Good Monday AM,
No data today but it is a busy week none the less.
First, trading desks are a bit more full after last week’s holiday week, with more senior traders taking back the reins. The early morning trading direction indicates that upon a more seasoned review, last Friday’s jobs report was weaker than Friday’s reaction showed. Second, there is some Fedspeak today (5 Fed members Vice Chair Michael Barr on bank capital at 10 a.m. ET, San Francisco’s Mary Daly at the Brookings Institution at 11 a.m. ET, Cleveland’s Loretta Mester on the economic and policy outlook at 11 a.m. ET, and Atlanta’s Raphael Bostic on the U.S. and Atlanta economies at 12) which will likely calm markets. Third, this is a busy week for inflation data with both CPI and PPI coming midweek. With all the above going on, the bond market is showing some life and with any luck, we could see the 10yr drift below 4%. After last week’s whipping, I think it is ok to float locks for the moment.
Some interesting notes from the WSJ today…
Wall Street economists and strategists caution that the process of reducing the Fed’s balance sheet remains complex and hard to predict. Powell has assured lawmakers that the central bank is avoiding a repeat of 2019 — when the repo market, a key part of US financial plumbing, seized up. However, the full impact of the process — known as quantitative tightening — has yet to be felt in markets. “Things will start tightening on the liquidity side,” predicted Raghuram Rajan, the former International Monetary Fund chief economist and Indian central bank governor. “Then we will see the full consequences” of QT, he said last week on Bloomberg Television.
There is good news on inflation in store for Americans. This week, the Labor Department is expected to report that overall inflation fell to about 3% in June, the lowest in two years. Excluding volatile food and energy prices, core consumer price inflation is expected to drop to around 5%, an 18-month low. One source of relief: a slowdown in rent growth. A boom in household formation had driven up rents sharply in the past two years. But that boom has slowed and the supply of new apartment units has hit a 40-year high, Nick Timiraos writes.
Economists think core inflation could ebb further in coming months, to between 3.5% and 4%.
The bad news: Getting inflation down further from there, to the Federal Reserve’s 2% target, will prove difficult if the economy keeps chugging along. That could force the Fed to keep monetary policy tight until the labor market weakens.
Please remain safe and stay healthy!
