The thing I love and hate about trying to piece together economic data to try and create interest rate probabilities is that there are so many moving pieces! After a few weeks of what feels like being in a fog from the uncertainty around Trump’s tariff plans, I am finally starting to get some clarity. It helps that we can start seeing the “end” of tariff uncertainty, and the effects on inflation and the economy. It is so satisfying to emerge from the fog and come up with actionable trades. Of course, there are still many things that are unclear. The journey of a thousand steps begins with one step.
But first the week in news:
· I forgot that the Bureau of Labor Statistics also compiles the CPI (as well as PPI and Import/Export Prices). Trump fired the head of the BLS and will look to have a “friendly” head of not just the Employment Report but the inflation reports. At some point, you would think that the reads we get from TIPS (and other inflation-related securities) will be less clear. In addition, CPI is used as a benchmark for all kinds of Cost of Living Adjustments (COLAs), including for Social Security and other pension plans. I’m assuming there are some checks and balances in the data reporting system. However, I’m assuming the new head can push for some methodological changes could cause downward pressure on inflation metrics. This could open the door to lower alleged inflation (causing the Fed to lower rates), as well as lower Federal payouts on Social Security benefits and TIPS securities (improving the fiscal position).
· I’ve always thought that I should look at alternate sources of economic data to get corroboration. This will be more important going forward, as some weaknesses of the current methodologies at the BLS come to light. As you know, I like looking at ADP and I will probably start looking at Homebase for employment data. Truflation comes to mind for inflation data. There are other sources that I will start looking into.
· Stepen Miran (shill) will be a temporary Fed Governor until Trump figures out who he wants as Fed Chair. I’m guessing the reason Warsh wasn’t chosen for Governor is that he may not be interested in being “just a Governor” (since he was one previously), but he is still interested in being Fed Chair. Trump needs some time to decide.
· At the end of the day, I still don’t think the choice of Fed Chair matters that much in terms of actual policy. I’m not sure the new guy can get 5 additional votes on any radical interest rate policies. We will probably get a lot of jawboning, and to what degree the market listens is the question. I liken this situation to having your current manager replaced by a parrot who constantly says, “buy crypto memecoins”. He can say it all he wants… I would completely ignore him and just do what I was going to do anyway. Because at the end of the day, he is a dumb parrot just repeating what he was trained to say, with no power by himself. My colleagues are mostly respected, and I assume are not lemmings. I have the most uncertainty about how many in the markets that would think memecoins would go up because the parrot said so. However, there are ways to profit from various lemming scenarios, so I’ll wait for the right moment.
· This is a random thought, but fast-tracking depreciation (in the tax legislation) is stimulative for the economy but bad for tax receipts. I would think this would be priced into the markets, but I hadn’t thought about the Treasury funding side before.
Here are some pieces of clarity I am getting on tariffs and the economy: