Inflation and Recession Watch, Fed Rate Cuts, Market Review and Outlook


By Victor Sperandeo with the Curmudgeon

Inflation Watch:

The BEA reported Friday that the Fed’s favorite inflation gauge- the PCE index - increased 0.3% in April (2.7% YoY) while the core PCI (see chart below) was up 0.2% (2.8% YoY). That’s not too far above the Fed’s 2% annual inflation target.  The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Fed has used PCE inflation reading as its main measure of price pressures in the U.S. economy since 2000. Former St. Louis Fed President James Bullard identified several reasons for that in this post.

Here’s a 2-year chart of the core PCI which you can clearly see is in a downtrend:

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Recession in 2024?

The majority of economic reports this week confirmed that the U.S. economy is continuing to slow. The 2nd estimate of Q1 GDP was revised down by the Commerce Department from 1.6% to 1.3%. Pending home sales dropped by nearly 8% month-over-month, the single biggest monthly decline since February 2021. Personal spending rose less than expected in April. There have been many consecutive months of an inverted yield curve, declining Leading Economic Indicators (LEIs) and very low consumer confidence, all of which indicate a pending recession.

As we’ve stated many times in 2024, there won’t be a recession in this election year. Ignore commentary by some popular economic forecasters (e.g., David Rosenberg) about an imminent recession which is worthless.

The Conference Board does not forecast a recession in the US in 2024, as per a May 16th report. However, they do expect a slowdown in consumer spending growth and GDP growth to under 1% between Q2 and Q3 of 2024.

U.S. government officials won’t talk about a recession until perhaps next year, even if the unemployment rate rises as we expect.

Fed Monetary Policy:

Victor expects a completely different tone from Fed officials later this month, as discussed in last week’s column:  Update on Reverse Repos and a Possible U-turn in Fed Policy.  Gone will be the hawkish talk by FOMC members of “higher for longer” and “sticky” inflation numbers.  Victor forecasts that the unemployment rate will rise, and inflation will not accelerate this year.

Despite Minneapolis Fed president Neel Kashkari saying on Tuesday that the Fed is still not ruling out an interest rate hike, Victor firmly believes that rate increases are in fact “OFF the table.”  He thinks the current setup is for two Fed rate cuts before the November elections. 

No dear reader, the Fed is NOT independent of the U.S. federal government.  The Fed is a quasi-governmental agency with a board of governors selected by the President and approved by Congress.

àVictor believes that the worse President Biden’s poll numbers get, the larger the Fed rate cuts will be.

Victor’s rate cut scenario is at odds with this week’s Barron’s cover story, The Fed Won’t Cut Rates This Year.

“The Federal Reserve isn’t likely to lower interest rates in 2024.  Elevated inflation, a resilient economy, and a still-strong, if softening labor market argue against the need for easing monetary policy, especially as these conditions are expected to persist through year end.”

The CME Fed Watch Tool currently assigns a 47% probability of a 25-bps rate cut vs a 45.2% probability of no rate cut (Fed Funds remain at 5.25 to 5.50%) at the conclusion of the Sept FOMC meeting – the last one before the November 5th U.S. elections.

Victor says the Fed’s Balance Sheet will stay above $7 trillion (despite ongoing QT which is intended to reduce it), while Reverse Repo’s will be virtually at zero.  That will provide substantially liquidity for financial markets and the U.S. economy.

2024 YTD Market Returns:

A recap of key assets as of 5/31/24 YTD returns (without including dividends or interest payments) are the following:

·        Silver +26.4% (July Futures)

·        Gold +13.23% (August Futures)

·        S&P +10.64%

·        NDX 100 +10.17%

·        Crude Oil +7.45% (July Futures)

·        Dow Jones Utilities +7.34%

·        Dollar index +3.56% (June Futures)

·        Russell 2000 +2.12%

·        Dow Jones Industrials +2.04%

·        Dow Jones Transports -4.15%

·        TLT (20+ year U.S. bond ETF) -8.58%

Victor’s Market Comments:

As reported in these columns, Victor has been bullish on U.S. stocks and gold since June 2023.  He believes the rally in equities and the yellow metal will continue till September 30th or a bit earlier. Most traders and investors will then go to the sidelines or hedge their long positions. That’s because of the uncertain outcome November elections with many unknowns.

