It looks like a no-brainer that the Fed will hike (interest rates) again in June, and that there could easily be more to come.

Why?

1. Last week I wrote about the ample liquidity canons in place to protect the economy from bank collapses. These protections are ‘keep calm and carry on’ devices to allow Fed Chair Powell to continue his war on inflation. You can get a refresher here.

2. Last Thursday, the U.S. Bureau of Labor Statistics reported that while non-farm productivity decreased in the majority of states, output actually increased in 43 states and hours worked increased in 48 states.

3. Last Friday, the Bureau of Economic Analysis released its PCE, (personal consumption expenditures index) which for April came in hot at 4.4%, above the 4.2% print in March. PCE minus food and energy (or core PCE) was up from 4.6% to 4.7%. Core PCE is the Fed’s favourite yardstick for spending/inflation. It is too high. This will frustrate the Fed.

4. Inflation (measured historically by CPI) is nowhere near the Fed’s 2% target.

5. To add insult to the Fed’s injury, NASDAQ is rallying and while the rally is concentrated in AI-beneficiary tech companies, this should be eyebrow raising for every Fed governor.

6. Unemployment is still at historic lows, and there’s more disposable income being spent on services and goods, creating inflation - too many people with more dollars than they had to dispose of in March, chasing limited goods and services.

7. McCarthy and Biden reached an in-principal agreement to lift the debt ceiling above the $31.4 trillion cap. More details to come.

Check out PCE and Core PCE here 👇👇👇

Spending and consumption are strong 👆👆👆

Given the 7 reasons above, the Fed which last month said it would now be data dependent, has no good reason to stop hiking just yet.

Unless something funky happens with the Jobs report (if it comes in really low) or McCarthy and Biden can’t deliver the debt deal, Fed Governors will be hard pressed to think anything other than that their job is by no means done.

Put another way, now is not the time to pause.

For final confirmation, we wait for the Jobs report.

It’s one of the most important drivers of interest rate policy.

The reason is that Fed Chair Powell believes that ~100,000 jobs are needed to be created each month to sustain the economy. But the problem for the Fed is that job creation is growing at 2-3x that level.

If it turns out that jobs were still strong in May and all of the above plays out as expected, the pause and pivot get pushed out again.

Instead, we get higher interest rates for longer, stronger USD vs. Aussie dollar, more deposits transferred into money market accounts, weaker commodities, weaker bonds, weaker gold/crypto and weaker equities (other than for a narrow fairway of Hollywood stocks) and more pressure on the RBA to keep hiking.

In the meantime, saddle up!

Mike