The Bond Vigilantes Are Fighting The Fed
After today’s PPI, we won’t be surprised if Fed officials plant a story in The Wall Street Journal over the weekend titled something like “Fed Officials Might Vote To Pause Rate Cutting Following Hot Inflation Data.” The current consensus seems to be that the Fed will cut the federal funds rate (FFR) by 25bps on December 18. But it might be a “hawkish cut” with the FOMC’s Statement and Summary of Economic Projections signaling a pause in rate cutting early next year.
If so, then Fed Chair Jerome Powell will amplify that signal at his December 18 presser. He certainly sounded somewhat less dovish on November 14 when he said, “The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” (…)
The Fed cut the FFR by 75bps since September 18. Two days before that happened, the 10-year US Treasury bond yield was 3.62% (chart). It has increased 70bps since then to 4.32% today. We anticipated that the Bond Vigilantes might fight the Fed because the economy is strong and inflation might stop moderating north of 2.0% because the Fed is easing too much, too soon. Another rate cut next week might push the bond yield higher, again.
The 10-year bond yield was up another 6bps today after the latest auction of 30-year Treasuries found lukewarm demand following the release of November’s hot PPI report. Consider the following:
There were large upward revisions to previous months and November’s 0.4% m/m increase boosted PPI final demand to up 3.0% y/y (chart). That’s its highest since February 2023, and a stark difference from September’s originally reported 1.8% y/y increase. PPI services rose 3.9% y/y, another multi-month high. Revisions were so substantial that August’s PPI services actually rose 5.8% y/y after being initially reported as up 2.6% y/y. (…)
The labor market still looks solid, in our opinion. Today’s unemployment claims report showed initial jobless claims rose 18,000 to 242,000 in the week ended December 7. That was likely due to Thanksgiving Day falling later in November this year, as it matches the increase seen the prior week a year ago. Continuing claims rose 15,000 t0 1.871 million for the week ended November 30. It’s taking slightly longer for unemployed workers to find jobs, but we do not see major concerns in the labor market.
This “data dependent” Fed last summer ditched the inflation fight to focus on the labor market with a particular emphasis on the unemployment rate which had been rising from 3.4% in April 2023 to 4.3% (actually 4.253%) in January while core PCE inflation receded from 4.8% to 2.7%.
Three rate cuts later, the data is not collaborating: the u-rate is back to 4.3% (actually 4.246%) and inflation has stabilized just under 3.0%, still far from the 2.0% goal, and threatens malign stubbornness.
Meanwhile, consumer demand, 70% of GDP, remains very buoyant (see yesterday’s Consumer Watch and below) but corporations seem to be riding the productivity wave. Both the manufacturing and servicing PMIs recently indicated that employment is not keeping pace with strengthening order books.
The recent unseasonal rise in unemployment claims has been blamed on strikes, hurricanes and Thanksgiving (?) but Indeed Job Postings, after stabilizing in summer, have resumed their downtrend through December 6, something Ed Yardeni has not spotted yet.
A strong and strengthening economy, rising unemployment and stubborn inflation in spite of solid productivity gains are really complicating the Fed’s assessment.
The bond market is keeping it simple: strong demand, a lenient Fed and stubborn inflation risk, with tariffs coming next year, suggest caution on duration.
CONSUMER WATCH
Following on Bank of America’s yesterday spending update, Placer.ai confirms a shopping-minded consumer:
- Malls traffic was up 4.6% in November.
- Simon Property Group also reported that traffic was up 5.9% YoY on Black Friday followed by +6.3% on Saturday and +8.2% on Sunday.
- SPG’s retailer sales productivity on a TTM basis was $737 in 3Q24, 8.4% above the $680/sq. ft reported in 3Q19.
Some service providers have little problems raising prices:
YouTube TV will raise prices by $10 a month (+13.7%) starting in January, bringing it up to $82.99.
Data: Axios research. Chart: Axios Visuals
YouTube TV’s price now rivals what a traditional cable package costs, per industry trade group CTAM.
ECB Prepared for Quarter-Point Rate Cuts at Next Two Meetings
European Central Bank policymakers expect to cut interest rates by another quarter point in January and probably also in March as inflation stabilizes at the 2% target and economic growth remains sluggish, according to officials familiar with their thinking.
A gradual approach to lowering borrowing costs is the most appropriate path forward provided the economy develops in line with current expectations, the people said, asking not to be identified discussing private conversations.
A larger, half-point reduction remains an option in case of emergency, they said. But they stressed that such a step risks conveying an unintended sense of urgency. (…)
They highlighted that preferences might change once there’s more clarity over Donald Trump’s policies after he takes office again in January. (…)
The ECB cut for the fourth time this year on Thursday, taking the deposit rate to 3%. Economists surveyed by Bloomberg before the decision expected consecutive steps at every one of the Governing Council’s four policy decisions through June. That would leave the benchmark at 2%. Markets price a more aggressive outcome.
