Benign PCE but a Presidential Debate seems to have rocked the boat - US10s +14.30 bps

"Champions aren't made in the gyms. Champions are made from something deep inside them -  a desire, a dream, a vision" ~ Muhammad Ali

Fed Fund Pricing for interest cuts was seen at 47 bps for 2024. Q1 GDP came in line with estimates at 1.4%, however, consumer spending was revised lower to a modest 1.50% which means consumer coming in at a lot weaker position in Q2. The Atlanta Fed GDPNow estimates were revised lower to 2.20% IN Q2 from 3.00% at the end of prior week. DXY found resistance at the 106.13 levels and is seen lower in Asia Open today at 105.67. 

Durable Goods Orders rose 0.10% mom driven by an increase in new orders for transportation equipment. 

U.S. PCE Prices showed a welcome moderation with headline number flat over the month and the Core PCE numbers 0.10% higher over the month. Deflation in Durable goods at -0.79% mom and -0.15% in non durable goods alongside a less than 0.20% rise in price of Services and -2.12% mom change in price of core services confirmed broad based progress in inflation. PCE excl. Food, Energy and Housing was flat over the month following a 0.30% rise over the prior month. 

In as much as the PCE report was benign, it was largely on expected lines. Markets are a discounting machine and after the initial dip to the benign PCE report, we saw sharp reversals higher in bonds - yields on Us2s +9.2 bps off lows to close at 4.756% and yield on US10s +13.90 bps off lows to close at 4.40% - bear steepening in US2s10s +7.2 bps to close the day at -35.60 bps. 

Looks like what spooked the markets was the first US Presidential Race between Joe Biden and Donald Trump where after the debate, chances of a Trump win rose and Economist ran an article " Joe Biden should now give way to an alternative candidate". With Presidential race 4 months away and Democratic Convention slated for August, there is hardly anytime for a new candidate. This means rising uncertainty for the markets and with Trump's focus on protectionism, deregulation and tax cuts, deteriorating fiscal metrics of the US Economy and high inflation could be perpetuating themes. 

The Initial Jobless Claims fell 6K over the week but Continuing Jobless Claims (CJC) moved sharply higher at 18K with number highest since Jan 2024. 

On the housing front, the Case-Shiller Home Price Index showed prices rose 7.2% yoy for the month of April 24 from prior revised higher 7.50% yoy. Data on new Home Sales showed 11% decline mom from an upwardly revised prior mom reading of 2.00% while pending home sales decreased 2.10% in May. The data over the last week shows declining activity in the residential sales and suggests easing home price appreciation in the coming months. 

I realized that I made a mistake w.r.t to the data calendar in the Monday's post and can only make sad smileys now :( :( :( Just to reiterate then, this week is employment heavy data week. 

Next week Economic Calendar includes the ISM PMI data and then the onset of Jobs data with JOLTS data on Tuesday (+7.85M), ADP on Wednesday (+170K) and NFP data on Friday (+180K). Alongside we have the Fed Chair Powell's speech on Tuesday and FOMC Minutes on Wednesday. 

Now if you go back to the earlier articles, you would see the mention about the divergence between the Household Survey and the Establishment Survey. 

Economist also published an article on the same subject , give it a read here

One of the reasons behind the divergence  stems from multiple jobholders which are counted as one in case of household survey but counted "as is" in case of Establishment survey, i.e. if I hold 2 jobs, Establishment survey counts it as 2 but household survey counts it as 1. Household survey shows employment increased only 376K over 12 months but NFP shows employment increased 2.756m over the 12 months period. The divergence in the two data sets is particularly wide and the picture gets clearer when the benchmark revisions are released in September. 

Happy Trading !!