the 10-year Treasury should yield over 6%, with mortgage rates near 10%.

XTOD: too long to repost, but feel free to read Bill Ackman's views on why yields should be higher here https://x.com/BillAckman/status/1705056634072863102?s=20

XTOD: By giving up industrial production, the West has given up industrial innovation.

XTOD: The first human patient will soon receive a Neuralink device. This ultimately has the potential to restore full body movement.   In the long term, Neuralink hopes to play a role in AI risk civilizational risk reduction by improving human to AI (and human to human) bandwidth by several orders of magnitude.  Imagine if Stephen Hawking had had this.

XTOD: Hundreds of humans who identify as dogs gather at a Berlin train station to advocate for the rights of people who identify as dogs.  The event was organized by a group called "Canine Beings."