Treasury yields declined nominally as the Fed’s preferred gauge of underlying inflation rose mildly in August. The core PCE was up 0.1% from July and 2.7% from a year ago. Last month the 12-month increase was 2.6%. The data largely met expectations. The yield curve steepened.
The markets have fully discounted an additional 175 to 200 bps of easing by the end of 2025. Is this realistic? If inflation as defined by the core PCE remains at 2.75% and if the overnight rate is reduced to 2.75%, monetary policy is neutral, via the simplistic definition that the overnight rate equals the inflation rate.
By the same definition, the overnight rate today is very restrictive by over 200 bps. Historically a similar environment creates a recession, hence why everyone including the FOMC had been forecasting a recession for the last 20-24 months.
Moreover, inflation would decline. Yes, inflation is considerably below its peak but has been bouncing along current levels for the past 9 months.
Third quarter growth is estimated to be around 3%. The argument stands that if there are lower interest rates in the future, will economic activity not continue to accelerate, and inflationary pressures would rise?
The consistency of the last 48 months is the unexpected occurs. There are perhaps tectonic changes occurring beneath the surface as the world is radically different than four years ago. Accepted benchmarks or relationships may no longer be valid.
The first week of every month has numerous releases of top tier economic indicators. How will the data be interpreted, specifically the employment data. The Federal Reserve has stated monetary policy is primarily dependent upon employment.
Earnings season also commences next week. Will there be any high-profile warnings?
What will happen today?
The economic calendar is comprised of many top tier releases, including the JOLTs Job openings, the ISM Manufacturing and Service Sector Surveys, the ADP Private Sector Employment Survey and the BLS Labor report.
Last night the foreign markets were down. London was down 0.73%, Paris down 1.62% and Frankfurt down 0.61%. China was up 8.06%, Japan down 4.80% and Hang Seng up 2.42%.
Futures are down about 0.30%. Chinese shares are continuing to surge on further stimulus. The markets are ignoring an escalation in the Middle East, perhaps under a false sense of misplaced complacency. The 10-year is off 3/32 to yield 3.77%. The narrative is beginning to rise about the lack of discussion about the deficit in this year’s campaign, an issue that may define the next presidency and beyond.
