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The relief that came from a spreadsheet
For most of the past two weeks this letter has traced one setup: a Fed that hiked in September and signaled more, a 10-year yield at a 19-year high, and a bond market taking real losses on the fear of another increase. The whole structure rested on the idea that inflation was sticky and the Fed was not done. Tuesday’s inflation report was supposed to confirm or break that. It did neither cleanly, and the way it landed matters more than the number.
On its face, the report was a dovish gift. Core PCE, the gauge the Fed watches above all others, fell to 3.0% from 3.3%, when forecasters expected it to hold. Within the hour, traders cut the odds of an October hike from roughly 71% to 37%. The headline read: inflation is finally cooling, and the Fed can stand down.
Read the footnote. Most of that decline traces to the Bureau of Economic Analysis’s annual revisions, a routine remeasurement of how it captures things like business software and portfolio-management fees. The same revisions trimmed headline PCE for prior months, too. Prices at the store slowed by nothing close to that. The number moved because the method moved, which is a different event from the cost of living easing for a household in Denver.
The market’s own tell. Here is the part the headline missed. If investors truly believed inflation had cooled and the Fed was done, long-term Treasury yields would fall, because lower future inflation and lower future rates make a bond paying 5% more valuable. Instead yields rose. The 10-year ticked up to 5.29% and the 30-year to 5.64% on the day of the supposedly dovish print. The bond market, which has roughly $28 trillion of real money behind it, looked at the revision and declined to treat it as disinflation.
The Fed said as much. John Williams, who runs the New York Fed and sits at the center of the committee, said there is “no need for urgency” and that the Fed has “time to gather more information.” That cooled October. But in the same breath he said one more increase “may be appropriate late this year.” On Tuesday the hike slid from October to December, and the market mostly heard the first half of Williams’s sentence.
Where that leaves you. The bond sleeve that lost ground all quarter was the one asset that would rally hardest if the hikes were truly finished. This week handed it the perfect excuse — a soft inflation number — and it fell anyway. That is worth sitting with before treating the October reprieve as the all-clear. If you have been waiting for falling rates to rescue long bonds, the bond market just told you, in its own money, that it is not there yet. The reprieve is real for the calendar and thin on the substance.
Friday brings the September jobs report, the next hard read on whether the economy is actually slowing. A weak number would give the doves a reason rooted in the real economy rather than a revision. A strong one, paired with that 0.9% jump in spending, puts December back in play fast. The decision the market just talked itself out of has not gone away. It has only changed its date.
The number that cancelled the hike came from a spreadsheet revision, and the bond market refused to cash the check. When the inflation relief is real, yields fall. On Tuesday they rose.
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