Get Ready To Short Bonds?

Episode Overview

• The speakers analyze the significant impact of extreme weather on recent weak economic data, particularly the July employment, retail sales, and housing start figures.
• They argue that the US economy remains resilient, with a "goods growth recession" being offset by strength in the services and technology sectors.
• The discussion highlights a major disconnect between the market's aggressive expectations for Federal Reserve rate cuts and the likely hawkish stance Fed Chair Powell will take.
• It is predicted that upcoming August economic data will show a rebound as temporary weather-related distortions fade, potentially pushing bond yields higher.

Key Concepts

• Weather-Distorted Data: The central theme is that recent weak economic figures were skewed by extreme weather events (e.g., heatwaves and storms), not a fundamental decline in economic health. This was seen in the August 2nd employment report, July retail sales (specifically building materials), and a drop in housing starts in the South.
• Resilient US Economy: Despite some weak headline numbers, the underlying economy is viewed as solid. This is supported by low unemployment claims, record-high construction employment, and continued strength in the services and technology sectors.
• Goods vs. Services Dichotomy: The economy is described as being in a "goods growth recession," where manufacturing is weak (as reflected in the ISM survey), but this is counteracted by a robust services sector, preventing a broader downturn.
• Market vs. Fed Expectations: There is a significant gap between the futures market, which is pricing in numerous and swift interest rate cuts, and the Federal Reserve's likely position. The speakers anticipate the Fed will maintain a hawkish tone to manage these overly optimistic expectations.
• Economic Surprise Index (CESI): The analysis links the Citigroup Economic Surprise Index to the 10-year Treasury bond yield. The expectation is that as weather-affected data normalizes and surprises to the upside, the index will rise, which is correlated with rising bond yields.

Quotes

• At 01:31 - "We really believe that weather really did depress employment." - Dr. Yardeni explaining his firm's view that the weak August 2nd jobs report was an anomaly caused by extreme weather, not a sign of a deteriorating labor market.
• At 01:58 - "We did see a strength in housing-related building materials." - Dr. Yardeni pointing to a specific category within retail sales data as confirmation of weather impacts, suggesting people were buying materials for storm preparation and repairs.
• At 11:10 - "I think he's going to talk tough, especially against these pretty... ebullient or overly hopeful rate cut expectations priced into the futures market." - Eric predicting that Fed Chair Powell's upcoming speech will aim to push back against the market's aggressive pricing of future interest rate cuts.

Takeaways

• Scrutinize headline economic numbers for temporary distortions, as external factors like extreme weather can mislead interpretations of underlying economic health.
• The US economy currently exhibits a split nature, with a struggling goods sector but a resilient services and technology sector that is preventing a broader recession.
• Be prepared for the Federal Reserve to maintain a hawkish or data-dependent stance, as the economy's resilience does not support the aggressive rate cuts currently priced in by markets.
• Expect economic indicators for August to show a rebound as July's weather effects fade, which could lead to upward pressure on bond yields.