Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Saxon words, writing this, the totality of the data seems
Speaker 2: to have shifted, and that was a certainty last week,
Speaker 2: sticking the soft landing now is being called into questions.
Speaker 2: Sarah joins us now from Well, Sarah, good morning to you.
Speaker 3: Good morning.
Speaker 4: What changed to eight thirty Eastern time on Friday mornch I.
Speaker 3: Think it started to change on Thursday and Friday, just
Speaker 3: confirm the fact that the data was in fact getting weaker.
Speaker 3: Those im numbers were weak on the manufacturing side, and
Speaker 3: then you had a payrolls report that was much weaker
Speaker 3: than people expected and There's been a lot of controversy
Speaker 3: on the Perils Report of how much of how easy
Speaker 3: is it to interpret the data, and whether or not
Speaker 3: the birth death model makes a lot of difference. And
Speaker 3: when the numbers were high, nobody worried, and now that
Speaker 3: the numbers are coming down, people are really starting to
Speaker 3: worry and you start to hear that conversation again, like
Speaker 3: how strong was it really all year? And how strong
Speaker 3: is employment? And I think that that's part of the
Speaker 3: problem that you're having, and it just reinforced the fact
Speaker 3: that you had weak ism numbers.
Speaker 2: Let's shop up the equity market seven percent move lower
Speaker 2: almost on small camps. Last week, financials got battered on Friday,
Speaker 2: text get in hambered. This morning, banks it down again.
Speaker 2: Is there any think about these moves that you want
Speaker 2: to pick up the pieces anywhere anywhere at all?
Speaker 3: I think the place that most people are going to
Speaker 3: want to pick up the pieces is going to be technology.
Speaker 3: Because I think you had a guest on earlier this
Speaker 3: morning that made the point that the small cap trade
Speaker 3: in the bank trade didn't make a lot of sense
Speaker 3: if you thought the economy was going to get weaker.
Speaker 3: So I would say that that also is true, and
Speaker 3: that was one of those what else can we buy
Speaker 3: trades as opposed to we really need to be in
Speaker 3: these sectors right now. I think that some of what's
Speaker 3: happening in tech is just you haven't really had a
Speaker 3: correction in a long time. You had this market running
Speaker 3: right up from January to July, and then we did
Speaker 3: a complete U turn. So I think that that's where
Speaker 3: people are going to want to be. To day Ive's point,
Speaker 3: I don't think it's the end of the world, but
Speaker 3: it certainly is a very fast correction and a very
Speaker 3: strong correction when people were not necessarily expecting this much drama.
Speaker 3: But you have so much that's happening on an unwind
Speaker 3: of the carry trade. To your point on the end,
Speaker 3: there's so many different mechanical pieces underneath that it's hard
Speaker 3: to parse them all out because they're not obvious. It's
Speaker 3: not one thing like earnings were terrible. They weren't, they
Speaker 3: were okay. It's just a lot of different pieces.
Speaker 5: But I wonder, even if tech.
Speaker 6: Is the trade, is some of that huge enthusiasm we
Speaker 6: had over AI. It's not just done in a market
Speaker 6: where you need to worry about whether the FED is
Speaker 6: going to cut or not. Can you really be so
Speaker 6: hopeful on giving those companies more time to let their
Speaker 6: AI plays play out.
Speaker 1: Well, if you think.
Speaker 3: About some of the parallels that the people had made
Speaker 3: to like the two thousands, right, you had a lot
Speaker 3: of companies in the two thousands that were selling to
Speaker 3: customers that didn't have any money, so they were financing
Speaker 3: their own customers. It was a whole different situation than what's.
Speaker 5: Happening right now.
Speaker 3: I think that AI is like dark fiberback then. People
Speaker 3: are putting in capacity because they're not sure exactly how
Speaker 3: they're going to use it, but they're pretty sure they're
Speaker 3: going to find a use for it. Is that as
Speaker 3: fast as people expect it to be?
Speaker 5: Probably not.
Speaker 4: Is it what people expect it to be.
Speaker 1: It never is.
Speaker 3: It always changes, So I don't think that that goes away.
Speaker 3: And the companies that are bankrolling spending on this have
Speaker 3: a ton of money. It's not like they're in trouble
Speaker 3: in any way, shape or form. But the timing was
Speaker 3: always going to be, you know, wall streets.
Speaker 5: So quick immediate.
Speaker 3: I need to know immediately what's going to happen, And
Speaker 3: that's not the way it's playing out.
Speaker 5: And I think that that's.
