July 2024 Market Update

Over the past few weeks, the markets have echoed volatility, questioning what would otherwise be somewhat of a true sustained inflation consensus, as it reacts to a multitude of greater forces that are driving market dynamics and the reactionary treasury markets daily. While we would all love to be able to quantify inflation ahead of us by tacking a spread onto the Core PCE or CPI, we can’t undermine the greater forces at playing driving global market ebbs and flows through short bursts of fear, greed, optimism, and so on as we all try to price future risk that is increasingly harder to quantify. If we study the domestic data granularly, we can pin the resulting effects of data releases, as well as Fed member commentary, on risk free yields. But ignoring the bigger, longer picture can lead to greater consequences. Data that shows weaker labor markets and deaccelerating inflation unsurprisingly translates into lower inflation expectations. However, as previously stated in last month’s newsletter, it seems the economy is more resistant to higher interest rates this cycle as consumer spending and sentiment reflects in greater aggregate demand. The neutral rate the Fed has historically targeted may need to shift upward to have a real impact on the economy, but time will tell. In this cycle, it is important not to overlook the root cause of credit creation. This time around our debt increases are on the federal level, a result of government (fiscal) spending and continued loose monetary policy prior to the hikes, and not isolated to the private sector like they were in the GFC. Federal debt increases, coupled with hidden liquidity backstops that the fed has created (reverse repo, bank term lending program), has resulted in the shockingly resilient data, greater bank liquidity, and labor market strength on the surface, puzzling the markets as to why inflation has remained so stubborn despite having been hit the fastest rate hike cycle in modern history. Tightening monetary policy while continuing to feed the money printing machine through debt issuance, however, is like putting a strong band aid on a gunshot wound. It’s counterproductive, unsustainable, and the truth will eventually reveal itself.

The two looming questions remain. Is the market as strong and resilient as the data leads us to believe? How long can we continue to spend, and print, our way into oblivion? According to the Congressional Budget office’s total debt predictions, by 2027, our annual interest rate burden will reach 30% of tax receipts if the present rate trajectory remains the same. Compared to January, the market is anticipating elevated rates in response to stickier than anticipated inflation expectations.

Charts Courtesy of

The 10-year treasury has swung by 20 basis points over the last 4 weeks as its reacted to a mixed pool of data and public commentary, reaching a low of 4.21% earlier in the month, and a near high of 4.469% on June 10th before being broken by Monday’s high of 4.479%. Election outcome predictions have played a significant role in recent price movement and future expectations as well, as the future administration’s policy has a direct effect on entitlement spending, immigration policy, defense spending, tech regulation, corporate tax receipts, debt issuance, and much more. These factors affect implied growth, total money supply, and therefore, inflation. The market is pricing in 2 interest rate cuts by year’s end, while most Fed members still predict 1-2 cuts to close out 2024. We expect continued volatility, and greater risk premiums applied to risk free rates, as we see more of the greater forces play out through this summer.


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