Daily Economic Update: June 14, 2024

It's a summer Friday, two days past the most important Wednesday of your career, why are you reading this?

Yesterday saw headline PPI post a decline of 0.2% MoM with core PPI flat MoM, both lower than expected.  Jobless claims rose more than expected, but remain low.  Many market participants believe the recent inflation data rules out the chance of a rate hike from here.

The 30Y Treasury auction was referred to as "stellar" as it priced 1.5bps inside when-issued. Is it falling inflation, falling growth expectations, both that helped bolster demand?  In any event today's supply didn't look like an issue.

If you guessed all-time highs on equities you were right.  

On the day head it's UofM sentiment as the highlight.

XTOD: Private equity is coming to college athletics.  As detailed in this article, the Big 12 is considering an equity investment of up to $1 billion for 20% of the conference.  Another example demonstrating that college athletes are professional athletes.  https://cbssports.com/college-football/news/big-12-considering-private-equity-investment-of-up-to-1-billion-for-as-much-as-20-of-conference/

XTOD: Private equity is going to blow up the world.

XTOD: The question for private credit is how much continued growth depends on expanding:

- retail access  - redeem-ability  - secondary market liquidity - leverage (!!) 

By all accounts, all these features are becoming more common. The asset class quickly starts looking a lot different.  Leverage is the key because it’s the only way outsize relative growth can continue. You can’t somehow recreate the 15x levered banking system on 1x leverage.

Daily Economic Update: June 13, 2024

It was the most important Wednesday in history I believe.  And I learned why I should be gravely concerned about electric boats and sharks, perhaps later than others, but educating myself nonetheless.

The cooler than expected CPI data lead to a double-digit move lower in yields and of course sent stocks to new highs.  Both moves were mostly sustained through the FOMC despite the ‘hawkish’ dot plot.

 The composition of the CPI report may not have been as promising as people think with most of the cooling coming from categories that might be considered less stable like a big reduction in airfare.  

The FOMC held rates as expected, you’ve already read 100 recaps, but you haven’t read my recap here.

And speaking of questions, why does no one ask about FAIT? If we’re targeting average inflation, doesn’t that mean we need inflation to be below 2% after being above 2% to average 2%, because like math?  Who knows.  And why did no one ask Powell to weigh in on the risk of electric boats, it would have been entertaining: “Do I stay on top of the boat and get electrocuted, or do I jump over by the shark and not get electrocuted?”  That seems like a good segue way into a discussion about the balance of risk.

I would tell you what’s on tap for Thursday, but how will it ever compare to Wednesday?  But sure, PPI and 30y auction is exciting stuff.

XTOD: Perfect time to start cutting rates https://pbs.twimg.com/media/GP4QjJ7W4AAeqgR?format=png&name=900x900

XTOD: Hawkish dot plots. Only 1 cut, AND revising up neutral rate (still low IMO) and longer term unemployment rate.

XTOD: Powell's implication remains that Fed policy can control inflation or growth just because it's part of the Fed's dual mandate. In reality, the Fed can't control geopolitics, trade wars, international development strategies, commodity sourcing or distribution costs, rents, debt-based purchasing, skyrocketing rents, the price of gold, cocoa, or a host of variables that can and will influence any randomly set target inflation rate.  

The Fed's policy hasn't kept the markets from booming either. However, it has fueled the distortion between financial assets and the real economy. #permanentdistortion

XTOD: Finally a pleasant surprise. Core CPI was 0.16% in May (2.0% annual rate). Headline was 0.01%. These are the best monthly readings since 8/21 & 7/22 respectively.  Good news but caution: just 1 print & some fluky items.  Core annual rate for 1/3/6/12 months:  2.0/3.3/3.7/3.4

XTOD: NEW: 2nd-grade teacher who was arrested for being drunk in class is no longer facing charges because "it is not illegal to teach drunk."  I love America. 

