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Bond Market Insights - Thurs 26 June 2024

Fed speakers have admitted that in essence they don’t have much control over any of the variables that determine whether or not economic targets are hit. They’ve noted that monetary policy is not efficacious in bringing down energy prices or moderating food prices, and some have opined that the rapid rate increases might have artificially increased shelter inflation by restricting the supply of homes on offer thanks to trapped mortgagees. Did the Fed rate hikes cause Used Car prices, one of the largest sources of the disinflation to date to drop precipitously? Unlikely.

Small adjustments in policy rates directly affects very little of the economy. Given that the best policy response is to do nothing unless the need for policy change is unambiguous. Then the magnitude needed would be substantial. Otherwise any move adds unnecessary volatility to markets.

Last night Powell’s comments were interesting, and ambiguous enough to be taken whichever way you wish. Having sat on the sidelines waiting for data to illuminate the way, Powell stood up to give some sort of guidance.

Regarding employment he said “Unemployment has moved up a bit, that’s an important statistic” having stated that “If jobs were to weaken unexpected, the Fed is ready to respond”, translated to wait for more data.

On inflation he said “If you are at 2.6%-2.7% PCE inflation, that is a good place” a bit of loosening of target. On rents he said that “the pass through may take several years” so inflation is sticky.

He did add that the Fed’s plan is “not to wait for things to break, then fix”

The Fed ought to make just a few moves and keep rhetoric to a minimum. The market is pretty good at moving interest rates to where supply and demand balance when it is left alone.

Europe is in inflation reporting mode and will be closely watched following a surprising push to the upside in both Canada, who cut rates a bit prematurely perhaps, and in Australia. It is going to be an interesting summer.

The longer end of the market has its own issues. US National Debt accounts for $266,952 for each and every US taxpayer. At the current run-rate it is expected that by 2028 US National Debt will hit US$46 trillion, with another US$4.4 trillion in state and local debt. Interest payments are expected to be more than the total combined spending on Medicare and Defense.

Markets are all about confidence. No matter how stretched issues become as long as there is a belief that all will be ok markets can stay orderly. Once that belief goes, well you can imagine where I am going with this.


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