“We continue to see five- to 10-year real and nominal rates as attractive, but markets may struggle for direction in the near-term as data could remain noisy amid an overall slowing trend,” TD Securities’ Oscar Munoz and Gennadiy Goldberg wrote, editorializing around the new Fed dot plot.

TD “marked to market” (their words) their Treasury forecasts, even as they “continue to expect rates to decline in the months ahead as data softens.”

I mention the above because I generally agree with it. All of it, for whatever that’s worth. It’s entirely possible that we’re currently witnessing “peak higher for longer” in terms of the waxing and waning of various macro-policy narratives.

The figure shows how much buy-in that narrative had late Wednesday (i.e., following the FOMC) versus two months ago.

That’s not (necessarily) to say the Fed will cut rates next year by more than the 50bps implied by the new 2024 median dot, it’s just to say I do wonder whether it’s realistic to suggest the economy can continue to perform with rates just 25bps below current levels looking out 15 months, which is what the dots now telegraph. And then there’s the unemployment rate projections, which don’t exactly convey the kind of “softening” that Jerome Powell still says will be necessary to reestablish price stability.

“The peak unemployment projection was lowered to just 4.1% — arguably more akin to a no-landing than a material softening of growth,” BMO’s Ian Lyngen and Ben Jeffery wrote on Thursday. “In the event these forecasts come to fruition, Powell will have effectively reestablished price stability without meaningfully curtailing demand in a still-imbalanced labor market,” they added. “Hey, could happen.”

Yeah, it could. Stranger things have certainly happened. And there’s absolutely still scope for job vacancies to fall further, theoretically limiting actual job losses as the labor market rebalances. In a testament to Munoz and Goldberg’s cautious remarks about the peril inherent in playing for lower yields when the data is still inclined to send mixed signals, Thursday’s initial claims print betrayed no evidence of a softer labor market.

201,000 was the lowest print since January. That was in part responsible for a long-end selloff that meaningfully bear steepened the curve on Thursday.

I have to wonder, though, with two-year yields the cheapest since 2006 and 10-year yields the highest since 2007, if this is it. Yes, the Fed could make good on the “threat” of another hike in 2023, but it’s hard to see where the incremental hawkishness will come from at this juncture.

Notwithstanding the eight-month low for claims, a material re-acceleration in the NFP prints that sees the three-month average reset meaningfully higher seems unlikely, and while I don’t think anyone realistically expects core price growth to beat a hasty retreat back to target in the near-term (indeed, the MoM prints could be less favorable in the months ahead), I’m not sure where the re-acceleration catalyst will come from there either.

I’d argue that whatever happens in the near-term, the medium-term risks are skewed to the downside for growth, the labor market and maybe even for inflation, depending on the evolution of the broader economy. While the Fed is cognizant of the risks, they seem to be overweighting the upside case now.

Larry Summers alluded to the same on Thursday, although his determination to be “right” about inflation prevented him from conceding that the kind of growth downdraft he’s variously warned about could easily be disinflationary. “It’s more likely than not that they’re either going to get surprised on the higher inflation side, or on the weak” growth side, he told Bloomberg. “Or possibly both could materialize in a stagflationary kind of dynamic.”

I don’t make predictions in these pages. And anyone who makes predictions when they don’t have to is, in my judgment, incurring unnecessary reputational risk (“better to remain silent and be thought a fool…”). But I will say this: If the bottom falls out over the next four- to six months, there’ll be a lot of sarcastic derision aimed at the September FOMC meeting. And there’ll be a lot of people wishing they’d faded this latest cycle high for yields.

If nothing else, the constellation of unknowns (e.g., a prospective government shutdown, the drag from the resumption of student loan payments on spending, ongoing tension between capital and labor) argues against the kind of complacency inherent in the idea that two-year yields are “destined” to converge with Fed funds come hell or high water before the inevitable bull steepener can set in on the back of some adverse development.

I’m not especially fond of David Rosenberg (which puts him in good company — with the exception of maybe five or six people, I’m not especially fond of anyone), but I think he was on the right track Wednesday when he jeered, on social media, “Same institution that brought us ‘no tech bubble’ in 2000, ‘subprime contained’ in 2007, ‘green shoots’ in 2009, ‘funds rate through neutral’ in 2018, ‘transitory’ in 2021, is now peddling ‘higher for longer’ in 2023. Fade the Fed.”