Wendy Munson was arrested after teaching her students at Nuestro Elementary School in California while drunk.  Munson failed a sobriety test and was twice the legal limit two hours after she was initially arrested.  District Attorney Jennifer Dupre announced that they didn't find any charges, noting that "it is not illegal to teach drunk."  "While the District Attorney’s Office agrees that it is highly inappropriate to teach while intoxicated, it is, unfortunately, not illegal."  "We couldn’t prove that her intoxication would endanger [the kids]."  Munson is not listed as a teacher on the school's website, indicating she was fired.

XTOD: "There’s no way to create a long-term, enjoyable, sustainable life by having a series of short-term transactional relationships that you move your life through. That’s where you end up with these people who can buy anything, who’ve made hundreds of millions, if not billions, of dollars, who are miserable. I’ve met these people. They have their IRR (internal rate of return) etched on their tombstone.   No one gives a shit. No one cares."

FOMC Recap: I've got 21 Questions Behind the Questions at the FOMC Press Conference

 

• FOMC held policy rates at 5.25% to 5.50% as expected
• FOMC statement characterized progress towards reaching the 2% target as "modest further progress" while continuing to characterize growth as "strong" and unemployment as "low"
• The SEP (Dots) Median dot showed 1 hike projected for remainder of 2024 vs. 3 in the March Dots
• The median longer run neutral rate was also raised to 2.8% up from 2.6%.

We spend a lot of time thinking about the FOMC statement and press conference, but do we really pay much attention to the questions the reporters in the room ask?  We know the questions are generally tame, perhaps you remember what happened to Pedro Da Costa when he asked Yellen a tough question back in 2017.  You also know Powell's answers are generally all non-answers.  So does anyone actually pay attention to the press conference?

Well today we are going to focus on the questions and try to get to the questions behind the questions.  Please note that the "Actual Question(s)" are paraphrased from reporter questions during the press conference.

1. Actual Question: Walk me through the average inflation forecast of 2.8% by year end, it's already 2.75% and forecasted to be lower, do you expect inflation to get worse?
   Question behind the Question:  How do you guys actually come up with your forecast / what are you smoking?
   
   
2. Actual Question: If you have this wrong and inflation is rising is the outlook for rates wrong?
   Question behind the Question:  Are you going to pull a Lagarde and cut rates while rising inflation forecast?
   
   
3. Actual Question: Would more inflation readings like today make a September cut possible?
   Question behind the question: You say you're data dependent, so can you please just tell us what the data needs to show you so you are willing to cut rates?
   
   
4. Actual Question: Did anyone change their projections after the inflation data today?
   Question behind the question: If there is no consistency with how people make their projections, do these dots mean anything?
   
   
5. Actual Question:  How do you view the labor market and how it gets us back to 2%?
   Question behind the question:  Do you still think 'there will be pain' to get inflation back to 2%?
   
   
6. Actual Question: How do you interpret the differences in labor market survey data?
   Question behind the question:  It looks like these surveys are a shit show, can we even rely on the jobs data?
   
   
7. Actual Question: Why did the committee shift down their rate cut forecast?
   Question behind the question: You say you're data dependent, if the data is moving your way, why are you moving the other way?
   
   
8. Actual Question: How should we interpret the rise in the long-run neutral forecast?
   Question behind the question:  You guys have no clue about r-star, right?
   
   
9. Actual Question: Should we conclude that you guys realized you haven't been as restrictive as you think you are?
   Question behind the question: Again, do you guys have any clue as to whether your policy is actually restrictive?
   
   
10. Actual Question: If policy is restrictive why does growth and unemployment not change in your forecast?
    Question behind the question: How many times do we have to ask you whether you can explain how your policy works and how you determine these projections?
    
    
11. Actual Question: Your growth forecast sees no slowdown and unemployment isn't worse, and inflation isn't falling, why do you need to cut rates this year?
    Question behind the question: Either your forecast is wrong or the way you describe your policy is working is wrong, which is it?
    
    
12. Actual Question: Is there concern for housing and financial stability in leaving rates where they are?
    Question behind the question: Are you really just planning to cut rates to bail out certain industries?
    
