I am thankful for tame inflation data

In this holiday shortened week, we saw several important events occur that influence the bond markets and interest rates.  Early in the week, President-elect Trump made an extremely important pick for his cabinet.  We also heard from an important Federal Reserve (Fed) member, John Williams, the NY Fed President.  Tariff threats were made to our neighbors to the north and south.  On Wednesday, we got the October Personal Consumption Expenditures (PCE) inflation report.  This is the Fed’s favorite inflation index.

The next US Treasury Secretary will be Scott Bessent, the head of Key Square Group, a large hedge fund.  This was announced earlier in the week.  He is not expected to have any confirmation issues.  The markets, stock and bond, loved the pick and we saw rallies in both pushing rates lower.  He is expected to be pro-business and take a reasonable approach to tariffs.  After a couple weeks of less than mainstream picks coming from the new administration, the markets enjoyed having a little predictability.

John Williams, NY Fed President, spoke last weekend.  The NY Fed President is unique in the Fed.  The important Fed Open Market Committee (FOMC) is the group that actually votes and makes decisions on interest rates and monetary policy.  This committee is composed of the Fed Governors (appointed by the President and confirmed by the Senate) and a rotating group of Fed regional presidents.  The NY Fed President is always on the FOMC and therefore always votes on important decisions.  After Chairman Powell, President Williams is likely the second most influential member of the FOMC.  He said he expects continued deflationary pressure and that the labor markets will not contribute to upward pressure on inflation.  He is forecasting continued rate reductions over time.  This news was good for bonds and rates.

President-elect Trump announced his plan to Tariffs are taxes on imports.  If the US places a blanket tariff on a country, say Mexico, that makes everything that much more expensive to import from Mexico.  The result is higher costs on those goods and therefore less demand.  Consumers and businesses will look to alternatives in other countries and even inside the US to cut the costs.  Tariffs create a one-time increase in the cost of those goods which is inflationary and is why interest rates don’t like them.  President-elect Trump is threatening Canada and Mexico with 25% blanket tariffs along with an additional 10% tariff on China on day one of his term.  What markets and economists are curious about is how much of this tariff discussion is a threat to get Canada and Mexico to close their borders to Fentanyl and illegal immigration vs an actual intent to apply these tariffs.  Both Mexico and Canada quickly responded that they intended to cooperate with the US.  They clearly do not want these tariffs as Mexico exports 27% of its GDP (a nations income) to the US and Canada exports 21% of its GDP.  Those are massive numbers.

Wednesday saw the October PCE numbers come out as the market was expecting.  Monthly inflation rose .2% and increased to 2.3% year of year.  It replaced a 0% number from a year ago which is why the yearly number rose.  The Core rate (removing the volatile food and energy prices) rose .3% to 2.8%, as expected.  This was good news to be thankful for and bonds and rates like it.

Bond markets were closed Thursday and Friday for the Thanksgiving holiday.  Here is a look at next week:

Monday: ISM Manufacturing Index

Wednesday: ADP Employment, ISM non-Manufacturing Index

Thursday: Initial and Continuing unemployment claims

Friday: November Jobs Report (This will be very important to confirm the Fed’s rate cut at their December meeting)

I hope you had a wonderful holiday!