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Speaker 1: Joining us now to discuss the pay roster for Mohammad

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Speaker 1: al Aaron of Quain's College, Cambridge and black Rick Raider. Gents,

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Speaker 1: wonderful to catch up with both of you. Muhammad, First

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Speaker 1: to you your response to that jobs report thirty one

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Speaker 1: minutes ago.

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Speaker 2: Good morning John. Three responses from the specific to the general.

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Speaker 2: One is despite the miss on drop creation, this will

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Speaker 2: not get in the way of the FED hiking in July.

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Speaker 2: It will moderate expectations as to what happens thereafter. But

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Speaker 2: with the wage growth, the labor force participation in the unemployments,

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Speaker 2: wait that these three things means it will hike in July.

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Speaker 2: Two is the craziness we're seeing in the fixed income

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Speaker 2: market where the two year has been all over the place,

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Speaker 2: and God bless Wick for navigating this market. The craziness

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Speaker 2: we're seeing there highlights not just the regime change, but

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Speaker 2: importantly the lack of a policy anchor. And then the

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Speaker 2: final thing is something that's not discussed often enough, is

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Speaker 2: that if you look at the details of this jobs report,

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Speaker 2: it indicates that it is the most vulnerable segments of

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Speaker 2: the population that i'd risk right now.

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Speaker 3: God bless Rick. Reader, Rick, what's your take.

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Speaker 4: I appreciate that a lot. The uh listen, I agree

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Speaker 4: with that with the Mohamads.

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Speaker 5: You know, it's a solid report, though, I mean we had, yes,

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Speaker 5: it was a little softer on the headline, that the

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Speaker 5: wages were up, the work week was up, and h

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Speaker 5: you know, I mean, you're you're operating at three point

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Speaker 5: six percent unemployment rate and we just had claims data

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Speaker 5: that continues to show that labors in good shape. You know,

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Speaker 5: Joel's data was a little bit encouraging, and that private

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Speaker 5: was coming private hiring was coming down a little bit.

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Speaker 5: But boy, you're still talking about a lot of jobs open.

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Speaker 5: So anyway, I think it's you know, I think you

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Speaker 5: got to parse it quite quite finally to say it's

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Speaker 5: softer ry.

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Speaker 4: I mean it's solid.

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Speaker 5: I mean the economy is solid and employment data is solid.

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Speaker 5: And agree with Muhammad that was some defense. Got going

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Speaker 5: to keep moving on the back side of this.

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Speaker 1: And to be clear, the bond market is of that

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Speaker 1: opinion as well. Yield to climbing high now by two

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Speaker 1: basis points. We're buck through five percent on a two

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Speaker 1: year initially off the back of the downside surprise on

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Speaker 1: a headline number.

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Speaker 3: Yield to a lower they've popped back.

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Speaker 1: You look through the rest of the report Muhammed rix point,

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Speaker 1: you've got the average ALI workweek that's just a little

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Speaker 1: bit longer, unemployment, a little bit lower wages coming in

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Speaker 1: a little bit Hofer Mohammed.

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Speaker 3: Where are you now? Which camp you win on the FMC.

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Speaker 1: Are you of the opinion that there are longer available

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Speaker 1: lives the policy there's enough in the pipeline, or if

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Speaker 1: you were on the committee, would you be pushing for

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Speaker 1: more to do more hikes?

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Speaker 4: John?

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Speaker 2: It depends what anchors this committee. And you've heard me

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Speaker 2: say this over and over again. If this committee is

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Speaker 2: anchored by we've got to get a two percent whatever may,

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Speaker 2: and central bank policy is the only tool being used,

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Speaker 2: then they're going to have to hike at least a

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Speaker 2: couple more times because they're highly data dependent. If, however,

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Speaker 2: they step back and have a more strategic view of

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Speaker 2: the economy and recognize that we have issues on the

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Speaker 2: supply side and that crushing demand to address supply issues

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Speaker 2: isn't the right thing at this stage, but it means

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Speaker 2: accepting a much lower trajectory or decline in the inflation rate,

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Speaker 2: they would hike once and stop but you know the problem,

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Speaker 2: and you've heard me say this is that when you

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Speaker 2: excessively data dependent, you'll swing all over the place, and

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Speaker 2: with that, market will swing all over the place, and

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Speaker 2: then the risk of something breaking goes up.

