We saw rates pop last Friday. This was due to a strong jobs report. If there is strong economic data, the Fed will translate that data to mean the economy is doing well (and no need to fear a recession) and therefore more aggressive rate hikes to battle inflation are warranted. The markets will cheers to the bad news/data because that means the Fed won’t raise rates.
The unemployment data, however, does not consider everyone who is unemployed. For example, it only considers those that are not working but actively looking for work within the past 4 weeks (if you are unemployed and haven’t done a job interview, you are not included).
We have an incredibly important week. We get the CPI numbers, and inflation expectations and hear from a few Fed members. Rates will be volatile. I think the most important piece of data in the CPI will be the month-over-month change. Remember, we already saw a year-over-year decline in May’s report, but we have yet to see a month-over-month decline (or even flattening). The importance of the month-over-month decline is the market will assume that inflation has peaked, and they will believe there will be no more rate hikes and we will go back to the asset inflation celebration.
The Calendar This Week
- 3 Year Inflation Expectations
- NY Fed President John Williams Speaks
- Richmond Fed President Tom Barkin Speaks
- CPI Data Released
- Initial and Continuous Jobless Claims
- Fed Gov. Chris Wallace Speaks
- 5 Year Inflation Expectations
- Atlanta Fed President Raphael Bostic Speaks
- Retail Sales Data
Keep in mind that GDP is coming out at the end of this month. Q1 was revised down an extra .2% so we do have a -1.6% contraction. Q2 should also be negative. If so, a lot of economists define a recession as 2 quarters (back to back) of negative growth. A lot will point to the low unemployment numbers to counter the “recession” debate, but it is something to be aware of.
Chart Check (see above)
The trend continues to be down. We had a great week 2 weeks ago, and another one end of May. Besides those, it has been a volatile roller coaster with the 30yr MBS trending downward. The story continues to be the same: inflation needs to be tackled first, and then a recession – if it comes.
This chart looks like it wants to push lower, but again, everything is depending on this week’s CPI report. If we get decreased inflation, get ready for those price improvements.
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Hi Ray Hensen,
My expectation is that we would experience a recession in the first or second quarter of next year and the Fed would be able to reverse course, lowering the funds rate they have been hiking all year to try and reign in inflation. So I see rates moving down beginnin in the middle of next year.