Superconductors & Rake Hikes: TBL Weekly #55
Welcome to TBL Weekly #55—the free weekly newsletter that keeps you in the know across bitcoin, rates, risk, and macro. Grab a coffee, and let’s dive in.
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With a yet-to-be-confirmed physics breakthrough that brings the potential to rehaul energy production and consumption as we know it, superconductors stole more headlines than another rate hike from the Federal Reserve. Jerome Powell’s determination to end inflation is crystal clear to observers, but his drive to strike at the labor market—creating not just modest but sizable unemployment—is finally coming into focus. With inflation back within 1% of the FOMC 2% inflation target, “settle in and wait” is obviously not the Fed’s chosen strategy. The strategy is now better understood as “hit the labor market now” so that renewed inflation expectations don’t return in a passionate way. Even though inflation is cooling, higher for longer in America remains the party line:
We don’t even believe that the Fed is coming with rate cuts with inflation almost certainly heading below 2% in the coming months. Yes, you read that correctly. From levels near 10% (and above in Europe) to below the 2% target itself, one might think that the Fed’s job would be done, and that the threat of deflation might actually shift monetary policy from restrictive to accommodative.
For much of the year, this has been our approach. But with each passing day that Powell digs his heels in on the tight labor market (probably this year’s “forceful” approach to inflation), and we fear for the economy that it will not be receiving any policy support for as long as stocks remain fired up (they are up 20% YTD). And don’t forget oil prices, now a net contributor to the inflation outlook. Take a look at the bullish price action since the heavy consolidation during the spring—oil is making its own bull market case:
The economy officially put in strong numbers for the second quarter. Any recession worries for the current period have proven premature, and the lagged effects of monetary policy are not yet hitting all areas of the economy. Services data remains in positive territory and housing has finally shown that low supply matters a lot. Sales are still sluggish, but both Case Shiller and Redfin data show that housing prices are stabilizing and nowhere near a crash formation:
With all the positive data throughout the economy, Powell and company are able to look past many of the worrying signs we have noted lately, including contractionary manufacturing and terrible lending and deposit numbers that suggest a credit contraction is well underway. Credit contractions have their own lagging effects on consumption, but those lags won’t factor in by the annual Jackson Hole meeting during which central bankers swap ideas and give us a preview for policy for the rest of the year. We fully expect Powell to be hawked up and do everything in his power to keep those rate-cut expectations far away. He is so far succeeding on the money market front—near-term policy rate expectations are firmly anchored in the flat to slightly positive territory. He is not succeeding just yet on US Treasury 2-year yields, for example, which remain over 40 basis points below the policy rate, meaning that expectations are for modest cuts over the coming 12 months or so. Will he be able to uninvert this curve? He will be trying, but it’s yet to be seen if the market will obey.
In the week ahead, we’ll receive several tier-1 data points, including both ISM surveys for July, and employment data in the form of NFP on Friday. This is our first look at Q3 and another opportunity to point at an economy staving off recession despite 525 basis points of tightening. Expectations are for manufacturing to remain in contraction, services to once again continue to drive the economy in expansion, and for the unemployment rate to remain near record-low levels at 3.6%. Nowhere in the data expectations are there places the Fed will derive imminent worry, yet another reason why nothing Powell says on the hawkish front will surprise us:
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Here are your quick links to all of the TBL content for the week:
Monday
Joe sat down with Randy Woodward (@TheBondFreak) who is a Fixed-Income Bond Broker at Raymond James Financial. Randy and Joe discuss ODL and other measures of money supply threatening to send US consumer prices into deflation, the Fed's big experiment in doing away with QE and ZIRP after 15 years, and the state of banks as we head into yet another rate hike.
Check out—The Fed's Big Experiment Will End In Tears | Randy Woodward
Tuesday
Massive earnings weeks such as this give us a window into the health of US corporations, and whether they are growing, stagnating, or struggling in aggregate. With 40% of US companies reporting, and analyst expectations for growth already surprising to the upside, it’s lining up to be a major week for equities.
The S&P 500 is within spitting distance of setting a new all-time high—just 5%, or roughly 280 points away from the 4,800 level it topped out at in 2022.
If earnings this week perform well as expected and support valuations, raising risk sentiment and drawing more investors into the fray as well, stocks could have the support that they need to climb to 4,800 or higher.
Check out—The S&P 500 is 5% off an all-time high, stellar earnings this week could send it there
Wednesday
Nik breaks down the latest decision by the Fed to hike rates yet another 25 basis points. He discusses the tight labor market, why the Fed feels no need to pivot whatsoever, and how Powell's Jackson Hole speech in August will set the tone for even more hawkishness.
Check out—The Fed Is Playing With FIRE
Thursday
Confused why the Fed continues to hike? Surprised? Don’t be. While the Fed carries two official mandates, maximum employment and price stability, its creeping third mandate—stock prices—will always win out. High inflation and high unemployment affects mom and pop, but stock prices affect the rich and powerful—when choosing between which to support, do you really think the Fed is more interested in helping the public than the powerful?
Check out—Powell To Bring The Pain
Friday
In this episode, we are joined by Custodia Bank Founder and CEO, Caitlin Long. Caitlin explains why FedNow is a technology upgrade but not a CBDC, and she and Nik explore the theory of stablecoins as an extension of the Eurodollar, or offshore banking, system.
Check out—Stablecoins Are The New Eurodollar System | Caitlin Long
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That’s all for our markets recap—have a great weekend, everyone!
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