Economy
Next week’s CPI and PPI reports will be much more important determinants of the near-term Fed policy path than this morning’s employment report. However, if the trend of labor market tightening continues through year-end, it could lead to a re-acceleration of wage growth in 2027.
MacroQuant recommends a slight underweight position in equities, counterbalanced by a slight overweight to bonds, and a significant overweight to cash. The model is positive on the US dollar, modestly negative on gold, and bullish on copper and oil.
The PCE/CPI gap is an increasingly important factor driving the near-term outlook for Fed policy. We discuss the drivers of that gap and conclude that it’s likely to narrow in the coming months.
The US Treasury department’s attempts at yield suppression are doomed to fail unless the Federal Reserve gets involved.
Despite recent increases, long-maturity Treasury yields are roughly consistent with fundamental fair value. We see limited value in long duration plays.
An acute shortage of AI hardware will support tech stocks into year-end. However, AI companies may need to ultimately generate $10 trillion per year in revenue to justify their capex. Barring a massive increase in productivity growth, this will be very difficult to achieve. Despite today’s Treasury announcement of upsized buyback operations, bond yields are likely to remain elevated over the coming months. Rising crack spreads have reduced the demand for crude, which is not encouraging for global growth. On the FX front, recent intervention to support the yen will probably be insufficient, but there is significant long-term upside for the currency.
Four decades of robust stock market gains have positioned the equity wealth effect to play a larger role in the business cycle.