Hope of a Fed rate cut in July is has all but vanished. But more than one cut are now priced in by December.
I thought there was a decent shot at a July cut. That’s all but totally priced out so I removed July from the chart. But the odds of a cut for September went up and December is now up to two full cuts.
There is no meeting in August, October, or February.
Further Progress on Inflation
Fed Chair Jerome Powell met with the Senate on Tuesday and will meet with the House on Wednesday.
Please consider Powell’s Remarks Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.
Recent indicators suggest that the U.S. economy continues to expand at a solid pace. Gross domestic product growth appears to have moderated in the first half of this year following impressive strength in the second half of last year. Private domestic demand remains robust, however, with slower but still-solid increases in consumer spending. We have also seen moderate growth in capital spending and a pickup in residential investment so far this year. Improving supply conditions have supported resilient demand and the strong performance of the U.S. economy over the past year.
In the labor market, a broad set of indicators suggests that conditions have returned to about where they stood on the eve of the pandemic: strong, but not overheated. The unemployment rate has moved higher but was still at a low level of 4.1 percent in June. Payroll job gains averaged 222,000 jobs per month in the first half of the year. Strong job creation over the past couple of years has been accompanied by an increase in the supply of workers, reflecting increases in labor force participation among individuals aged 25 to 54 and a strong pace of immigration. As a result, the jobs-to-workers gap is well down from its peak and now stands just a bit above its 2019 level. Nominal wage growth has eased over the past year. The strong labor market has helped narrow long-standing disparities in employment and earnings across demographic groups.
Inflation has eased notably over the past couple of years but remains above the Committee’s longer-run goal of 2 percent. Total personal consumption expenditures (PCE) prices rose 2.6 percent over the 12 months ending in May. Core PCE prices, which exclude the volatile food and energy categories, also increased 2.6 percent. After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress. Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.
The Committee has stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. Incoming data for the first quarter of this year did not support such greater confidence. The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.
Rate Cut Signal
The market took those last two paragraphs as a signal the Fed is prepared to cut rates in September.
If rent behaves (goes up less than the current pace of at least 0.4 percent for 33 months) or unemployment rises further, or the economy enters recession look for the Fed to be more aggressive with rate cuts than my lead chart shows, but not wildly so.
My base case is all three of the above. We find out about rent with the CPI report on Thursday. The Bloomberg Econoday forecast is 0.1 percent. That’s a tough over-under line but I’ll take the under.
A Recession Has Already Started
On July 8, I commented Weak Data Says a Recession Has Already Started, Let’s Now Discuss When
I’ve seen enough. A recession has started. Let’s discuss starting with a very good indicator that has few false positives and no false negatives.
Looking further ahead, I do not sense a strong recession. That will preclude strong action by the Fed.
Covid was very short and extremely deep. This recession will be a longer period of shallow stagnation.
Both Biden’s and Trump’s tariff polices are inflationary. The budget is a mess, and any decline in the rate of inflation is likely to be transitory. Rates are not going back to zero.
The Fed may struggle with this weakness for years, unable to do much because global wage arbitrage and just-in-time manufacturing have been replaced with contentious, inflationary trade wars coupled with weak demographics.
Can you please expound on your theory of the depth of the next recession. Thanks
Last week, Powell’s speech came from Sintra, Portugal. Were a few days earlier, the ECB announced their intent to purchase bonds from Portugal, Italy, Greece, Spain with proceeds from matured German, French, Dutch debt, to cap spreads between their borrow costs. The same PIGS of Europe that were bailed out in 2000s. The ECB will want to lower long-rates to reduce the costs of servicing the bonds. The Fed will lower rates to match the spread in currency values, and halt a trade disadvantage. The problem is raw produce prices increased greatly in June, known to anyone that visited a grocery store. Yellow onions increased to $1.69 per pound, they were .89 cents last November, when the Fed first announced the defeat of inflation. Costs remained elevated through the end of June, without an attempt by grocers to dress mid-year books. India reported the same elevated vegetable costs in June. Reports blamed record high temperatures, although high temps didn’t occur until mid-June, and vegetable costs in America fell sightly in July, as temps increased (it could be global temperature variation). In July, Yellow onions fell to $1.39 per pound, still higher than in May. And in June, Kroger worker’s union announced an intent to strike for higher wages.
Why are you worried about the price of onions? You should be more concerned about the price of oil.
Worldwide onion consumption is 14 pounds per person per year. In the US it is 20 pounds per year at $1/pound. Or $20 per year.
In contrast, the average American uses 22 barrels of oil per year, or $1800 per year. Which is the cost before processing it into the products we use.
Each 42 gallon barrel of oil produces 20 gallons of gasoline (and 22 gallons of other products). That’s 440 gallons of gasoline per American per year.
