Daily Economic Update: October 1, 2024

Port strike on the horizon.  Continued messy situation in the middle east, with Israel invading southern Lebanon.  What a port strike and continued escalations in MidEast tensions might mean for inflation is something that will likely get further attention, but in the meantime crude oil prices are down over 20% from last year.

In everyone's favorite topic Fedspeadk yesterday we had the guy who used to work for Obama (Goolsbee) call for lots of cuts.  Then we had the guy who runs the Fed say the Fed is data dependent and seems to think they can take their time and are in no rush to cut: "not something that we need to go fast on. It’ll depend on the data, the speed at which we actually go.”  Barring bad data, whatever that actually means, I think you can pencil Powell in for 2 more 25bp cuts.

Initially stocks didn't like Powell, but they nonetheless hit new highs.  Yields backed up a little with the 2Y up ~8bps to 3.65% and the 10Y up ~4bps to 3.79%. 

 

Interesting paper out of NY Fed called "The Central Banking Beauty Contest", it kind of reminded me of a paper I wrote about here on the "Hall of Mirrors" effect of information feedback loops, but in this case it approaches "expectations" from a game involving the Fed and market participants and the impact of their beliefs about one another's beliefs.  My summary, are we doing economics anymore or psychology or game theory, or a realization that the economy is dynamic and all of the above?

On the day ahead JOLTS will be the highlight, along with ISM Mfg.

XTOD: Multivariate Core Trend (MCT) #inflation increased to 2.6 percent in August from 2.4 percent in July (revised down from 2.5 percent).  The 68 percent probability band is (2.2, 3.0). https://nyfed.org/3NY8FCh

XTOD: “360 substations are out… There is a high likelihood that the substations are not reparable, and replacement of the substation equipment will be necessary.”  This is devastating. We do NOT have 360 substations worth of transformers and other electrical equipment sitting in stockpiles waiting to be deployed. It could take a very long time to restore power to everyone. Are we facing a Hurricane Maria-type impact on grid infrastructure?

XTOD: You’ve heard of Founder Mode, now get ready for …https://pbs.twimg.com/media/GYqY3z_bQAACp97?format=jpg&name=medium

XTOD: "Damodaran Bot has read everything that I have ever written, watched every webcast that I have ever posted and reviewed every valuation that I have made public."  https://t.co/6TRwh23Pth

XTOD: The ultimate status symbol is time. Time is the new money.

Daily Economic Update: September 30, 2024

Happy last day before we start the 4th quarter.  On Friday, PCE data was waeker than expected in the MoM core at 0.13%, yet the YoY rate increased to 2.7%. I'm not sure it mattered as markets seem much more focused on Chinese stimulus and labor markets for the moment, where the focus will shift to this Friday's job's report. 

We ended the week with Atlanta Fed's GDPnow estimate for 3Q2024 revised up to 3.1%.  The NY Fed nowcast is in general agreement at 2.99%.  Stocks in general agreement that things aren't bad (or maybe they just believe in the Fed put).  The 2Y is 3.57% and the 10Y at 3.75%.

Away from markets you have historic flooding as a result of Helene and continued dismantlement of Hezbollah leadership by Israel.  Not top of mind for many is the fact that Oct.1 starts the resumption of normal collections, late fees, reporting to credit agencies, etc. for student loans. 

On an unrealted note, if you're looking for a perhaps under the radar podcast on AI, I thought this podcast with Edward Chancellor and Marathon Asset Management was interesting https://shows.acast.com/66acfe26e65b9fd5b02a0fcd/66b22e2fec20c36e8ebf8542

Monday: Fedspeak, including Powell

Tue: Constructing spending, JOLTS, ISM mfg.  VP debate

Wed: ADP, moar Fedpseak

Thur: Jobless claims, factory orders, durable goods, ISM services

Fri: Jobs Day in 'merica

XTOD: What the core PCE price index looks like as of August 2024

12-month rate: 2.7% (up from 2.6% in June and July)
6-month annualized rate: 2.4% (lowest since Dec)
3-month annualized rate: 2.1%

What the headline PCE price index looks like as of August 202

12-month rate: 2.2% (lowest since Feb 2021)

6-month annualized rate: 1.9% (lowest since Sep 2020)

3-month annualized rate: 1.5%

XTOD: I think about this often, living in a tech transplant-centric area  On a given weekday, I see moms and dads shopping together, at the gym for 9 am yoga, walking dogs at 10 am, picking up kids from school at 3 pm…etc   Part of me celebrates that we’ve unlocked this level of work/life balance  It’s an enormous quality of life booster for working parents with kids  But part of me also fears this is “too good to be true”  Perhaps a number of these jobs are disposable, or at the very least, transferable overseas  Perhaps some of these couples are semi-retired, living off a wealth effect that may dwindle away in a stock market correction, or if inflation relentlessly drives cost of living higher Time will tell.

