Control Panel: Foundations of soft landing improving?

The iron law of supply and demand says that prices will rise if demand increases faster than supply. This is true of goods and services as well as assets like stocks, bonds and real estate.

Improvements in productivity, supply chains and other macroeconomic foundations of supply can help the economy achieve a soft landing (avoid a recession even with low unemployment). Rising productivity enables higher wage growth without inflation.

The Hidden Hero Fueling Soft-Landing Hopes: A Boost in Supply

Rising labor force, productivity lowered inflation despite still-strong growth, taking pressure off Fed to raise rates

By Nick Timiraos, The Wall Street Journal, Nov. 19, 2023

Federal Reserve Chair Jerome Powell signaled an important shift this month when he said the central bank didn’t necessarily have to worry about stronger growth feeding through to higher prices.

The reason: The U.S. economy’s speed limit, known as potential growth, appears to have temporarily moved up thanks to easing bottlenecks and a boost in the number of people available to work and, possibly, in productivity, or the output that each worker produces…

Fed Chair Jerome Powell’s view is that over the long run, the U.S. economy should grow 2%. But an uptick in both immigration and workforce participation rates, together with easing supply bottlenecks, has raised the short-term speed limit for growth… [end quote]

Since the beginning of November 2023, the stock and bond markets have turned in a bullish direction. We have seen at least 2 major bullish head-fakes since the Federal Reserve began raising the fed funds rate to combat inflation in 2022. In both cases, the markets erroneously predicted that the Fed would cut the fed funds rate, contrary to the Fed’s own announcements.

Is the current bullish move another head fake or the start of a true bullish trend that will continue? Will inflation continue to ease? Will the economy continue to grow without inflation resurging?

Let’s look at the fundamentals.

The Labor Force Participation Rate - 25-54 Yrs. is higher than pre-Covid 2019 and still increasing. It’s near the all-time high reached in 1998. Despite the high participation rate, the labor market is still very tight with only 0.63 unemployed worker for every job opening. This tends to be inflationary since employers need to offer higher wages to attract workers, especially since there aren’t many employables on the sidelines.

Disposable income, which drives consumer demand, is stagnant. Real disposable income (inflation adjusted) has dropped.

Nonfarm Business Sector: Labor Productivity (Output per Hour) for All Workers is growing. This can help support non-inflationary economic growth.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2023 was 2.0 percent on November 17. This is exactly what the Fed is hoping for. In October, the Consumer Price Index for All Urban Consumers was unchanged, seasonally adjusted, and rose 3.2 percent over the last 12 months, not seasonally adjusted.

The options market predict that the Fed will not cut the fed funds rate in December 2023 or January 2024. This market has finally stopped trying to front-run the Fed. The probability of a Fed cut in the fed funds rate by May 2024 is 60%. Of course, this is a snapshot. The markets have been wrong before.

The asset markets have already begun to anticipate the cut in the fed funds rate. The Control Panel shows continuing bullishness across many indicators in the stock market. The Cyclically Adjusted P/E Ratio (CAPE Ratio) is in bubble territory, over 30 and rising.

Bonds are also bullish. The yields are falling and prices rising. The Treasury yield curve has dropped dramatically, especially at longer durations.

The Fear & Greed Index is in Greed. The trade is risk-on as stocks and junk bond prices are rising faster than Treasuries even though Treasury prices are also rising. USD is falling.

The fundamental improvements that can underwrite a non-inflationary expanding economy are small and not yet established as firm trends. Despite this, it’s better than a sharp stick in the eye. The markets are happy.

The METAR for next week is sunny. If the PCE index inflation comes in low next week I would predict a year-end rally (barring black swans).



Bonds. Yes, it’s true. Let’s look at treasury bonds (bills/notes/bonds) for example. The Fed can, and likely will, move the Federal Funds rate around at will. The “market” is now saying that they will likely reduce to about 4.25% by the end of next year. But supply and demand also affects popular interest rates (the ones people/companies use as a typical base rate for borrowing). What if (and it’s not an “if”, it’s definite) the treasury needs to issue $1.5T in new debt, and “the market” can only absorb $1T of that new debt at rates near 4.25%? What happens in that case? Either the new debt has to pay more than that, or the fed has to buy (“QE”) the $500B remaining debt at the lower rate.

PCE and CPI inflation are highly correlated (Inflation: data says going down, down, down - #15 by mostlylong), so given we have CPI data for Oct that came in mild (similarly mild for PPI inflation), there is a good chance that PCE inflation comes in mild for Oct.

Right as usual, @MarkR. With both the Fed and China actively shedding Treasuries at this time, yields will have to climb as issuance increases. But Janet Yellen recently said that Treasury would shift more to the shorter-duration debt. That will take pressure off the longer durations.


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They ALREADY do that! And have been doing it for years and years. That’s why they have to refinance constantly, because shorter-term debt is maturing constantly. It’s also why, when rates go up, the average rate across all treasuries goes up pretty quickly.

Last week issuance:
4-week $95B
41-day 75B
8-wk 85B
13-wk 75B
17-wk 56B
26-wk 68B
2-yr FRN 26B
10-yr TIPS 15B
20-yr 16B

The tools or reports such as PCE are longer-term policy tools.

Citing them here the importance of their comparative numbers falls out. We are left with a few traders just doing whatever. Some call it buy the rumor sell the news but that can get flipped however by whatever for a day or two.

Just luck if you are right until we factor in the FED is not raising rates at least into the new year. This last bit is the weekly determinant.