Daily Economic Update: December 11, 2023

Jobs Friday faded into what I’ll call Shohei Saturday with Ohtani getting a record $700mm, 10 year deal.  If the Dodgers market him correctly, maybe he’ll create a Taylor Swift economic boom?  We need more excuses for economic growth and inflation. 

The 10Y starts the week at 4.26% and the 2Y at 4.75%, both up from where they started the day Friday as Friday's jobs numbers seemed to cause a reassessment of the pace of rate cuts that the market had priced into the curve.  If you're looking for a summary of Friday's jobs report, perhaps the best read on Friday's jobs number was this take from Barry Ritholtz per his blog post here: "You may have missed the most important data point in today’s Employment report.  It wasn’t that Nonfarm payrolls increased by 199,000 in November, somewhat higher than expected; nor was it the unemployment rate, which fell to 3.7% in November, from 3.9% in October; nor was it that Wages continued to rise at a modest pace, with average hourly earnings up 0.6%.  It was that 157.087 million people are employed full-time in the United States....  First, it is a full 5 million more people working today than in January 2020, just before the pandemic struck."

In other news, the UofM survey sure seems to really be correlated with gas prices, gas prices down sentiment up and inflation expectations down.

The week ahead features the some major Treasury auctions, CPI, Retail Sales, FOMC, BoE and ECB.  The main action with this week's FOMC will likely market participants scrutinizing the number of cuts implied in the "Dots" and if there are any changes to where the Fed believes the long-run neutral rate is estimated.  The other term you'll probably become familiar with, or hear more of this week, is "normalization cuts".  These are rate cuts that are necessary to keep the real interest from becoming overly restrictive as inflation falls

On the week ahead:

Monday:  NY Fed survey of consumer inflation expectations, 3Y and 10Y Auctions
Tuesday: CPI, 20Y auction

Wednesday: PPI, FOMC

Thursday: Jobless claims, Retail sales, BoE, ECB, SNB

Friday: is it the weekend yet? It's been a lot of central bank meetings to hear about

XTOD: 'Even if inflation declines, soaring debt levels, deglobalization, and populist pressures will keep rates higher for the next decade than they were in the decade following the 2008 financial crisis.' https://project-syndicate.org/commentary/era-of-low-interest-rates-has-come-to-an-end-by-kenneth-rogoff-2023-12 by  @krogoff

XTOD: Here’s what the economists don’t get about the vibes in the economy. People hate inflation. Inflation turns the economy into a war of all against all. When the government prints and spends money it in turn raises the price level and creates winners and losers. One then has to expend effort in order to not become a loser. Asking for raises, switching jobs, speculating with savings etc. it requires a lot of effort and frankly feels dishonest because it is in fact somewhat dishonest. Savvy, lucky and advantaged people come out ahead while less savvy, less lucky and disadvantaged people fall behind. That is why people hate the economy - despite the average being the same the distribution is different and redistributed in a way that feels arbitrary. As Keynes puts it “The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

XTOD: Hey, I thought Biden always said he respected the Fed’s independence. What gives?

“Biden said the Federal Reserve should be discouraged from raising interest rates, in rare comments from the president on central bank policy making” https://bloomberg.com/news/articles/2023-12-08/biden-says-jobs-numbers-should-deter-more-fed-rate-hikes?utm_source=website&utm_medium=share&utm_campaign=twitter via 

@bpolitics

XTOD: If you change your mind too frequently, it suggests that you do not think carefully and responsibly before formulating an opinion & don't know when to remain silent or neutral. 

If you never change your mind on anything, it indicates that you are an intellectually dishonest.

XTOD: The Media Is Hyping Up "Carbon Passports" To Restrict Travel

XTOD: Curb Season 12...February!   “Curb Your Enthusiasm” Season 12 will return to HBO in February.   Network CEO Casey Bloys announced the premiere month during a Thursday media event in New York.

XTOD: NEW: President Joe Biden announces a remarkable "billion 300 million trillion 300 million" dollar infrastructure plan.   I'll admit, that's impressive!   In the same breath of saying Donald Trump doesn't know what he's talking about, Biden appeared to claim that America is having an "infrastructure decade" with a price tag of "over a billion 300 million trillion $300 million dollars."  Very cool!

