“To Rate Cut, Or Not To Rate Cut, That Is The Question”

Pictures "10 Best Shakespeare Movie Adaptations." Hypable. N.p., n.d. Web. .

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To rate cut, or not to rate cut, that is the question:

Whether ’tis Inflation  to suffer below 2% core PCE
The slings and arrows of pain to savers
Or to take arms against a sea of trade wars

And by opposing end them. To die—with no good deal

It’s almost like the entire world went crazy with that last rate hike in December; however, that is the world we live in these days.

Personally, I have documented for many years that the Fed should raise inflation expectations or go slow on rate hike. Now they’re caught in a situation that I thought would be the case eventually.

“The Fed Needs More Inflation 2019 Edition”

https://loganmohtashami.com/2019/06/19/the-fed-needs-more-inflation-2019-edition/

However, we are really putting too much weight on one or two rate cuts being the savior of the U.S. economy. Right now, we don’t see any reason not to take back a few rate hikes. Core PCE is still below 2% and even though this data line has the potential to get back to 2% #TeamTransitory

We can see below that inflation is not screaming overheating.

From Doug Short
https://www.advisorperspectives.com/dshort/updates/2019/06/28/pce-price-index-may-headline-core
July PCE Short

Only 3 of my 6 recession flags are up, more on that model here.

“Congratulations America You Destroyed The American Bears”

https://loganmohtashami.com/2019/06/30/congratulations-america-you-destroyed-the-american-bears/

However, 2 of the last 3 economic indicators are not flashing healthy signs either, more of a stalling view.

Recession Flag 4 

Housing Permits + Starts fall into a recession. Late last year on Bloomberg I discussed that housing starts are in question for 2019

https://www.bloomberg.com/news/audio/2018-12-28/u-s-housing-starts-are-in-question-in-2019-mohtashami-radio

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Housing permits have stalled out for 30 months now really, and housing starts are down 3.7% compared to the same period in 2018. While the excess housing inventory we had late last year has been drawn down to a more acceptable level, the data isn’t screaming an overheating economy.

More on that topic here

“Housing Permits Stalled 30 Months” 

https://loganmohtashami.com/2019/07/17/housing-permits-stalled-30-months/

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/07/17/secular-trends-in-residential-building-permits-and-housing-starts

July Permits + Starts vs Pop

Recession Flag #5 

Leading economic indicators

These data lines always go negative into a recession, and while we aren’t there yet, we have been stalling out for a year.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/07/18/conference-board-leading-economic-index-fell-in-june

July LEI

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I refuse to use the R-word until all 6 flags are up, however, taking back some rate hikes isn’t a bad idea. I don’t believe at all we are at risk of anything truly terrible happening with where rates are now.  Even with the weakness in PMI data, we all need to realize that trade isn’t that important here in the U.S., and we already had a PMI recession here in this cycle.

My yield curve inversion call late in 2017 for 2018 was based on long term yields falling. At the end of 2018, I called for the 10-year yield to go below 2% if world growth got slower as well as our PMI data.

More on this topic here

“2017 Yield Inversion Call Looks Great Now”

https://loganmohtashami.com/2019/06/24/2017-yield-inversion-call-looks-great-now/

“At the end of 2017, my forecast was for yields to invert in 2018. Typically that is a recessionary forecast. I believe I was the only one on record to have that forecast that in 2017.”

“I am also looking for yields to invert in 2018.”

https://loganmohtashami.com/2017/12/31/2018-economic-housing-predictions/

“At the end of 2018, my forecast was for the 10-year yield to go below 2% if world trade got weaker. I believe I was the only one on record to have that forecast in 2018.”

“For 2019, I am sticking to my call that the 10-year yield will channel between 1.60% to 3%.  If world trade gets weaker, we could see the 10-year yield with a 1% handle again.”

We recently had a 1.97% on the 10-year yield today currently at 2.02%

My 2019 economic forecast was to focus a lot on our domestic PMI data which had room to fall.

“I expect PMI data to fall year over year, which could impact domestic investment slightly, but the economic cycle still has legs to move forward. Keep an eye on the PMI data in 2019.  Since America PMI data was good 2018, it has the most room to fall with falling oil prices now.  Keep in mind that we already had a manufacturing recession when oil prices crashed a few years ago. We no longer have that massive over-investment in rigs ready to collapse like we saw before.  We haven’t even recovered all the extraction jobs at the peak of the shale boom.”

https://loganmohtashami.com/2018/12/29/2019-economic-housing-predictions/

So we don’t have any real adverse risk if we take back one or two rate hikes. Especially with some economic data not overheating like housing starts and leading economic indicators.

If inflation really picks up next year, (Cough) we are working from an excellent base to hike if need be. Try not to get too emotional or political about this topic because it does look like we are getting an insurance cut soon.

Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data  daily on his own facebook page https://www.facebook.com/Logan.Mohtashami