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Speaker 1: Well, they have been in the bottle market big time.

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Speaker 1: Mi McKay's with us to break down this report. My McKay,

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Speaker 1: the headline disappoint saying, but beneath the surface, this is

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Speaker 1: a mixed one.

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Speaker 6: It is a mixed one, but it might be. As

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Speaker 6: we were talking about on surveillance a few minutes ago,

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Speaker 6: a turning point two hundred and nine thousand jobs is

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Speaker 6: still a very strong report. So it's not like we've

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Speaker 6: fallen off a cliff here, and we're well ahead of

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Speaker 6: a number of jobs we need created to absorb new

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Speaker 6: entrants into the labor force. And as you guys were

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Speaker 6: just talking about, we're at a three point six percent

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Speaker 6: unemployment rate. Hours worked went up at average hourly earnings

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Speaker 6: unchanged on the month after being revised up for May,

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Speaker 6: so you have some strength in this report. But it

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Speaker 6: does raise the possibility maybe that we are now slowing

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Speaker 6: down to a sustainable level, and it will keep the

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Speaker 6: idea of a soft landing in play. You take a

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Speaker 6: look at where the jobs were and weren't. We knew

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Speaker 6: housing has been very strong, new home construction very strong.

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Speaker 6: Construction up by twenty three thousand, government up by sixty thousand.

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Speaker 6: There could be a seasonal component to that and that

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Speaker 6: is probably not going to continue. And then you look

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Speaker 6: at retail. Are we seeing a slowdown in retail sales?

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Speaker 6: We've seen a bit of one, and so is this

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Speaker 6: a precursor of what's going on? And then everybody likes

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Speaker 6: to look at temporary help because that's usually seen as

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Speaker 6: a sign of what's going to happen going forward with

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Speaker 6: the labor market. And now I'm going to switch gears

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Speaker 6: and go to inflation because that's the big number next week.

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Speaker 6: This is the Cleveland Fed CPI now cast, and as

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Speaker 6: you can see, it tracks pretty well with what's happening

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Speaker 6: on CPI and it does see a big drop next

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Speaker 6: week to a little over three and a half percent,

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Speaker 6: which would be signed to the Fed that they are

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Speaker 6: making progress. The interesting debate is going to be how

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Speaker 6: much of an impact wages are having. Profits have fallen off,

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Speaker 6: and there was all to talk about greedflation, but wages

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Speaker 6: are still high, so our wages creating inflation. That's going

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Speaker 6: to be the question for the FED, and of course

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Speaker 6: they're arguing maybe not.

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Speaker 1: Mi McKay, Thank you, sir, Rick Reader. Let's get into it.

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Speaker 1: Payrose behind us, CPI in front of us. We've had

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Speaker 1: a disappointing read of the headline number. We talked about

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Speaker 1: the nuances around that. The rest of it is pretty solid.

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Speaker 1: CPI next week. What would need to happen to stop

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Speaker 1: the FED from hiking in July?

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Speaker 5: I think it's be pretty hard to stop the FED

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Speaker 5: from hiking, and we think it's going to be a

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Speaker 5: softer number. I mean, some of the high exag and

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Speaker 5: this influence you've had from used car shelter, you know,

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Speaker 5: shelter comes down with a lag. We think that is

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Speaker 5: going to come down, and we think you'll get a

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Speaker 5: softer number. I think the market's anticipate that already, but

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Speaker 5: I think it'll be pretty hard unless the number was

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Speaker 5: extremely soft, which is hard to believe.

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Speaker 4: What's enough FED is? I mean, I think you got

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Speaker 4: to take them at their word. They pause. We could

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Speaker 4: debate was it effective the pause or not?

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Speaker 5: No, boy, it would be pretty difficult given all this

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Speaker 5: labor data we got that we've just we've just received.

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Speaker 5: It'd be pretty hard for to take the FED off

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Speaker 5: the mission. At least for this meeting. We get debate,

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Speaker 5: we get debate future meetings.

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Speaker 1: Well man, and let's talk about future meetings. This is

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Speaker 1: what Andrew hollenhoorse the city had to say this morning,

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Speaker 1: risk a rising. The FED will once again need to

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Speaker 1: deliver a more hawkus message, perhaps at Jackson Hole in

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Speaker 1: late August. And dare the September website Meetingham And I

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Speaker 1: think for a lot of us, we're less interested in July,

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Speaker 1: maybe even less interested in what September might bring. It's

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Speaker 1: really about whether they need to go much further than that,

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Speaker 1: never mind twenty five to fifty basis points. Do you

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Speaker 1: have an opinion on that yet?