XTOD: $700 Million: What the Dodgers just agreed to pay Shohei Ohtani.  $667 Million: Total Oakland A's Payroll, Last 10 Seasons

XTOD: Time, diversification, and compounding are the only friends you’ll ever make in investing.

XTOD: Steve Jobs on leadership   “The greatest people are self-managing. They don’t need to be managed. Once they know what to do, they’ll go figure out how to do it… What they need is a common vision, and that’s what leadership is. Leadership is having a vision, being able to articulate that so the people around you can understand it, and getting consensus on a common vision.”

Daily Economic Update: December 8, 2023

Jobs Day in 'merica.  Will the jobs report throw cold water on the recent bond rally and bets for rate cuts or will it lend further credence to the 'lower faster' yield camp (who might also be the 'Fed put' camp)?  The impact of the return of striking auto and SAG workers may complicate the interpretation of the data where expectations are in the +180-190K range, though the unemployment rate might be the more important number.  It's comical how many economist are discussing the triggering of the Sahm rule, often to the extent of ignoring or disagreeing with Claudia Sahm who created the rule. Yesterday, Claudia put out a post with all the steps involved in the calculations for the rule she created.

Yields are up 4-5bps to start the day with the 2Y at 4.63% and the 10Y at 4.18%

Yesterday's jobless claims data didn't show any signs of a deteriorating labor market.  On the equity side,  Google and AMD said something, something, followed by the magic word "AI" and their shares went up, taking the market with them.

You probably missed the release of the Treasury OFR's Annual Report to Congress on their assessment of risks to the U.S. financial system and economy.   The headline takeaway was "Financial-stability risks have increased since last year’s report and remain elevated in 2023. Multiple indicators signal an upcoming economic slowdown—potentially magnified by persistent inflation, ongoing geopolitical risks, and global conflicts."  If you want a summary of their research on various areas of financial risk, you can find it here

XTOD: Just because you have free time doesn’t mean anyone who asks for it is entitled to it.

XTOD: Can Social Security Be Saved by Selling America’s Oil & Gas Reserves? 

The proposal: In a town hall hosted by Fox News, former President  @realDonaldTrump

 suggested that America’s fiscal problems – and specifically #SocialSecurity’s looming insolvency – can be solved by tapping into the “incredible wealth under our feet” in the form of domestic oil and gas.

Our findings: Dedicating current oil and gas leasing revenues to Social Security would cover less than 4 percent of its shortfall, and it would be impossible to fix Social Security even if all federal land were opened to drilling operations.

XTOD: An amazing roller coaster ride for the 10-year treasury yield, despite no meaningful change in expected future primary budget deficits.

XTOD: An income-based explanation for "vibecession":   1) Even though we haven't had an actual recession over the past 2 years, inflation-adjusted personal income per capita (blue) have behaved in a recessionary way.  2) That's true even though "the economy is good" (orange)

XTOD: Blackstone, Digital Realty join hands to develop $7 bln data centers http://reut.rs/4aecEE3

XTOD: The Department of Justice on filed new criminal charges against Hunter Biden, US President Joe Biden's son, accusing him of failing to pay $1.4 million in taxes while spending millions of dollars on a lavish lifestyle https://reut.rs/3uLvAJX

XTOD: After this week’s unacceptable testimony from presidents of @Penn  

@Harvard , and  @MIT , the Education Committee is launching an official Congressional investigation that will include substantial document requests and compulsory measures including subpoenas to those universities and others. 🚨🚨🚨  https://stefanik.house.gov/2023/12/stefanik-statement-on-committee-on-education-the-workforce-announcing-investigations-into-mit-harvard-penn-following-their-inability-to-condemn-antisemitism

XTOD: On December 7, the #GDPNow model nowcast of real GDP growth in Q4 2023 is 1.2%. http://bit.ly/32EYojR #ATLFedResearch 

XTOD: I'm still a bond bear. I still have my target of 5.50% 10-year in 2024.  I'm in the "no landing" camp. That is no recession or even a soft landing but continued expansion. (as an aide, I've been critical of the soft-landing forecasts as they don't have an accepted definition, and by some criteria, it can be argued there has never been a soft-landing before).  So, I think there will be 2+% real GDP growth in 2024. I'm also in the "sticky" inflation camp that bottoms at 3+% in the long run, not 2% (it only gets to 2% in a full-blown hard landing or recession, which I do not see).  

