Diary: Week 38- 4th Of July Fireworks
Wishing everybody a Happy 4th this week
Last week the signs of the US Consumer being "All tapped Out" only grew. Personal Consumption (Thursday) in Q1 was revised down to 1.5% after a 6-month period that saw it above 3%.
This with real GDP now just 1.4% and nominal GDP calculated at 5.4% (Below the upper band of the Fed Funds rate for the first time since Q3, 2020 (and on the way down since Q2, 2020).
We also saw this "inversion" leading into the GFC in Q1, 2007 (When Fed continued to hold the Funds rate at 5.25% until Sept that year) and saw ZERO in Q3,2000 (Dot Com Bubble Burst) before inverting in Q4. (Then with the Fed holding rates at 6.5% until Jan 2001.)
Since Q2, 2021 the quarterly nominal GDP numbers have been
17% (Peak);10.1%;11.9%;10.7%;9.7%;9.1%;7.1%;7.1%;5.9%;6.2%;5.9%
And now 5.4%- That is a clear trend in anybody's book and has happened as we have continued to generate more debt. (Federal debt was $26.95 trillion at end 2020 and now $34.7 trillion)
So over the period from the end of 2020 to now the debt has increased by $7.75 trillion
At the end of 2020 the US economy was a $22 trillion economy and now it is a $28.3 trillion economy
That is an increase in size of $6.3 trillion while the debt has increased by $7.75 trillion.
That must qualify as the most mismanaged Hedge Fund in the World with increased debt not even matched 1 for 1 with increased (nominal) size of the economy. That is completely unsustainable especially as the cost of debt servicing has exploded.
It is beyond me how anybody could describe that as a healthy or sustainable situation especially as over the same period the level of nominal growth has gone down pretty much in a straight line.
Then on Friday we saw Personal spending at .2% (expected .3%) with the prior month revised down to 0.1%
Core PCE came in at 0.1% taking the YOY rate to 2.6%. - Giving us a level of real yields at close to 300 bp's.
That compares to about 80 bp's before the first cut in 2019 (July) when core PCE was around 1.7%; 325 bp's before the first cut in 2007 (Sept); and 460 bp's bp's before the first cut in 2001 (Jan)
The Fed speakers (about 10 times a day every day it seems) tell us that they are concerned that the rate or improvement in inflation seen in 2023 (that led them to embrace many cuts in 2024) has not continued in 2024 leading to a lot of "One or None projections" now. Really?
Core PCE in Dec 2022 was 4.9% and by May 2023 was 4.7% a drop of 0.2% at that point in the year
In Dec 2023 it was 2.9% and now it is 2.6% a drop of 0.3% in the same period
Since Sept 2022 at 5.5% annualised, Core PCE has fallen every month but one (Jan 2023)- We have clearly seen that January has become a bit of a seasonal nightmare but even in Jan 2024 the annual rate did not rise.
Bottom line this indicator turned in March 2022 and has been in freefall ever since. This month it also moved below the peak of 2.7% in August 2006 when the Fed funds rate was at 5.25% (And that all ended really well)
In addition last week we also saw the Supercore PCE print below Zero (-0.03%) for the first time since August 2021 AND the less focused on than before (By Jay at least) Michigan 1 Year inflation expectations fell from 3.3% to 3%
Last week the Citi Economic Surprise index also hit a new trend low in the move at minus 29.2 and still looks set to continue lower.
On top of that we are also now seeing softer housing data that is not just about lack of supply. Quite the contrary, supply (Existing and New home) has been increasing recently while activity has being falling.
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At the end of the week all of this was overshadowed by the DEBATE and the Friday Bear Steepening is clearly a "Trump" trade.
Despite the "train wreck" disguised as a debate it is far too early to be playing that card and week/month/quarter/half year end possibly also created some volatility.
Despite everything I have said above the Fed members have dug their heels in (possibly in quicksand) and the "ONE or NONE" brigade is shouting from the rooftops.
