The employment report came in in line at 227,000 vs. expectations of 220,000, but importantly the household survey was very weak with a decline of 355,000 which caused the unemployment rate to rise to 4.2%. The weak household survey and rising unemployment report virtually assures a Fed rate cut this month as employment is the second mandate for the Fed and the current policy rate is highly restrictive. We expect, however, a hawkish cut as the SEP is likely to show only 2-3 cuts next year and the Fed chair will likely say further cuts are data dependent.
We continue to be bullish on both bonds and declining inflation. We forecast the 10-year treasury will decline to 3.5-4.0% in 2025. The best gauge of the restrictiveness of the Fed Funds rate is the change in the money supply required to achieve that level. The Fed had to shrink the money supply by 3.5% over the last year which is very restrictive as the money supply usually grows in line with nominal GDP which is normally in the positive 4-6% range. We expect that inflation will decelerate significantly to as low as 2.3% on PCE core Y/Y in the 1st quarter of 2025 as we are rolling off high inflation in the 1st Quarter of 2024. In addition, real time inflation as measured by our PCE-R index (www.infracapfunds.com) is only running at .6% Y/Y, which indicates that reported PCE core, which is distorted by the highly lagged shelter component, will eventually decline to the PCE-R level which is well below the Fed’s arbitrary 2% target.
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