The Kobeissi Letter Analysis

The Kobeissi Letter, a prominent financial publication, provides insightful market commentary. On December 26, 2024, it highlighted a curious trend: interest rates have risen despite ongoing Federal Reserve rate cuts.

Since the Federal Reserve began cutting rates in September 2024, notably with a 50 basis point cut, the yield on the 10-year U.S. Treasury note increased from 3.60% to 4.60%, the highest since May 2024. Normally, U.S. Treasury yields drop when rates are cut, making this rise unusual and indicative of increasing borrowing costs. Consequently, the average 30-year mortgage rate in the U.S. has escalated from 6.15% to 7.10%, equating to an extra $400 per month for the median-priced home worth $420,400.

The Letter attributes this interest rate surge to rising inflation concerns, as seen in increases across critical inflation metrics such as the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE). For instance, the 3-month annualized core CPI is nearing 4%, with Supercore PCE inflation reaching 5% on a 1-month basis. These inflationary pressures are compounded by potential impacts from new tariffs or tax cuts from the previous Trump administration, leading markets to anticipate higher inflation long-term.

On November 2024, after a 25 basis point rate cut, Federal Reserve Chair Jerome Powell acknowledged the material change in financial conditions, yet the cause of this persistence remains uncertain. Since then, rates have continued to rise, indicating shifting market sentiments towards inflation worries.

The U.S. dollar index (DXY) has also peaked at a 25-month high, climbing almost 8% since October, while gold prices are on the rise as demand for safe-haven assets increases amid inflation fears.

The Kobeissi Letter emphasizes an exceptional disconnect between the markets and the Federal Reserve, marking this scenario as potentially historic. Normally, rate cuts foster lower yields and more accessible financial conditions, but currently, yields and borrowing costs are rising amid escalating inflation expectations—reflecting a waning confidence in the Fed’s inflation control capabilities.

Moreover, forecasted shifts in market expectations for 2025 reveal that instead of proceeding with four anticipated rate cuts, the first cut may occur around May 2025, with a 21% chance of no rate cuts next year. Despite these rising inflation expectations, investors have significantly invested $140 billion into U.S. equities since Election Day, indicating a volatile yet potentially lucrative investment landscape ahead.

In comparison, China is seeing 10-year bond yields decline nearly 100 basis points in 2024, as the country employs stimulus measures to combat economic decline, starkly contrasting the inflation-related challenges in the U.S.