Dominique Dwor-Frecaut
Summary The NY Fed’s MCT is the best overall one-year-ahead predictor of headline PCE; acyclical core PCE has performed at its best since 2023. Core PCE has recently been boosted by legal services, portfolio management, and software—the same categories BEA will revise in September. Excluding these categories lowers current core PCE inflation by about 0.5pp […]
Dominique Dwor-Frecaut
Summary The growth–unemployment relationship—Okun’s Law—remains intact, supporting the signal from today’s low UR despite conflicting labor-market data. Stronger productivity and slower labor-supply growth explain why weak hiring can coexist with solid growth and stable unemployment. Breakeven growth is likely more useful than breakeven NFP in predicting unemployment. Weak NFP alone is unlikely to trigger Fed […]
Dominique Dwor-Frecaut
Summary Despite recent announcements, the administration has kept the average tariff rate near 11%, well below the 20% Liberation Day peak. This restraint likely reflects both the limited economic and market benefits of tariffs and their substantial political costs. Tariff policy is therefore unlikely to become a renewed source of inflation. Market Implications I expect […]
Dominique Dwor-Frecaut
Summary The Treasury has taken the unusual step of intervening alongside Japan. The Treasury’s suggestion that the Fed funds Japan FX intervention could reflect the Treasury’s limited firepower as well as concerns over rising bond yields. Heeding the Treasury call could create perceptions of fiscal dominance and further lift the Treasury’s term premium. Market Implications […]
Dominique Dwor-Frecaut
Summary The war could evolve into a prolonged, low-intensity conflict punctuated by periodic flare-ups. The conflict is likely to remain limited to an air and naval campaign, containing its fiscal cost. Defense spending is still likely to surge: even if Congress rejects the administration’s proposed 50% increase in FY2027, a substantial increase remains likely. Historically, […]
Dominique Dwor-Frecaut
Summary I changed my Fed call from one insurance cut to no cuts through end-2026, largely because I expect a more hawkish Fed reaction function. Under Warsh, policymaking has shifted away from Powell’s consensus-building toward “good family fights,” giving individual FOMC participants greater influence. Since most participants are more hawkish than the Chair, this raises […]
Dominique Dwor-Frecaut
Summary I expect the Fed to remain on hold while shifting to a neutral bias, with no dissents and a dot plot showing no cuts in 2026 and one cut each in 2027 and 2028. I expect a neutral-to-dovish press conference. With both the data and the FOMC constraining his room for manoeuvre, Warsh could […]
Dominique Dwor-Frecaut
Summary The payroll recovery likely reflects an increase in labor supply driven by lighter immigration enforcement since Q4 2025. Because the recovery is supply-driven, it has been accompanied by wage disinflation and should continue to support broader disinflation. Payroll growth could remain near 200k until Q4 as migrant workers discouraged by aggressive enforcement last year […]
Dominique Dwor-Frecaut
Summary Thanks to a falling savings rate, consumption has continued to grow despite an income contraction. The savings rate likely has further downside due to the ongoing pressures on real income and to households’ generally healthy balance sheets. Because the savings rate is out of step with historical averages and fundamentals, there is a risk […]
Dominique Dwor-Frecaut
Summary The disconnect between consumer confidence and consumption reflects that confidence is more strongly tied to income than spending. Income growth has been slowing, while lower savings have supported consumption. The University of Michigan (UM) survey has fallen much more than the Conference Board (CB) survey because it is more sensitive to affordability and lower-income […]
Dominique Dwor-Frecaut
Summary The bond market sell-off appears driven less by inflation fears than by fiscal concerns. Although the FY2026 deficit is likely to undershoot CBO forecasts, the improvement largely reflects one-off spending cuts rather than durable fiscal consolidation. The share of price-insensitive Treasury buyers — particularly the Fed and foreign central banks — has declined as […]
Dominique Dwor-Frecaut
Summary Despite continued disruption in the Strait of Hormuz and what the IEA calls the largest oil supply shock in history, oil prices have risen much less than expected, reducing the likelihood of a 2026 recession. Therefore, I revise my 2026 Fed outlook to one insurance cut rather than multiple cuts. The inflation shock is […]
Dominique Dwor-Frecaut
Summary Since 1971, around 80% of Fed easings have taken place with inflation above 2%; even excluding the 1970s–mid-1980s high-inflation era, the share remains about 75%. Somewhat lower inflation around Fed cuts since the mid-1980s seems to reflect more of a change in the inflation regime than in the Fed’s reaction to inflation. Since the […]
Dominique Dwor-Frecaut
Summary Fed on hold; data steady: Economy is holding up (stable inflation expectations, limited pass-through, balanced labor market, slowing but on-track growth); Fedspeak is still “wait-and-see.” Main market risk = Powell’s plans: Bigger catalyst than data; base case is no announcement (50%). If he signals: More likely to stay on as Governor (30%) than step […]
Dominique Dwor-Frecaut
Summary The Fed may be preparing to adjust the structure of policy rates to encourage banks to hold fewer reserves. The Powell–Warsh transition could be turbulent, but is unlikely to materially affect Fed policy. Market Implications I continue to expect a recession and around four Fed cuts in H2, in contrast to market pricing, which […]
Dominique Dwor-Frecaut
Summary A year in, there has only been some progress on the Trump administration’s key objectives, partly due to their structural and complex nature. The continued trend of rising profit income share is supportive of equities. The lack of fiscal consolidation could be LT bearish for bonds, though actual fiscal policy so far has been […]
Dominique Dwor-Frecaut
Summary With the Iran ceasefire already in doubt less than 24 hours after being agreed, I outline three post-war scenarios. My base case is a low-intensity conflict with Iran retaining control of the Strait of Hormuz (SOH), keeping oil around ~$125/bbl as it manages flows to fund reconstruction—triggering a US recession. The worst-case scenario involves […]
Dominique Dwor-Frecaut
Summary Base case: War triggers a 2026 recession, driven by a prolonged Strait of Hormuz (SOH) closure and underlying economic fragilities. Policy response: With long-term inflation expectations anchored, the Fed can cut four times in H2. Alternative: If the SOH reopens within a couple of months, the US likely avoids recession, and the Fed delivers […]
Dominique Dwor-Frecaut
Summary The private credit crisis is likely already underway, but unlikely to turn out systemic in view of overall strong corporate health and limited bank exposure. Because private credit borrowers tend to have weaker resiliency to economic downturns, the crisis could be signalling further economic weakness. Market Implications I continue to expect, before any war […]
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