XTOD: Google breached the mindshare moat w a spartan web page that was fast - and an AOL deal that raised awareness - kids started “googling”.  And then it was over.  Technology is required but not sufficient - mindshare is lightening in a bottle that triggers network effects.  💥

XTOD: And these foreign interests trying to cash in on big city real estate development are just following the example set by our own home-grown developers who've been bribing mayors, inspectors, and local politicians for decades to build "luxury" developments that charge obscene rents

XTOD: Modern life rewards distraction and consumption. But fulfillment comes from focus and simplicity. Reclaim your time. Reclaim your health. Reclaim your life. 

Daily Economic Update: September 27, 2024

China continues with stimulus. AI stocks (sans Supermicro Computer) continue to have legs and overall everything is perceived as bullish for equities.  Powell didn't say anything about monetary policy, so that was that. 

On the data front, you still can't get fired with jobless claims at a 4 month low, this despite constant headlines about layoffs (so maybe they'll make it to claims eventually).  Pending home sales slightly higher than expected, Durable Goods orders held up and 2Q GDP was confirmed at 3% and most of the revisions to previously reported growth estimates were positive.  The 7Y auction solid.

Away from data there is still war, there is the threat of East coast port strikes next week and Mayor Adams was indicted (if he goes to jail will he be in the same jail as Diddy and SBF?)

On the day ahead it's PCE Day!  

XTOD: These BEA revisions seem material. A common recession narrative has been GDP would "catch down" to weaker GDI, and that low savings rate indicated consumer stress. But today it was GDI revised significantly higher due to greater interest income, leading to higher savings rate.

XTOD: Revised GDP for Q2, the more interesting news is in the revisions which go back the last five years.  Notably: Remember the debate over whether there was a recession in 2022 because of two quarters in a row of negative growth? Well, one of those quarters was revised to positive.  https://pbs.twimg.com/media/GYZ446XbIAAi_3S?format=png&name=small

XTOD: The $NVDA bull & bear case summarized in 2 minutes by Zuck.  It is that simple.  https://x.com/i/status/1839304406938038624

XTOD:  The game of football is officially broken.   NIL, transfer portal, 6th year seniors, high school kids being offered money to play college ball or transferring 2-3 times between freshmen - senior year in high school, youth select travel teams, personal trainers making more money than Bill Gates from training 9 year olds how to run routes. We are just chasing after the wind. Good luck catching it.  

Football was once built on the foundation of commitment, grit, finish what you start no matter the cost. 

We should apologize now to future employers, wives, and children for the young men that are learning to quit or leave when things are difficult or times get tough.

XTOD (READ the full thread if interested) : A #Refinance Solicitation: True story from a client call yesterday.  "They told me I'd save about $300 per month and it would only cost me $1,219. Sounds like a good deal to me! Can you tell me what you can offer before I proceed with them?"   The Devil is in the details! https://x.com/AdvisorJohn/status/1839347434612498864

XTOD: Clarity comes from subtraction, not addition.  Remove the noise, the distractions, and the unnecessary.  What truly matters will emerge.

Daily Economic Update: September 26, 2024

So long Apple Vision Pro, hello Meta Orion.  I wrote this in augmented reality.  I, like Sam Altman, have been lobbying the government in hope that we can further build out our electric grid so that we have electricity available to power data centers so AI can do a better job writing this blog. 

Mortgage refinancings surge 20%.  Sales of new homes in August were lower than July, but better than expected. If they give first time homebuyers more money prices will go____?

Putin talking about potentially using nukes. Israel preparing for ground ops in Lebanon. A Hurricane in the gulf.  Possible strikes at ports. Stocks near all-time highs (yes they were down slightly).