Europe’s central banks are taking a determined dovish turn to aid economies bracing for more disruption from Donald Trump’s second stint in the White House.
Decisions by policymakers in Frankfurt and Bern on Thursday to cut interest rates left little doubt over the prospect of possible future easing to cushion the effect of unknowns ranging from trade tensions to geopolitically stoked currency volatility.
Most drastic was the Swiss National Bank’s surprise half-point reduction to 0.5%, further undoing constriction to reach a level last seen in September 2022, when officials ended almost eight years of subzero monetary policy. (…)
Angst about the regime change in the White House is apparent elsewhere too. Canada’s central bank, cognizant of the danger of higher trade tariffs from its southern neighbor, cut by a half-point on Wednesday.
Brazilian policymakers, fresh from currency gyrations amid fiscal turmoil and Trump’s threat to BRICS members not to challenge the dollar’s dominance, later raised their own rate by 100 basis points. (…)
The ECB, meanwhile, changed the language of its statement to show it no longer wants to restrict the economy, also unveiling wholesale cuts to its 2024-2026 growth projections. Officials now see the euro-zone economy expanding just 1.1% in 2025, down from 1.3%, with Lagarde adding that risks to the outlook are “to the downside.” (…)
- German Economy Will Hardly Grow in 2025, Bundesbank Says Bundesbank lowers forecasts significantly from June outlook
Gross domestic product will fall by 0.2% in 2024, it said Friday — slashing a June prediction for 0.3% growth. Output will expand by just 0.2% in 2025, rather than the 1.1% seen earlier, and could even fall if US trade tariffs materialize.
“The German economy is not only struggling with persistent economic headwinds, but also with structural problems,” Bundesbank President Joachim Nagel said, highlighting the industrial sector in particular. “The labor market, too, is now responding noticeably to the protracted weakness of economic activity.”
The forecasts worsen an already gloomy outlook for Europe’s biggest economy as long-standing struggles among its industrial and car giants are compounded by political turmoil before snap elections in February and the dangers posed by Donald Trump’s return.
The Bundesbank expects the economy to stagnate this winter and only begin to slowly recover during next year. For 2026 and 2027, it forecasts growth of 0.8% and 0.9%.
Risks are to the downside, however, specifically from Trump’s policies. Germany’s “strong reliance on exports makes it particularly vulnerable to the decline in foreign demand resulting from the global trade losses triggered by the restrictive trade policy,” the Bundesbank said.
Overall, economic output in 2027 could be 1.3%-1.4% below the baseline scenario due to a US policy shift, the report said. According to different models, a trade conflict could even cause German GDP to stagnate or shrink again in 2025.
Nagel has warned in the past that Trump’s levies could cause another GDP contraction in 2025. (…)
Canadian households are coping with their debt loads surprisingly well
For the first time since the Bank of Canada began raising interest rates in 2022, total interest payments made by households declined on a quarterly basis as the bank’s recent string of rate cuts delivered much-needed relief to borrowers.
At the same time, household indebtedness relative to incomes dropped again in the third quarter, continuing a trend that began at the start of 2023.
It all suggests Canadians have managed their finances reasonably well, despite concerns going into the rate-hike cycle about their heavy debt loads. (…)
Meanwhile, debt loads became more manageable. For every dollar of disposable income Canadian households earned, they held $1.73 in credit market debt, which includes consumer credit, and mortgage and non-mortgage loans. Except for the early months of the pandemic, that’s the lowest the debt-to-income ratio has been since the end of 2015.
Rising incomes have been key to the improvement in household finances. Disposable income grew 2.3 per cent in the third quarter, and that helped push the household saving rate to a three-year high of 7.1 per cent, Statscan said.
While the higher savings rate also reflects a pullback by Canadians from discretionary spending – a fact that explains some of Canada’s sluggish economic growth – those savings are a potential buffer for homebuyers who took out mortgages during the height of the pandemic when interest rates were close to zero and face much higher payments as their mortgages reset over the next two years.
There are still reasons to be cautious. While rate cuts have helped most borrowers, rising incomes have disproportionately benefited the top 40 per cent of earners, leaving lower and middle-income households still strained in that respect. But economists are optimistic household finances in general have turned a corner. (…)
MEMORIES…
This chart reminds me of how miserable I was in 1999. Even a “garp” (growth at a reasonable price) investor like me was feeling the pinch. I had been outperforming for 11 consecutive years but I quickly became labeled as out-of-date during the dot.com years… until 2000 and 2001. Maybe that can help lift some spirits….
The S&P 500 tech mega-cap concentration makes it difficult to outperform the index.
Source: @DayHagan_Invest