Speaker 3: Part of what you're seeing here as well.
Speaker 6: But even so, when you do see these stocks swing
Speaker 6: to the upside, the moves are huge. I mean, you
Speaker 6: get again one hundred billion plus dollar moves on the
Speaker 6: upside or on the downside for just a single name
Speaker 6: like Nvidia. Does that make it harder just to stomach
Speaker 6: to hold on to the ride.
Speaker 3: It's one of the reasons why you're not supposed to
Speaker 3: look at your wordfolo every day, right, But we do
Speaker 3: anyway because that's what that's what we do for a living.
Speaker 3: And I think the problem is just you had to
Speaker 3: love large numbers. With a lot of these tech companies.
Speaker 3: The earnings moved so fast fro Nvidia in particular because
Speaker 3: people were scooping up those ships and they were being
Speaker 3: able to charge higher prices for them. So then the
Speaker 3: question becomes, Okay, when things settle down, what kind of
Speaker 3: pricing can they get an amdal All of a sudden,
Speaker 3: theres now becoming a player, which people thought that they
Speaker 3: would be, but that didn't seem to be. And then
Speaker 3: all of a sudden their earnings were good and they
Speaker 3: were like, yes, look out for us. So there's a
Speaker 3: lot of moving parts, and yes, those things swing around
Speaker 3: a lot.
Speaker 2: Let's just sit on the FED just for a moment.
Speaker 2: You'll catch up with ed Ouh Senning a little bit
Speaker 2: later this hour. He draws the distinction between a FED
Speaker 2: cutting to become less restrictive and a FED cutting to
Speaker 2: become accommodative. And I'm trying to work out where we're
Speaker 2: going to be in September. Are we cutting to normalize
Speaker 2: or are we cutting to address a growth shock, because
Speaker 2: that's very different things. And I just wonder how different
Speaker 2: your captain adication decisions would be based on what kind
Speaker 2: of decision we actually get in September.
Speaker 3: Well, that's part of the U turn, right, And that's
Speaker 3: If the FED had cut last week, which I would
Speaker 3: argue that they should have at least twenty five basis points,
Speaker 3: then I think the amplitude of this would have been lower.
Speaker 3: You still would have had a direction downtrend, but I
Speaker 3: don't know if the amplitude would have been so high.
Speaker 3: And I think part of the problem is that's what
Speaker 3: they were moving towards, which is cutting to normalize, and
Speaker 3: now the growth scares is making that shift to maybe
Speaker 3: they're cutting because they have to and that's where the
Speaker 3: fifty basis points I think is a push because I
Speaker 3: don't think that they want to look that worried about
Speaker 3: it in September.
Speaker 4: But I think that if.
Speaker 3: There really is a growth scare, I mean, we've been
Speaker 3: trying to position for slower growth anyway, so it's not
Speaker 3: like that's going to change our allocation too much. But
Speaker 3: in the end, this quick turn from markets and perception
Speaker 3: and investors from it's all fine, and we still have
Speaker 3: growth to oh my god, the world is coming to
Speaker 3: an end is really made all of the markets come down,
Speaker 3: and I mean everything is coming down right now. So
Speaker 3: I think that that's I don't think people are expecting
Speaker 3: the amplitude.
Speaker 5: Of that change.
Speaker 2: Okay, So I put it another way, at least right
Speaker 2: cuts worth buying, go right cuts, and I should sell.
Speaker 3: Oh that's a tough one too, because I mean, I
Speaker 3: think that the question about I was thinking about this
Speaker 3: in the green room, the question about rate cuts and
Speaker 3: what happens with rates When people are piling into treasuries
Speaker 3: as a safety trade, it stops becoming about rates and
Speaker 3: it starts becoming about safety. So it almost doesn't matter
Speaker 3: in the near term because people are piling into treasuries
Speaker 3: because that's someplace to put money, and I don't know
Speaker 3: when that flips back to know, we really care about
Speaker 3: what the Fed's doing, and that's why I'm buying bonds too.
Speaker 3: I need to buy bonds because they're safe.
Speaker 6: You mentioned what would happen if we got a fifty
Speaker 6: basis point cut, Sarah. If the FED does do what
Speaker 6: this market is saying, an inter meeting FED cut, what
Speaker 6: would the reaction be?
