Weekly Commentary | July 7, 2024 | Economic Inflection Point. Muni CEFs Still A Deal.

Macro Picture

The economy continues to show signs of cooling backing up our thesis of a weaker summer period. The labor market was the latest sign of that with a jobs report Friday showing continued weakening. The labor side of the Fed's mandate is likely to garner more attention and be the larger catalyst over inflation in the coming months.

Inflation is on a glide path towards 2.0%. A slow glide path but both Goldman Sachs and Citibank (among others) have Core PCE in the 2.3% to 2.5% range. It's not the Fed's target but it's close enough for them to say mission accomplished. Afterall, we were at 6.5%+ not all that long ago.

However, if unemployment, which hit 4.1% in June, continues to rise steadily towards 5.0%, I could foresee the Fed more aggressively cutting rates.

Despite the top line figure of 206K new jobs being created besting estimates, the underlying features of it were not as strong. For one, private payrolls were just 136K. The two prior reports were downwardly revised by 110K (that's a large number!), and long-term unemployment was up 29% y/y to 2.6mm.

I follow the temporary worker numbers which hit a new low and is down nearly 8% on the trailing year.

The most recent ISM Services report showed some additional signs of economic weakness - and now we have both manufacturing and non-manufacturing segments of the economy in contraction.

While U.S. consumers had initially spent more on goods during and following the pandemic, households have since shifted their spending to services, including travel, leisure and hospitality. That had kept the services side seeing good strength but even that is now starting to change.

Overall, I think the economy has slowed to the prior trend speed of 1.5% and there are zero signs of another inflationary spike or even stagflation over the medium term.

We would continue to take advantage of these interest rates on individual bonds while they lost and lock it in for the medium to long-term. Additionally, the amount of equity risk here should be curtailed as we feel the equity markets are priced for perfection led by AI-euphoria. Buffer ETFs are a good option here given valuations and the ability to protect the downside risks.