Good Thursday morning from your Hometown Lender,

I think the best way to start today is with a recap of yesterday. Bloomberg did a good job with it, and I am not going to change much. The bottom line, the Fed sees the economy cooling and is happy about it but not happy enough yet. Yesterday’s CPI data showed a drop in inflation and today’s PPI report which came in negative (as in -.2%) showed an even larger drop. Keep in mind that PPI is the precursor to CPI. If inflation cools in the Producer component, that will flow into reductions in the Consumer component. Bonds are reacting cautiously (mostly because we are at strong lines of resistance in the current trading channels). The 10yr note though is back to 4.25% and 40bps better than just 2 weeks ago. If we can close here (or lower), it does open up the next channel for the 10yr to run down to 4.15%. I think for the moment, it is ok to float but of course, things can change quickly.

It was an interesting, and perhaps unusual, day on the macro front yesterday.

First we got that cool CPI report. The headline was a flat 0%. And then the core rate came in at 0.2% vs. the 0.3% that was expected. And if you’re the type who likes to go out to multiple decimal points, it was actually at 0.16%. Markets boomed on the news. Traders priced in two rate cuts at some point for the rest of 2024.

Then in the afternoon we got the Fed news. And on paper, it was on the hawkish side. According to the dots, FOMC members anticipate just 1 cut this year. And then during the press conference (more on that in a second), Powell didn’t really do anything to downplay the dots, or distance himself from them.

But then the market… just didn’t seem to care.

Here’s a look at S&P futures over the last two days. Futures jumped after the CPI report, and as of the time I’m typing this, they just held their gains. You wouldn’t know that the entity that sets rates came in and indicated that the market was ahead of itself in pricing cuts.

Now the timing is interesting. As Powell said during the press conference, the dots were submitted prior to CPI having been released, but that each participant did have the opportunity to revise their dots after the number came out. Whether anyone actually changed their dot is unclear. But the opportunity existed.

Regardless, markets didn’t seem to care too much.

Bloomberg’s own Cameron Crise wrote that the “dot plot looks obsolete already”.

Omair Sharif, founder of Inflation Insights, wrote that Fed officials have “Q1 inflation PTSD,” having been burned by the hotter-than-expected start to the year for pricing.

In a note to clients, Neil Dutta of Renaissance Macro wrote: “The SEP is fluid. It is NOT an iron clad promise, but a conditional forecast. Conditions can change. Today’s inflation data are laying the groundwork. This statement notes “modest further progress” on the Fed’s inflation goals.”

Generally speaking, there wasn’t a ton of meat in the actual press conference itself. So for now, there seems to be sort of two things going on.

One is that maybe the Fed is still just going to be (understandably) conservative, in light of having gotten over-optimistic before about disinflation. (One note though on that is that the unemployment rate has been drifting higher, so the risks are getting a bit more balanced. And during the Q&A, Powell indicated that the Fed does not want to wait until the labor market has already broken before cutting rates).

The other thing is — and nobody from the Fed would ever acknowledge this is a factor, but traders can’t help but wonder — is how the election effects the calendar? Is September a weird time to be cutting rates, on the eve of the vote? And then there’s the fact that the election itself is on November 5, and the FOMC meeting for the month starts the very next day (the decision will be on the 7th). Yeah, that’s after all the voting’s been done, but still it’s guaranteed that the meeting will be viewed and discussed through the lens of whatever just happened on that Tuesday.

Anyway, probably the most important takeaway from yesterday is that the broader disinflation story remains intact. The dots, as Dutta put it, are not “iron clad.” The dots can move all over the place. And from an econ standpoint, whether we get fewer cuts in 2024 but more in 2025 may not be a huge deal, if inflation keeps on cooling.

Stay safe and make today great!