Speaker 3: I think, unfortunately, because they missed the opportunity last week,
Speaker 3: the reaction to an inter meeting cut would be what
Speaker 3: are they seeing that we don't see? And I think
Speaker 3: that's what they don't want to do, right, That's what
Speaker 3: markets don't want to have, is that kind of you know,
Speaker 3: two weeks ago everything was fine, or a week ago
Speaker 3: everything was fine, and now you feel like you have
Speaker 3: to come and intervene when twenty five basis points to
Speaker 3: be fair is not a huge cut. It's just that
Speaker 3: people were worried that if they went twenty five, they
Speaker 3: would expect that they keep going. And I don't that
Speaker 3: kind of concern. I don't really understand. I think the
Speaker 3: FED has more power than that, but they seem to
Speaker 3: get trapped into perception, and I think that that's.
Speaker 5: Part the issue.
Speaker 2: I just want to make sure I walk away with
Speaker 2: the right impression of where you were at currently. Do
Speaker 2: you think the pendulum swung too far in the other direction?
Speaker 1: Now?
Speaker 5: Absolutely?
Speaker 4: But I don't know. But it doesn't so in stocks
Speaker 4: are in bonds, both both.
Speaker 3: Right now because the bond is a panic where am
Speaker 3: I going to put my money? And the stocks are,
Speaker 3: Oh my goodness, the world is coming to an end.
Speaker 3: But the question is, you know, did the whole Olympic stick?
Speaker 5: The landing thing?
Speaker 3: When does that knife stick? And does it keep falling?
Speaker 3: And I don't know because things always move too far,
Speaker 3: and there have been a lot of really levered trades
Speaker 3: that are underneath all of this that, yeah, everything else
Speaker 3: that are unwinding that we can't see, and that's where
Speaker 3: it's hard to figure out where does that stop. I
Speaker 3: think that this is an overreaction, but I don't know
Speaker 3: when that overreaction stops, because I don't think that the
Speaker 3: underneath is as bad as it has been in the
Speaker 3: last couple of times the market's really had problem.
Speaker 2: I'm just trying to work out where we actually really
Speaker 2: are at the moment, and we'd ask this question a
Speaker 2: few times over the last few weeks coming into that
Speaker 2: unemployment report, if we triggered the psalm rule, and clearly
Speaker 2: a psalm's going to have our own thoughts on our
Speaker 2: own rule live late to this morning, So you should
Speaker 2: look out for that, I said, if we triggered it
Speaker 2: with this market behavior as if we're in a recession already,
Speaker 2: even if the Fed policy makes that everyone else said,
Speaker 2: would not with the market begin to behave like we're
Speaker 2: in a recession or ready, and this tease up. I
Speaker 2: think the data a little bit later. Let's say we
Speaker 2: get M services and it comes in strong. Is that
Speaker 2: data that this market's going to ignore because it's so
Speaker 2: firmly fixated on the view that that's where we are
Speaker 2: now a recession and it embraces weakness, that ignores strength.
Speaker 2: I'm just trying to work out how we respond to
Speaker 2: incoming information, how sensitive we are to strong data, how
Speaker 2: sensitive we are to weak data.
Speaker 3: Well, I think this goes back to Danny's point how
Speaker 3: much of this is underlying mechanical trading problems and how
Speaker 3: much of this is a reaction to the data. It
Speaker 3: started as a reaction to data, and then it became
Speaker 3: its own problem. And that's again the problem of highly
Speaker 3: levered trades is that when they go against you, the
Speaker 3: forced unwind is not necessarily things that people want to do,
Speaker 3: but it's things that people have to do. So the
Speaker 3: data can help slow that down, possibly, but it's not
Speaker 3: as much reactive to data as it is reactive to
Speaker 3: margin calls and to other issues that are underneath that
Speaker 3: on the financial side. So I think that the data
Speaker 3: would help, but bad data could make it worse. Good
Speaker 3: data might make it a little bit better, but I
Speaker 3: don't know how much that's going to stop this. This
Speaker 3: has to stop on its own because there's some calming
Speaker 3: down of forced selling, and I feel like that's what
Speaker 3: we are right that right now, forced.
Speaker 2: Buying at the Japanese yen as well, in particular. So Hun,
Speaker 2: thank you, Vampire Saxon Woods, let's park all the price
Speaker 2: action and just sit on this. I know many of
Speaker 2: you have heard this phrase in the last few weeks.