5Y auction was on the screws at 3.591% with decent internals, but no uptick in demand.  The long end of the curve continues to sell off post last week's FOMC.  The 2Y is at 3.56% and the 10Y at 3.79%.

Today we get updates to GDP, GDI, including revisions to data going back something like 5 years.  Durable goods data,  Powell at 9:20am and the 7Y auction at 1pm.

XTOD: A trader has placed the single biggest ever trade in SOFR futures today 🤯 Why? No idea.

XTOD: It is fascinating that yimbyism started with sensible democrats (as the problem is so much worse in places like sf), but then republicans rather than say great, you discovered property rights and markets, let’s get this done, moved to reflexive opposition.

XTOD: In the future, I think this era is going to be looked at critically in this regard. The ratio of attention that market participants have to give to the Fed, and the amount of communication that the Fed gives to the market on a regular basis, has kind of reached banana land.

XTOD: Almost one third of our life is spent at work.  But only 20% of people are passionate about their jobs.  This is one of the key reasons why:  45% of people have not felt true happiness for more than 2 years.   25% don't know, or have forgotten, what it means to feel happy.

XTOD: Do It Your Way  You do your best work and have the most fun when you’re not burdened by fear that someone else thinks you’re doing it wrong. 

https://collabfund.com/blog/your-way-is-the-only-way/

Daily Economic Update: September 25, 2024

China eases, cutting their RRR by 50bps which should open up over $140bln in new loans.  Chinese authorities also cut certain repo and mortgage rates by 20bps, while making some regulator changes to spur demand for homes and stocks.  Elsewhere in Asia, BoJ talked tough on inflation and the Aussie central bank held rates at 4.35% for the 7th straight meeting, so far abstaining from the rate cutting frenzy as they remain vigilant against inflation risk.

Stateside, the Conference Board's Confidence data dissappointed with an uptick in recession probability and a worsening "labor differential".  Not in most of the headlines, the survey also showed an uptick in inflation expectations for the next 12-months to 5.2%.

In fedspeak, Bowman, AKA 'the dissenter', expressed concern that the Fed's fight against inflation may stall and that the neutral rate may be much higher than it was pre-pandemic.  She also expressed concerns around geopolitical risk related to supply chain disruptions and fiscal policy as creating upside risk to inflation.  She didn't seem overly concerned about labor markets, but noted the cooling.

Stocks at all-time highs again, led by tech.  Caroline Ellison going to jail for 2 years.  The 2Y auction was 'meh', but probably as expected with yields having fallen as much as they had recently.  Closing the day, the  2Y at 3.54% and 10Y  at 3.74%.    Witht the 2s10s uninverted are you betting on a further steepening?  Bill Gross provides some context see XTOD down below.

XTOD: The trends in China are really quite worrying.  This isn't a crash like scenario where demand will suddenly be destroyed and intl markets will drawdown. It isn't 2015.  But I'm afraid China is in a decaying spiral that is getting impossible to climb out of.

XTOD: R.I.P. inverted yield curves. 

XTOD: Yield curve trades working well   Would not add here — due for a few weeks rest but last 25 years 2/10 curve avg — 107  Now — 18

XTOD: Almost everything is noise. A tiny fraction of things are enormously valuable. They are hidden many layers below the surface.

Daily Economic Update: September 24, 2024

Euro area PMI's were weak, while U.S. PMI's were solid with services leading the way.  

In Fed land, Bostic supported 50bps because he was convinced inflation was sustainably heading back to target while risk to employment were increasing.  Bostic's full speech is here.   

Kashkari was also out with an essay in support of cutting 50bps, largely echoing Bostic's view and like Bostic emphasizing that policy remains restrictive, but that they view the balance of risk as having shifted.   Kashkari does not rule out that the neutral rate may be structurally higher.  Kashkari then also asks how might the Fed be surprised and of course hits on largely the same two questions I posed in my kinda a FOMC recap.  Those questions are: (1) could the economy be closer to recession than we think and (2) could inflation be reignited.  Positing that he doesn't see much risk that either of those are major risk at present.  He also doesn't rule out the inevitable "shocks".   Overall he is very much in the "soft landing" camp and that there is no need to move too fast with rate cuts. You can find Kashkari's essay here.

