Bring on the election

May 15, 2024

As we wrote this morning, markets would cheer a .3 monthly number, but the macro picture is far more complex. Inflation in the United States. If you increase demand because of spending you must bring more supply online. We've done the opposite. And it's lingering and now, on the services side, embedded. It's a complex process once the wheels are in motion. Some things now out of the Fed's control. This last leg however is damaging the consumer and that's why we're seeing the slowdown. And why Chair Jay Powell is saying: "we'll just sit tight if we need to".??

Let's Take a Look:?

The world is in transition right now. It doesn't matter where you look. No further than the college campuses in the United States. Someone please offer sanity and lead. Chicken and the egg but we live in complexity across the globe.?

We have always felt a proper level of interest rate matters. It falls out into currency levels too. Ask our friends in Japan. Coming out of the pandemic the quest for resources. Land. Territory. More changed coming out of this pandemic than most realize.?

In the United States we look toward an election. It seems easy to predict policy with two incumbents. But we've written, regardless of who gets elected, the secular changes that sit in front of us are not going away. Nor our increasing debt load.?

What we're learning, not given, is that higher rates are not the enemy. This is what some have been conditioned to believe. Or perhaps, too young to remember. In actuality, the higher rate structure plays extremely well into the older generation of our time in the US and offering counterbalance in this economic climate.?

Bigger picture, today's number changes little from a macro perspective. We are somewhat surprised at Chair Powell's discount of the neutral rate yesterday. His colleagues have been discussing for months. Us too. How can you set policy if you don't have comfort around the rate that's not too hot, cold. In reality they don't know.?

Overall, within this pocket of time central banks have been reactive. Reactive to a global pandemic, ensuing policy right or wrong, and in the United States excessive fiscal contribution. If the pandemic doesn't hit, we are back to the last 15 years. The Fed created the lower rate environment and regulation which now sits on the balance sheet of many smaller banks.?

But the pandemic did hit. The implications moving forward lend to a higher rate structure. The secular changes, coupled with fiscal and geopolitical challenges around the world, will keep this Federal Reserve on its toes and make policy very complicated for years ahead.?

On the Ground

The overall US Treasury market skewed lower in yield before today's inflation release. We came very close to the 200-day in 10-year UST at 4.30% which we highlighted. But nothing structurally has changed with one number.?

We've highlighted the slowing US economy. It's a very different economic cycle than what we're used to. The regional bank shock was quelled but continues to evolve. The Fed is looking at financial conditions through that prism for sure.??

At the same time, market based financial conditions are the loosest since 2021. No one should close their eyes here. We are learning this pocket of time each and every day. We can talk weeks on end about economic crosscurrents.?

The Fed needs to sit here. Of course, markets will react and overreact. The rate of change with inflation has come down. The overall price structure in the United States is far higher over the past three years. And Jay Powell has a very soft spot for that. As do I. You can't crush this economy in a quest for one number: 2%.

Much of the services inflation we are seeing now is far out of the hands of central bank policy.??

Have a great day!