Speaker 2: In fact, for the last few months, we've been talking
Speaker 2: about the so called Psalm rule, the rise of the
Speaker 2: unemployment rate in July triggering the Psalm rule, a recession
Speaker 2: indicator for so many which has a perfect track record
Speaker 2: over the past half century. Claudia sam herself of New
Speaker 2: Century advisors, saying this, I don't look at this and
Speaker 2: big pictures say we are in recession. But I look
Speaker 2: at this and I say we're not headed in a
Speaker 2: good direction. Claudia joins us. Now for more, Claudia famous,
Speaker 2: if you weren't already, I think you know that. Anyway,
Speaker 2: it's great to catch up with you. I just want
Speaker 2: to take a beat and just sit on this from moment. Claudya,
Speaker 2: let's go from the very beginning. Tell us what the
Speaker 2: psund rule is, what you wanted it to be used for,
Speaker 2: and whether you think it's applicable in Alpa market like
Speaker 2: this one.
Speaker 1: So the origin of the recession indicator was in a
Speaker 1: proposal I had to improve fiscal policy, put it on
Speaker 1: autopilot automatic stabilizers in a recession. It's a rule in
Speaker 1: the sense of not the economy must do something. It
Speaker 1: was a rule in the sense of policymakers do something.
Speaker 1: It may end up playing out that way. So, but
Speaker 1: what the idea of it was was to look at
Speaker 1: the historical record in the United States and find the pattern,
Speaker 1: find the unemployment rate, increase. It's very important to look
Speaker 1: at changes at which in the past the US has
Speaker 1: been in a recession months into a recession. This is
Speaker 1: not a forecast, right, and so it's just trying to
Speaker 1: capture and yet it is absolutely true it doesn't have
Speaker 1: to be that way this time. And frankly, if we
Speaker 1: look at all of what we know about the US
Speaker 1: economy right now, it is very unlikely that we are
Speaker 1: in a recession. And yet a really important question is
Speaker 1: where are we headed. And those changes in the unemployment
Speaker 1: rate that the sambrule picks up on, they do not
Speaker 1: look encouraging, right, They're headed in the wrong direction, and
Speaker 1: that momentum is what can get us in trouble.
Speaker 6: So, Claudia, for just all of those people out there
Speaker 6: who are talking about your name, who are talking about
Speaker 6: the same rule, using as an excuse to sell, using
Speaker 6: as an excuse to say that the FED should be moving.
Speaker 5: Sooner, Just what do you say to those people?
Speaker 1: Calm is important in a moment like this, regardless of
Speaker 1: what indicator data points you're looking at. You know, the
Speaker 1: fear does no good. And this, again, this was trying
Speaker 1: to give a simple summary of one piece of the
Speaker 1: US economy, the labor market is very important. There's a
Speaker 1: lot of complications right now. Again it's this balance between
Speaker 1: calm but take it seriously. Right, Like, there is slowing
Speaker 1: in the US economy, and we have seen that the
Speaker 1: point is to keep that slowing from really pulling us
Speaker 1: in reverse. We're not there yet. Usually dissemble by the
Speaker 1: time it triggers, we're past that point. Right, So there
Speaker 1: is this opportunity of as I said, the Federal Reserve
Speaker 1: has a lot of place to ease there is. We
Speaker 1: do come into this in a position of strength, broadly speaking,
Speaker 1: in the economy. So that's really important for weathering a
Speaker 1: storm like this that has many different contributors to it.
Speaker 6: Today, I didn't mean to use your pun as a segue,
Speaker 6: but I want to in terms of storm and weathering
Speaker 6: it because on Friday there was just this huge debate
Speaker 6: when the numbers dropped of people saying, look, don't believe
Speaker 6: the numbers you're going to see because they will revert quickly.
Speaker 6: Because a lot of it has to do with weather,
Speaker 6: A lot of it has to do with Hurricane Beryl.
Speaker 6: But by the way, the BLS comes out and says
Speaker 6: there's no discernible impact which side of this do fall on, Claudia,
Speaker 6: Whether the numbers we saw on Friday are something that
Speaker 6: can somewhat re verse because it's a weather impact.
Speaker 1: Is absolutely the case that any indicator, and the so
Speaker 1: rule fits into this, should not be designed to overreact
Speaker 1: to one months of data. Right, So this looks it
Speaker 1: smooths across months. The pattern it's responding to is a
Speaker 1: gradual increase, gradual steady increase in unemployment over the past year. Right,
Speaker 1: So there's that in terms of weather effects. I the
Speaker 1: beer of Labor Statistics has the ability and the experience
Speaker 1: to look very carefully at the geographic data to get
Speaker 1: a sense of where its effects are. I think they
Speaker 1: take those statements very seriously, and I agree with them
Speaker 1: for a lot of reason, including their statement that the
Speaker 1: unemployment raid specifically the ambos On was not affected the
Speaker 1: labor force status was not affected being home because being
Speaker 1: unable to work because of the weather doesn't flip you
Speaker 1: out of being employed to unemployed. So it gets really
Speaker 1: technical in that, but absolutely that one month that was
Speaker 1: a big surprise was a negative one a prior of
Speaker 1: just some of them. Reverse is probably the right one,
Speaker 1: but it is the context of the year as a whole,
Speaker 1: and even moderate slowing. And this increase in the unemployment
Speaker 1: rate has been in the past consistent with early in recession.
