SGOV - SGOV: Recessionary Disinflation Has Arrived Increasing Rate Cut Odds

2024-06-16 03:56:42 ET

Summary

• The significant decline in April and May services inflation and revolving consumer credit growth indicate demand-driven disinflationary patterns.
• The labor market appears to be facing a typical recessionary trend: a lower number of full-time workers (without second jobs) compared to the total working-age population.
• Job growth may be strong, but that is primarily driven by a rising need for part-time jobs to offset lower real disposable household income.
• As the population and Federal Reserve recognize these patterns, I believe significant interest rate cuts and a typical deflationary recession are very likely.
• SGOV's yield may decline, but not necessarily its yield compared to inflation. Further, inflation seems unlikely to remain low in the long term, as over-zealous rate cuts may spur an even greater inflationary wave.

Earlier this year, a central theme in my research was the apparent rebound or stickiness of most inflation indicators. As such, I have had a bullish view on short-term bonds, particularly Treasury Bills that pay an attractive ~5.3% yield today. This view describes the short-term 0-3 month government bond ETF ( SGOV ) in " SGOV: The Federal Reserve May Not Cut Rates In 2024. " Further, my outlook on long-term Treasuries has been bearish , citing prolonged inflationary pressures as potentially lowering bond prices. In other words, my view has been that the yield curve would steepen without a significant decline in interest rate cuts....

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