The Migration of the Medallions

Leadership, Leniency and Leaks at the NY Fed

Inflation is up, and the yield curve is flattening? What gives? In bond market nomenclature, much of which is indecipherable by the design of craft fixed income traders, what we are witnessing today is a bull flattening. Long maturity Treasury yields are falling at a faster pace than short rate Treasury yields are decreasing.

The short rates rising reflects the March core CPI, which excludes those two essentials of food and energy, hitting 2.1%, the highest in 13 months. At 2.4%, the headline CPI is also at a 13-month high. It would seem consumer prices are finally beginning to echo what we’ve known on the input side, that is producer prices rising at the fastest pace in nearly six years, not months.

As for the pressure on the long end of the curve, words such as “missiles” and “strike” when combined tend to make markets a bit edgy. The clear winners are investors who have been waiting for such a development to hammer home the validity of their owning oil. Refer back to that headline CPI, however, as relentlessly rising gasoline prices will do little to assuage drivers and policymakers.

Is this Syria business the real deal? The crafty analysts at Political Alpha, one of the Street’s preeminent political intelligence outfits, certainly seem to think so. “The main issue under debate is that last year’s strike didn’t deter Assad from using chemical weapons. The conclusion is that a bigger strike is necessary.” That emphasis is theirs, not mine.

So, the Administration is serious even as the GOP’s leadership ranks continue to disperse. Nervousness is thus justified.

In the other corner of the market ring is the happy crew, those who are elated at Chinese President Xi’s sweet nothings. The risk, as has been the case since Xi took office, is that Xi’s words are closer to being nothing at all.

According to the China Beige Book, trade tensions aren’t going anywhere. “Markets have rallied several times over the past few weeks on the idea that Presidents Trump and Xi can quickly come to a trade deal. The logic: ‘It makes too much sense not to.’ We disagree, possibly over the short term and certainly over the long term. Media and business hysteria over the tariff list aside, going after China is perceived as still popular by the White House and both sides of the congressional aisle.” Again, the emphasis is theirs.

The market’s relative euphoria could just be a simple, technical matter of short covering as those betting on a negative outcome get squeezed by happy headlines.

Of exceedingly more importance is the upcoming earnings season. Traders are betting on companies continuing their streak of under-promising and over-delivering on the bottom line. Banks may be the exception and get things off to a swimming start but be careful from that point on.

As my great friend, Dr. Gates warns, persistence cannot be discounted. To wit, input costs have been rising at a most persistent rate. Headline PPI final demand grew at a 0.3% rate in March – it’s been higher for six of the last eight months, a streak not seen since the eight months ended July 2011. Perhaps more tellingly, the measure favored by the Federal Reserve, that is core PCE, has risen in five of the last six months. The last time we’ve seen such persistence: the six months ended March 2008.

Fed Chair Jay Powell and his recently anointed second in command, John Williams, have their work cut out for them. Come June, Williams will rise to the position of Vice Chair of the FOMC, permanent vote and all, in his capacity as New York Fed President. Williams comes to the position with deep experience on the economics front but precious little as the financial markets go. In a perfect world, the duo will have everything from the economy to financial stability to regulation of the banking system covered.

The hope is that Williams’ work ethic and capacity to learn will offset the formidable challenge his new position presents. For more on this, please enjoy this week’s installment, The Migration of the Medallions: Leadership, Leniency & Leaks at the NY Fed.

Before signing off, I would like to share with you a noble endeavor undertaken by my good friend, Josh Frankel. Last November, Rich Yamarone passed away suddenly at the age of 55, much, much too young. Rich had become an institution in and of himself as senior economist at Bloomberg. Everyone he called friend he loved and made laugh, and we were all better for knowing him. Josh has blessed Rich’s memory by spearheading the creation of the Richard A. Yamarone Memorial Scholarship in Economics at Brooklyn College. Please join me in contributing via the link below.

Richard A. Yamarone Memorial Scholarship in Economics at Brooklyn College

NOTE: Donors should enter “Richard A. Yamarone Memorial Scholarship” in the comments box provided to ensure that their gift will be allocated to the Yamarone Scholarship. 

Hoping someone has blessed your life as Rich blessed mine, and wishing you well,

Danielle

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