Good Monday AM,

Not much news out this week (other than the new Apple product line release in a few hours).

Today we had both Factory orders and ISM non-manufacturing reports, and both missed expectations. The latter dropped like a rock and is more as roughly 74% of the economic output relies on the service sector. At a reading of 50.3, it is almost in contraction territory. If it continues dropping, if will impact GDP. I do think the reaction to last Friday’s jobs report was a bit of a knee jerk and that rates will moderate a bit from here but I would not expect any big moved before next Wednesday’s Fed announcement.

With not much news and the Fed in its blackout period where there is no more Fedspeak ahead of next week’s FOMC meeting, there is a lot of speculation on the trajectory of rates. Expectations that interest rates would fall before December helped boost markets this year, but persistent strength in the economy has surprised investors. Derivatives markets show investors now expect the Federal Reserve’s target rate to sit at 5% at year-end, according to Tradeweb, up from just above 4% last month. The disappearance of bets on rate cuts has driven up short-term Treasury yields, but the climb hasn’t rattled other markets. The two-year Treasury Bill is not at 4.60% from 3.8% last month. That pattern—in which stocks have benefited from expectations of Fed rate cuts and from signs the economy will remain strong—has made it especially challenging to forecast the market’s path going forward. The graph below shows a real time expectation of how bets on the Fed Funds rate have move in just four weeks. If you want to understand volatility in interest rates, this is a great visual.

But where is the economy going? The pictures below do an awesome job of setting the expectations. If we look at the precipitous drop in GDP you can see that while it may be positive for the moment, the slope of the fall is unprecedented in recent history. The only thing that is keeping GDP above zero is that GDP started at 12% from the government Covid stimulus. Additionally, the second graph below explains how ineffective it has become raising more debt to boost GDP. Where we used to get more than $1 in output for each $1 in new debt, today we only see about 13 cents for each dollar of debt we issue..

Food for thought…

Please remain safe and stay healthy, make today great.