Speaker 1: So we might not be there, but we're getting uncomfortably
Speaker 1: close to that situation.
Speaker 2: Cloda, you've worked at the Federal Reserve. You know better
Speaker 2: than most how that institution operates, how slowly it can
Speaker 2: move sometimes. How do you think it's going to respond
Speaker 2: to this data, not just on Friday, but the data
Speaker 2: from Thursday as well as we go into Jackson Hoe
Speaker 2: on a day like.
Speaker 1: Today, when, as you said, the panic word is loubing
Speaker 1: large for many people. The fact that the Federal Reserve
Speaker 1: is slow moving and deliberate, it's a good thing. The
Speaker 1: last thing we need is them joining into that kind
Speaker 1: of that energy, that emotional energy, and yet they're watching
Speaker 1: it very carefully. The market functioning, liquid these are all
Speaker 1: you know. The reason that we have the Fed is
Speaker 1: to make sure the markets keep functioning. Monetary policy then
Speaker 1: came later, right, So there is this aspect of them
Speaker 1: being diligent in terms of them looking at Friday's report
Speaker 1: and changing dramatically their views on a September rate change.
Speaker 1: I think that that would be unlike them, and I
Speaker 1: think it would be premature. Right they're pointed in the
Speaker 1: right direction. They have some time to get there, but yes,
Speaker 1: they are slow moving, particularly when it comes to the
Speaker 1: economic data.
Speaker 2: How do you imagine they'll frame that first interest rate cut?
Speaker 2: Do you think that's going to be framed as a
Speaker 2: mid cycle adjustment, the process towards sort of normalization, or
Speaker 2: the first step towards taking a more accommodative stance. Given
Speaker 2: what's developing, how do you think they're going to frame it?
Speaker 2: Just give them what we know so far.
Speaker 1: In the September feels like a lifetime away right now. Yeah,
Speaker 1: I think they if they can. The FED likes to
Speaker 1: move in on the path it's set out. The path
Speaker 1: it has set out is to begin normalizing interest rates.
Speaker 1: Because inflation is normalized and we are in you know,
Speaker 1: kind of everything is planned in that right direction. I
Speaker 1: think they're going to want to keep to that narrative
Speaker 1: and to that path if they can. You know, the
Speaker 1: last few days have called into question whether that is appropriate.
Speaker 1: It will be appropriate at that point. And I will
Speaker 1: say one thing for the Fed, you know it is
Speaker 1: it is very deliberate. It can be very slow moving.
Speaker 1: But when the facts change and it gets its mind
Speaker 1: around it, it will move and it will do what
Speaker 1: it has to do. And we are in a position
Speaker 1: right now where they have the ability to do quite
Speaker 1: a bit, and that is notable.
Speaker 6: And John made the point that both City and JP
Speaker 6: Morgan have changed their call now to see two consecutive
Speaker 6: fifty basis points cuts from the Fed. Claude, what difference
Speaker 6: does it actually make moving twenty five or fifty in September.
Speaker 1: It it will all it all fits within the context
Speaker 1: of that moment. Right for someone changing to fifty point cuts,
Speaker 1: particularly consecutive ones, that's that's a pretty dire outlook for
Speaker 1: the economy when we get to that point. Or you
Speaker 1: know in the intervening that that's not where my baseline is.
Speaker 1: I don't think that's where the fence is. I mean,
Speaker 1: looking at the data and where we're at. And yet
Speaker 1: you know, clearly if we were seeing large moves like
Speaker 1: that out of the gate, there's there's a real problem.
Speaker 1: But you know, but we saw some big moves out
Speaker 1: of the gate and fighting inflation in twenty twenty two
Speaker 1: in the other direction, and you know, you you the
Speaker 1: FED will take its policy to where it needs to
Speaker 1: be to the conditions in the economy.
Speaker 2: Chlodia, we appreciate your time. Just fantastic to space you
Speaker 2: passed some Clodia Son of New Century advises.
