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Eurodollar University

LEAKED: Interest Rate Cuts Are Coming?!

Wed Jul 10 2024
Interest RatesRecession RiskUnemployment RateLabor MarketFederal ReserveYield Curve

Description

After last week's payroll report in the U.S., there is increasing talk of interest rate cuts and heightened recession risk. The unemployment rate has grabbed the world's attention as it is rising throughout much of the world, including the United States. Expectations for lower interest rates are increasing along with higher unemployment. One major bank strategist team expects eight consecutive rate cuts out of the Fed starting in September. The recession scenario is becoming more difficult to ignore.

Insights

Unemployment Rate as a Recession Signal

The unemployment rate is a crucial indicator of the labor market's strength. Economists are paying attention to the unemployment rate and acknowledging the weakness in the U.S. economy.

Fed's Response and Rate Cuts

The Federal Reserve is expected to cut rates sharply in recognition of the weakening economy. Rate cuts are not a solution but an admission of weakness.

Timing Signals and Weakness in Labor Market

Timing signals like the SOM rule and yield curve changes are being embraced as indicators of trouble ahead. The labor market may have cracked and is far weaker than previously believed.

Chapters

  1. Interest Rate Cuts and Recession Risk
  2. The SOM Rule and Treasury Market Signals
  3. Unemployment Rate and Policy Restraint
  4. Unemployment Rate and Fed's Confidence
  5. Yield Curve Signals and Bull Steepening
  6. Unemployment Rate as a Recession Signal
  7. Fed's Response and Rate Cuts
  8. Economic Activity and Rate Cuts
  9. Unemployment Rate and Treasury Market Signals
  10. Timing Signals and Weakness in Labor Market
  11. Unemployment Rate and Bull Steepening
  12. Conclusion and Acknowledgment of Weakness
Summary
Transcript

Interest Rate Cuts and Recession Risk

00:00 - 01:02

  • After last week's payroll report in the U.S., there is increasing talk of interest rate cuts and heightened recession risk.
  • The unemployment rate has grabbed the world's attention as it is rising throughout much of the world, including the United States.
  • Expectations for lower interest rates are increasing along with higher unemployment.
  • One major bank strategist team expects eight consecutive rate cuts out of the Fed starting in September.
  • The recession scenario is becoming more difficult to ignore.

The SOM Rule and Treasury Market Signals

01:02 - 02:35

  • The SOM rule, which measures the unemployment rate, is triggering major warnings of a recession.
  • There is a potential warning developing in the treasury market, specifically in the middle of the curve.
  • Jay Powell, Chairman of the Federal Reserve, claims to have everything under control but is sounding more dovish.
  • A broad set of indicators suggests that conditions in the labor market have returned to about where they stood on the eve of the pandemic.

Unemployment Rate and Policy Restraint

02:35 - 03:09

  • The unemployment rate is a key view of the labor market and its increase is causing concern.
  • Jay Powell acknowledges the progress made in lowering inflation and cooling the labor market but warns against reducing policy restraint too late or too little.
  • Elevated inflation is not the only risk, reducing policy restraint could weaken economic activity and employment.

Unemployment Rate and Fed's Confidence

03:09 - 04:45

  • The unemployment rate is a significant signal of weakness in the labor market.
  • Wall Street economists and strategists are paying attention to the unemployment rate and its implications.
  • The SOM rule, created by economist Claudia SOM, is generating talk on Wall Street about potential trouble ahead.
  • The Federal Reserve is taking a big risk by not moving with gradual rate cuts.

Yield Curve Signals and Bull Steepening

04:47 - 06:43

  • The five-year, ten-year spread in the treasury market is an initial indication of conditions in the economy.
  • Changes in the five-year, ten-year spread can signal big changes in the bond market.
  • The current un-inversion of the five-year, ten-year spread could potentially lead to a full bull steepening case.
  • The yield curve signals need to be monitored along with other timing signals.

Unemployment Rate as a Recession Signal

06:43 - 08:21

  • The unemployment rate is a crucial indicator of the labor market's strength.
  • The unemployment rate has moved up substantially, signaling cracks in the labor market.
  • The SOM rule is not a forecasting tool but a coincident indicator that confirms when a recession has already begun.
  • Economists are paying attention to the unemployment rate and acknowledging the weakness in the U.S. economy.

Fed's Response and Rate Cuts

08:22 - 09:57

  • The Federal Reserve is expected to cut rates sharply in recognition of the weakening economy.
  • Rate cuts are not a solution but an admission of weakness.
  • Citi analysts forecast eight consecutive quarter-point rate cuts by the Federal Reserve starting in September.

Economic Activity and Rate Cuts

09:58 - 10:52

  • The U.S. economy has cooled off from its previous pace, with inflation slowing down.
  • The Institute for Supply Management Service Sector Gauge and the monthly jobs report indicate a risk of a sharper weakening of economic activity.
  • Citi strategists forecast a faster pace of rate cuts by the Federal Reserve.

Unemployment Rate and Treasury Market Signals

10:52 - 11:45

  • The unemployment rate is a crucial signal that cannot be ignored.
  • Changes in the five-year, ten-year spread of the treasury market provide additional information about the economy.
  • Wall Street strategists are paying full attention to the unemployment rate and acknowledging the weakness in the labor market.

Timing Signals and Weakness in Labor Market

11:47 - 13:04

  • The unemployment rate is signaling substantial weakness in the labor market.
  • The labor market may have cracked and is far weaker than previously believed.
  • Timing signals like the SOM rule and yield curve changes are being embraced as indicators of trouble ahead.

Unemployment Rate and Bull Steepening

13:04 - 14:49

  • The unemployment rate is the most charitable view of the labor market.
  • The recent increase in the unemployment rate is a solid recession signal.
  • Changes in the five-year, ten-year spread of the treasury market could potentially indicate a bull steepening case.

Conclusion and Acknowledgment of Weakness

14:49 - 16:43

  • The U.S. economy is far weaker than previously believed, and more people are starting to realize it.
  • The labor market has shown cracks and weakness, leading to concerns about a recession.
  • The economy has been halfway to a recession since last year, and timing signals like the SOM rule confirm this.
  • Even the cheerleaders on Wall Street are changing their tune and acknowledging the weakness.
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