And Fed feints toward a September rate cut because the economy is slowing.
Traders are now betting 100% odds that Powell & Co. will lower interest rates in September, and Powell’s dovish tones, as talked about in my last editorial, certainly sound like he is preparing to move that way, though I have argued he won’t. The oddity here is that he is—after saying the Fed needs to really be convinced that inflation is headed back down—averring to the possibility of a cut because the Fed has now seen one month where inflation did not budge at all followed by another where we actually had a minute dip into deflation.
For some reason, Powell averaged that out and said we have just had three months where inflation started going down again, which he admitted was after three months of the Fed getting nowhere. Although, it was actually worse than the Fed getting nowhere. We had three months at the start of the year of the Fed losing traction and inflation slightly rising.
So, now he sounds like he is leaning toward a rate cut because he says labor isn’t tight anymore, never mind that continuing unemployment slumped back downward as soon as he said that, and new applications dropped as well.
Some of the good news there, according to Fed economists, is that the huge number of illegal migrants Biden is letting into the country really are making a difference by helping to add a lot more available workers ready to work dirt-cheap to assure those jobs remain jobs Americans don’t want. In other words, the peasant class is growing.
(Bloomberg) — A slowing in the US labor market that started last year is set to continue amid an ongoing wave of undocumented immigration, according to a Federal Reserve Bank of San Francisco study.
“My estimates suggest that around one-fifth of the easing of labor market tightness in 2023 can be attributed to the spike in immigration,” San Francisco Fed economist Evgeniya Duzhak said in a paper published Monday on the reserve bank’s website.
Markets pumped
So, naturally, the stock market, which has slavered for a rate cut for two years and constantly believed one is right around the corner, fell all over itself in the trading pits today, sending the Dow upward over 700 points and giving a 3% rocket ride to the Russell 2000 small-cap index.
These are tough times to watch for one like me who believes the market leans out over nothing, so he doesn’t trust investing in a market that is rising when earnings are falling and inflation has hunkered in and Powell is constantly vacillating about rate cuts, but ultimately still holding out on making them. It’s hard to watch the profits not come into the ol 401Ks, but I also feel any second after I did switch those funds to stocks, the whole house of cards could tumble. That would be just the luck.
For example, I wrote yesterday and in my Deeper Dive about how inflation is being pressured upward by rising fuel costs, still soaring housing costs that are just about to pass through to CPI, given the long lag that exists in that measure, and most of all by soaring PPI because producers almost always find a way to pass through their own soaring expenses. The old mantra is that the consumer always pays.
So, if those forces gather enough strength to start pushing inflation back up again after this last minute dip, then Powell may have to step back from his rate cut once again, and markets may not like that.
That is what is likely to happen the day after I move 401K funds back to stocks, and so I don’t, but the day he makes his move keeps stalling, but the market keeps just moving its bet forward. Somedays it’s hard to be a bear, but in a year of chaos, it’s hard not to be.
The Year of Chaos
Consider the chaos that we are seeing. The Republican candidate for president just had a slice shot through his ear that would have taken out part of his head, had he not turned his neck and tilted it slightly two seconds before impact. The nation really would have gone into outrage and endless conspiracy theories (maybe one of them actually true, maybe not), had the killer succeeded in ending the vote for hundreds of millions of voters by stealing their candidate away. It almost happened.
Major wars continue to rage around the earth, and hotter now than at the start of the year.
Goldman Sachs just announced it’s about to raise its supply-line crisis meter back up to “congested” as the closure of two of the world’s largest canals continues to take an increasingly heavy roll on shipping:
As noted last week, while the recent uptick bears monitoring as it continues to reflect a combination of steadily rising container ship backlogs and re-surging ocean container shipping rates (China-to-US ocean container rate was up over 500% YoY at the beginning of July)
And so it goes. Powell has ultimately held out on rate cuts as I was certain he would, but the market keeps cutting him grace and rising anyway. Now, I’m not as sure that Powell will hold out. It depends on whether inflation continue to give him the tiny amount he seems satisfied with probably because he is fearing that nascent recession that is trying to show through his broken labor gauges and mis-reporting real GDP.
In a stealth recession that few can see and with markets that are content with denial, the wait for reality to break through can feel long and hard to endure. It’s not that you want to see things break. It is that you are certain they are breaking, and you wish we could get that part behind us. However, I don’t think it is the kind of thing that will just step behind us when it’s done. It’s a long, slow unwind, and waiting in the doldrums as you see it continue to come isn’t much fun.