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@LHSummers

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Rick Rieder

@RickRieder

Oct 10

Call it the Couldn’t Possibly Ignore report. That’s how important CPI has been in the past few years, as it has kept markets on edge as to what it means for Federal Reserve policy and interest rates across the curve.

It’s still important, but the Fed’s clear focus has shifted toward more balanced priorities, with considerably more emphasis on the labor market for judging how quickly (if at all) to move the Fed funds rate.

In today’s data, Core CPI (excluding volatile food and energy components) printed at 0.31% month-over-month and 3.31% year-over-year.

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Rick Rieder

@RickRieder

Oct 1

CIO Charts of the Week: The Economy Is Doing Better Than We Originally Anticipated

While many called for recession in 2024 due to recent weakness in the labor market, the triggering of the Sahm rule, and generally weaker growth prospects, last week’s GDP revisions from the @bea_news helped to quell many of those concerns for the time being. Real GDP was revised up from 22.9tn to 23.2 tn, thus highlighting that the economy is doing better than previously expected, boasting a 3.0% growth rate quarter over quarter for Q2 and a 3.2% growth rate for 2023.

Almost more impressively, GDI, a measure often cited as the better representation of growth through the tracking of income rather than expenditures, had previously been running over $500bn below GDP! This growing discrepancy blurred the picture of the state of the economy and called into question the relative strength of households as they seemed to be spending more via GDP, but not making more via GDI. However, in last week’s revisions, GDI was revised up to match GDP!

This paradigm was largely due to impressive upward revision in personal and disposable income spanning back to 2021. So, while the data previously created the narrative that households were stretched and potentially spending beyond their means, these revisions demonstrate that in aggregate, households are in a decent place.

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Rick Rieder

@RickRieder

Sep 18

The markets have been riveted with a singular focus on one number, as a reflection of the Federal Reserve policy stance, and the primary question has been whether the Fed would cut 25, or 50, basis points (bps) at today’s meeting.

As if one number carried as much relevance to financial assets as Pi does to mathematics and physics, in determining a circle’s diameter to its circumference.

A 50-bps cut, bringing the Fed Funds rate to 4.75% to 5.00% is not Pi, a special number that reveals many secrets. The future rate path remains uncertain and data dependent, and all that has happened is the Fed has jumped out to a faster start on the path to neural, an appropriate move given how far they are from their likely destination.

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Rick Rieder

@RickRieder

Sep 6

A Thread on Today’s Payrolls Report:

There are some jobs reports over the years that are acutely followed by markets and others that are more of an afterthought. Today’s was the former, and the market reaction casts no doubt on the employment data’s importance. We can see the market's focus shifting from inflation to labor market data in the term-premia being priced around important data releases. It is clear that the labor market data has now overtaken inflation as the most important focus for both markets and the Federal Reserve.

While the recent labor market data is clearly softer, it is very far from a disastrous indicator of recession, hard-landing, or some pernicious foreshadowing of future consumer weakness. Rather, we continue to believe the job market is moderating from robust post-COVID demand. In fact, almost none of the recent increase in unemployment has been permanent job losers; rather, it was driven by temporary (weather-related) layoffs in August, which reversed this month, and a steady stream of new entrants.

So, while last month’s print famously triggered the Sahm rule, thus sending markets into a frenzy by hinting at the idea that a recession is nigh, we remain firmly in the camp that the data is that of a moderating economy, rather than a one headed towards recession. Even in today’s softer payrolls report, we see that job destruction is nowhere near the typical rate seen at the onset of recessionary periods.

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Rick Rieder

@RickRieder

Aug 23

In his conference speech today @federalreserve Chair Powell delivered a jumping off point for a shift in monetary policy that would start to bring the Fed Funds rate down at the next FOMC meeting in a couple of weeks.

Specifically, his description of a more balanced economic condition, which has largely normalized and is consistent with pre-Covid growth and inflation levels, sets the stage for such a change in policy.

The Fed has been waiting to gain more confidence in those parameters being in place, and today’s comments suggest that the time has come, as the Chair explicitly stated.

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Rick Rieder

@RickRieder

Aug 19

CIO Charts of the Week: We believe the recent return of chaotic markets likely has its origins in onerously tight policy, which has created increased vulnerability to crowded positioning and stretched valuations for risk.

With the benefit of hindsight, we would note that the first foreshadowing of fragility may have been SOFR spiking on July 2.

Shortly thereafter, the US Tech sector, which had risen to >20% above its 200d moving average, reversed dramatically on the largest ever 1-week small cap > tech outperformance!

Next, an earlier-than-expected Bank of Japan hike in policy rate set off a +5 standard deviation move in the Japanese Yen as investors rushed to close this popular carry trade.

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