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Speaker 2: So that's where the disagreement is. John, I think most

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Speaker 2: people expect they will hike in July. There's one or

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Speaker 2: two outlayers, but for the reasons that Rick just said,

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Speaker 2: they will hike in July. And this is despite I

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Speaker 2: want to stress I also expect next week's CPI number

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Speaker 2: to be quite soft. We may get very low in

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Speaker 2: the trees, but look at core. Core is going to

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Speaker 2: be critical because of the changing dynamics of inflation, the

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Speaker 2: fact that inflation has now migrated and is well embedded

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Speaker 2: in the service sector. That is the concern as to

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Speaker 2: what happens thereafter. Inflation will proof sticky core poof sticky,

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Speaker 2: and the FED it's going to have to choose can

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Speaker 2: it live with a three to four percent inflation rate

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Speaker 2: that it's stable, or does it want to crush the

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Speaker 2: economy to get to two percent. That's the choice that

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Speaker 2: they're going to have to make later in the year,

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Speaker 2: and that's why people are all over the place because

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Speaker 2: the expectations of the real economy is quite different. As

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Speaker 2: you know, I've always thought a recession need not happen,

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Speaker 2: that this economy is strong enough to avoid a recession,

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Speaker 2: but a lot will depend on how the FED plays

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Speaker 2: it well.

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Speaker 1: To be clear, you've also suggested, Muhammad, and you've insinuated

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Speaker 1: it there that it have to tolerate higher inflation to

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Speaker 1: make sure that recession doesn't happen.

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Speaker 3: Is that still the.

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Speaker 2: Case, Yes, John, I don't think anybody can deny what's happening.

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Speaker 2: On the supply side. We're seeing significant deficiencies of agurgate

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Speaker 2: supply happening from the rewiring of supply chains. There happening

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Speaker 2: from the jail politics. They're happening from the year, from

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Speaker 2: the energy transition, and the labor market itself. Labor force

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Speaker 2: participation has been stuck and we're not attracting more people

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Speaker 2: in the labor market. So we have issues on the

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Speaker 2: supply side and this notion that we've got to crush

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Speaker 2: them on. We've got to cross jobs to address a

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Speaker 2: deficient supply side. For me, that's not go to economics.

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Speaker 2: We've got to address the supply side and make it

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Speaker 2: more elastic.

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Speaker 3: Let's talk about it, Bob. Market. There's been cast crust

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Speaker 3: as well.

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Speaker 1: Ten year right now, three four percent, two year right now,

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Speaker 1: around five percent r If you look across that curve

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Speaker 1: right now, what's a buy for you?

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Speaker 4: Like commercial paper?

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Speaker 5: You know, yeah, we're buy I mean it's pretty incredible.

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Speaker 5: You can buy six month to one year commercial paper.

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Speaker 5: We bought some this this week at six point six percent.

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Speaker 5: Good good issue now by the way, not a fly

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Speaker 5: by net issue.

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Speaker 4: I mean it's pretty attractive.

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Speaker 5: I mean, if you can clip in, if you can

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Speaker 5: clip sixes and uh, you know, you're seeing banks, you're

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Speaker 5: seeing others that are companies.

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Speaker 4: For working capital that are issuing there. That's pretty darn attractive.

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Speaker 5: Listen, I think you still got to be a big

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Speaker 5: patient on the rest of on the rest of the curve,

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Speaker 5: and uh, you know, let it do what it's let

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Speaker 5: it do what it's going to do.

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Speaker 4: I mean, to take a.

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Speaker 5: Lot of duration risks today doesn't doesn't strike me as

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Speaker 5: awful lot of awful lot of sense.

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Speaker 1: We've got to take some more out of you than that. Rick,

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Speaker 1: Are you saying it's still ups at risk or not?

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Speaker 1: Ten you right now?

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Speaker 4: I mean I do.

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Speaker 5: I mean, you know, you look at it by the

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Speaker 5: way you operate in the bond markets in the global framework.

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Speaker 5: You know, the Bank of England is hiking, the ECB

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Speaker 5: is hiking. And by the way, there's a lot of

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Speaker 5: DV there's a lot of durations at VLVE. There's a

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Speaker 5: lot of duration that comes into those markets. You know,

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Speaker 5: US Treasure's got to issue a.