    
13. Actual Question: People are unhappy at the prices at the grocery store, it doesn't seem like there are still a lot of inflationary pressures in the economy, could you tell us more?
    Question behind the question: Can you tell me again why people hate inflation?
    
    
14. Actual Question: Can you give us a sense of what one rate cut would actually do to the economy?
    Question behind the question:  Why are we all here wasting our time talking about one rate cut?
    
    
15. Actual Question: Is there something about what happened in the first half of the year that you think differently about now?
    Question behind the question:  You guys were so wrong to start the year, did you learn anything?
    
    
16. Actual Question: What is your message to American's who see good data, but feel unhappy about the economy?
    Question behind the question: Do you think American's don't understand economic data, or are they right and inflation just sucks that bad?
    
    
17. Actual Question: Borrowing money is expensive, about when will you lower rates?
    Question behind the question:  People liked free money, when can people get back to getting free money?
    
    
18. Actual Question: What data have you found that is encouraging to you?
    Question behind the question:  You said data matters, can you please just tell us what data matters and where it needs to get to for you to be happy?
    
    
19. Actual Question:  Is your conservatism really just concern about stickiness of housing inflation?
    Question behind the question: Why do we use OER in our inflation measures?
    
    
20. Actual Question: The last jobs report showed more people working multiple jobs, people are paying for things on their credit cards, what will cause a breaking point for spending?
    Question behind the question: Do you really believe the economy is doing as well as the data shows, or is it all a facade?
    
    
21. Actual Question: Can you tell me what you look at in the labor market to decide when to cut rates?
    Question behind the question:  My god, I've been sitting in this press conference for almost an hour, will you please just tell us what data matters?

Daily Economic Update: June 12, 2024

The big day is here.  Is CPI > FOMC today?  What will the Dots show (2 cuts vs. 3 in March and rising longer-run neutral rate)?  

Yesterday's NFIB Small Business Optimism Survey showed an increase in optimism, albeit still below average, along with rising uncertainty.  My favorite line from the report was this (underline is mine): "The government’s share of GDP has grown as has government employment, but hiring more IRS agents is not going to improve consumer well-being. Unsustainable debt levels, including the national debt, risk destabilizing events in financial markets. And, the election promises to bring major changes in the tax and regulatory environment, regardless of who wins. All of this presents a very uncertain outlook for small business owners and uncertainty is the enemy of progress."

The 10Y Auction looked strong trading 2bps through where WI was trading on strong foreign demand and with it yields fell on the day.  The 10Y ended at 4.41% and the 2Y at 4.85%.  Stocks hit new record highs...Oracle, Apple...AI.

Anyway, just remember this is the most important Wednesday of your career, don't blow it.  

XTOD: Roger Federer: "In tennis, perfection is impossible... In the 1,526 singles matches I played in my career, I won almost 80% of those matches... Now, I have a question for all of you... what percentage of the POINTS do you think I won in those matches? Only 54%. In other words, even top-ranked tennis players win barely more than half of the points they play. When you lose every second point, on average, you learn not to dwell on every shot"

XTOD: I'm one of the few Biden supporters who *does* think that society should prioritize marriage and kids.  Family is the best technology we have for mass-producing meaningfulness. Without family, most people will be left to seek meaning from bullshit jobs or misguided activism.

XTOD: Was curious about fertility demographics people have been discussing, so pulled some data myself this morning.   Even though I knew it, striking how much of the childbirth change is from age 15-25.  Also didn’t appreciate how much the college education trends might explain some of this

XTOD: Big new annual report on kids shows "decades of lost progress" due learning loss during - and even after - Covid.  Math & reading scores keep falling.  Many kids just simply stopped going to school, with nearly 15 million "chronically absent" even post-Covid in 2022.   This while tens of billions of the 2021 "reopen schools" money still hasn't been spent.   Tough but necessary read.  

Keep in mind that no western nation kept kids out of school nearly as long as we did.  Most not even close.    Tough but necessary read.  We owe so much to making it up to the kids. 

2024 KIDS COUNT Data Book - The Annie E. Casey Foundation

XTOD: JUST IN: Tuttle Capital just filed for a Congressional Trading ETF $NPEL  The ETF will invest in the stocks that sitting members of 🇺🇸 Congress and/or their spouses have reported owning through public disclosure filings - Bloomberg

XTOD: In 1958, a 20-year-old Hunter S. Thompson wrote a letter to a friend with his advice on finding his life purpose.  It is a work of art.  5 brilliant lessons on finding purpose (everyone should read this):....Lesson 5: Live by Design, Not Default  You get one shot. Stop playing games by default. 

You have the power to choose how you live your life. That doesn't mean you will choose, but you always have the power to choose.  Find the Ninth Path. Live life by design, not default. https://pbs.twimg.com/media/GPtlA3lbsAI8Bhn?format=jpg&name=small

Daily Economic Update: June 11, 2024

Elections came into focus with Macron dissolving parliament and calling for snap elections after strong showings by far right candidates in parliamentary elections swept parts of Europe.  The Euro sold off some, but the U.S. is the honey badger don't care economy with equity indexes hit new highs.  Something, something AI, Apple, meme's, you get the gist.

The 3Y auction tailed 1.1bps, but bond yields did little ahead of Wednesday's FOMC.  2Y is 4.89% and 10Y is 4.47%

I think I'm willing to bet that the Hurley decision to stay at UCONN is more important than the FOMC this week.  Maybe that's just a belief that the head coach of 5 guys on the court's policies are more directly transmitted than the guy at the Fed who sets a rate and needs it to transmit through a gigantic and complex economy...and something about long and variable lags probably doesn't work in sports.

In other Fed news, the NY Fed SCE seemed to indicate consumers fell pretty good and are not lowering their inflation expectations, in fact their 5 year inflation expectations increased to 3%. 

On the day ahead it's small biz optimism (the commentary in that report is actually usually solid) and the 10Y auction as highlights.

XTOD: Not encouraging for the Fed: New York Fed 5-year inflation expectations ticked up to 3% from 2.8%.   UMich longer-term inflation expectations have also climbed a bit lately. Probably not enough to make officials freak out, but definitely something that they'll be keeping an eye on. 

XTOD: With these European election results smashing the liberal left, it appears that rampant illegal immigration and inflation are a toxic mix. Get ready for November.

XTOD: $20,000 a box? Spot rates on Asia-Europe ready to eclipse pandemic highs https://splash247.com/?p=207893 

XTOD: Two huge and powerful forces are pushing for further globalization: 

1) A flawed US corporate tax code that encourages offshoring (see US pharma imports)

2) China's domestic economic weakness, which has pushed it rely on exports

XTOD: Don’t mistake burnout for laziness. When people show a steady decline in effort and output, it’s often a sign of exhaustion. They don't need carrots and sticks to motivate them. They need people to demand less of them and provide more support to them.

XTOD: "Wonder is the desire for knowledge." 

Daily Economic Update: June 10, 2024

Headline payrolls solidly beats estimates coming in at +272K and showed an increase in average hourly earnings running at 0.4% MoM and 4% YoY. Despite that the unemployment rate creeped higher as the household survey was soft.  As expected seasonal factors and the divergence in the household and establishment surveys offers something for any narrative about the economy you feel like creating.  Yields immediately shot higher following the report but equities held onto a winning week (thanks AI).

We enter this FOMC week with the 2Y at 4.90% and the 10Y at 4.44%.   After pulling rate cut expectations forward to July, following the jobs report, it seems like many analyst are pushing back their expected timing of the first rate cut to September or November.   We'll see what the latest Fed "Dots" show.   Central Bank divergence will remain a buzz word.

It would be worthwhile not to lose focus on elections, wars, world trade, etc. as we can tend to get myopically focused on U.S. data.

On the week ahead Wednesday is the main event with CPI and the FOMC.

