Notes on the Week Ahead

This discussion delves into the growing concerns around federal deficits and their impact on U.S. Treasury yields. It connects economic overindulgence to potential market reactions during election season. Upcoming budget deficit figures are analyzed, highlighting their implications for the economy and political landscape. The risks of tax cuts and spending in a full employment context are examined, shedding light on inflation and government debt. Key insights on tariffs, Federal Reserve responses, and the importance of portfolio diversification also take center stage.

The Commerce Department's upcoming international trade data will reveal the ongoing U.S. trade deficit and its implications on the dollar's value. A high dollar makes U.S. goods expensive abroad but encourages foreign investment back into American stocks. The podcast further delves into monetary policies of major central banks and their differing approaches to inflation and interest rates. It also examines the influence of countries like Canada, Mexico, and China on the dollar's future, touching on strategies for managing currency exposure.

Delve into the remarkable rise of American household wealth, now at $157.2 trillion, fueled by thriving stock markets and rising home equity. Explore how this wealth surge impacts consumer behavior, confidence in retirement, and overall economic stability. Uncover the contrasting experiences of homeowners versus renters amidst these financial shifts. The discussion urges a reevaluation of investment strategies in light of these dynamics, particularly given the looming government debt and the tech sector's financial concentration.

On Thursday, the Bureau of Economic Analysis, commonly known as the BEA, will release revised data on the national income and product accounts going back to the start of 2019. This is an annual process, usually only mildly interesting to economists and ignored by everyone else. However, this year it’s more important since it could help clarify the trajectory of the economy at a critical time for both political and monetary policy choices. It’s also important because it could help resolve at least some of a yawning discrepancy between the estimates of output produced and income received in the American economy.

Cutting short-term interest rates from a peak is a little like hauling a piano down a flight of stairs. The operation is best done slowly and with care. The Federal Reserve will probably show some awareness of this in their actions and communications this week. That being said, one of the greatest identifiable dangers to the economy and markets today is that the Fed, by acting too aggressively or talking too negatively, increases the risk of the economy falling into recession.

On Wednesday of next week, the Federal Reserve will almost certainly embark on its long-anticipated easing cycle. However, whether the first cut in the federal funds rate is 25 or 50 basis points is still very much in doubt. This is a crucial question for the economy and financial markets since a 50 basis point cut might well do more harm than good if businesses, consumers and investors saw it as a signal that the Fed is worried about recession. The most important issue for the Fed as they debate this decision is the strength of the U.S. labor market. It is quite clear that job growth has slowed over the past year as the post-covid rebound has faded. But is the labor market stalling, or just slowing to a more gradual pace?  

Explore the slow growth of the U.S. working age population and its implications for job markets. Delve into the dynamics of inflation and how it sustains federal deficits while keeping the dollar strong globally. Discover the struggles of currencies like the yuan and euro against the resilient U.S. dollar, along with insights into gold investment. Finally, compare the volatility of Bitcoin with the stability of gold, stressing the importance of diversification in financial strategies as 2024 approaches.

Every August, for more than 40 years now, the Federal Reserve has held a retreat in Jackson Hole, Wyoming. It has become an important venue for Fed communications and investors this week will be focused on Jerome Powell’s speech, to be delivered at 10:00AM eastern time (or 8:00AM Wyoming time) on Friday. The topic of this year’s conference is “Reassessing the Effectiveness and Transmission of Monetary Policy”, a subject that is well worth careful reconsideration. This, no doubt, will be the focus of Chairman Powell’s remarks.

The last two weeks have provided a vivid reminder of how sensitive markets can be to small changes in the macro-economic outlook. With a nudge down in oil prices, the Fed’s 2% inflation goal suddenly seems achievable within a matter of months. With a slight weakening in the labor market, the unemployment rate has shifted to a trajectory that has foreshadowed recession in the past. In response, the 10-year Treasury yield fell from 4.29% on July 24th, to 3.78% on August 5th while the VIX index, a measure of stock market volatility, more than doubled over the same period, with stock prices falling sharply by the close of business last Monday.

We live at a time when extreme voices get the most attention and so it is tempting, following a string of weak economic numbers, to yell the word “recession”. However, a balanced assessment of demand and supply suggests that we are, thus far, merely transitioning to slower growth. A slower growth path is a more vulnerable one, particularly because excessive monetary ease is more likely to weaken than strengthen the economy in the short run. Nevertheless, barring some outside shock, the baseline scenario should be a slowdown scenario, even as volatile markets remind investors of the importance of diversifying and paying attention to valuations.   The mood on the economy has changed quite quickly. The economic headline from just 12 days ago was that real GDP growth had, yet again, surprised to the upside, coming in at a robust 2.8% for second quarter, well above the 2.1% consensus expectation. Since then, however, we have seen higher-than-expected weekly unemployment claims and weak readings on construction, durable goods orders, home sales and manufacturing activity. This was topped off, on Friday, by a softer-than-expected employment report, both in terms of payroll job gains and the unemployment rate.