The Kobeissi Letter, a well-regarded financial publication, is known for its sharp analysis of markets, economics, and investment trends. Its commentary often draws attention from traders and financial professionals for its actionable insights. On December 26, 2024, The Kobeissi Letter posted an extensive thread on X (formerly Twitter), discussing the perplexing rise in interest rates despite the Federal Reserve’s ongoing rate cuts.
The Kobeissi Letter pointed out that since the Federal Reserve began cutting interest rates in September 2024, with a notable 50 basis point cut, the yield on the 10-year U.S. Treasury note has risen from 3.60% to 4.60%. This represents the highest yields since May 2024, even though the Fed has been aggressively reducing rates.
Source: MarketWatch
According to their analysis, this trend is unusual because U.S. Treasury yields often fall when the Federal Reserve cuts interest rates. Instead, yields have risen, leading to higher borrowing costs. For example, the average 30-year mortgage rate in the United States has increased from 6.15% three months ago to 7.10% now. The Kobeissi Letter notes that this rise translates to an additional $400 per month in mortgage payments for the median-priced home of $420,400.
The Kobeissi Letter attributes the rise in interest rates to growing concerns about inflation. They explain that several key measures of inflation, including the Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Consumption Expenditures (PCE), are climbing. Notably, the 3-month annualized core CPI has approached 4%, and a measure called Supercore PCE inflation, which excludes volatile items like food and energy, is nearing 5% on a 1-month annualized basis.
They emphasize that inflationary pressures are mounting even before considering potential impacts from new tariffs or tax cuts introduced by the Trump administration. This has led markets to price in higher inflation expectations, pushing interest rates upward.
In November 2024, after a 25 basis point rate cut, Federal Reserve Chair Jerome Powell was asked about rising interest rates. The Kobeissi Letter quotes Powell’s acknowledgment that financial conditions have materially changed but stated that their persistence was uncertain. Since then, rates have continued to climb, signaling a shift in market sentiment toward more inflation concerns.
The Kobeissi Letter also pointed out that the U.S. dollar index (DXY) has hit a 25-month high, rising nearly 8% since October. The strong dollar, valued at $1.44 CAD, is nearing a 20-year high against the Canadian dollar.
Source: MarketWatch
Simultaneously, gold prices have rebounded, with The Kobeissi Letter previously forecasting a rise from $2,600 to over $2,700 per ounce, reflecting increased demand for safe-haven assets amidst inflation fears.
The Kobeissi Letter’s claim of an unprecedented disconnect between markets and the Federal Reserve stems from the unique combination of factors at play. Typically, rate cuts are associated with declining yields and easing financial conditions. However, in this instance, the opposite has occurred: yields are rising, borrowing costs are climbing, and inflation expectations are escalating.
This divergence reflects a loss of confidence in the Federal Reserve’s ability to control inflation. Markets appear to be pricing in persistent inflationary pressures, ignoring the Fed’s efforts to stimulate growth. By emphasizing this divergence, The Kobeissi Letter highlights how today’s macroeconomic environment challenges conventional economic dynamics, making this moment potentially historic.
Looking ahead, The Kobeissi Letter suggests that inflation data has significantly altered market expectations for 2025. Whereas markets once expected four rate cuts in 2025, the base case has shifted. Now, the first rate cut is anticipated around May 2025, and there is a 21% chance there won’t be any rate cuts at all next year.
Despite these inflationary concerns, both U.S. and foreign investors have pumped record amounts—$140 billion since Election Day—into U.S. equities. The Kobeissi Letter views this as a setup for heightened uncertainty and volatility in 2025, with excellent returns possible for those who can navigate market technicals and avoid distractions.
In contrast to the United States, The Kobeissi Letter notes that China is experiencing the opposite trend. Chinese 10-year bond yields have fallen nearly 100 basis points in 2024 as the country implements widespread stimulus measures to combat an economic slowdown. They highlight that China is teetering on the edge of a recession, a stark difference from the inflation-driven challenges in the U.S.