Under normal circumstances, the #economy might be said to resemble a Newton’s cradle, with moderate and somewhat predictable feedback loops reverberating through #policy actions, the #financial economy and the real economy; resulting in a system of reasonable equilibrium.
Over the past few months, however, as the #coronavirus pandemic encircled the globe and drastic responses to it got underway, this regular dynamic was thrown into disarray, crushing the real #economy and the #capital stack, and sending #volatility to dramatic heights.
Yet, these massive disruptions to the #economy have been met with an extraordinary #fiscal and monetary policy response, as illustrated in the current and expected growth of the #Fed’s balance sheet, which to our mind can go some distance toward offsetting lost growth potential.
These rescue measures are certainly not without costs, and many argue the burgeoning Federal #debt burden to be a huge headwind to future U.S. #growth, but while the aggregate numbers are large, some context about where things stood heading into the #crisis may assuage fears.
Yet, despite quintupling in size since 2000, the @USTreasury index offers less #income today (on a yield basis) than nearly at any time over the last 30 years, which gets to one of the central problems #investors face today: how does one source #yield in an age of #YieldScarcity?
These are all topics we plan to engage more with in the days ahead, since while the #economic system appears to be stabilizing for now in aggregate, we think there will be tremendous dispersion, both within and between #asset classes, and continued #uncertainty in months ahead.
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Today’s much anticipated #CPI report provided greater detail on the current #inflation picture, and importantly, on what the @federalreserve is most focused upon these days, and unfortunately, it’s hard to see it as anything other than a #setback.
Recently, it has become clear that the #Fed is taking on a patient stance with regard to #inflation coming down, but today's report was further evidence that it may take even longer for inflation to finally reach the Fed’s 2% target level.
In fact, today’s data means #CorePCE on a year-over-year basis may not get to 2.5% at any point in 2024, and that’s with a wedge where #CoreCPI is running around 100 basis points higher. This meaningful surprise therefore forces us to reassess some views.
Yesterday’s #CPI data was highly anticipated by #markets, and particularly whether the elevated shelter #inflation from last month’s data ended up being a quirky aberration within service level inflation that is still quite a distance from the Fed’s 2% intermediate-term target.
What compounded this quandary last month was a very strange divergence between the Owner Equivalent Rent (#OER) calculation and that for general #Rent.
Those two data points typically migrate closely together over time, with a maximum divergence of 9 basis points (bps) in 2023.
As was widely expected, the @federalreserve today halted the most aggressive policy rate #HikingCycle since 1980, leaving the Fed Funds range unchanged at 5.0% to 5.25%, a level that appears clear to us to be finally having an impact on the #economy.
We think today’s actions represent a “Hawkish skip,” which implies that #policy makers are seeking more #data before potentially hiking rates again in July, or September.
For our part, we think #ChairPowell’s comments at the press conference made it clear that the #FOMC is seeking to balance increasingly restrictive monetary policy with the high degree of uncertainty around the tightening of #CreditConditions…
Today’s #CPI report for May showed another very firm depiction of where #inflation currently resides in the U.S., with #coreCPI (excluding volatile food and energy components) printing at 0.44% month-over-month and 5.33% year-over-year.
Meanwhile, #headlineCPI data printed 0.12% month-over-month and came in just above 4% year-over-year, with declines in #energy components and some food prices being offset by gains in #shelter and used cars and trucks.
Overall, headline #inflation does appear to be moderating at a faster pace and we believe that the trend in inflation (despite the firmness of core measures in today’s report) is broadly heading in the right direction, relative to the @federalreserve’s inflation target.
We’ve seen the pace of #payroll gains decelerate to roughly the monthly trend pace from the last expansion; consensus has been waiting for this moment and expected a 195,000 job gain in May, but the data printed considerably stronger at 339,000 #jobs gained.
The three-month moving average of #nonfarm payrolls sits at 283,000, down from 334,000 jobs at the start of the year, but what the #LaborMarket imbalance needs is more supply and more slack.
The #unemployment rate ticked up to 3.65%, close to its 12-month average level, and average hourly #earnings (a volatile figure) gained 0.33% month-over-month and 4.3% on a year-over-year basis.
Today’s #CPI report continues to depict #inflation that is just too high for most people’s good, especially the @federalreserve’s.
In fact, the report showed that #inflation remains remarkably sticky, which doesn’t correspond to virtually any practical thinker’s timeline of when it might be expected to start to come down further.
These elevated levels of inflation continue to be remarkably high relative to the many months with which the #economy has now operated with persistently higher #InterestRates.