After WWI the R/R collapsed bc Ford sold over 1.4 millions cars and trucks. After Charles Lindberg, a mailman, landed in Paris private aviation took off. Radios sets were snapped. Between 1920 and 1926 gov debt was cut by 1/3. The Mississippi river and CA floods forced the gov to spend on dams and large electric generators. Hoover was popping up all over the place, out shining the president. The DC triangle was built. Gatson Borglum carve three presidents in Mount Rushmore. NY Fed Ben Strong, an Anglophile, cut rates for Churchill. The lack of regulation enabled speculations. The flyover Fed banks divorced NY Fed, which used their deposits, farmer’s money, to finance GB. Frank Kellogg wrote the Kellogg Briand pact which made it legal for GB to rule the world without opposition. The mess created in Paris 1921 and during the roaring 20’s planted the seeds for the depression and WWII.
The nonexistent rate cuts will happen when the nonexistent recession happens /s
The bond market is preventing the Fed from raising rates. There are 3-4 months until the low in the nominal 54 month interest rate cycle. Rates have not corrected much, which means the larger move off the nominal 54 YEAR cycle low is much stronger than initially estimated.
Yeah, the rate for a 3 month CD from Schwab is 5.3%. The bond market is not convinced inflation is under enough control even though PCE has remained below 3% since October 2023. I suspect if it remains below 3% through September 2024 with rates then the bond market will ease up.
I am pretty sure that Mr. Powell & Co. would prefer to wait for a day when the S&P 500 is not hitting a new record high before announcing any rate cuts.
How can they justify rate cuts with increasing inflation? It’s obvious that inflation at the grocery store is taking one step backward and two steps forward. Prices of everything continue to climb, and nothing has systematically changed. We’re just going to make it easier for the ruling class to own everything. This makes no sense.
Why do you never mention the impact of war on inflation? War is always inflationary, and when we are making enemies of our biggest lenders, it will be much worse with WWIII.
It should be obvious the West needs/wants war. Govt’s need war as the cover to default and impose digital currencies. The WEF needs war to force Russia and China into the Great Reset / One-World-Govt agenda, and the NEOCONS/NATO want war because they are psychopaths needing to justify their existence, plus some harbor grudges for generations – https://www.armstrongeconomics.com/world-news/neocons/necons-should-be-tried-for-treason/.
the opportunity costs are terrible, plus a real dollar amount in 10-20 trillion spent on war since the end of WW2. All that money could have made America into a star trek future.
The US needs a stronger ammunition industry. The ME and the Ukraine wars showed how unprepared and deficient we are. We lack the ability to produce for our allies and our own stocks, after recycling what we got. WWIII will cause a destructive deflation, the worse type of deflation, not inflation. Our cities will be destroyed like Atlanta GA during the civil war. Tens of million will die.
High mortgage rates froze the RE market. About 50% of millennials are home owners.
The rest rent. Yet most millennials (28-43) support Biden, according to the last poll, and most Gen Z (12-27) support Trump.
Let them eat cake.
I say the economy is not in recession and actually ticked up in May/June. Inflation is rising again with the latest data I see and we will not a get a rate cut. Things are currently stable as is between rates, employment, inflation. We will bounce around 1-2% GDP.
https://www.advisorperspectives.com/dshort/updates/2024/06/25/chicago-fed-national-activity-index-cfnai-economic-growth-increased-may-2024
“…The market took those last two paragraphs as a signal the Fed is prepared to cut rates in September…”
the market is wrong. the market has been wrong ALL YEAR.
higher for longer.
The market is looking for data always So far market hasn’t been wrong about corporate profits.
They just need negative real rates.That means inflation higher than the rates.And inflation will come from government spending.
If inflation is not strong enough,then they need to cut the rates to keep negative real rates.
If they cut right before the elections,people will love it …..
Aren’t negative interest rates a tax on capital?
Yes, i think so.
There is so much debt issued that if the rates are really positive,the whole thing implodes.This is what i guess.
Powel might cut rates, while demand for skilled and semiskilled workers is high.
When things are good co will raise wages of the unskilled workers. During the prosperity he gov will collects higher taxes.
during the prosperity gov deficit might flip to green. debt might be cut. If no prosperity along with inflation JP window will close. if things are bad JP might stimulate, or raid
to save the banks.
the next president, zombie all day, during the prosperity, watching the
surplus every qt, cutting debt, resisting congress pet projects.
So Powell cuts rates; the economy booms; governments collect huge taxes; the deficit disappears; debt gets paid down; and the next president gets all the credit.
It’s all so easy. I wonder why no one ever tried it before?
Got it. Thanks!
Powell is blowing smoke trying to project optimism to Americans. He shouldn’t even be talking about a rate cut. The numbers will continue to get worse EVERY month. I see the Fed increasing rates as the inflation numbers increase.
It’s purely a Political decision, and has total disregard for any fallout from such. You can’t get re-elected in a recession, so Zero Rates if possible or as close as they can get to that.
If I’d doesn’t work, then it becomes a Republican problem, but if it works, the Dems can Paper Over another 4 Years!!!
Agree, they are doing it for incumbents
American Yale Professor Irving Fisher’s truistic “equation-of-exchange” says otherwise.
