Reiterating this past week’s theme of focusing on long-term narratives over short-term distractions, the April PCE data, the number which the Fed tends to favor when assessing inflation, may be the most consequential for the next couple of quarters. Core PCE, in particular, unexpectedly sped up to an annualized rate of 4.7%, countering the narrative that inflation is cooling. From the standpoint of how the Fed might react to this, the markets have essentially written off the possibility of a rate cut at some point in 2023, something which was never really realistic to begin with given how steady core inflation has been, but has begun baking in another rate hike in June. If it hasn’t become clear already, investors would do well to expect rates to remain higher for longer over the foreseeable future and that will act as a deterrent for Treasury prices.
It’s tough to say what should be expected out of the debt ceiling fight in Congress. The latest headlines say a deal is close, but who really knows at this point. As I wrote about yesterday, this is just political theater meant to be a distraction. I can’t envision a scenario where the government will default on its debt (even though short-term T-bill yields recently hit 7%), which means this will be largely forgotten before too long.
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