Speaker 4: Shoting us now.
Speaker 2: It's Andrew home Hosts of City and Steven Stanley of Santanta.
Speaker 2: A gens is try to catch up with you bugs
Speaker 2: the when it comes to you first entry. Because you wrap
Speaker 2: with the big cop on Friday, fifty basis points in September,
Speaker 2: Goldman's to stick him with twenty five. They think maybe
Speaker 2: you should wait for payrolls to come out for August.
Speaker 2: In September, why they run, Why is it now the
Speaker 2: right time to make the call? Why are you so
Speaker 2: convinced by Friday?
Speaker 4: STATESA.
Speaker 7: Yeah, when we came out with the fifty basis point
Speaker 7: call for September, we also think they'll go fifty basis
Speaker 7: points again in November. That was just after the jobs report.
Speaker 7: And I think that the key thing of the jobs
Speaker 7: report is not that the unemployment rate rose to four
Speaker 7: point three percent. It's not one month of data. It's
Speaker 7: that we now have four consecutive months of the unemployment
Speaker 7: rate rising and accelerating. So if the Fed is trying
Speaker 7: to get a soft landing. You have a lot of
Speaker 7: momentum upwards in the unemployment rate that you need to stop.
Speaker 7: If you're trying to stop that kind of slowing momentum,
Speaker 7: that means rate should be down, maybe at neutral, maybe
Speaker 7: below neutral.
Speaker 5: Well, where's neutral from here?
Speaker 7: Most people would say at least two hundred basis points
Speaker 7: below where we are, So fifty basis points in September
Speaker 7: is really just getting started. That's why we have fifty
Speaker 7: again in November. I base case they don't do this
Speaker 7: emergency cut.
Speaker 4: But it's possible, possible. What would make it happen?
Speaker 7: I think further sell off in risk assets and seeing
Speaker 7: that broadened. Right, it can't just be about the tech sector.
Speaker 7: It has to be broad It has to be in
Speaker 7: credit markets and credit spreads, widening liquidity issues.
Speaker 5: Those are the kind of things that could get the
Speaker 5: Fed to move early.
Speaker 6: Stephen, you're skeptical of that that they could go fifty,
Speaker 6: that they more likely to go twenty five?
Speaker 5: Why? Yeah?
Speaker 8: I think well, first of all, I mean the key
Speaker 8: thing for the FED right now is inflation, and I
Speaker 8: don't think that we've gotten over the hump on inflation yet.
Speaker 8: We had four bad numbers. We've had two good numbers.
Speaker 8: I mean, I did my forecast last month for CPI
Speaker 8: and I got point three for the core CPI.
Speaker 5: I don't think the Fed's going to.
Speaker 8: Be cutting dramatically in that sort of an environment. I
Speaker 8: also don't think the economies that week.
Speaker 5: I mean, I mean, Andrew's.
Speaker 8: Right about the unemployment rate, but if you look at
Speaker 8: the totality of the labor market data, it's certainly not
Speaker 8: signaling that the unemployment rate is giving us an accurate
Speaker 8: signal what's going on in the labor market.
Speaker 6: But again, as Andrew says, if it's not the level,
Speaker 6: it's the trend. Is the trend not concerning, it's not
Speaker 6: enough for the FED to step in.
Speaker 5: Again.
Speaker 8: I mean, look, household survey is a very noisy set
Speaker 8: of data.
Speaker 5: It's a very small sample.
Speaker 8: If we were seeing dramatic pick up in jobless claims,
Speaker 8: if the Jolts data were supportive, if you know, all
Speaker 8: the other survey data that we were seeing was supportive
Speaker 8: of a dramatic cut in or a dramatic weakening in
Speaker 8: the labor market, I'd be more convinced. But as it is,
Speaker 8: I see that as more there's a lot of noise
Speaker 8: in that number.
Speaker 2: Of my view, I want to pick up on your
Speaker 2: point on inflation. I think it's really important and it's
Speaker 2: hardly been talked about for the last few days. We've
Speaker 2: got the next print on August fourteenth. Peter chev Academy
Speaker 2: published this over the weekend and he said, if the
Speaker 2: FED does anything that looks or smells like there eager
Speaker 2: to embrace the FED put, we would likely see inflation.
Speaker 2: Starting with risk assets. They're caught between a rock and
Speaker 2: a hard place in terms of being able to be aggressive.
Speaker 2: Why do you disagree with that, Andrew? Why do you
Speaker 2: think they're not as constrained as perhaps Stephen and the
Speaker 2: likes of Peter Cheer are suggestic.
