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April Fools?

| April 02, 2024

While the markets were celebrating the Good Friday holiday, the BEA (Bureau of Economic Analysis) released the preferred measure of inflation by the FED. It was largely in line with expectations.

Meanwhile the ‘Core PCE’ came in at 2.5% for the previous 12 months. Not what the FED’s goal is, but closer than it was several months ago. In fact, Chair Powell said this on Friday.

Again, the “no-landing” scenario would say that inflation would come down but probably not to the 2% level. You would also expect that the labor market would largely hold together and the unemployment rate would not go up significantly. Hard for me to argue that rates should be cut under those circumstances. In fact, Powell was careful with his words to that effect.

In accordance with the ‘no landing’ scenario, the ISM Manufacturing index came out yesterday and was stronger than expected, climbing back above 50 for the first time since October 2022 (that would be 18 months for those counting). For context, below 50 means that manufacturing is contracting and above 50 is expanding. The chart below shows the last five years of the manufacturing index. It has looked depressed for quite a while now.

Some would point to this as being recessionary and is represented in the Leading Economic Indicators (LEI) I’ve shown before. And just to look at it again, you can see the LEI have turned up from very low negative numbers. Is this a sign of better things going forward?

This strong manufacturing number has led to higher interest rates to start the week, as the concern of less rate cuts comes to the fore.

In fact, the 10-year Treasury is at a very important level. One that has served as resistance many times in the past year.

The overall economy continues to appear healthy, while still working through the trillions of dollars of stimulus from COVID.

The St. Louis Federal Reserve chart above is showing that personal savings have mostly been used up and are back to the long-term trend line. That would be a good thing after the massive spike we saw in 2020 and 2021. But, at the same time, personal savings are coming down from their COVID peak and credit card debt is at its highest ever.

In addition, auto loans are now $1.61 trillion.

And if that’s not enough, the Federal Reserve is now losing money on their bond portfolio as the amount of money they pay out in overnight lending compared to what they bring in is negative.

I don’t think that hits on any budget item, but that money has to come from somewhere. I’m sure it’s buried somewhere.

It remains to be seen if the rebound in manufacturing will be sustainable or if it was an April Fool’s joke. At any rate, expectations are slightly better than 50/50 for a rate cut in June. I’m not sure I would bet on that, barring some real slowdown in the economy between now and then.

Have a good week and please do reach out with questions, comments, or concerns.