Aug 16, 2024
“From my perspective, the risk to both sides of the mandate seem more balanced,”
Now that the “giant global margin call” appears to have run its course, global equity markets were free to celebrate successfully navigating the potential banana skin that was US inflation data (both CPI and PPI). Inflation is tamed (at least till next month) with only the irritating exception of the shelter components (again!) and those pesky insurance premiums. Turns out that inflation has a long tail: higher auto prices beget higher insurance premiums, and that’s without considering the impact of recent hail storms. That said perhaps we should count our blessings. Both headline CPI and PPI beat (i.e., were lower than) the consensus by 0.1%, which led some economists to point to a core PCE deflator figure below the Fed’s 2% target: good enough for stocks to start celebrating a September rate cut. It was the first time CPI inflation has fallen below 3% since March 2021. Core CPI was stuck at 3.2% for a second month.
All of that good news on inflation helped 10-year treasuries to rally towards the lows (yields) of the last 12 months. One might worry that the porridge was getting way too cold for a market priced for Goldilocks. Luckily for stock investors, the retail sales data arrived to inject a note of optimism. Yes, investors, you can have both rate cuts and a soft landing: well maybe. At the risk of being considered churlish, some have suggested that the seasonal adjustment might have skewed the data a little given Amazon Prime Day arrived in mid-July this year. That said, rates markets have been on a very good run recently, so it’s hard to be surprised when it gives back a few bps. We have moved from pricing >4.6 rate cuts (25bps per move) on August 2nd to 3.7.
Inflation seems to be a key pressure point for both politics and economics right now. Why focus on what Musalem is thinking? Well, he is nominally in charge of organizing Jackson Hole. But also, it’s interesting to see what a guy who has spent time as both poacher (Tudor) and gamekeeper is thinking at this potential turning point. Will the Fed stick the perfect soft landing? Maybe, but it’s still worth asking what could go wrong? Not that we think something THAT destabilizing is likely. But that’s the thing about unknown, unknowns: it is very hard to see them coming. Some might argue that markets can even ignore known, unknowns, like for instance, a Chinese container port explosion, when it flies in the face of momentum. Still, if there is one thing Covid taught us, it’s that logistics can be important for goods prices, particularly when base effects are less friendly.
