Market 07/09: Powell - balance of risks between Fed's 2 objectives

Summary of Fed Chairman Powell's testimony session

• High inflation is not the only risk we face:

  (“Elevated inflation is not the only risk we face,”)

  • labor market has cooled considerably (“cooled considerably”)

  • economy no longer overheating (“no longer overheated”)

• Fed has moved towards balance between 2 risks (“2-sided risks”: i.e., inflation risk VS economic growth + labor decline) => therefore Fed will decide cautiously:

  • Easing too early and too aggressively could cause inflation to return.

  • But cutting rates too late could weaken the economy

• After Q1/2024 data lacking conviction on inflation, recent data has shown modest further progress (“modest further progress”)::

  • More data needed for Fed to gain confidence that inflation is sustainably heading to 2%.

Viet Hustler’s opinion:

Overall, Powell's testimony clearly shows which of the 2 risks Powell (and Fed) is currently prioritizing more (“2-sided risks”):

1. Escalating inflation

2. Worsening labor market (accompanied by higher recession risk).

Previous phase clearly Fed prioritized curbing inflation: because “escalating inflation” risk was more important – while economy and labor market remained favorable.

But now: importance of Fed's 2 risks/objectives has balanced (“balance of risks”) due to:

•  economy no longer overheating (“no longer an overheated economy”)

•  labor market has normalized (“labor market appears to be fully back in balance” / “cooled considerably”)

=> this is the stance neutral but leaning dovish from Powell:

• He cited both risks of cutting rates early VS late

• but Powell seems to lean towards earlier rate cut possibility by deliberately emphasizing: labor market has balanced + economy has stopped overheating (a.k.a., no longer a buffer for Fed to confidently keep rates high).

(Linh Ha)

Statements by Treasury Secretary Janet Yellen

• Labor market no longer driving inflation in the US economy

• US President Biden has worked very effectively in the meetings she attended.

Favorable 58 billion USD 3Y T-Note auction

• High Yield: 4.399% (market yield: 4.407% | previous session: 4.659%)

  => Stop-through: 0.8 bps

  • Bid-to-cover ratio at High Yield: 78.35% (previous session: 53.41%)

• Bid-to-Cover: 2.67 (previous session: 2.43)

• Competitive bid components:

  • Dealers: 14.78% (previous session: 19.96%)

  • Foreign investors: 63.97% (previous session 64.14%)

NFIB Survey: Small business optimism index for June continues to rise

NFIB small business optimism index rises to 91.5 (estimate: 90.2 | previous month: 90.5)

• Hiring plans and long-term investment expectations unchanged

• Expectations for economic conditions rise sharply (but still in contraction territory)

• This increase was driven by business owners reporting inventories too low and planning to build them up + brighter economic outlook.

• Inflation remains the top concern for small businesses in June

• Labor quality is the second biggest concern

Credit card balances surge unexpectedly - credit card rates hit all-time high

May credit card debt rises 11.354 billion USD (>estimate: 8.85B | previous month: 6.485B) - largest increase since February

• May Y/Y consumer credit growth ticks up slightly - but still fluctuating around historical lows

• May revolving credit rises +7 billion USD, reversing the -0.9 billion USD decline in April and the largest increase since February.

• Nonrevolving credit - including student and auto loans - rises modestly +4.3 billion USD (previous month: 7.3 billion USD)

• Consumer credit card rates dip slightly in May (first decline since late 2021), but not meaningfully and still extremely high historically

• Dollar Futures Index rises as consumers will soon withdraw money to pay debts (money supply decreases)

• Consumer credit loan losses are one of 3 scenarios that could cause large bank losses according to Fed's 2024 Stress test:

  • Read more: Bank Stress Test and FDIC report

Crypto Market: German government continues to transfer BTC to exchanges and market makers

• German government transferred 6,300 BTC worth 360 million USD to Cexes and OTC services.

• According to Arkham Intelligence: German government still holds ~27,460 BTC worth 1.57 billion USD

US spot Bitcoin ETFs record largest inflows in a month

• These 11 funds attracted 295 million USD on 07/08

Other news

1. US Misery Index (Misery index = inflation + unemployment rate) rises to 7.4% in June from 6.8% in January.

2. Boeing Q2 deliveries: 92 commercial aircraft and 28 defense aircraft

3. A United Airlines Boeing 757-200 lost a wheel seconds after takeoff from Los Angeles International Airport.

   • In March, Boeing had a similar incident

4. Moody's warns France that they could downgrade this country's outlook to negative if France does not improve its public debt servicing capacity

5. CalSTRS - California State Teachers' Retirement System has invested 200 million USD into Kennedy Lewis Investment Management, a private credit fund manager with AUM of approximately 16 billion USD