Daily Economic Update: September 11, 2024

 

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

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

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

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

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

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

We truly are in the Golden Age of Private Credit.

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

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

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

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

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

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

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

Daily Economic Update: September 10, 2024

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

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

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

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

Debate is the highlight of the day.

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

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

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

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

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

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

Daily Economic Update: September 9, 2024

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

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

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

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

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

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

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

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

Monday: Inventories

Tuesday: Small business optimism, 3Y Auctions

Wednesday: CPI, 10Y auction

Thursday: PPI, jobless claims, 30Y Auction

Friday: UofM

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

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

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

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

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

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

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

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

@eldsjal

) 

Daily Economic Update: September 6, 2024

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

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

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

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

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

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

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

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

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

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

Daily Economic Update: September 5, 2024

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

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

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

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

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

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

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

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

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

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

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

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

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

Daily Economic Update: September 4, 2024

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

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

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

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

Back to labor in forcus with JOLTS today.

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

@LondonSW

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

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

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

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

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

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

Daily Economic Update: September 3, 2024

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

Speaking of labor:

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

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

We shouldn't forget about geopolitics and upcoming elections. 

On the week ahead:

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

Wed.: JOLTS, factory orders, durable goods

Thur: ADP, jobless claims, ISM services

Fri: Jobs Day, Williams and Waller

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

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

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

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

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

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

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

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

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

https://pbs.twimg.com/media/GWQYvsWWsAAPxI7?format=jpg&name=large

Daily Economic Update: August 30, 2024

The last trading day of August, a month in which the crazy moves attributed to an unwind of Yen-carry trades now seems long forgotten, will end with PCE data.   Yesterday, the Dow and S&P finished up despite NVIDIA dragging down tech and Dollar General hitting a 6 year low. 

Yields rose some as economic data showed the economy was "resilient" and 2s10s remained inverted by 3bps with the 2y at 3.89 and 10y at 3.86.  On the data front the 2nd revision to the 2Q GDP showed that the economy grew at a 3% annualized real rate which was above consensus and seemed to show continued strong consumption. Inventories grew in line with expectations and the jobless claims didn't show any major concerns, though some will note the increase in continuing claims as an indicator that those unemployed are having a harder time finding new employment.

With the soft landing narrative feeling firmly enchrenched, is there a concern that perhaps the market's pricing of rate cuts is discounting the chance that the Fed will need to keep rates a little higher for a little longer and that there will need to be more "pain" in the labor market to bring down inflation back to target?  After all inflation is still above target with the market expecting PCE data in the 2.5% YoY tomorrow, of course some quarterly annualized and nowcast numbers are indicating we're at or back to running at 2% target.  Time will tell.

XTOD: With this release & Q3 tracking at around 2% the economy is looking in fine shape overall. The Fed should still cut because, as Powell said, the unemployment rate is higher than it should be. But absent an (unlikely) rise in the urate in August no pressing reason for a 50bp cut.

XTOD: A story in four parts:

1) US GDP growth has outpaced all other G7 nations

2) it's outpaced pre-COVID projections

3) inflation-adjusted wages are up, and most for low-wage folks

4) wages at the bottom rose so much, income inequality is down, undoing 1/3 of its growth since Reagan

XTOD: Pretty good year so far for financial assets: 

S&P 500 +19.2%

Gold +22%

Bitcoin +39.8%

Nasdaq 100 +16.8%

Russell 2000 +10.3%

MSCI EAFE +12.4% 

Double-digit gains as far as the charts can see

XTOD: Dreams are fun when they are distant. The imagination loves to play with possibilities when there is no risk of failure. 

But when you find yourself on the verge of action, you pause. You can feel the uncertainty of what lies ahead. Thoughts swirl. Maybe this isn't the right time? Failure is possible now. 

In that moment—in that short pause that arises when you stand face to face with your dream—is the entirety of life. What you do in that pause is the crucible that forges you. It is the dividing line between being the type of person who thinks about it or the type of person who goes for it. 

When I really think about it, I want that moment to be my legacy. Not that I won or lost. Not that I looked good or looked like a fool. But that when I had something I really wanted to do, I went for it.

XTOD: 1. If you had a heart attack and had to work two hours per day, what would you do? 

Not five hours, not four hours, not three—two hours. It’s not where I want you to ultimately be, but it’s a start. Besides, I can hear your brain bubbling already: That’s ridiculous. Impossible! I know, I know. If I told you that you could survive for months, functioning quite well, on four hours of sleep per night, would you believe me? Probably not. Notwithstanding, millions of new mothers do it all the time. This exercise is not optional. The doctor has warned you, after triple-bypass surgery, that if you don’t cut down your work to two hours per day for the first three months post-op, you will die. How would you do it? 

2. If you had a second heart attack and had to work two hours per week, what would you do? 

3. If you had a gun to your head and had to stop doing ⅘ of different time-consuming activities, what would you remove?

Simplicity requires ruthlessness. If you had to stop ⅘ of time-consuming activities—e-mail, phone calls, conversations, paperwork, meetings, advertising, customers, suppliers, products, services, etc.—what would you eliminate to keep the negative effect on income to a minimum? Used even once per month, this question alone can keep you sane and on track.