Never Forget

September 11, 2024

CPI. The debate. Some further thoughts on today, last night, and looking ahead to next week. Today, markets gravitate toward our baseline of 25-basis points for next week. Big swings in 2-year yields and risk markets overall. We know markets love clarity and we need time here.?

Let's Take a Look:?

CPI: We've had our timing and believe size of the first rate cut accurate before markets were sure. The usual suspects led to a slightly higher core inflation numbers today (Shelter (stale), Vehicle Repairs (painful), Airlines Fares (volatile). The overall number was on point at .2. The year over year numbers are stale. If you look at the 3-and-6 month annualized numbers, it's in line with what the TIPs market is telling us. Game over with inflation for now, and the risk is similar with the consumer if the job market weakens further. Many aspects of the "required inflation" are up 25-50%. If jobs hold up, we plod along. If the job market continues to weaken, we move quickly into recession. The Beveridge Curve (Unemployment versus job openings) we believe is a good metric here and one that Fed Governor Waller has written on. The rubber has met the road and indeed it's time.?

The Debate, Fiscal Policy, and Markets: This was the former President's second debate. He's one and one. The interesting thing is, had he not debated President Biden in June, it would have been the two of them on stage last night. The ABC debate was designed for President Harris to have a good night in terms of content material and questions versus current polling. That was known. She outperformed her CNN interview and had an effective night against the former President and the betting odds have shifted a touch.?

Policy issues remain largely uncertain. We've been around and involved with both parties for a lifetime. Voted many ways depending on policy issues. There's content out there on the history of elections, how consequential or not. We firmly believe this one matters more than many. The overall challenges are not easily resolved. Geopolitical dynamics are running extremely high. Our debt trajectory is beyond unsustainable. Consumers are taking it on the chin each and every day. And there is no political will to rein in spending. Markets have done well over the past four years but if we don't achieve gridlock, it may not be as easy in the coming four years is our belief.

For markets, more volatility short-term seems likely. Could be with downside risks. The keys to the Presidency generally lie with the economy and the consumer pocketbook. But things are very close with this election, we live in diverse and changing times, and it likely stays that way through November. Based on the response from both candidates on two separate issues (NATO, Poland/Fracking), and some personal analysis, it lends to both candidates having a heightened focus on Pennsylvania moving forward. Overall, it's likely a delayed response in rate markets this time around versus 2016/2020 as we await not only the election outcome but the balance of power and potential policy implications. The outcome of 2020 was felt after the January, Georgia runoff election in early 2021.?

Markets love clarity and will look toward the Fed to lend a balanced hand next week in our view amidst the electoral uncertainty. Let's see how Chair Powell plays it during his presser. Becoming "less restrictive" is likely the theme.?

The Fed: Two questions: 1) What does the trajectory look like 2) Where is the neutral rate for this economy. How fast and to what level. Both questions remain unanswered although the market has spelled out a view with its recent pricing. Market pricing versus Fed outcomes is often not in sync in normal times. And although we've "normalized" since the pandemic year it's been a process. Housing still has issues. My sources on the ground indicate lower rates are helping which is what we've advocated for. Need even lower ones. We have an insurance crisis on multiple fronts across buckets and states. And the auto sector is showing clear signs of stress. Yes, the lags of monetary have taken longer and we've written. But rate alleviation is needed and on the way. Beginning with 25-basis points seemed to us the logical start. Markets are converging there following today's inflation release. And next week we welcome a new Summary of Economic Projections where the Fed, ironically, likely has three (3) rate cuts penciled in for 2024. And a pathway down toward more neutral levels in 2025 and 2026. But the fiscal side and electoral outcomes will matter for this Fed. No, they can't afford to wait for policy outcomes to move. But in the face of clear signs of inflationary pressures and extreme fiscal spending in 2021 they primed the pump of liquidity which led to unprecedented rate hikes. In our view and opinion they need to be more thoughtful as this year unfolds with a clear eye on preserving the economy and further downside labor risks, while remaining cognizant of the extreme inflationary period we've witnessed, have seemed to have tackled but still have inherent risks. This is far and long way from a science.?

On the Ground

Another solid US Treasury auction, UST 10-year. Whipsaw 2-year yields and liquidity an obvious ongoing factor. Not just in rates. Expect more choppy behavior ahead. Tomorrow, PPI, and the 30-year auction. There's not much in the way of data between now and next week's meeting. Claims tomorrow but nothing glaring in our view. And then Retail Sales on Tuesday, the 17th, as the Fed kicks off their 2-day policy meeting.

Have a safe and peaceful evening. And Let'sNeverForget.?