The Upshot: Schrödinger’s soft landing still intact despite wobbles. It’s a Fed skip not a Fed pause.
We got our 10y yield forecast wrong: 10y yield surged after the Fed rate cuts and a string of hot jobs and inflation prints and stocks have been wobbly as a result over Christmas. But, the continuation of the disinflationary factors we identified remains intact (further shelter disinflation anchored by slowing wage growth) and was validated in the latest inflation print.
While the broader stock market indices have erased their post-election gains, a few of our central thematic baskets (AI, Trump trade etc) have held onto their post-election gains and notched new ATHs, suggesting the unique macro environment in which key investment themes may dominate traditional macro forces incl higher rates.
We believe the market has hit peak perceived monetary policy hawkishness and peak US growth optimism while discounting risks to growth emanating from Trump policies. The LA fires present challenges to expected further rent and services disinflation, which we will discuss in detail.
The Fed will skip but not pause rate cuts at the January meeting. The Fed wants to “protect a good thing”. They continue to believe their policy is working, and want to reach the neutral rate, which is below current FFR, albeit with less urgency. They will likely resume cutting in March after observing resumed signs of disinflation.