Speaker 7: There are medium term concerns about inflation. I'm not discounting
Speaker 7: that at all. But in terms of the near term,
Speaker 7: you have financial conditions that are tightening right now, are
Speaker 7: tightening rapidly, and as we say here, and if the
Speaker 7: FED doesn't push against that tightening and financial conditions, you
Speaker 7: will actually end up slowing the US economy by more.
Speaker 1: So.
Speaker 7: What they're dealing with right now is risk management, where yes,
Speaker 7: there are some concerns about inflation, but cutting rates.
Speaker 5: Now, if they.
Speaker 7: Cut fifty basis points in September, that's already priced into
Speaker 7: the market. That's not going to cause equity prices to rally.
Speaker 7: They need to over deliver on what's priced at this
Speaker 7: point to get equity prices just to stop selling off.
Speaker 2: This is where I'm a little bit confused. It was
Speaker 2: only a few months ago we had people asking whether
Speaker 2: we need to hike again. How much of a clear
Speaker 2: sort of sight have you got on how tight we
Speaker 2: actually are right now? How do we know that we're
Speaker 2: as restrictive as you are making out we are.
Speaker 7: I think the clearest evidence is from the labor market.
Speaker 7: That's been our guiding light throughout this cycle and continues
Speaker 7: to be. If you look at the Jolts report, for instance,
Speaker 7: the hiring rate has just consistently been falling, falling below
Speaker 7: prep endemic rates, falling out. If you look at the
Speaker 7: leisure and hospitality sector and the JOLT survey, the hiring
Speaker 7: rate is the lowest we've ever seen outside of two
Speaker 7: thousand and eight. It's lower than it was in twenty twenty.
Speaker 7: So it is harder to get a job at a
Speaker 7: restaurant right now than it's been in very deep recessions.
Speaker 5: That's telling us that we have some real softness there.
Speaker 2: Check out this movement a bond mark. You've been talking
Speaker 2: about it for a while. Two year versus ten year.
Speaker 2: The two year is down twenty three basis points. The
Speaker 2: ten year is down just twelve. And look at the
Speaker 2: difference between the two. There is a positive sloping difference
Speaker 2: now on that yield curve, Danny, I haven't been able
Speaker 2: to say that for quite a while. Now the difference
Speaker 2: between the two is now positive a single basis point.
Speaker 6: And there have been so many people who have said
Speaker 6: that when this happens, this is the recession indicator, not
Speaker 6: the thing being negative, not a being inverted, that it's
Speaker 6: uninverting that finally causes the recession. Steve, do you want
Speaker 6: to take any indication from this at all?
Speaker 4: I'd like to.
Speaker 5: Let the dust settle a little bit. This seems like.
Speaker 8: Not a good day to be taking your fundamental signals. No,
Speaker 8: I think to Jonathan's point before or I mean, what
Speaker 8: we really need right now is we need more data
Speaker 8: and we do get the ISM nine manufacturing today, the
Speaker 8: consensus looks for it to bounce above fifty. Boy, that
Speaker 8: would I would imagine change the way people were thinking
Speaker 8: at least a little.
Speaker 2: Do you think it would put this story to bed,
Speaker 2: because we said one of the problems with this week
Speaker 2: is that actually the Canada for the economic data is
Speaker 2: quite light. Funny, really got two points to play with.
Speaker 2: One is the ism at ten and the other is
Speaker 2: jobless claims on Thursday. Is one strong ism services print
Speaker 2: sufficient to put this to bed? Or do you think
Speaker 2: the mood this market said will just ignore strength and
Speaker 2: embrace weakness for the rest of this month.
Speaker 8: It seems like an awfully strong panic mode this morning,
Speaker 8: So I don't know.
Speaker 2: Maybe we'll see, Andrew, this is tough, and I think
Speaker 2: this is what everyone's got to sort of embrace and
Speaker 2: confront right now for the next couple of hours and
Speaker 2: through this week, how sensitive this market will be to
Speaker 2: incoming data, strong data and weak data alike.
Speaker 7: It's a really difficult moment. It's a really difficult moment
Speaker 7: for the Fed. Danny said it earlier. You have the
Speaker 7: market that started responding to the economy. Now you're going
Speaker 7: to have the economy that's responding to the market as
Speaker 7: these financial conditions, and it actually raises further the probability
Speaker 7: that we're inter recession.
Speaker 5: Right now or that will soon be in a recession.
