Good Monday AM,
I hope you made it through Hillary without much interruption.
Bonds are struggling again today.
Maybe it is expectations the Federal Reserve will hike again (although futures markets don’t seem to have moved) or maybe it is the news from China where mortgage rates were left unchanged while short term rates were cut marginally. There is no data so markets are left to their own devices and for now, that is not working in our favor. Here is not much data at all this week. We do have Durable Goods on Thursday, but the main stage will be reserved for Central bankers, policymakers, academics, and economists who descend on Jackson Hole, Wyo., this week for the Federal Reserve Bank of Kansas City’s annual economic policy symposium. The event will kick off on Thursday and Fed Chairman Powell will speak on Friday.
Insights from around…
Was good to read that after punishing losses in 2022, bond bulls are doubling down. J.P. Morgan Asset Management Chief Investment Officer Bob Michele, who correctly predicted the slide in Treasury yields “all the way down to zero” from 2% in 2019, says now his strategy is to buy every dip in bond prices. Others including Allianz Global Investors and Abrdn Investments are in the same camp, and believe the economy is only just starting to absorb the impact of five percentage points of Federal Reserve rate hikes. “We continue to see a growing list of indicators which are only at these levels if the US economy is already in recession or about to enter recession,” Michele said.
That shared, there is this from the WSJ:
Despite the Federal Reserve’s raising interest rates to a 22-year high, the economy remains surprisingly resilient. Some estimates put third-quarter growth on pace to easily exceed its 2% trend. It is one of the factors leading some economists to question whether rates will ever return to the lower levels that prevailed before 2020 even if inflation returns to the Fed’s 2% target over the next few years.
And last, what is the neutral rate of interest?
It is the rate at which the demand and supply of savings is in equilibrium, leading to stable economic growth and inflation. First described by Swedish economist Knut Wicksell a century ago, neutral can’t be directly observed. Instead, economists and policy makers infer it from the behavior of the economy. If borrowing and spending are strong and inflation pressure rising, neutral must be above the current interest rate. If they are weak and inflation is receding, neutral must be lower. The debate over where neutral sits hasn’t been important until now. Since early 2022, soaring inflation sent the Federal Reserve racing to get interest rates well above neutral. With inflation now falling but activity still firm, estimates of the neutral rate could take on greater importance in coming months. If neutral has gone up, that could call for higher short-term interest rates, or delay interest-rate cuts as inflation falls. It could also keep long-term bond yields, which determine rates on mortgages and corporate debt, higher for longer.
That’s all I’ve got for today.