If you want to go full dove, Goolsbee comments would lead you to believe rates should probably be zero.

The Fedspeak reminded me of what I wrote at the start of the year:

I have no clue what views will be right in 2024, but I'm going to guess that the advice Paul Volcker left in his 2018 biography, "Keeping At It", may not be entirely lost on JPOW.  That advice is: "A lesson from my career is that such successes [in maintaining low inflation] can carry the seeds of its own destruction. I've watched country after country, faced with damaging inflation, fight to restore stability.  Then, with victory in sight, the authorities relax and accept a "little inflation" in the hope of stimulating further growth, only to se the process resume all over again."

Clearly the Fed believes inflation is nearly or completely beat, but I guess we'll see.  Don't worry there are only like a dozen more Fed appearances this week.

Either way stocks hit new highs, so did Gold and bond yields rose a little.  The 2Y was 3.59% and the 10Y 3.75% as the 2s10s curve continued to steepen.

On the day ahead it's home sales and the 2Y auction.

XTOD: Chinese policy makers keep running into the issue that lower rates and more programs to lend to the private sector aren't the solution to a debt deleveraging.   That's b/c it's not a supply or price of credit problem. Its an asset price & demand problem.

XTOD: A visualisation of why the fees you pay, matter: https://pbs.twimg.com/media/GYLcllYakAIgh9P?format=jpg&name=900x900

XTOD: "...just 86 stocks accounted for half of the total stock market wealth creation over this 90-year period...less than half of the stocks in the universe generated any returns for investors...only 42% earned more than risk-free Treasuries over the entire period...less than 4% of the thousands of stocks in this universe accounted for virtually all of the market gains. Harvey D Shapiro Henrik Bessembinder 

@barronsonline .  there are no words for how important this Shapiro essay is...

XTOD: Retirement starts when you stop sacrificing today for some imaginary tomorrow. 

You retire by saving up enough money, becoming a monk, or by finding work that feels like play to you.

Daily Economic Update: September 23, 2024

From: 'The Devil's Financial Dictionary" by Jason Zweig

The irony of maintaining a daily economic update blog while firmly believing it is best to ignore all of the noise and false stimuli is not lost on me. If you’re paying attention it’s the message of this blog that you can’t predict the future and it's a waste of time to focus on the noise or "what the world looked like ten minutes ago."

"the "short-term crowd" responds constantly to "false stimuli" whether it's the latest economic data point or the trivial news that a company has beaten analysts' expectations.  "You need to be wired not to believe the bullshit, to not be listening."  - William Green discussing and quoting Nick Sleep (if you don't know who Nick Sleep is google Nomad Partners investment letters)

 "All of humanity's problems stem from man's inability to sit quietly in a room" - Blaise Pascal

Speaking of noise, on Friday, Fed Governor Waller said he saw inflation falling much faster than he anticipated, which pushed him into the 50bp camp, while dissenting Fed Governor Bowman released this statement which included: "Although it is important to recognize that there has been meaningful progress on lowering inflation, while core inflation remains around or above 2.5 percent, I see the risk that the Committee's larger policy action could be interpreted as a premature declaration of victory on our price stability mandate." as she argued in favor of a 25bp cut which "would also avoid unnecessarily stoking demand."  Speaking of demand, nothing is stopping demand for AI as we're firing up nuclear reactors to power data centers.

We ended the week with equities at or near all-time highs and with the 10Y ~10bps higher than it was prior to the FOMC meeting, trading near 3.75%.   The 2Y yield at 3.60% is little changed from pre-FOMC.  The geopolitical situation looks no better than it was with Israel and Hezbollah firing rockets.  The only situation worse than geopolitics might be Diddy's.

On the week ahead PCE will be in focus along with PMI's and talk from Fed officials like Powell.

Mon: Flash PMI's, Fedspeak

Tue: Home prices, 2Y Auction

Wed: New Home Sales, 5Y Auction

Thur: Durable Goods, 2Q Final GDP, Jobless Claims, Powell, Pending home Sales, 7Y Auction

Fri: PCE & Income, UofM final

XTOD: Why indeed! To recognize market imperfections, even serious ones, is one thing; but to claim, in light of experience, that governments are generally better able than the market system is to husband scarce resources, you have to be a moron, or a fiend, or both.

