Kathy Jones
@KathyJones
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Chief Fixed Income Strategist, Schwab Center for Financial Research, Charles Schwab & Co., Inc. Disclosures:
New York
Joined October 2014
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Our May issue of Bond Market Update is available now. It covers our broad views on Fed policy, treasury, corporate and muni markets.
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Corporate profits rose to a new all time high in Q4 of 2023.
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Two-year treasury yields plummet. Market is saying the Fed is done. (I agree).
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Seems like Powell flubbed this one. Meant to send a cautious, hawkish message but ended up doing the opposite.
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If the Fed tells you it's setting policy in a way that projects higher unemployment and slower growth, it's telling you it's willing to risk a recession to get inflation lower.
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The point is that the Fed is willing to trigger a recession in order to bring down inflation.
Lael Brainard says the Fed will raise interest rates steadily while starting to reduce the balance sheet "at a rapid pace" as soon as next month
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Public payrolls and private payrolls now at post-pandemic highs.
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"Super core" has turned higher - which is a problem for the Fed.
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What's not to like? Ten-year treasury yields fall below 4.5% on good CPI print.
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As a reminder, this is what the
#Fed
’s balance sheet looks like. Moving to a balance sheet with primarily “treasuries” opens up questions of how the Fed can work down its MBS holdings given their long durations.
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The shelter component was the big contributor to the rise in core CPI.
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Negative yields on European junk. Now I've seen everything.
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Fed tightens, yield curve flattens, dollar rallies, risk premia shrink and air comes out of the most speculative, leveraged trades. Kind of the way it's supposed to work when you aim to tighten financial conditions.
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Yield curve has pushed into positive territory after being inverted for nearly 5 months
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Breakdown of CPI by major categories: Core services are the major contributor to overall rise in inflation.
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CPI breakdown by category. Core services at 3.1% = good news.
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The good news is 2020 is half over. The bad news is 2020 is only half over.
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Credit spreads are starting to widen as Fed rate hikes approach.
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The odds of a May cut are now down to about 20%. It was nearly 100% at the start of the month.
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Dot plot: 3 cuts in 2024. The long run estimate stays at 2.5%. Fed acknowledging slower growth and low inflation.
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Oof! Home sales came in much below expectations at 591K vs 763K last month. Down 16% mo/mo
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Ten year treasury yields plunge on jobs report. Some things are more important than supply/deficits.
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Core PCE - Feds benchmark inflation indicator- edges down to 2.4%.
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PPI - big picture. PPI came in stronger than expected driven by higher insurance costs among other categories. Not a breakout to the upside, but declining trend is leveling off.
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Delivery times are coming down in most regions indicating easing supply side problems.
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PPI breakdown. All categories seeing continued decline. Energy and food deflation, but services and other goods price increases slowing as well.
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Does the
#Fed
look at its own research? NY Fed's 3 year
#inflation
expectations survey indicates a drop to 2.8%. Look pretty well "anchored".
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I know how it all works and why it was done, but I never imagined in all the decades of doing this that the Fed would be hiking/QT mode while use of the discount window and special lending programs is rising strongly.
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CPI - Overall rebounds on energy prices but core continues to trend lower. This isn't likely to change the Fed's "hold" at next week's meeting.
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Q4 GDP showed all major categories contributing to growth with consumer spending as the main driver.
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Remarkable: Despite the Fed's rate hikes the economy grew at a faster rate in 2023 than 2022.
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The labor market remains resilient: initial jobless claims declined to 190K, matching its recent low.
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Just met with a friend - super smart and has been using Ai for a while. His take on it so far - "It's great for generating written documents no one is going to read."
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ISM for March came in stronger across the board. Readings above 50 indicate expansion intentions. The rise in prices paid and new orders is contributing to the selloff in bonds.
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Just a note that although our focus is markets, economy and central bank policy - we are aware that peoples’ lives are being shattered by bombs today.
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The 2-year Treasury fell sharply following the release of the FOMC statement. The market is interpreting the statement as the Fed likely being done with rate hikes this cycle.
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A breakdown of yr/yr PPI shows all components declining except wholesale food prices.
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3mo/10yr treasury curve inverted by 93 bps. You could see it as the market fighting the Fed - or as the market saying the Fed's forecast for inflation persistence is wrong.
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Small business outlook hit a record low in June - and the survey goes back to the 1970s.
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Fed view summary: We will hike 25 bps next week and keep going to 5%-5.25%. Then we'll calibrate - but bias is to "hold" for the rest of 2023 to be sure inflation is coming down. Holding is tightening if inflation is falling. So risk of overdoing it are high.
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Not surprised bond yields are edging lower on taper talk. Each time the
#Fed
has tapered in the past, 10-year Treasury yields fell. This time may be different but historically tapering has not been bearish for bonds.