None of the above is yet going to "Sharply Move Their Needle". They are going to maintain their monetary independence despite the political backdrop.
However, there is still something that can change that.
From JOLTS to Initial Claims to Quits to Continuing Claims. From the Household Survey to the Birth Death Effect to the Unemployment rate (Which is their mandate in the dual mandate) the Employment picture is soggy "under The hood"
However the Fed (and to a large extent the market now) is obsessed with NFP being the most important indicator (It is not but they think it is)
So as the Independent Fed heads to the Employment report on the day after Independence Day, is that the one that is going to shift the narrative?
We all know that any piece of data can come in anywhere at any time. However it is interesting (as I have been) to look at the similarities to today and 2000.
Nothing is ever the same but as Mark Twain refrained "History does not repeat but it rhymes"
We went into the release of the June Payroll numbers in 2000 with an unemployment rate of 4% , an NFP print the prior month of 231k (revised down to 171k) and an expectation for June of 260k.
Initial claims had also been rising as had continuing claims
We printed an unemployment rate again of 4% (as expected) but NFP came in at +11k and was followed in the following 2 months by negative prints.
Up until that point the numbers for 2000 had been pretty stellar (like now)
Are we finally at that juncture now?
We will know next Friday.
While it is unlikely that we will pin the turn on the same month as 2000 what is sure is that the key to everything now is employment and IF it turns then so will the narrative that has developed in the first 6 months of this year.
One thing is for sure with, this release sandwiched between 4th July and the weekend, Thursday and Saturday may not be the only days we see fireworks.
............(As stated previously, going forward you will need to be a client of R J O'Brien or a paid subscriber to receive this full content.)
Best
FITZ
Applied physics.(JOIN ME) the work presented here is entirely new
8 个月(continued) I believe it is vital not only to provide updates, (please see my previous comment above,) but also [it is] vital to provide solution(s). Join me, in ushering in a new age of understanding. One principle defines nature, robust entanglement. Nothing truly collides Understanding nature in this way allows us to realize energy in four new ways; to experience atomic interactions, chemistries, mathematics, physics in a new way; to educate our children and adults better, as we come to understand the human condition and nature better; and finally, to understand the physical connection of me to you, you to me. Now would you to please join me and 185 distinguished faculty, academicians and theologians, and industry professionals, some of which are listed under profile in "letter of invitation."?There are five discussions you may join: physics & mathematics; and four discussions "downstream,"?including theology, diet & disease, aging & evolution, education and cognition, in light of this one principle. Join me, and let's gather to return to the farms of old, outlaw this unbounded, unruly corporate form generating the wars and death we see, and join me to invert the hierarchy of power in government MARK applied physics
Applied physics.(JOIN ME) the work presented here is entirely new
8 个月If we were to provide update here in America, on this 4th of July, what would it look like? Runaway inflation makes new strides into the American landscape, destabilizing entire local, state and federal economies, as folks realize and attempt to survive 10% rates annually, since coming off the gold standard in 1971, in plant, equipment, land, homes, cars,...(a home, a car in 1971 cost $14,000 & $1,200. Today those assets cost $1.5 Million & $60k.) Private banking interests, operating without oversight, without audit, both unelected and appointed, continue to set interest rates, destabilizing Federal, state and local economies, even the American family, all mired in debt, just to survive, now faced with unsustainable monthly debt obligations. Public spaces like the federal government, state and local governments may soon fall prey to private interests, and private companies, to provide city service(s), much like the prison industry, already capitalizing on public policy(s) and drug war(s). The line between federal official and private corporate practice continues to blur as officials and public policy continue to serve private interests, now entering more conflicts around the globe. MARK applied physics
Managing Director, Rates Sales - R.J. O'Brien
8 个月terrific as always Tom Fitzpatrick Fitz. Glad to hear opposing opinions to the general norm. Grill
Executive Director, Global Treasurer @ R.J. O'Brien and CFO of OASIS Investment Strategies
8 个月Always a great read! Thanks Fitz