Monday: nothing major in data, 3Y Auction

Tuesday: small biz optimism, 10Y Auction

Wednesday:  CPI, FOMC

Thursday: Jobless claims and PPI, 30Y Auction

Friday: Bank of Japan decision (Thursday night) UofM consumer sentiment

XTOD: On June 7, the #GDPNow model nowcast of real GDP growth in Q2 2024 is 3.1%: https://bit.ly/32EYojR #ATLFedResearch  

XTOD: They really are losing the plot on how to manipulate the numbers: not only a crash in full-time workers, but Household Survey was DOWN 408K, vs 272K establishment survey.  

The gap between the two surveys has never been bigger

XTOD: The household survey could be too low. Is designed to measure ratios based on a survey (what fraction of people surveyed unemployed etc.) not to measure levels (what are the total number of people). With immigration levels could be off....Overall, however, past evidence strongly suggests that a Bayesian should place little to no weight on the household survey in estimating employment levels. The payroll survey is much, much better for that purpose.

XTOD: When have you done 'enough'? Just as clients can experience 'lifestyle creep' as earnings increase, so too can advicers experience 'service creep' as their businesses grow… The key is understanding that it's okay  to stop stacking on additional services.

XTOD: To paraphrase both Greg McKeown and Jim Collins: look for single decisions that remove hundreds or thousands of other decisions.  This was one of the most important lessons Jim learned from legendary management theorist Peter Drucker. As Jim recounted on the podcast, “Don’t make a hundred decisions when one will do. . . . Peter believed that you tend to think that you’re making a lot of different decisions. But then, actually, if you kind of strip it away, you can begin to realize that a whole lot of decisions that look like different decisions are really part of the same category of a decision.”  Much like my startup vacation/retirement in 2015, I’m now asking myself across the board: what can I categorically and completely remove, even temporarily, to create space for seeing the bigger picture and finding gems?

XTOD: “Bad times, hard times, this is what people keep saying; but let us live well, and times shall be good. We are the times: Such as we are, such are the times.”         — Saint Augustine of Hippo

Daily Economic Update: June 7, 2024

Jobs Day in ‘merica.  The expectation is for ~+185K headline and unemployment to remain at 3.9%.  There will likely be plenty of commentary around the seasonal factors and the impact of immigration.  Heading into jobs, stocks and bond yields were little changed yesterday.  The 2Y is 4.74% and the 10Y is 4.29%.

The ECB cut by 25bps as expected, citing easing inflation and the strength of monetary policy transmission. All while also stating that inflation likely to remain above target through next year and expressing some concern about wages.  If I had to paraphrase the ECB it would be: we cut despite raising our inflation targets, thanks for asking, but we are central bankers we’re confident in our path ahead….after all our track record of forecasting is stellar.

The SpaceX launch was newsworthy enough or the ECB presser was boring enough that BBG cut way from Lagarde to televise the launch.

In other data nonfarm productivity slowed to 0.2%, unit labor cost slowed to just 4%, the U.S. trade deficit widened and jobless claims rose.

Other than that we're all just doing it wrong, the key to a happy and successful career combining social media post and Gamestop.

XTOD: "Although we were quite coordinated on the way up — and that was really helpful because a big part of inflation was global — you're going to see some divergence on the way down, and that makes sense," top Bank of Canada official Carolyn Rogers told reporters Wednesday. https://axios.com/2024/06/06/rate-cuts-ecb-fed

XTOD: On June 6, the #GDPNow model nowcast of real GDP growth in Q2 2024 is 2.6%: https://bit.ly/32EYojR #ATLFedResearch 

XTOD: Yep.   The strongest argument that the world has not yet split into rival blocks that don't trade is that the autocratic block runs a massive combined surplus, and the democratic block a combined deficit.  that's only possible with cross-block trade