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Speaker 4: Lot of that.

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Speaker 5: I mean, by the way you look at the amount

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Speaker 5: of builds that are that are coming to market every week.

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Speaker 5: It's not like we're running out of supply to purchase.

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Speaker 5: So listen, I think I think rates can move a

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Speaker 5: bit higher from here. You know, do you start wading

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Speaker 5: into places. You know, some of the some of the

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Speaker 5: credit markets I think are okay. The mortgage market I

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Speaker 5: think is okay, and then you know, I think you'll

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Speaker 5: perform recably well. But I think there's any race. I

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Speaker 5: remember we run a couple of months ago and we're

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Speaker 5: talking about and somebody was saying, we're going on a recession.

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Speaker 4: You got to get into that world. I don't know.

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Speaker 4: I don't think there's a race.

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Speaker 1: We've been talking about credit crunches and banking failures right

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Speaker 1: only a few months ago. And look at us now, Muhammed.

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Speaker 1: The UK end of September list Trust is in number

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Speaker 1: ten Downing Street. We're talking about financial instability and bomb

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Speaker 1: buying more q we potentially from the Bank of England

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Speaker 1: and rates then on a two year guilt yield, we're

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Speaker 1: through four seventy right now they're looking at five fifty, Muhammed.

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Speaker 1: Have we walked away from the financial instability of the

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Speaker 1: last twelve months a little bit too quickly?

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Speaker 3: Do we need to keep an eye on that?

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Speaker 2: We do, John, I mean, what's happening in the UK

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Speaker 2: is the amplification of the inflation problems all over the

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Speaker 2: advanced world, inflation that is more sticky, is higher, and

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Speaker 2: the Bank of England's got to go do even more.

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Speaker 2: Add to that that the wheel economy is weak. So

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Speaker 2: this is probably the most difficult policy challenge out there.

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Speaker 2: And you have now the society is literally gripped by

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Speaker 2: interest rate fever. Everybody's talking about mortgage rates, everybody's talking

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Speaker 2: about what's the back of it at going to do.

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Speaker 2: It's not limited to Bloomberg anymore. It's everywhere, So it's

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Speaker 2: going to be really interesting as to what happens to sentiment.

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Speaker 7: I think the main issue now, John, is that while

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Speaker 7: we've navigated interest rate risk relatively well, notwithstanding what happened

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Speaker 7: in March, but we've navigated as a whole relatively well.

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Speaker 7: The big question is do we also have to navigate

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Speaker 7: credit risk? That is I think the big question in

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Speaker 7: the UK. The answer is more yes than anywhere else

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Speaker 7: in the advanced world.

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Speaker 3: Rick, what's your response to that for the US?

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Speaker 5: I mean, listen, I mean I I think you've got

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Speaker 5: to be a bit careful about you know, as rates

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Speaker 5: continue to move higher, I think you've got to be

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Speaker 5: a bit careful about the levered parts of the market,

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Speaker 5: whether that's leverage loans.

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Speaker 4: Whether obviously commercial real.

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Speaker 5: Estate has been well established, you know we're going to

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Speaker 5: take We're going to have more pressure on the banking system,

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Speaker 5: there is no question about it. You're going to continue

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Speaker 5: to lift the costs of deposits. You can't build capital.

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Speaker 5: So I think there's going to be an increase of

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Speaker 5: some stress in some places. But you know, when you

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Speaker 5: look at you know there are also a lot of

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Speaker 5: the investment grade markets termed out it's dead. I mean,

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Speaker 5: the housing market is you know, consumers that pay down

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Speaker 5: their debt, so it's going to be bifurcated. But you're

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Speaker 5: definitely going to have in the stressed parts where that

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Speaker 5: are interest rates sensitive, there's definitely some credit stress.

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Speaker 4: It's going to continue to go.

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Speaker 1: Rick you mentioned this about whether high interest rates are

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Speaker 1: actually biting into this economy or not. Mohammed sourced and

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Speaker 1: Slock of Apollo wrote about this this morning, where it's

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Speaker 1: taking the Fed so long to slow the economy down,

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Speaker 1: pointed out a number of reasons. Here's three high savings

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Speaker 1: in the household sector. Post Covid went on to say,

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Speaker 1: during the pandemic, high yield investment grade corporates extended the

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Speaker 1: maturity of their loans. US households of thirty year fixed mortgages,

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Speaker 1: they're therefore less sensitive to FED hikes, Mahammad, from your perspective,

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Speaker 1: just how great sensitive is this US economy?