For both above, I've argued the cycle changed in 2020. The labor market is very different (remote work) and more transactional. That means employees are more willing to quit (or strike) as they are fearless in finding another job. This confidence allows them to keep spending. 

So 2+ real GDP growth and 3+% inflation = 5+% nominal GDP, which is how I get to 5.50% 10-year in 2024. 

A word about what this means for risk assets, like stocks: they will see the headwind of a viable alternative ("TINA" died in 2020). This was the case in 2023 with everything but the "Mag 7" stocks struggling to beat cash ... for the second year in a row. 

Dr. Jeremy Siegel has a new edition of his book "Stocks for the Long Run" this year. In summary, the long-term potential of the stock market is now 8%. If investors can continue to get 5+% from the bond market, why take the extra risk of 3%? 

On this front, the era of buying indices is now over. Peter Lynch can come out of retirement as we are on the road to transitioning back to a stock-picking environment.

XTOD: Essentialism isn’t about getting more done in less time.  It’s about getting only the right things done.

Daily Economic Update: December 7, 2023

Yesterday ADP came in below expectations while unit labor cost also hit lower levels than expected.  Stocks extended losses to 3 straight and were eliminated from the NBA's in-season tournament.  It's hard to believe that in mid to late October the 10Y was at 5%.  The narrative has shifted quickly to rate cutting and even the concept of "preemptive rate cuts" as soft data and slower inflation have seemingly one the day at present.  Crude is now back to ~$70, the lowest it's been since July.  Markets are also keeping an eye on the Yen as Kuroda again talks about the potential changes to monetary policy over there (for the millionth time).  The real question is will Friday's Jobs report do anything to change the current narratives heading into next week's FOMC?

To start the day yields are up 2-4bps with the 2Y at 4.62% and the 10Y at 4.15%.  Ahead we get Jobless Claims, Inventories and Consumer Wealth and Credit information.  

XTOD: gradually…then… say it, say the word…

XTOD: The term vibecession refers to widespread pessimism about the economy regardless of the actual economic situation. Learn more about the term and its origin.  https://t.co/uwZzsWEdpy

XTOD: The Summer Of Central Bank Gold Buying Extends Into The Fall

XTOD: One of the most famous short sellers, Carson Block of Muddy Waters, is shorting Blackstone Mortgage Trust - a lender to commercial real estate owners and developers 

Here's what he had to say on CNBC:  https://www.cnbc.com/video/2023/12/06/carson-block-shorts-blackstone-mortgage-trust-heres-why.html

XTOD: Time has been doing this since 1927, when Charles Lindbergh won the honor.   This is the first time a musician has ever won.  The most popular occupation for TIME’s Person of the Year is politics. A politician has been awarded the honor 64% of the time.

XTOD: Social media likes to give you the illusion of "fast", "quick" and "overnight" based on mechanical fixes  In reality, persistence over a long period of time is probably the most undervalued trait in successful players.  They just kept showing up and doing hard things

XTOD: Phil Jackson said, "The strength of the team is each individual member. The strength of each member is the team." 

Great teams know how to come together.

• They trust each other.

• They communicate.

• They connect. 

A great team is not a group of individuals seeking personal recognition, it's a collective group that trust each other enough to work towards a common goal. 

They work together and they care for each other. 

Great teams remove their ego from the decision-making.

Daily Economic Update: December 6, 2023

Yields fell again yesterday as JOLTS data seemed to continue to lend some credence to the soft landing chatter as openings declined by more than expected. Per GS research, "our jobs-workers gap based on the JOLTS, Indeed, and LinkUp measures of job openings stands at roughly 2mn workers—in line with the level we estimate is necessary to rebalance the labor market and return inflation to 2% on a sustainable basis."  On the other hand ISM Services data showed a strong report including an increase in the employment metrics.

To start the day, yields are up ~3-4bps with the 2Y at 4.62% and the 10Y at 4.20%. On the day ahead it's ADP Employment data and Productivity data.  We'll see if ADP (which is a notoriously bad predictor of how the Employment report on Friday will print) continues to cement market expectations for "lower and faster" for 2024 rate cuts.