XTOD: LinkedIn CEO: "Pre-pandemic, it was ~2% of all jobs on the platform were remote jobs. If you go back 2.5 years ago, it peaked at 20%, 21% of all jobs on LinkedIn were remote jobs, which is pretty insane to see that jump from 2% to 21% & now that number is back to 8%" 

XTOD: Here's a day in the life of Brunello Cucinelli.  The man behind the multi-billion dollar quiet luxury sensation.  Sprint, rest, focus. And allocate time for distraction.  https://pbs.twimg.com/media/GPYte5pbUAAlpFt?format=jpg&name=medium

Daily Economic Update: June 6, 2024

Stocks again at record highs.  U.S. service sector activity appeared to be quite strong while also showing some easing in pricing pressure, all keeping future rate cuts on the table. And sure, I'll say "AI" just to say it.  For all you know AI writes this blog and this blog obviously contributes to the market cap of all AI stocks.  Yields were down again with the 2Y at 4.73% and the 10Y at 4.29%.

Away from market highs the theme of central bank divergence will likely be one that investors eventually focus on.  The BoC cuts rates by 25bps to 4.75% as expected, while citing upside risk to inflation and today, the ECB is expected to cut rates.  Arguably we've been through many recent cycles where major central banks all were acting in a largely coordinated manner (see Nomi Prins book "Collusion") and now seem to be embarking on a potential period of divergence with the U.S. likely on hold, Japan possibly hiking, and other domestic central banks cutting, as well as some EM banks.  What this might mean for international finance, exchange rates, etc. could be interesting.

That said you can find a perhaps growing chorus of economist calling for the Fed to cut rates soon.  Brad DeLong reviewed some arguments by Paul Krugman in a blog post here. One of the central arguments ends up being related to everyone's favorite r* (r-star).  Ultimately seeming to conclude that interest rate cuts are needed to bring 10Y real yields back closer to 1.5%.  

On the day ahead it's jobless claims, ECB rate decision and people getting ready for Jobs' Day Friday.

XTOD: Let me bust this nonsense once and for all. There is a myth out there that weak data will lead to rate cuts which will lead to a melt-up in equities. That’s not only moronic but also proved to be wrong in every cutting cycle since the 70s. While it’s in character for the market to rise in the months following a hiking pause, it ended on average 23% lower over the 200 days following the first cut.

XTOD: Lots of talk about an economic slowdown, but what exactly is slowing down?  tl:dr, surveys of opinions, not actual or "hard" data.

XTOD: Babe, wake up, new Maboussin paper just dropped.  https://morganstanley.com/im/publication/insights/articles/article_stockmarketconcentration.pdf?1717518526766

XTOD: Over the past 32 trading days, NVDA has gained more than $1 trillion in market cap. To put that into some sort of perspective, the 6-week gain is greater than the total market cap of BRKA, which Warren Buffett has spent 6 decades in building.

XTOD: "stats show that only about 10 percent of elite 10-year-old athletes are still elite at 18. Only eight percent of Nobel Prize winners and world champions were child prodigies. In fact, the only thing that early success guarantees is … early success" (John O'Sullivan)

XTOD: U.S. general predicts war with China in 2025, tells officers to get ready. In the memo sent Friday and obtained by NBC News, Gen. Mike Minihan, head of Air Mobility Command, said, “I hope I am wrong. My gut tells me will fight in 2025.” Air Mobility Command has nearly 50,000 service members and nearly 500 planes and is responsible for transport and refueling.

Minihan said in the memo that because both Taiwan and the U.S. will have presidential elections in 2024, the U.S. will be “distracted,” and Chinese President Xi Jinping will have an opportunity to move on Taiwan. https://nbcnews.com/politics/national-security/us-air-force-general-predicts-war-china-2025-memo-rcna67967 via 

@nbcnews

XTOD: “What is success? It is an inner and indescribable force, resourcefulness, power of vision; a consciousness that I am, by my mere existence, exerting pressure on the movement of life about me. It is my belief in the adaptability of life to my own ends. Fortune and success lie within ourselves. We must hold them firmly—deep within us.” — Thomas Mann