God Bless the USA

July 19, 2024

Good morning, everyone. Global IT outages grabbing headlines this morning. Former President Trump accepts the Republican nomination for President and there is speculation in the media around potential next moves from the sitting President. The Fed enters their blackout period ahead of the July 31st FOMC meeting. Where to focus first.?

Let's Take a Look:?

"Where going to bring inflation down with rates in tow".?We are paraphrasing but that was the spirit last night. And the general premise, as we've written, focuses on the supply side of the economy. At the same time intimating the onshoring of jobs here in the United States carries a different flavor. Ultimately, history tells us that tariffs are deflationary contrary to the narrative coming from certain media outlets.?

It's an interesting pocket and debate. JPM CEO Jamie Dimon saying this week the Fed should wait: government spending, re-militarization, supply chain and trade shifts, the green initiative. We've written to these issues over the past few years post-pandemic. In the same breath, Greg IP writes in the Wall Street Journal this morning that the Fed should be cutting rates now.?

We've been in the September camp with the Fed while acknowledging nothing is a given. We don't believe the timing around the election is a factor. And the chorus is growing. Yesterday, Chicago Fed President Goolsbee (a dove for disclosure) who went from dove to forced hawk back to a dove indicating the Fed will lose their "golden spot" if they let labor slip. And Fed Governor Waller speaking to the inverse tradeoff with the Beveridge Curve, unemployment versus vacancies. It's been true to form of late and Waller took a slight bow in his recent speech.?

In our recent White Paper penned alongside our General Snodgrass we wrote to the spirit of how elections globally complicate and lend toward caution around central bank policy. Yesterday, the ECB taking a pass after one rate cut. September, wide open for them. Feels more symbolic than anything else. And it could very well turn out that way in the United States too. We do feel, and have throughout this year, that the Fed would like to and will come down. But this has been a slow, methodical, uneven, anticlimactic process.?

Some people say this is a good economy. We couldn't disagree more. And our contention has been and remains: If it weren't for people having one, two, and three jobs, it would look much worse. Waller is highlighting this clearly along with other committee members. The overall price structure in this country is onerous. And much of the inflation now is what we refer to as "required" inflation. You need the services and can't avoid paying it. And that simply becomes a tax on growth and a strain on incomes.?

Chair Powell's clear shift toward the employment market makes sense. Despite continued job growth coming from the government the finer details have been moving toward further softening. That's one hand. On the other, the outcome of the election in November could inspire job growth in the private sector through policy. There is the potential given what's in the fiscal pipeline for these two to actually intersect at some point in 2025. So, the Fed's job is complicated.

This is the question of the moment. Can we get back to that pre-pandemic, 2019 dynamic of lower interest rates, very stable inflation, greater labor force participation, and healthy job growth. A GDP to inflation relationship that was balanced. It's not entirely clear. Without question geopolitical dynamics have shifted and for clear reasons over the past four years. Elections have consequences. This will very much remain a work in progress. How aggressive the Fed can, will, and should be given potential policy changes on the fiscal side, remains with the labor market in the coming months.?

On the Ground

No data today. We are fielding lots of questions around potential decisions with President Biden's reelection campaign. Short term, there have been rotational changes around the "Trump trade". In rates, less so but some local yield curve steepening. To the extent we see a change over the weekend that would intimate a closing in the polls these themes could experience some noise. But we believe these potential outcomes would impact "risk" versus "risk-free" assets more. The US Treasury market will remain closer to the economic data, Fed pricing, balance sheet dynamics, in the very near term. Overall, the Fed's terminal rate has repriced a fair amount over the past few months. And when looking at pricing for 2024 with this month's meeting a likely pass, a move toward 75-basis of cumulative cuts for this year feels fully priced. But let's make no bones about it: The Fed will need to throw this market at least one bone in 2024!

Have a great weekend.?