Macro Recap - 2024-07-06

Economic Data:

June services ISM pretty bad. We only got to these levels during Covid and the GFC. It came in at 48.8 while the expected was 52.7. Business activity dropped to 49.6 (-11.6pts M/M), new orders declined to 47.3 (prior 54.1), and employment at 46.1 (47.1 prior). Jobless claims this week increased 26k to 1.858M and ADP at 150k below estimates. NFP came in at 206k (190K est) but revisions were negative (April, May -110k). Unemployment rate up 4.1% (est at 4%, up 10bps from May).

Powell

Powell At Sintra continues with the same rhetoric: we want to see more data to confirm what action to take next. Acknowledges that we are back on the disinflation trend even though there were some doubt given data in Q1. “We want to be more confident that inflation is moving sustainably down. We want to understand that the levels that we’re seeing are a true reading on what is actually happening with underlying inflation.” Powell also reaffirms what I’ve said since end of April, inflation isn’t the only thing that is important going forward. “It’s very much understood by us that we have two-sided risk.” (in reference to labor markets and growth worries).

Fed Minutes:

Reiterates very much what Powell has said. Inflation still elevated but signs are showing price pressure is slowing. Needs more data.

An important excerpt I wanted to highlight from the text: “A number of participants remarked that monetary policy should stand ready to respond to unexpected economic weakness. Several participants specifically emphasized that with the labor market normalizing, a further weakening of demand may now generate a larger unemployment response than in the recent past when lower demand for labor was felt relatively more through fewer job openings.” I think the committee is very cognizant of this reaction function moving forward and their sensitivity to it makes it probable that it will drive policy initiatives going forward.

Markets

Equities and yields were up and down 3 days in a row respectively given the above. There’s still residual demand for risk assets even though valuations are rich. But we know valuation don’t mean much when it comes to timing. What I think matters more in these markets are the trends in narratives which is governed by data releases. Inflection points, which are very hard to identify, come when the reaction function of asset prices change given new information.

Currently we are seeing a continuation of the narrative in Janurary. This means any development that contributes to rate cut is positive for risk assets. With the fed reiterating for the past several meeting for a more balanced policy reponse to growth and inflation that means bad news (slower growth) is good news. I will continue to operate based on this reaction function until provden other wise.