Good Friday morning from your Hometown Lender,

Lots of good news to share today.

The PCE report (the Fed’s favorite inflation gauge) came in lighter than expected with the core up .2% on expectations of .3%. This pushed inflation down to 2.7%. Personal spending also came in lower at .2%. We then had the Chicago Purchasing Managers Index which dropped like a rock to 35.4 against estimates of 41.0. Bonds reacted well but not nearly as well as I had hoped. The 10yr note dropped to 4.48% briefly before heading back to 4.51%. This is still a huge win over where we were just earlier this week at 4.69%.

This is a good week.

Today could have been better for bonds though. Recognizing we are in a global economy, what happens elsewhere, impacts our markets. While our inflation came in lighter, Euro zone inflation increased to 2.6% in May from 2.4% in April. Still, we will take it and be happy! Next week is another big week with Friday’s payroll report. If that comes in weak, bonds will take off and rates will improve substantially.

Why is the PCE report the ed’s favorite over CPI you may ask (I know I have asked)?

Well, the PCE uses a basket of what we actually buy every month because it’s based on our consumer spending,” Smith said. “It allows us to do what we all do when we go to the grocery store. We say, ‘Oh, these oranges have gotten more expensive, so maybe I’ll buy grapefruit.’” CPI doesn’t allow a substitution of goods; it uses prices of a fixed group regardless of whether anyone is buying them. Make sense?

It’s big news so I have to mention it apolitically.

Former President Donald Trump was found guilty in New York court on Thursday on all 34 felony charges of falsifying business records. The charges were related to a hush money payment his then-personal lawyer Michael Cohen made to porn star Stormy Daniels before the 2016 election. Trump is the first former U.S. president to be found guilty of any crime. His sentencing is set for July 11, four days before the start of the Republican National Convention, where Trump is set to be formally confirmed as the GOP’s presidential nominee. Trump is free without bail and can continue campaigning. He could face a maximum possible sentence of four years in prison for each count, although the judge isn’t bound to sentence him to prison. An appeal is all but inevitable, and that process could play out over many months, if not years.

Back to the economy

Consumers and businesses have turned cautious on spending for everything from hard goods to software, Bank of America CEO Brian Moynihan said Thursday at a financial conference in New York. There’s still some growth, as consumer spending via card payments, checks and ATM withdrawals has grown about 3.5% this year to roughly $4 trillion, Moynihan said. But, he noted, that’s a significant drop from the nearly 10% growth rate seen in May 2023. “We’ve got to keep the consumer in the game in the U.S. economy, because [they’re] such a big part of it,” Moynihan, who runs the second-largest U.S. bank by assets, said. “They’re getting a little more tenuous, and that is due to everything going on around them.”

And a great recap from Bloomberg on this week:

Bond investors have had a nervous week as signs of sticky inflation disrupted expectations for rapid easing across most major economies.

Treasury yields approached the year-to-date highs reached in April on the back of some wretched US government bond offerings and there were plenty of hawkish cries from Federal Reserve officials to keep investors on edge. Top of mind, is whether the central bank will deliver any of the interest-rate cuts they’ve been talking about. Fed Minneapolis President Neel Kashkari even mentioned hiking as a possibility! That was likely music to the ears of one top-performing quant fund that’s been shorting five- to 10-year US Treasuries on bets the Fed won’t cut in 2024.

Markets got a lot calmer after Thursday’s reading on the US economy showed it slowing as expected, and New York Fed President John Williams signaled “restrictive” policy settings are doing their job. Rates traders boosted their bets on cuts this year — they remain certain of at least one — but are effectively seeing only about a one-in-three chance of a second reduction.

The prospect of higher interest rates for longer was cited as a concern by Treasury Secretary Janet Yellen, who said it heightens the importance of boosting revenue. This year’s US elections are also focusing minds on the case for higher yields. Piper Sandler & Co. strategists calculate 10-year yields could rise about 12 basis points if President Joe Biden wins reelection. Bill Gross, meantime, told the Financial Times a Donald Trump victory would be more disruptive for bond markets than a Biden win.

Extreme Hurricane Season to Put Tens of Millions of Homes at Risk This Summer

The National Oceanic and Atmospheric Administration has forecast up to 25 named storms, while a separate report shows Miami, New York and Houston face the biggest threat.

Stay safe, enjoy the weekend and first, make today great!