So:
- The FOMC raised rates as most expected. Easy decision since Warsh seeks to listen to the market. The statement and the presser were revealing:
- The statement was brief but to the points: “resilient spending,” “strong productivity,” “robust capital investment,” “job gains have kept pace,” and “unemployment has changed little.” Strong economy.
- Not a single Fed member has the unemployment rate up but 15 of 19 see upside risk to core PCE inflation.
- Warsh was clear on the dual mandates: labor side is fine, inflation is the problem. This is not “one and done”.
- How many more?
- August retail sales came in much better than expected at +1.2% moM, the best since March, after July was revised up a tenth to -0.5%. Total sales were +6.0% YoY. Control group sales (which feeds into GDP): +1.4% MoM with 12 of the 13 major categories higher. Strong back-to-school sales are often followed by strong holiday sales. Americans keep spending in spite of inflation.
- US import prices ex-fuel rose 0.8% MoM after + 0.3% in July. Last 3 months:+4.9% a.r., last 6 months: +6.1% a.r.. They are up 5.5% YoY.
- Industrial supplies & materials ex-fuel: +12.9% YoY
- Capital goods: +7.3%
- Manufacturing: +5.9%
- Nonmanufacturing: +18.8%
- US Atlanta Fed GDPNow Q3: 5.1% (prev 4.42%)
How do higher interest rates impact the economy?
- Consumer demand slows from the higher cost of debt: credit cards, auto and mortgage loans. Today, this only impacts the lower part of the K, already hit by inflation. The higher end of the K have little debt and high savings now earning better cash returns.
- Business investment normally slows. Today, AI, defense and green related spending are full steam ahead. Profits and profit margins are booming necessitating no cost cutting measures.
How many more hikes?
- The stock market can handle a few hikes (Axios)
But: “Historically, the higher the inflation when the Fed begins to hike, the worse equities have performed. The faster the tightening cycle, the worse equities have performed.” (@Marlin_Capital)
Profits are key…
About that “little excursion”:
Trump tells Axios he’s approaching major crossroads in Iran war
President Trump told Axios Thursday that he’s approaching a critical juncture in the Iran war over whether to restart massive attacks in an effort to bring the conflict to a close.
- “I have a big decision coming up. Do I want to go in and annihilate them [the Iranian regime] or do I not? It’s a big decision. Anything could happen with me.”
Though Trump has made similar threats before, his comments come ahead of a planned meeting Tuesday with leaders from six Gulf countries — Saudi Arabia, the UAE, Qatar, Bahrain, Kuwait and Oman — on the sidelines of the UN General Assembly in New York. (…)
Trump made clear in the interview that he wants to use the meeting at the UN to hear directly from regional allies about the war’s next steps.
- “I want to find out where they are and how they are doing. We have been very protective of them,” Trump said.
Indeed!!
Yogi Berra:
- “You can observe a lot by just watching.”
- “We made too many wrong mistakes.”
- “It ain’t over till it’s over.”
More (or less) seriously, JP Morgan yesterday: “For the first time since the start of the Iran conflict, we don’t have a baseline view. We simply don’t know how to model the endgame.”
Yogi gain: “When you come to a fork in the road…. take it.”