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The Fed vs stagflation

The FOMC meeting for the month of June will start in 10 days. What is our data dependent Fed looking at these days? Inflation, in its different measures (PPI, CPI, PCE) is not going down, it is stickier than expected and it could be picking up (too early to tell). Growth, measured by GDP, is anemic: the second revision for the 1Q24 (1.6%), came in weaker than the first reading at 1.3% which was already weak (see chart below). It’s becoming increasingly difficult to grow at higher rates with the amount of debt this economy is carrying. In terms of unemployment, the headline number is still good, but the sniff test concludes that the jobs picture is deteriorating, albeit slowly, with increasing temporary workers and lower participation. Finally, the markets. The equity market is still firmly climbing the wall of worry, but it’s a giant with feet of clay: high concentration, poor breadth, financial engineering and buybacks make it look solid in the surface, but weak underneath. And the bond market is starting to realize there’s too much government debt with an increasing servicing cost. Investors are pricing a 62% probability of a cut in November, compared to 6 cuts at the beggining of the year.

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