Leland Abrams of Wynkoop, LLC and a portfolio manager of a fixed income fund at Catalyst, provides his analysis and snapshot of the current economy given the recent higher-than-expected initial jobless claims report:
Weekly jobless claims came in quite a bit higher than expectations (264k vs. 245k estimate) and PPI on all accounts came in lower than expectations. Bonds are continuing their rally across the curve approximately 7 bps so far (as of 8:50 a.m.).
The recent uptick in jobless claims usually portends an even higher surge to come. We keep a close eye on this data and see if/when it may translate to a negative monthly non-farm payroll number, which likely would force the Fed’s hand to a pivot.
The Fed is clearly winning its war on inflation by every metric, particularly when examining rolling 3-month and 6-month data. The headline YoY data is irrelevant at this point and we wonder why so many pundits keep referring to that number.
Producer prices often lead consumer prices, so we see month-over-month headline ex-food, energy and trade up only 0.2% month-over-month with year-over-year falling 14 months now to 2.3% headline number. For example, egg prices at the wholesale level have crashed more than 80% since January of this year! Retail prices are down just 32% from the January peak, but we expect them to fall further.
Fed Funds Futures contracts are now pricing in almost 50% chance of a cut in July. We do not expect this to happen unless there is more stress in the banking system, although this morning, bank fears are resurfacing with PACW stock getting crushed as they reported deposit outflows last week.
We maintain that the Fed will pause in June and likely cut at least once by the end of the year as inflation has mostly been defeated while the real economy is slowing quickly.