Professional economists are stupid. Banks don’t lend deposits, deposits are the result of lending, as anyone who has applied double-entry bookkeeping on a National scale should already know.
I thought that after seven lean years follow seven fat years, but here we go. Keeping rates at zero forever was so smart, but a year at normal level, and down we go. Clownworld.
As long as the economy is expanding there is no reason for the Fed to cut rates so I doubt they will.
So that’s what they told Jerome in the last meeting. I was wondering when we would hear how fast and how many, you know for democracy and all…
“If rent behaves (goes up less than the current pace of at least 0.4 percent for 33 months)…”
ZH today has a story that says, “Record Number Of Listed Homes Have Price Drops.”
Uncle Sam has taken out over $100,000 in debt for every man, woman and child in the US. With boomers retiring, endless wars and a penchant to bribe voters, expect $Trillion dollar deficits as far as the eye can see. Will Powell cut? Does it matter? In the short term, yes, but in the long term, the script is written. America is bankrupt and the empire doomed. Thank the clown show in DC for squandering your children’s future. But if we send more $ and bombs to Israel, perhaps everything will turn out peachy keen as Yahweh blesses our nation with bounty for supporting his brat children. FJB! FI!
Yer gonna be very surprised when all that juicy guaranteed Federal debt is bought by our world’s newest and oldest billionaires and trillionaires. There will be plenty of demand for post-FDIC-inadequate $250k insurance. Its one of the benefits of being one of a shrinking number of non-dictatorships in this world.
If the Fed does “operation twist part 2” you can make out by selling to them. But otherwise, a buy and hold strategy for US long bonds is a guaranteed loss.
Scott setting daily records for down votes. Bravo
Dang! That’s what I sometimes aim for.
– Will Powell cut? > Of course
– Thank the clown show in DC for squandering your children’s future. > Maybe blame the Responsible, which is the Voters!
– Were doomed > Not even close, just need a Conservative Leader
Nonsense.
Jerry is adding timber logs to the inflation bonfire.
Most pundits agree that the next fed move will be a cut. The debate continues on when this will happen. As long as the economy continues to muddle along with inflation above 2%, and some job growth, the fed seems willing to wait.
I expect economic growth to slow so gradually that we could be in this situation for another 2 years. Though it is difficult to predict the future.
Should the economy appear to be slowing faster than I expect, I will sell more winners and raise more cash, but for now, I remain 75+% invested and day trade the remaining 20+%. Basically continuing what I have been doing for the last 4 years.
Thanks for the analysis Mish.
Hey Papa, I know you follow Energy, but by chance in your portfolio, do you have non-energy investments? If so, would you be willing to share just 1 of your more favored investments? I may follow that lead, but I’m also simply curious what else your looking at, that’s all… thanks either way.
Yep. Energy is just over 50% of my holdings.
I have been a long term holder of Microsoft, Alphabet (Google), and Constellation Software (Canadian company). When I sold off most of my tech stocks in late 2019, early 2020 to start acquiring oil stocks, those were the ones I held onto. Though I am always willing to sell the rips and buy the dips on “a portion” of any of the stocks I own.
TY Sir!
YW!
I figure as percentage of assets to hedge for currency devaluation or inflation:
10% in oil and gas ETF
7% in precious metals ETF
3% in Bitcoin ETF
I think the Amazons and Googles will continue to steadily grow for another 10 to 15 years.
There are many ways to invest and a lot depends on the individual. Personally, I take a very active approach because I can make the time to do so. Others are unable to be active and ETFs work well for them.
My goal is to keep growing my wealth substantially each year. As a result, I don’t worry about currency devaluation or inflation.
“…Most pundits agree…”
the pundits have been wrong FAR MORE than they’ve been right. fact. just sayin.
Yep. Including Mish and most prognosticators here. The future is hard to predict.
The best prognosticator I have ever seen here was Realist. He nailed almost everything, though even he was occasionally wrong.
Theyll be puny, or not at all. And nothing substantial till after Nov 5th.
Fed follows T-Bills historically once rates have shifted to a new level and stabilized i.e., after 3-4wks. The Fed is political and never wants to be out of sync with markets otherwise they are blamed and the Chair loses his/her position. Current T-Bill/10yr reveals a massive hedge bet on rate declines with very bearish PMI. Problem is PMI does not agree with IndPro which is holding steady, even had a recent adjustment higher. When that hedge is reversed T-Bill rates will fall as the short position in T-Bills will become buys. This will drive markets into industrials reporting better than expected and raising guidance last 2yrs. The Mag 7 will suffer. Overall, the SP500 should rise as issues heavily discounted on recession fear suddenly appear to have attractive business prospects.
Please explain yourself, to quote Gus Frang.
I like to keep it simple. The IRX (three-month bill) has been pinned around 5.37 percent yield for something like a year. The six-month bill is a bit lower at 5.28%. Until those move below 5.25% the Fed isn’t cutting anything.