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Speaker 1: More Wall Street banks are calling for more aggressive cuts

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Speaker 1: from the Federal Reserve following last week's jobs report. One

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Speaker 1: of the first out of the gate with a call

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Speaker 1: for two half point reductions at the next two meetings

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Speaker 1: was City Group, joining us now. One of the economists

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Speaker 1: behind that call Veronica Clark, us economist at City Veronica,

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Speaker 1: Good morning, Thanks so much for being with us. So

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Speaker 1: you've had a weekend to think about the impact of

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Speaker 1: the jobs report and some of the other data that

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Speaker 1: we've seen. Are you sticking to that call?

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Speaker 2: Yeah, yeah, good morning, Thanks for having me. Yeah. I mean,

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Speaker 2: I think this equity self that we're seeing overnight only

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Speaker 2: maybe furthers that call the sense that maybe the Fed

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Speaker 2: is a bit behind the curve here. I think if

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Speaker 2: the Fed had had this number on Wednesday when they

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Speaker 2: were meeting, we might have seen a cut last week already.

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Speaker 2: I think, especially the Doves, are just going to be

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Speaker 2: increasingly focused on the employment side of that mandate. And

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Speaker 2: it's not necessarily the one hundred and fourteen thousand jobs added,

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Speaker 2: you know, as a bad number. Four point three percent

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Speaker 2: unemployment rate is still generally low, but the trend will

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Speaker 2: just be very concerning to Fed officials, and they're far

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Speaker 2: from neutral, so yeah, you might as well start with

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Speaker 2: some bigger rate cuts right off the bat.

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Speaker 1: And to your point, we've heard from the market, to

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Speaker 1: some extent pricing in sixty percent odds that the FED

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Speaker 1: cuts rates this week, and some of your colleagues at

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Speaker 1: JP Morgan Chase are calling for an emergency rate cut

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Speaker 1: as well. Do you think that the Fed should cut

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Speaker 1: rates before the September meeting?

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Speaker 2: Yeah, I mean, that's that's definitely not our base case,

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Speaker 2: but yeah, I would never say never in a situation

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Speaker 2: like this. In terms of the economic data that would

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Speaker 2: get them there, it does seem a bit unlikely. It

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Speaker 2: really is going to be employment data that is the

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Speaker 2: most important. We won't have another jobs report until early September,

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Speaker 2: so that in that sense, there's not necessarily the economic

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Speaker 2: data that would get them there, but something like equity

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Speaker 2: you know, the decline in equity markets that we've seen

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Speaker 2: that that is a big tightening of financial conditions that

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Speaker 2: could get them a bit worried that things will be

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Speaker 2: slowing even faster.

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Speaker 1: Do you think that there's a risk of recession if

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Speaker 1: the Fed doesn't cut rates to the levels that you're

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Speaker 1: looking for?

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Speaker 2: Yeah, to be honest, we actually even have a recession

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Speaker 2: in our base case already. You know, these things are

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Speaker 2: you know, they start very gradually and then at some

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Speaker 2: point you can reach this non linearity and and things

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Speaker 2: weaken much faster. It does kind of feel like we're

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Speaker 2: on the tipping point of that right now, and it

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Speaker 2: might be a bit too late to prevent that slowing altogether.

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Speaker 2: So that's actually in our in our base case already.

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Speaker 1: Is it just about the jobs market? This weaker than

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Speaker 1: expected jobs report from last Friday or what else has

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Speaker 1: you thinking that the Fed needs to make up for

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Speaker 1: lost ground?

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Speaker 2: Yeah, it really is about the labor market. That's where

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Speaker 2: we're seeing, you know, most of the weakness. But of

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Speaker 2: course that's probably you know, the biggest underlying support to

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Speaker 2: the general economy as a whole. And if you see

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Speaker 2: the labor market turning, especially if we get to that

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Speaker 2: point where you are seeing the bigger layoffs, and that's

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Speaker 2: really the last step, that's where it's almost a bit

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Speaker 2: too late to prevent the weakening, you would expect to

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Speaker 2: see spending pulling back even more, and spending already has

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Speaker 2: slowed for a lot of this year. Manufacturing, you know,

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Speaker 2: data on manufacturing activity has been a bit weaker, at

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Speaker 2: least in the ism the survey indicators. It does seem

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Speaker 2: that broadly things are slowing down.

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Speaker 1: What if the FED sticks with the messaging that it's

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Speaker 1: been putting out there up to now before we got

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Speaker 1: this Job's report that twenty five basis point move in

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Speaker 1: September is warranted, what would the impact on the economy be.

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Speaker 2: Yeah, I mean at this point where we're certainly pricing

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Speaker 2: you know that we're going to be getting those bigger

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Speaker 2: rate cuts, so you would have to price that out.

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Speaker 2: That move higher and yields is a tightening of financial conditions,

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Speaker 2: which does seem probably like what the FED doesn't want

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Speaker 2: right now if you're tightening conditions into a weakening. You know,

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Speaker 2: I don't necessarily think they'll tell us right now that

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Speaker 2: you know, yes, it's going to be a bigger fifty

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Speaker 2: basis point cut, but we'll see the data over the

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Speaker 2: coming weeks. You know, we have Jackson Hole towards the

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Speaker 2: end of this month. That might be the avenue to

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Speaker 2: signal that, yeah, we're we're going to start a bit

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Speaker 2: bigger right off the bat.

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Speaker 1: When it comes to the weakness that we saw in

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Speaker 1: the jobs report last Friday. Are there seasonal factors that

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Speaker 1: play there?

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Speaker 2: Not particularly So. There was some speculation that maybe Hurricane

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Speaker 2: Barrel that hit during the reference period for this July number,

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Speaker 2: maybe that would influence things, Maybe that was causing people

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Speaker 2: to miss work or temporary layoffs. But the BLIS actually

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Speaker 2: told us that for payrolls there wasn't a big hurricane impact.

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Speaker 2: A lot of the weakness we saw really was kind

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Speaker 2: of across the board. It was not in sectors that

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Speaker 2: you would expect to be impacted by by the hurricane.

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Speaker 2: And there are a lot of just you know, fundamental

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Speaker 2: ways that you know, employment should be slowing down in

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Speaker 2: sectors like construction housing. You know, construction is pulled back,

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Speaker 2: Restaurant spending has been pulling back, you know, leisure, hospitality

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Speaker 2: employment might be slowing. Yeah, not nothing too idiosyncratic. I

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Speaker 2: think this is just genuinely a weakening trend.

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Speaker 1: Just thirty seconds left, your colleagues at Goldman Sachs raised

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Speaker 1: their recession risk for the US to twenty five percent.

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Speaker 1: I know you said recessions in your base case, but

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Speaker 1: would you put a number on it?

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Speaker 2: Yeah, I mean there, I think there's honestly probably a

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Speaker 2: pretty elevated chance that we're in, you know, the start

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Speaker 2: of a recession right now. Part of the issue is

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Speaker 2: that the official definition of the recession, however, you know

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Speaker 2: NBER defines it, We're not going to know that for

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Speaker 2: a year, year and a half later. You always define

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Speaker 2: the start in retrospect. But these types of you know, moves,

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Speaker 2: you know in the unemployment rate, you know, much more

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Speaker 2: quickly shooting up in the last couple of months. That

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Speaker 2: is what you see at the start of recessions. So

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Speaker 2: I would say there's a good chance we're already in

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Speaker 2: the early stages of it.

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Speaker 1: Okay, thank you for this, Veronica, really great having you

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Speaker 1: on these days after your call of Veronica Clark us

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Speaker 1: economist at City