XTOD: "Nobody believes this, but Charlie Munger and I have been buying stocks and business for 50 years. In that entire time, we've never had a discussion of macroeconomic factors in making a decision as to whether to buy, or sell a business — buy a business, or buy or sell securities. 

We just — it just doesn't get into it — our consideration. 

And if I were buying a farm, I would not be thinking about what the Fed was going to do. If I were buying an apartment house, if I were buying a business outright I wouldn't do it. 

So, when I buy a piece of a wonderful business, say Coca-Cola or American Express, it is not a matter of consideration. So Charlie and I will talk about the business. We will not get into discussions about the Fed, or — or Government."  - Warren Buffett

XTOD: This is how the world works. The stupid ones can never break free of the apparent complexity. Haruki Murakami

XTOD: “So, Cheryl, it’s called a freak-off, and Diddy asked me if I could bring the whale head and, well, things got out of hand.”

XTOD: Jamie Dimon has doubts about a "soft landing":“I hope it’s true, but I’m also more skeptical that inflation is going to go away so easily.” It´s gone already!  https://pbs.twimg.com/media/GX80emHXIAAiMdd?format=jpg&name=900x900

XTOD: "Success on Wall Street was getting the most money. Success for us was having the best life." - Ed Thorp

Daily Economic Update: September 20, 2024

One programming note, I'm old enough to remember all of the fear-mongering around the urgent need to cut interest rates to save off the all but certain recession back in early 2023, back when rates were at an upper bound of 4.50%.  That's all.  

Now almost 20 months later, markets are europhic over a 50bp cut to an upper bound of 5.00%.  I guess people changed their minds.  Equity indexes at new all time highs.  The yield curve steepens with 2Y at 3.62% and the 10Y at 3.75%.

Yesterday the BOE held rates at 5% while downgrading growth and upgrading near term inflation. Recall services inflation just printed a 5 handle in the UK. 

Stateside, initial jobless claims fell to a 4 month low.  Home prices hit a new high as sales fall and the Philly Fed Mfg index surprised to the upside. Not the usual data prints in an economy that is materially slowing.   Internationally the Middle East remains risky with the potential for escalation between Isreal and Hezbollah.

I asked David Beckworth's macromuse bot, an AI trained on the transcripts of all of his interviews on MacroMusings podcast, why a lowering of interest rates might help a weakening employment picture without leading to a rise in inflation.  The response (edited for brevity):

Lowering interest rates can help prevent a weakening in employment without risking a rise in inflation through several key mechanisms. First, lower interest rates can stimulate aggregate demand, boosting economic activity and employment. This is because lower rates make borrowing and spending cheaper for households and businesses....others caution that the Fed's Flexible Average Inflation Targeting (FAIT) framework made the central bank reluctant to raise rates until employment had fully recovered and the Fed should consider a more symmetric framework that is less tied to employment outcomes. 

Additionally, depending on the natural rate of unemployment, which may have risen temporarily due to pandemic-era dynamics, lowering rates could help bring more workers back into the labor force without necessarily stoking high inflation, as the unemployment rate may be above its new, higher natural level.

Ultimately ChatGPT agreed with the theory that timing rate cuts to when there is "slack" in the labor market coupled with a continued anchoring of inflation expectations and no perceived issues on the supply side can lead to a lowering of policy rates without running much risk of stoking inflation.

It's Friday, we get the BoJ overnight after the time of this writing.

XTOD: JP Morgan 3 days ago: “Stock won’t do much for the next decade”  JP Morgan today: “Expect a face ripping +15% rally from here”  Ok then.

XTOD: Ex-Kansas City Fed chief sees renewed inflation risk after large rate cut http://reut.rs/3MQFj7p

XTOD: 10 year treasury belongs at 3.75 based on dot plots and 2.5 % inflation  Stick with yield curve 2/5 steepner  I like mtge reits (NLY AGNC DX)  And mlps (WES)

XTOD: “Part of the game of investing is to 'come into your own.' You must find some way that perfectly fits your personality.”  — Li Lu

XTOD: “The most difficult thing is the decision to act. The rest is merely tenacity. The fears are paper tigers. You can do anything you decide to do. You can act to change and control your life; and the procedure, the process, is its own reward.”​ — Amelia Earhart