Happy Thanksgiving everyone!

On balance, since November 12th when the NFIB small-business survey was released strong, economic data has been coming back down again. This has been seen in retail sales (less autos), housing starts, permits, new home sales, durable goods orders (less transportation), and consumer spending. Yields have been following this pattern in nearly lock-step (see chart below.)

There will be no other data this week. Next week, 18 indicators (40% of the index) come into the LDEI with many labor indicators and ISM survey data. This will help conclude if there is a material turn-around in economic data to start the next leg-down in yields within this U.S. Treasury bull market.

I note that the terminal rate of the Fed cutting cycle is projected to be 3.63% now (SOFR futures.) In the last SEP projections (9/19/2024), the Fed’s median expectation for neutral was 2.9%. Even without a recession, the Fed intends to cut back to neutral to foster a soft-landing. Neutral may go up by a few tenths in December’s SEP because the winds are blowing that way, but nothing has dramatically changed the structure of the U.S. economy. John Williams in an interview last Friday in Barron’s said, “Before the pandemic, I would have said the potential growth rate of the economy was probably about 2%. Today, I’d say it is closer to 2.25-2.5%” This suggests the neutral rate is maybe 0.5% higher than pre-pandemic and the Fed has already raised their estimate about that much. The Fed’s median neutral was 2.5% consistently between 6/2019 and 12/2023.

The gap between the 3.63% the market has priced in and a 3% neutral rate is large, and that is before considering what happens with a recession. A turn back to weaker data will eliminate the confusion among the Fed as to why the economy is so strong which is the only thing behind the talk of a higher neutral rate. Productivity growth was 2.2% in the last quarter, it was much higher at 3.8% in Q4 2019 before the pandemic, there is no productivity miracle going on. It is just that the economy has enough power to get re-stimulated every time interest rates fall. That won’t last forever.