XTOD: soft landing you have to stop. your inflation too soft. your jobs market too moderated. your economy too normalized. they’ll kill you soft landing

XTOD: Pretty sure this is the Fed keeping REPO/SOFR in check. Fed REPO line tapped at the highest level since the massive stick Sept. '19 repocalypse. 200mm is pretty small but not to be ignored. This is why they killed Libor...so they can maintain control of the reference rate.

XTOD: Today the U.S. Supreme Court heard arguments on behalf of Charles and Kathleen Moore. Here is an overview: In 2018, Charles and Kathleen Moore learned that – because of the Mandatory Repatriation Tax – they had to pay income tax on a stock investment, even though they realized absolutely nothing on it.  We believe the Constitution prevents Congress from levying this kind of tax on the Moores – because the Moores never realized any income. “The word ‘income’ in the Sixteenth Amendment means the same thing today that it meant in 1913: economic gains coming in to the taxpayer. That’s why appreciation in the value of a home, a stock investment, or other property is not and never has been taxed as income”  Without the need for income to be realized by taxpayers for Congress to tax them on it, all bets are off. We are hopeful that the Court will follow the original meaning of the Amendment and reaffirm that there is no income without realization.

XTOD: The Supreme Court looked unlikely to impose strict new limits on Congress’s power to tax income, with some conservative and liberal justices alike signaling wariness about upending long-settled principles of the federal tax code https://on.wsj.com/415mxjf

XTOD: NEW: Elon Musk's AI startup, xAI, has filed with the SEC to raise up to $1 billion in an equity offering. The company has already brought in nearly $135M from 4 investors & has a “binding and enforceable agreement” for purchase of the remaining shares.

XTOD: MORGAN STANLEY: “.. 5% of the US population is taking #GLP1 drugs, with 11.4% of households having at least one member currently taking GLP-1s ..” [Huberty] 

XTOD: Zoom fatigue is not burnout. It’s boreout.  New study: when meetings are virtual, we’re not overwhelmed—we’re understimulated. Cardiac measures show drowsiness, not stress.  The antidotes are common sense but not common practice: fewer, shorter, more interactive online meetings.

XTOD: Harvard President Claudine Gay refused to answer my question about whether @Harvard

 received $1.5 BILLION in funding from foreign entities and governments for its Middle East Studies Department.  This is unacceptable. The American people have a right to know how foreign governments are influencing our colleges and universities. In fact, it is required by law. 

XTOD: “If you mislead a player, you lose them forever. If you tell them the truth, you lose them for about 24 hours." -Jim Leyland 

XTOD: "If you're chasing money you won't find your dream. If you're chasing the dream, you'll find the money."   -Jim Leyland

Daily Economic Update: December 5, 2023

Will Grand Theft Auto VI have a Taylor Swift effect on the economy?  Judging by the headlines I think that maybe the most important macroeconomic question at present, despite the fact that the game won't even be released until 2025.

Yesterday yields rose with the curve bear flattening.  Today, yields are starting the day lower by 3-4bps with the 2Y at 4.63% and the 10Y at 4.24%.  News of Moody's lowering China's sovereign credit outlook to negative hasn't seemed to help risk sentiment this morning.  Also overnight the RBA remained on pause as expected, keeping their policy rate at 4.35%.  On the day ahead JOLTS will be in focus on the data front.

XTOD: The Fed has two levers to pull  1) hike until things break. They abandoned this when they downshifted to start the year and especially when SVB happened 2) hold at a level they think is restrictive and hope financial conditions tighten over time  #2 is complicated because they don’t control FCI directly.  If conditions loosen prematurely, they have to respond.  Failure to respond is precisely what turns them into Arthur Burns 2.0  In 11 days we see what their response is.

XTOD: Out now - Dr. Barry @B_Eichengreen   &  @FedGuy12  on:  - How governments can live with high-levels of debt   - "Inflating away" the debt is a trick that doesn't work without financial repression tools that are now largely absent  - The "dominance" of the U.S. Dollar will continue to erode very, very slowly, but Euro or the Chinese Yuan do not pose a material threat to dethrone the USD anytime soon  

- Modern Monetary Theory (MMT) is "not consistent with basic economics" and been "discredited" by the surge in inflation & interest rates over past two years   - Central banks are slowly diversifying out of the U.S. Dollar and into alternatives such as gold. Why gold and not, say, aluminum? Tradition  

- The U.S. Dollar has been giving ground not to old-school alternatives (Euro, Yen, etc.) but to non-core currencies such as Australian Dollar, Canadian Dollar, and Swiss Franc 