Victor is currently neutral on U.S. debt longer than 5 years but will be long by the end of this month for a “trade.”

Critical Issues for the November U.S. Elections:

Voters will be examining candidate positions on issues like the Economy & Inflation, Healthcare, Abortion Rights, Climate Change & Environmental Policies, Gun Control, Immigration Policies & Border Security, Education, Voting Rights & Election Integrity, Foreign Policy & National Security (especially U.S. support for Israel in the Gaza war), Social Justice & Equality, Big Tech & Privacy, Infrastructure, among many others.

There are too many angles on the outcome of the upcoming U.S. elections to list or speculate on, but here are a few important issues related to Donald Trump as the presumed GOP Presidential candidate:

·        The N.Y. court will reveal Trump’s sentence for 34 counts of felony just days on July 11th.

·        Will the GOP nominate Trump (now a convicted felon) at their July 15-18th convention in Milwaukee, WI?

·        Will Trump be in jail or under house arrest in November? 

·        Trump could win the U.S. Presidential election from jail (he’s still ahead in the polls), but it might be overturned if the Democrats have a majority in the House of Representatives.

·        If a Trump presidential election is overturned, will the Republican Vice President become the President? In that case, the GOP pick of a VP candidate is incredibly important.  Or will the second-place Presidential candidate (presumably Joe Biden) take office in January 2025?

·        Section 3 of the 14th Amendment of the U.S. Constitution disqualifies those who have already held a public office from holding "any office" if they participate in an "insurrection or rebellion" against the United States. But since this mechanism has never been used against a president, there are still questions to resolve.

Power and Politics:

Today, U.S. politics is about obtaining and keeping power.  How you get it or use it is irrelevant. Deficit spending is used to buy power, supported by a “printing press” (aka Fed keystroke entries) that manufactures fiat money for which there is no limit.

If you look at any aspect of U.S. government you will find that no one cares about protocol, or laws, and rules.   In Sunday’s NY Times, liberal columnist Paul Krugman wrote:

“Institutions ultimately consist of people, and at this point many Republicans, up to and including Supreme Court justices, are showing about as much strength in supporting democracy and the rule of law (i.e., the U.S. Constitution) as a wet paper towel.”                                                                                                                                                     

Therefore, higher interest rates and inflation are the new (long term) normal. Stocks and gold are the best long-term hedges with Residential Real Estate and Bitcoin next. Neither Victor nor the Curmudgeon are advocates of the latter two as investments today. Residential Real Estate has risen substantially, despite high mortgage rates, while Bitcoin can be $100,000 or $500 on a change in the laws governing it.

Victor’s Conclusions:

I will be betting on positive “risk-on” markets and a strong economy in 3Q-2024. 1st quarter GDP was revised downward to +1.3% by the BEA, while 2nd quarter was estimated at +2.7% by the Atlanta Fed GDP Now, as of Friday (down from +3.4% on May 24th).

Lyrics to Ponder:

from Creedence Clearwater Revival’s song Bad Moon Rising:

“I see a bad moon rising. I see trouble on the way. I see earthquakes and lightning. I see bad times today. Don't go around tonight; it’s bound to take your life. There’s a bad moon on the rise.

I hear hurricanes a-blowing.  I know the end is coming soon. I fear rivers overflowing. I hear the voice of rage and ruin.”

This all amounts to extreme chaos ahead! However, for now it’s all good.

End Quote:

The goal of those in power is best expressed by an 1844 German Philosopher: “The purpose of criminal law is to punish the enemies of those in power.” 

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    Friedrich Nietzsche

Be well, success, good luck and till next time……………………………….

The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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