Look for Bonds to Rebound as Fed's Fear of Tariffs Turns Excessive
While the Fed fought the cut, and seems focused on tariff inflation, markets didn’t do much.
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Is it just me, or does the press conference seem to drag on longer and longer each time?
The Fed does not want to cut rates.
They have a fear of tariffs, that at this stage, might be a bit aggressive. They seem very content to “wait” to see if it shows up, regardless of any current inflation data. That's somewhat rational, but it's starting to seem excessive.
Their comfort with the job situation seems “surprising,” given the note we sent on Tuesday morning.
They also do not seem to fear another “summer slowdown” like we had last year. We continue to see evidence that the seasonal adjustments are “off,” making the winter seem stronger than it is, and making the summer weaker than it might actually be. These impacts are diminishing every year, but should be enough there to pull both jobs and CPI lower, like last summer (even with some tariff pressure).
The media seemed on board with a more dovish outlook. This seemed a little surprising, but was interesting (or maybe I’m just hearing what I think I should hear in their questions and tone, since it fits our narrative and outlook).
While the Fed fought the cut, and seems focused on tariff inflation, markets didn’t do much and, if we are correct on the trajectory of the data, a lot could change in the coming weeks.
We are only two weeks away from the payroll data, with NFP coming on a Thursday with July 4 being a holiday.
We almost always advocate that the “real” move gets priced in overnight and the day after the FOMC, as everyone has had time to digest it. But with Thursday being a holiday and all eyes turned on the Middle East as the risk of escalation remains high, it could make for an interesting Juneteenth holiday.
Look for bonds to rebound, with or without an attack.
Equities are more at risk from an escalation, but we do like adding to anything where national production equals national security, since despite everything going on, that seems to be gaining traction.
Good luck and have a great holiday!