- In most instances where "inflating the debt away" worked successfully to reduce debt:GDP levels, financial repression tools such as interest rate caps and capital controls were used aggressively. Such tools are infeasible in today's open and sophisticated global financial 

- This^ claim is from Dr. Eichengreen's paper, "Living with High Public Debt," which we discuss in detail in this interview and which he presented at the Fed's Jackson Hole Symposium this summer

XTOD: The New York Fed's measure of underlying inflation (the "multivariate core trend" rate) ticked down to 2.6% in October from 2.9% in September 

This was the lowest reading since January 2021 https://newyorkfed.org/research/policy/mct#--:mct-inflation:trend-inflation

XTOD: If you think wealthy families stay wealthy forever, consider this:  "When 120 of Cornelius Vanderbilt's descendants gathered at Vanderbilt University in 1973 for the first family reunion, there was not a millionaire among them."

XTOD: No one’s ever ready.   That doesn’t mean you don’t start.  Starting is the only thing that proves you’re ready.

Daily Economic Update: December 4, 2023

Last week ended with markets generally blowing off Powell's message of higher for longer and continuing to aggressively price in rate cuts beginning as early as March.  Yields start the week higher by 3-4bps with the 2Y at 4.61% and the 10Y at 4.25%.  With the Fed on blackout this week all eyes will turn to labor market data and this Friday's jobs report.  The rest of the days will be filled with talking heads trying to explain why gold is rallying, enjoy.

Today: Factory Orders

Tue: Markit PMI, ISM services and JOLTS.  Bank of Canada rate decision.

Wed: ADP, productivity

Thur: Jobless claims, inventories

Fri:  Jobs Day in 'merica and UofM survey

XTOD: I would love to see more concrete/thoughtful answers to the question of "what should you _personally_ do, for yourself, if you think AGI/ASI are within 10 years from now?" 

XTOD: The science of quantum computers is deep and we can’t scratch the surface, but we hope to explain enough so you won’t be blindsided by a technology that could transform civilization. Scott Pelley reports, tonight. http://60Minutes.com

XTOD: How much have Fed expectations moved this week?  Last Friday (orange, Nov 24) had 3 cuts priced in for 2024, with the first in June.  Today (blue, Dec 1) has five cuts priced in for 2024, starting in April (straddling the March 22 and May 1 meetings).  -- This is a massive move for a week that did not have a CPI or Payroll report.   But the week did start with Waller and end with Powell.

XTOD: He tried …Per the Bloomberg headline below, #FederalReserve Chair Powell tried to push back against market pricing of notable rate cuts next year noting “it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.” 

He added: “We are prepared to tighten policy further if it becomes appropriate to do so.”

Yet yields have moved significantly lower today, including a 10 basis point for the very #Fed-sensitive 2-year.

XTOD: *POWELL: FED POLICY RATE IS 'WELL INTO RESTRICTIVE TERRITORY' 

*POWELL: FED PREPARED TO TIGHTEN MORE IF IT BECOMES APPROPRIATE'  

*FED'S POWELL: PREMATURE TO SPECULATE ON WHEN POLICY MAY EASE 

Market: Got it, rate cuts definitely starting in March!

XTOD: I have said it a million times. If Powell even TRIES to print with inflation at 4% the long bond will go bid-less. How many would you want to own? I mean own--as in wear--not flip to the Fed. He will have to buy them all, which is a nonstarter.

XTOD: Don't let your dreams of a "bonanza" lead you to "expose yourself to the possibility of a catastrophe" - Howard Marks

XTOD: The only people who never feel like impostors are narcissists.  Being 100% sure of yourself at all times betrays arrogance and breeds complacency. Questioning yourself reflects humility and propels growth.  Pangs of doubt are a normal, healthy human response to new challenges.

Daily Economic Update: December 1, 2023

Hard to believe it's December.  It's been one of those years where certain months felt like years for markets.  Treasury yields moved higher by 6-8bps yesterday (in volatile trading), but have reversed some of that move and are down 2-3bps to start December.  The 2Y is yielding 4.68% and the 10Y is yielding 4.33%

Yesterday's PCE data came in largely in line with expectations, with headline PCE increasing ~3% year over year and flat month over month, the weakest print since mid-2022. The move higher in yields seemed somewhat driven by NY Fed Williams who said “I expect it will be appropriate to maintain a restrictive stance for quite some time to fully restore balance and to bring inflation back to our 2 percent longer-run goal on a sustained basis,” while noting the improving inflation situation.

