With regard to the Fed’s action on overnight rates, our plan was to watch how consumers reacted to the July rate hike as summer progressed. We expected that high gas prices along with broad based inflation would slow consumer demand enough that the Fed would, at the very least, moderate further rate hikes, possibly even pause for a meeting or two. Instead, the Fed, via the Wall Street Journal, communicated this week that another 75-basis point hike is likely when it meets on September 21st. The various members of the Open Market Committee have all aligned as hawkish and have left open the possibility of another 75-basis point at the November meeting. That would push the overnight corridor to 3.75% to 4.00% by November 2nd. In previous communications the Fed suggested that the target rate was 3.5%, so 4% would be somewhat restrictive.

The economic data this week continued to portray a deceleration in the economy, but the most anticipated highlight was Chairman Powel’s comments at the Jackson Hole Symposium. We’ve always had a distaste for the symposium. We view it as a Davos-like affair, attended by an elite group that considers themselves above their constituents. To us, that sends the wrong message about the mission of the Central Bank. Especially given the mess the Federal Reserve has created with excessively easy monetary policy.

We’d describe the speech as being saccharine-like in the in description of the current inflationary impulse. The speech didn’t follow the post-FOMC press conference structure in which a question & answer period followed. Because of that, there were whispers that Powell would offer a mea culpa to the mess that he oversaw, but that was not to be. Instead, he painted a “Pollyanna” picture of the current state of affairs. Of that, there were 3 “jaw dropping” quotes that we need to bring to your attention. They are, in chronological order of their mention in the speech, “The absence so far of broad-based inflation pressures,” “longer-term inflation expectations have moved much less than actual inflation…suggesting that households, businesses, and market participants also believe that current high inflation readings are likely to prove transitory,” and finally, “Today we see little evidence of wage increases that might threaten excessive inflation.”

The doldrums are finally upon us! Last Friday’s strong employment report assured worried investors that two straight quarters of economic contraction wouldn’t result in a “hard landing” and this week’s CPI offered hope that the inflation impulse has passed. With that, investors can relaxed and enjoy the last few weeks of summer.

The 0.00% monthly change in inflation was a welcome reprieve from what we’ve witnessed for nearly two years now. But we’re hesitant to declare victory in the Fed’s war on inflation. There’s still an enormous amount of excess liquidity in the system and the Fed’s quantitative tightening has been slow to drain the excess. The Fed’s reverse repo operation, the de facto add-on to the Treasury Bill market, totaled $2.199 trillion at Thursday’s operation, just a few billion below the peak reached earlier this year. And the T-Bill market itself continues to flash warning signs, with yield levels well below the overnight rate and bid/ask spreads of as much as 11 basis points, in some cases. Raising interest rates will slow some interest sensitive sectors, such as home and automobile sales, but the Fed needs to drain liquidity and they’ve barely scratched the surface.

We didn’t see that coming! On the back of the mixed June employment report, the July tally blew past all expectations. Coming in at 528,000 new jobs added, the report more than doubled the consensus expectation of 250,000 and exceeded the highest expectation of 325,000. Moreover, the details were equally eye popping, with average hourly earnings up 5.2%, year-over-year, and the unemployment rate ticking down to 3.5%, equaling the low touched on September 2019. The bond market didn’t like any of it. The yield curve that placidly drifted below 3% last week, convulsed back above that measure today. For the week, the 2-year note is 30 basis points higher, and the 2-year/30-year interest rate spread went negative for the second time this year, closing the week out decidedly inverted at -17 basis points.

From an economic perspective, this has been a terrible week; especially so for the housing sector. The NAHB housing index, housing starts, and existing home sales all plunged, as did mortgage applications. The earnings release from D.R. Horton, the home builder, beat expectations, but the company said that sales are expected to slow, and cancelations rise as buyers are experiencing “payment shock.” After falling a quarter point last week, the average 30-year mortgage rate ticked back up to 5.625%, giving pause to perspective buyers.