The recent breakout in oil/gas prices has now inspired a breakout in the 10Y.
It’s an important headwind for the Fed, which had relied on falling energy prices to keep inflation and interest rates at an acceptable level.
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We might be done with inflation, but judging by the oil/gas markets, it’s not done with us. Both CL and RB have now broken out of channels dating back to early 2022 – with CL pushing above its 200-day moving average this morning.
The Fed has its work cut out for it this week – and for the next several months.
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ES nailed our initial downside target yesterday and is currently off about 10 points this morning following weaker than expected nonfarm payrolls.
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The Fed will release its June minutes this afternoon, potentially shedding some light on why they paused their rate hikes. But, thanks to plenty of Fedspeak – including Jay Powell’s testimony – we already know that they are as confused and conflicted as everyone else. As always, they are more concerned about markets than anything else.
Futures are off about 0.50% as we approach the open.
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May PCE and core PCE were in line with expectations at 0.1% and 0.3% MoM respectively. YoY core came in at 4.6%, slightly below expectations of 4.7%. The most notable surprise was MoM personal spending which tumbled from 0.6% to 0.1%.
Futures, already up moderately following VIX’s overnight drop, ramped even higher.
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May durable goods came in much higher than expected: +1.7% versus -1.0 consensus. Goods ex transportation also beat, at 0.6% versus 0.0% consensus. Suffice it to say these are not the data that support a continued pause, let alone a reversal.
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According to futures and talking heads, there’s a 94% chance that the Fed will pause its rate hikes this afternoon – though perhaps with a hawkish tilt. By our reckoning, equities have piled on at least 6% in the past few weeks in anticipation of this outcome.
Is it justified?
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Initial claims spiked to levels not seen since October 2021, another indication of a slowing economy. Applications rose by 28,000 to 261,000, well above the consensus of 237K.
So far, futures have ignored the print.
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Non-farm payrolls exploded higher in May, tallying 339K versus 190K consensus. On the other hand, unemployment rose from 3.4% to 3.7%.
Futures initially slumped, as blowout job gains argue for further Fed tightening. But, VIX was hammered to lows of 15.12, a level not seen since Nov 2021, and the overnight ramp was salvaged, for now.
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If you’re a retailer, you might be thrilled with the personal income and personal spending beat last month (0.4% vs 0.3% exp and 0.8% versus 0.4% expected.) If you’re a manufacturer, you might be pleased with durable goods coming in at a +1.1% versus the -1.3% expected.
But, if you’re a member of the FOMC, you have to be chagrined that those hot numbers, combined with hotter core and headline PCE and tightening credit conditions, will force tighter monetary conditions. 
The algos agreed for a few minutes, but were quickly reminded of the requirement to take their cues from VIX.
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