We get 2x Powell today before the Fed begins their blackout period ahead of the next FOMC meeting. Will Powell push back on the easing of financial conditions.  If you recall Fed officials including Powell made a big deal about how tighter financial conditions were doing some of the work for them, especially if they were being driven by exogenous factors. We'll see if there is any push back on the recent easing of financial conditions.

Aside from Powell there is some manufacturing PMI data and construction spending data on the calendar. 

XTOD: Republican Lawmakers Call CDC Attention To "Suspicious" Virus Outbreak In China

XTOD: Russia’s Naval-Defense Dolphins May Have Escaped.

XTOD: Major League Pickleball asks players to take 40% pay cut on the back of rapid growth

XTOD: The 10-year Treasury yield will rebound to 5.5 percent, predicts market forecaster 

@biancoresearch  He argues that the current move is a head fake.

XTOD: You get recessions/sharp slowdowns when businesses/households get caught out over their skis & are forced to cut back quickly, and the speed triggers a self reinforcing dynamic. We've spent the last 18m in pre-cession. And you can't commit suicide jumping out the basement window

XTOD (Remember LIBOR transition, Remember ARRC?...good times): #ARRC, convened by the Fed, released its Closing Report & announced the group’s conclusion, following a successful transition from USD LIBOR. The report highlights forward-looking focus areas to maintain robust reference rates: https://nyfed.org/47Uri0Z

XTOD (If you don't know what PODS are in the Hedge Fund space you should google): BLOOMBERG ARTICLE ON SYSTEMIC RISK FROM PODS  Some interesting points in this Bloomberg article on multi-manager funds.   A couple points stood out to me, and there were a couple points I would add. What stood out:....

XTOD: Let me be clear to any corporation that hasn’t brought their prices back down even as inflation has come down: It’s time to stop the price gouging.  Give American consumers a break.

XTOD (Reply): Where to start?  A) Inflation is a change in the price level. Inflation slowing but still positive doesn’t bring down prices it brings them up less quickly. Math is hard.  I now actually believe JoeB may be writing his own tweets as a C- donor kid intern would’ve caught this.

B) Corporations try to maximize profits. It’s governments job to set conditions that lead to or away from inflation. Biden and others find this very confusing feeling if you they can only catch corporations maximizing profits it’s a smoking gun. Then sometimes they use the word “fiduciary” in other contexts and don’t notice the irony.

XTOD: A billionaire minimum tax of just 25% would raise $440 billion over the next 10 years.  Imagine what we could do if we just made billionaires pay their taxes like everyone else.

XTOD (Reply): The dude who just spent $6,130,000,000,000 this year is talking about collecting more taxes again like revenue is the problem. 

XTOD: Voluntary disregard for history's lessons has brought us crises and cul-de-sacs. We know how to contain inflation and restore containment when it fails. We know how to govern great cities. We know how to compete in the eternal contest between nations. But we decided to forget.

XTOD: Every day you face battles—that is the reality for all creatures in their struggle to survive.  

But the greatest battle of all is with yourself—your weaknesses, your emotions, your lack of resolution in seeing things through to the end.  ― Robert Greene, The 33 Strategies of War

XTOD: It was a useful phase, and I think that it’s important for most people to dedicate a chunk of time to learning the basics of productivity.  But you have to learn to let go of your task list or you will end up being shunted to the side of your own life.  If you’re not careful, you become so blinded by your obsession with work that you forget there is a world outside of it.  You literally forget the things that you used to love, and forget that you’ve forgotten them.  Your life becomes flattened down to the single dimension of your hustle.  You can learn to love the grind but it’s crucial that you don’t get parasitised by it.  Your work can crawl inside your skin and start to stare out through your eyes.  Then before you know it, even when you’re not working, you’re still working.

Daily Economic Update: November 30, 2023

The month of November is closing as the best month of the year for both stocks and bonds.  The S&P is up ~8.5% on the month, the 2Y yield is at 4.66% (it started the month at 5.07%), the 10Y yield is at 4.30% (it started the month at 4.90%).  Reportedly it was the best month for bonds since something like 1985.