Speaker 6: Could we get an intermeding cut then if this thing
Speaker 6: kind of.
Speaker 5: Snowballs, that's the question. I think you do need to
Speaker 5: see more here.
Speaker 7: I don't think this is enough for an intermeting cut,
Speaker 7: but that has to be something we put some probability on.
Speaker 6: At this point, it's even any probability of that for.
Speaker 8: You, not unless the world absolutely falls apart.
Speaker 2: You're not impressed by these colds. It's all you really think.
Speaker 2: This is just a panic that could be over pretty quickly.
Speaker 2: That's why it sounds like characterization.
Speaker 8: Yeah, yeah, I mean, look, the FED is going to
Speaker 8: be easing soon in my mind, you know, more likely
Speaker 8: than not now September rather than November. But and I
Speaker 8: think once they start to go, they're probably going to
Speaker 8: be going in a series of moves. But I just
Speaker 8: don't see the need for a kind of a panicked rush.
Speaker 4: Would they still call this amid cycle adjustment? Do you think?
Speaker 2: Or they tell us they're on the path to normalizing,
Speaker 2: on the path to getting accommodative.
Speaker 8: I think it well, I think it's a path to normalization,
Speaker 8: But whether that leads ultimately to a commodative or not.
Speaker 5: I think remains to be seen.
Speaker 4: Andrew, how do you think they'll frame things?
Speaker 7: I think I agree with Stephen though, that they will
Speaker 7: see this as the need to normalize policy rates.
Speaker 5: At least that will be the first move here.
Speaker 7: Now it might move to a need to move to accommodative.
Speaker 7: We've heard from Caair Powell they think rates are restrictive here,
Speaker 7: and I guess that's my broader.
Speaker 5: Point this morning.
Speaker 7: Why would you be restrictive when the equity market is
Speaker 7: selling off and the unemployment rate is rising, you wouldn't be.
Speaker 7: So they'll be looking pretty quickly to move rates down
Speaker 7: towards at least three percent.
Speaker 4: But if we want to live with.
Speaker 6: The philosophy if the Fed should do the least damage
Speaker 6: in this scenario, is hiking aggressively or before September not
Speaker 6: doing damage in terms of them signaling we're worried about
Speaker 6: something that there is an emergency.
Speaker 7: Yeah, I mean, I think that's exactly what they need
Speaker 7: to negotiate here. And I think you heard that tension
Speaker 7: from Chicago Fed President goals Be on Friday. Not wanting
Speaker 7: to sound like they're over responding, not wanting to spook
Speaker 7: the market.
Speaker 5: Further.
Speaker 7: But the reality is the sentiment is shifting, and it
Speaker 7: has shifted, and they'll have to respond to that.
Speaker 6: But see, Stephen, that's why I wonder to your point,
Speaker 6: why there can't be something bigger, because it feeds back
Speaker 6: on itself and you get that negative wealth effect, you
Speaker 6: get conditions tightening, maybe more than they should, which gets
Speaker 6: a bigger reaction from the FED.
Speaker 5: Yeah.
Speaker 8: Well, I mean this has been one of the problems
Speaker 8: for the FED all through this cycle is that financial
Speaker 8: conditions have been easy, right. I mean, they raise rates,
Speaker 8: they talk about how policies a restrictive, but if you
Speaker 8: look at broader financial conditions indicies, they've all been very
Speaker 8: easy up until the last few days. And now we
Speaker 8: have to weigh you know, deterioration and risk assets versus
Speaker 8: the big rally that we're seeing in.
Speaker 5: Interest rates.
Speaker 8: So I think they're certainly cognizant of that. But I
Speaker 8: think the underpinnings for the economy are still pretty solid.
Speaker 8: And the one problem that this economy has conceivably is
Speaker 8: that FED policy is super tight, and that's something that's
Speaker 8: very easy to fix. So we'll just see whether that
Speaker 8: comes fast or slow.
Speaker 2: Asais last weight Chaman pound a great with you. I
Speaker 2: just wonder how much has changed since Friday. Andrew, do
Speaker 2: you think if they have that information to hand on Wednesday,
Speaker 2: we would have seen a different decision.
Speaker 1: Yeah.
Speaker 5: I think we would have seen a card on Wednesday
Speaker 5: if they knew this was going to be the job
Speaker 5: to report.
Speaker 2: Amazing, Andrew, Thank you, sir, Andrew Hanhorser City Stephen Stanley
Speaker 2: are santantaire to the two of you.
Speaker 4: Thank you.
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