The latest data reaffirm there is not a good case for cutting rates this year. The price action in gold is a sign of inflation concerns, loose monetary policy, a lack of credibility in central banks, overlayed with a healthy dose of political risk due to rising global tensions, and a potential Donald Trump second term. There is growing alarm at extremism. Combined with governments unwilling to make difficult decisions on public spending, this will inevitably lead to the monetisation of deficits.
Bitcoin and gold are sending an unequivocal message: inflation is settling above target. The bond market has not fully cottoned on yet. But when it does, term premia will have to rise. Based on the latest CPI numbers, the core PCE price index will plausibly rebound by an annualised 3.31% in Q1, according to the Cleveland Fed, up from an annualised 2.63% in the three months to January. The 10-year US Treasury yield rose back up to 4.16% yesterday – following the February CPI report, and then a weaker 10-year auction – but it is still well over a percentage point below the underlying rate of nominal GDP growth.
The aggressive rate cuts priced in at the start of the year have inevitably been dialled back. The dovish Fed ‘pivot’ at the end of last year was indeed ‘mistaken’. Whether or not this was a political move, remains open to debate: it is not entirely clear that letting inflation run above target would benefit the incumbent President. But whatever the case may be, the Fed (“that little outfit”) has left itself wide open to criticism of political interference. FOMC members will have to push back more meaningfully against the clamour, that persists, for rate cuts. Payrolls are growing north of 200k/month, and the core services CPI (ex-energy & shelter) rose by an annualised 6.40% in the three months to February. If the Fed cuts in this environment, bitcoin and gold could surge further, and the long end of the Treasury curve will start to sell off more vigorously.