Yields continued to move lower again yesterday.  The move lower in Treasury yields came despite of the higher than expected 2nd reading of 3Q GDP, which was 5.2%.  Lower inflation readings in Germany, the Governor Waller discussion the other day, Bill Ackman, some easing of geopolitical tensions  etc. all seem to have helped fuel bets on lower yields.  Yesterday's Fed's Beige Book showed some slowing in economic activity, easing in labor market conditions and moderating in inflation, seemingly also signaling "goldilocks".  Something to keep an eye on is the continuing chatter that the Fed may look to change their inflation target when they complete their next policy review over the course of 2024 and 2025.  Yesterday's comments from Richmond Fed Pres Barkin where he stated he's open to an inflation target range, importantly after we hit the 2% goal, is definitely making the rounds with some bond bears.

On the day ahead we get jobless claims and the Fed's preferred inflation measure with PCE.  The OPEC+ meeting and impact on oil will also be watched, reports so far this morning is that there is a preliminary agreement for an additional output cut of 1 million barrels per day.

If you recall much of the last two months have featured discussions around risk premiums and term premiums in bond yields.  We only have to go back to November 1st FOMC to recall Powell discussing how higher yields were helping do some of the Fed's work in tightening financial conditions and just yesterday Mester had reiterated this point. With yields now falling from their recent highs, it will be interesting to see if Powell or other's show any concern at the loosening of financial conditions. 

On the topic of risk premium,  I thought this description of the components of long term interest rates by Deutsche Bank's Matthew Raskin on MacroMusings was worth sharing (the full show transcript is here):

"so my framework for thinking about longer-term interest rates… I guess I would describe it as the expectations theory with time-varying risk premia. What I mean by that is, I think of term interest rates on default-free instruments. So, I'm thinking about US Treasuries as a function of two things: one is expectations for the path of short-term interest rates over the life of the bond, and two is a risk premia or term premia, which is an excess expected yield over and above that expected short-rate path, which is compensation that investors get for bearing interest rate risk in a longer-term bond....I actually think it's helpful to break that expectations piece down further into two pieces, one of which is expectations for the long-run neutral policy rate. That's the short-term interest rate that will prevail when the economy is in equilibrium. In a nominal space, I think of that as a function of expectations for R-star or the neutral real rate, and expectations for longer-run inflation, which should be a function of the Fed's inflation goal. Now, that real piece, that R-star-neutral real rate, is not something that's controlled by the Fed. I think that's a function of fundamentals like productivity growth, demographics, and other things that alter the balance between savings and investment. That's one piece of the expectations component. I think the other is expectations for interest rates over the cycle, so over the next few years, and the extent to which interest rates will deviate from that long-run neutral level. And so, I do think the Fed controls that, but with constraints that depend on its goals, but they decide how to trade off their inflation and unemployment objective...Those three things together, I think expectations for long-run neutral, expectations for the Fed policy cycle, and then term premia, for me, at least, are a useful framework in thinking about moves in longer-term interest rates, and I think I found them quite useful in applying to what we've seen over recent months in terms of the big moves in rates....." 

XTOD: We have entered the peak soft landing narrative zone!

XTOD: Nominal GDP grew at an annualized 9% rate last quarter! 

XTOD: To put this in perspective, this is higher than any quarter, except for one, during the entire 2007-2019 period.  Higher than the 'recovery' from the Great Recession, or during any of the prepandemic Trump years.

XTOD: Elon saying “Go fuck yourself” live on CNBC and them not expecting it, so there was no profanity delay, and therefore it violated FCC guidelines means CNBC gets fined. Hilarious  https://twitter.com/i/status/1730000411501687175

XTOD: Musk: “The only reason I am here, Jonathan, is because you are a friend.”   Andrew: “I am Andrew.”

XTOD: Henry Kissinger, the child refugee who rose to become US secretary of state and defined American foreign policy during the 1970s with his strategies to end the Vietnam War and contain communist countries, has died. He was 100.

XTOD: I've said this often  If you are doing the exact same things as people with better genetics than you, that work  just as hard as you do how on earth will you ever catch them? 

You won't unless you take a different, more contrarian route but you have to be comfortable in your own skin to do that

XTOD: There is nothing so pointless as delegating work that should not be done at all.