@FerroTV
@lisaabramowicz1
@tomkeene
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Ten year treasury yields drop to a 3 month low on weaker than expected job openings data.
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The real fed funds rate is nearing the 2007 peak. It may be different this time. . .
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About those "bond vigilantes". Looks like ten year treasuries are ending the year about where they started out. In the words of the Grateful Dead, "What a long strange trip it's been."
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@sgodofsk
I used to live near this house (in a garage apartment). It was and still is a rich neighborhood. No one at the time would have thought a typical American family could afford it,
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JOLTS suggest labor market continues to cool off. Job openings are trending lower (although still high) but ratio of hiring to openings, although up slightly, continues its downward trend.
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FOMC balance sheet run off plan looks like the goal is to get down under $6 trillion in the next two years which is pre-covid crisis level. Considering the economy is larger now, that's a reduction as % of GDP.
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Ten-year Treasury yields jumped on comments from Fed's Waller. As far as I can tell, there was nothing new in his comments, but he seemed to discourage the prospect of a March rate cut. We are sticking with our view that May is likely with Mar about tapering QT.
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Q1 core pce rose by 3.7% - well above expectations. That's what is causing the selloff in bonds.
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The 2-year Treasury yield plunged as the
#JOLTS
report showed that job openings fell to their lowest level since May 2021.
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Not sure why the bond market isn't pleased with the inflation data. Trend is cooling. It is led by durable goods but rise in services is slowing.
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Survey of Lending Officers: Huge decline in demand for loans.
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Mortgage applications fell for a fourth consecutive week. We have only had 10 positive readings since the beginning of 2022.
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It's not that the market doesn't believe that the Fed intends to keep policy tighter for longer. It's that the market doesn't believe the Fed's forecast.
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The yield curve inversion deepens. The bond market is pricing in a recession coming.
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Leading indicators fall again, marking the 18th consecutive monthly decline.
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Nonfarm payroll growth beat expectations at 253K, but downward revisions pull 3 mo average falls to 222K.
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More good news on the inflation front – PPI data generally came in lower than expected.
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Ten year treasury yields well below fed funds rate. Can the Fed talk up long-term yields? Not likely. The more hawkish the talk, the more the curve inverts.
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Prediction: People will interpret tomorrow's unemployment report in a way that confirms their point of view.
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"super core pce" ex housing edges down a bit to 4.5% year/year. Overall trends are moving in the right direction but still a long way to go.
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Two-year yields spiked on the retail sales report. Still a ways to go to correct the expectation for a March rate cut - but getting there. We are sticking with our forecast for the first cut in May and 3-4 (25 bp) cuts this year.
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Supercore pce was higher mo/mo. Year over year trend was up slightly at 3.5% with healthcare, transportation services and other up.
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So let me get this right, people woke up today and realized that trade wars are bad for the economy?
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A broad breakdown of CPI. The overall trend is easing, but very slowly. Fed will probably see this as no reason to change its policy plan near term.
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Producer prices rose more than expected in January, with core PPI (yellow line) rising by 0.5%, its largest monthly increase since last July.
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Is it different this time? Based on the Cleveland Federal Reserve’s yield curve model, the probability of recession has risen to 75% - the highest since the 1980s.
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The headline year/year change in core PCE suggests that inflation continues to head towards the Fed’s 2% target, but on a 3-month and 6-month annualized basis it's already there.
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Personal savings rate is down to 3.4%. Consumers may say they are pessimistic but they keep spending.
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My Mom received this letter from the president for her 98th birthday!
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Manufacturing sector continues to contract. Overall
#ISM
index falls to lowest levels since May 2020.
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Pce and core pce hit new lows for the year at 3.0% and 3.5% year/year respectively.
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“Supercore” CPI, a metric the Fed has been focusing on, continues to decline and is now below 5% on a year/year basis.
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PPI came in higher than expected, but not so much that it's having an impact on the market given all of the other issues in play. CPI tomorrow could be more significant.
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Jus got a solicitation on another platform to interview for a job as a therapist since I have a background in “ mental health “. I guess being a bond strategist qualifies me?
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The 2-year Treasury yield falls to 4.5% as traders reassess the timing of the first rate cut on the back of a weaker than expected retail sales report.
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Real GDP rose only 1.6% due to a drop in inventories and net exports.
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Inflation continues to trend lower. The core PCE has risen 0.2% or less for 6 of the last 7 months.
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Overall, another solid jobs report. But below the surface it's not as strong as headline suggests. Three-mo avg increase in jobs is 165K. That's solid but not as strong as 216K Dec headline suggests.
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So we're in the midst of a surge in Covid-19 cases with deaths rising and a contested election result and now Mnuchin decides to quit and take his toys with him. Wow.
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PCE and core pce in line with expectations and still trending lower.
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So just to get this straight, the Fed took away the punchbowl and Wall Street threw a party.
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