- Risk markets are looking great and the ferocious rebound in broad equity indices suggests that far too many market participants were offsides (I mentioned this probability in a previous Observations). The risks to the Yen carry trade were overblown as well. A perusal of financial media platforms indicates that the recessionistas are standing firm in their convictions of an immediate downturn. Some people are natural born masochists.
- Important economic data I’ll be watching this week is fairly sparse, with PCE and jobless claims being the only two data points grabbing my attention. I believe there is a chance Core PCE comes in lower than expected due to the high base effect in healthcare (healthcare receives a greater weight in PCE relative to CPI).
- Jobless claims have practically become a surrogate unemployment rate the way the market has been responding to it lately. It’s not totally unfounded, especially now that: 1) Powell has made it clear at Jackson Hole that the Fed is not willing to see unemployment above 4.3% and 2) The Bureau of Labor Statistics had overestimated nonfarm jobs by 818,000 for the one-year period ending March 2024.
- Possibly the most critical data point that no one is looking at is the RRPs on the Fed’s balance sheet. The data clearly show that liquidity was injected into the market to the tune of nearly $100 billion this month. Now we have a firming economy, falling inflation, guaranteed rate cuts and silent QE. Sounds like a recipe for a historical rise and eventual blowoff.