• Posted on April 4, 2024
  • by MI2 Research

“the actual path… will depend on how the economy actually evolves”

If the Fed can “only know” the neutral rate (and hence whether policy is restrictive) “by its works”… there may be reason to think that the music is still playing. Whether it’s the price surges of misspelled celebrity memecoins ICOs such as “Joram Poowel” (a coin based on Elizabeth Warren was the “Top gainer” at the time of writing), the return of the Manufacturing PMI to positive territory “for the first time in 17 months”, or the simple good old fashioned break out of gold to all-time highs (sympathy to all mining stock bros, miners have failed to attract the same level of enthusiasm), the “restrictive” territory being bandied about seems less of a place of economic pain, and more one of milk and honey. The bond market certainly appears a little suspicious of the Fed’s tolerance of the extended party: yields “rose to their highest levels in two weeks” in response to Headline PCE and the ISM. As an aside, ISM Services was less exuberant than expected, with the Prices Paid metric falling to “its lowest reading since March 2020”, though this was followed with a caveat: “however, respondents indicated that even with some prices stabilizing, inflation is still a concern”.

The dispersion in the data has been accompanied by some dispersion in the Fed commentary. Powell stuck with the idea that “if the economy evolves as we expect, most FOMC participants see it as likely to be appropriate to begin lowering the policy rate at some point this year” amid the “bumpy” data. Bostic was the hawkish voice, saying, “he sees just one rate cut in the fourth quarter”, while a number of other speakers “still see three rate cuts in 2024”. Among the three-cut doves was Mester, who, while sticking to a dovish tone, casually mentioned that in addition to expecting somewhat higher inflation this year also raised her “estimate of the longer-run federal funds rate to 3 percent compared with 2.5 percent…. To reflect the continued resilience in the economy despite high nominal interest rates and higher model-based estimates of the equilibrium interest rate, r-star.”

Which takes us back to the whole “Ye shall know them by their works” thing. The commodity sector’s “moon-shot” higher might be considered one of the clearer pieces of evidence that “financial conditions just aren’t that tight”. Not all commodities are as hot as cocoa. As ever with commodities, one could argue that it is the sum of a series of diverse market parts rather than one well-correlated whole. The energy complex has certainly been boosted by specific tensions in the Mid East. That said, the rallies have been increasingly broad-based, and the gold break-out to new highs (we did say) undercuts the idiosyncratic argument. If any commodity is closely tied to financial conditions, it is gold.