While the FOMC did not bring any surprises for markets, pressures on monetary policy persist. With economic activity stable, labor markets tight, and inflation materially removed from the Fed’s objectives— our monetary policy gauge continues to show pressure on policymakers to hike policy rates. Yields remain under pressure to drift higher.
We scan through the data driving these views. We begin with nominal GDP, which remains stable and elevated:
We show our CPI Nowcast, which has rebounded to show higher inflation readings:
Next, we show our Labor Market Gauge, which has offered a timely reading of labor market conditions. Labor markets look to be inflecting higher:
As a result, our monetary policy pressures gauge continues to suggest hiking cycle pressures:
Thus, while the Fed may not have tightened policy today, there remains considerable pressure on the Fed to hike policy rates over the coming months. A hiking cycle offers the worst risk-adjusted-return periods for Treasuries across all macroeconomic environments. Barring a significant growth shock from either i) an equity sell-off causing a reverse wealth effect or ii) demand destruction driven by excessively high oil prices, US fixed income likely continues to offer negative returns, or poor returns relative to the risks of owning them for most investors.
Until next time.
That's the second systematic model this week landing on the same conclusion about duration, a bond-ETF trend signal a few days ago, now a monetary-pressure gauge, both bearish for completely different reasons.
Our own TAA consensus has government bonds as the least-favoured category in the current fixed income mix, so the human survey and the systematic gauges are, for once, not fighting each other.
When that many independent processes agree, the risk isn't being wrong, it's being late