The guest commentary below was written by written by Mitchel Krause. This piece does not necessarily reflect the opinions of Hedgeye.
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“The Fed is seeing the ‘possibility’ of three rate cuts in the back half of the year (assuming inflation reaches their 2% target). Yet markets are telling the Fed they’re cutting rates seven to nine times, with the first cut coming as early as March! How’s that for a disconnect?” |
We’ve been throwing ice on the “Fed’s going to cut rates” camp for quite some time, as you can see in the excerpt above.
The odds of a March rate cut at that time were 97%.
Today, Jerome Powell officially confirmed what had become an increasingly obvious outcome: no March cuts.
As Tier 1 Alpha noted this morning, Fed Fund Futures anticipated seven rate cuts in 2024 at one point. Now, there’s just a 32% chance we see four cuts.
The precipitous pace in which rate cut expectations collapsed following January’s CPI print is only remarkable to those who need the Fed to cut rates.
For those with a decent handle on CPI construction, or who follow Hedgeye – whose inflation model has pretty much nailed each major turn – the only surprise is how others were so “wrong.”
- February’s most recent Headline CPI number decelerated slightly, but remains “hotter” than consensus anticipated coming in at +3.1% vs. +3.4% in December … expectations were for +2.9% and +3.0%, respectively.
- While Core CPI remained, flat M/M coming in at +3.9% vs. Wall Street expectations of a -0.2% deceleration to +3.7%.
- The Fed’s frequently discussed Core Services ex-housing number accelerated to +4.3% Y/Y, arguably creating a bit of a problem.
While we may see some softening into next month’s print (per the chart below from Hedgeye’s Josh Steiner) given the easing base effects into the back half of the year, and rising pressures in things like shipping and other commodities, it becomes extremely difficult mathematically to get anywhere close to the Fed’s 2% inflation target.
Thus, we remain in the “higher for longer” rates camp … UNLESS something “markets-related” breaks, bringing us much larger issues.
Just this week, the Case Shiller Home Index accelerated from 5.4% Y/Y to 6.1% Y/Y. We understand there is nuance to how it all flows through into the headline data on a lead/lag basis in addition to comparable base affects, but at the same time, Housing and Energy add up to north of 40% of Headline CPI, which poses a bit of a problem for both the Fed as well as those in the “rate cut” camp.
This conundrum leaves Hedgeye Macro analyst Christian Drake begging the question: Is inflation risk controlled or recoiling?
Here’s what we said about Powell in our 3Q 2023 note, published on October 31.
“When someone like Federal Reserve Chairman Jay Powell has the audacity to suggest in front of the world that the massive run up in Treasury yields isn’t large in part because of inflation expectations or credit risk based on the massive borrowing as he did last month … someone with more clout than us (say the financial media) who is allowed to ask him questions, should be calling BS.”
The data continues to scream these guys are lying and they most likely know that they’re full of sh*t trying to central plan and manipulate markets. The below chart was recently published by Hedgeye CEO Keith McCullough, which shows us the directionality of inflation expectations vs. the precipitous collapse in rate cut expectations (inverted).
Inflation expectations have been rising since we wrote the 3Q note, mentioned above back in October.
Again, Powell was either lying or maybe he should consider using models that have been consistently accurate, like Hedgeye’s, instead of listening to those who give him “different answers” (his words) that have consistently been wrong (i.e., pretty much all of Wall Street).
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Click here to read Mitchel's note in its entirety on the Other Side Asset Management website. |
ABOUT MITCHEL
This is a Hedgeye guest contributor piece written by Mitchel Krause and reposted from his most recent monthly report. Krause is an industry veteran of nearly 28 years, where he’s seen the industry from the inside out. Nearly a decade of private wealth service, followed by just under seven years with an institutional group focused on banks and thrift stocks. He’s been managing discretionary money since 2015. His career began at, Ryan, Beck & Company in 1996, a boutique firm specializing in financials and municipal bonds, which was later bought by Stifel Financial Corp in 2007. He opened the doors to Other Side Asset Management in 2018 in an effort to tell the “other side” of the investing story to those willing to listen. He continues to manage discretionary assets while publishing these notes monthly. His archives are open to the public. Currently, he both works and resides in Raleigh, North Carolina.
Twitter handle: @OtherSide_AM
LinkedIn: Mitchel Krause