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Speaker 2: So he's absolutely right. Initial conditions matter, and the initial

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Speaker 2: conditions was such that we had strong household balance sheet

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Speaker 2: and strong corporate balance sheets. So monetary policy hasn't hit.

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Speaker 2: But John, we are the envy of the rest of

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Speaker 2: the advanced world. I was sitting with the European politician

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Speaker 2: yesterday and he was complaining that fund direct investment is

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Speaker 2: going to the US, including European investment is going to

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Speaker 2: the US. So we mustn't forget that this economy is

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Speaker 2: in relative terms, outperforming many other economies, and therefore when

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Speaker 2: people live in relative space, as they do most of

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Speaker 2: the time, they will come to the US.

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Speaker 1: Ray, does that shape your approach, your bias geographically and

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Speaker 1: markets at the moment?

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Speaker 4: Yeah.

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Speaker 5: By the way, I'll say one thing. I mean, you know,

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Speaker 5: I think when people talk about you the FED just

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Speaker 5: keep going. If you think about where we are, most

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Speaker 5: people are sitting in mortgages that they locked in at

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Speaker 5: three percent four percent, So that's not interest right sensitive.

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Speaker 5: The companies that are growing healthcare and check are not

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Speaker 5: big borrowers. What ends up happening is once you just

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Speaker 5: keep raising interest rates, all you're doing is you're impacting

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Speaker 5: the lower end of the income strata.

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Speaker 4: In fact, people.

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Speaker 5: Are savers and they benefit from it, and the people

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Speaker 5: are actually hurt by it.

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Speaker 4: I just don't feel like to raise interest ring well

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Speaker 4: Man's opinion.

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Speaker 5: Now to your question, Listen, I do think the US is,

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Speaker 5: particularly in equity space, the most the most attractive place,

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Speaker 5: by the way, in globally from a debt perspective. I

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Speaker 5: actually thinking EM is interesting. Although we've been talking about

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Speaker 5: for a few months now. It's had a pretty good run.

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Speaker 4: But you know that.

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Speaker 5: EM central banks got that hiking earlier and you're seeing

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Speaker 5: inflation coming down. I actually think EM is in Latin

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Speaker 5: X Brazil are actually interesting places to invest. Like generally,

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Speaker 5: I would say US is interesting. The credit markets in

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Speaker 5: Europe are the are the other place so that I

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Speaker 5: feel like you're getting paid for taking the risk and

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Speaker 5: we think that the fall paradigm will be reasonably low there.

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Speaker 5: But so then I would say that that shapes it generally.

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Speaker 1: Well, you took us there, let's sit on it. Ammm.

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Speaker 1: That's your world, particularly with your work with Grammarcy. What's

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Speaker 1: the big one for you at the moment.

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Speaker 2: I think being highly selective. Rick mentioned a few places

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Speaker 2: that are interesting. You've got to be highly selective, higher

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Speaker 2: in quality overall, and then look for the overshoots, look

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Speaker 2: for a situation where the market goes too negative. There's

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Speaker 2: certain cases right now that are trading at ridiculously low levels.

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Speaker 2: But the bottom line for me is highly selective, highly

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Speaker 2: differentiation differentiated, because there will be a lot of dispersion

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Speaker 2: going forward.

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Speaker 3: I have to say, Rick, and I want to be

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Speaker 3: where you are. Mohammed. It looks very relaxing wooden.

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Speaker 4: Cabins, It's true.

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Speaker 2: No comment from this end of course.

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Speaker 4: Have it hopefully no screens on it.

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Speaker 1: Thanks for being with us, Mohammad. We appreciate it. Read

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Speaker 1: it to you as well, sir.

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Speaker 3: Thank you.

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Speaker 1: On his playrolls Friday, just breaking down a really nuanced

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Speaker 1: report what it means for this FED. For this FED

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Speaker 1: looks like a hike in July, but for a lot

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Speaker 1: of us is what happens after that further down the road.

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Speaker 1: How do they set the stage for policy to Mohammers,

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Speaker 1: point strategically coming forward from here beyond the September meeting