InfraCap Commentary, October 6, 2023 ~ The strong employment report is causing sharp sell-offs in both the bond and stock market. However, the unemployment rate rose, and wage growth remained contained. This report continues to demonstrate how the Fed's Phillips Curve model of inflation is broken, as employment is strong and wages are moderating. The key drivers of inflation are housing prices, which are heavily influenced by Fed rate policy, and energy prices, which bleed through to all goods and services. Oil prices are now flat for the year and wholesale gasoline prices are down 10% while housing prices are approximately flat over the last year.
PCE core adjusted to reflect market changes in shelter vs. the misleading BLS method is only 2.1% and the three-month annualized PCE core is only 2.2%. Fed Fund futures indicated a 30% chance of a November increase, which is up approximately 10% after the employment report. We continue to believe that the Fed will not raise rates again as Mary Daly of the SF Fed confirmed that the recent rise in long-term rates is contractionary and the equivalent of a 25bp rate increase.
We believe that global interest rates are at unsustainable levels with the European economy in free fall. The Euro Zone GDP now- cast is indicating a deep recession is underway with GDP declining at a 3.6% annual rate. That rate of decline rivals the 4.3% decline in GDP during the Great Recession. We believe that when investors start to focus on the European economic implosion global interest rates will decline as expectations of an early 2024 ECB rate cut will increase the global monetary base and increase global liquidity. In the past, tight monetary policy has caused something to break such as the housing market, the high-yield market, and the commercial real estate sector. In this tightening the collapse is in the European economy, which is highly disadvantageous relative to the US as it has limited upside to the AI boom, has an 80% energy natural gas and electricity cost disadvantage, and is not benefiting from counter-cyclical government infrastructure spending.