Good Tuesday morning from your Hometown Lender,
Two items for discussion this morning.
First, the JOLTS report which showed more job openings than expected. Second and more importantly, Chairman Powell spoke at the ECB conference in Portugal today and shared a more dovish stance on rates. He said, “We’ve made quite a bit of progress and in bringing inflation back down to our target. The last [inflation] reading and the one before it to a lesser, lesser extent, suggest that we are getting back on the disinflationary path. We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy”. This is welcome commentary, and the markets are reacting cautiously optimistically, backing off the high yields we saw yesterday. Shortly after Mr. Powell’s comments, other Fed members have poked their heads out making similar comments.
Looking at the recent data, I continue to wonder why rates haven’t improved more.
The answer is starting to come into focus. Markets are now seeing a Trump victory as negative for bonds (as they did after the 2016 election) with tax cuts, tighter immigration, and higher tariffs. While all these things may be good for the economy, they are likely to maintain sticky inflation and higher long-term bond yields and to contemplate policies that could lead to more rate cuts. JPMorgan says now is the time to pocket profits from short bets on five-year Treasuries.
Tomorrow is filled with economic data before the holiday and then Friday we have the jobs report. A lot going on this week and I don’t think I would float over the holiday.
On the other side of the fence and from a technical analysis, Bloomberg wrote a lot about how the risks to the economy look more two-sided as the labor market slows (based on a whole raft of measures) and inflation measures continue to drift lower. The concern is that the Fed waits too long to cut rates and that the unemployment rate will start gathering sustained upward momentum by the time they have sufficient certainty to move lower. Anyway, the evidence seems to be building that the economy is decelerating. Yesterday we got the latest update of the Atlanta Fed’s GDPnow measure, and it currently shows that the economy is growing at a 1.7% pace, which is down from the 2.2% reading near the end of June.
Meanwhile, Cameron Dawson at NewEdge pointed out in a chart deck yesterday that we recently saw a modest cut in 2024 US GDP estimates. And while a little jag lower might not be a big deal on its own, it’s striking to see how it had previously been an almost virtually straight line up since the middle of last year.
Also yesterday, we got the latest ISM Manufacturing reading, and it came in light across the board.
The headline measure was 48.5 — signaling contraction — versus the 49.1 that economists had expected. New Orders were sub-50, as was the employment sub-index. One sub-index that was positive was the Prices Paid Component, which came in at 52.1, signaling that the majority of companies are still seeing rising costs. However, there’s an important caveat here. The historical average for this measure is actually much higher. For the last 50 years, the Prices Paid component is close to 60. So while the prices that companies pay for goods are still going up, they’re going up at a slower-than-normal rate — yet another sign that inflation is headed toward the Fed’s goal.
Stay safe and make today great!
