Speaker 1: More Wall Street banks are calling for more aggressive cuts
Speaker 1: from the Federal Reserve following last week's jobs report. One
Speaker 1: of the first out of the gate with a call
Speaker 1: for two half point reductions at the next two meetings
Speaker 1: was City Group, joining us now. One of the economists
Speaker 1: behind that call Veronica Clark, us economist at City Veronica,
Speaker 1: Good morning, Thanks so much for being with us. So
Speaker 1: you've had a weekend to think about the impact of
Speaker 1: the jobs report and some of the other data that
Speaker 1: we've seen. Are you sticking to that call?
Speaker 2: Yeah, yeah, good morning, Thanks for having me. Yeah. I mean,
Speaker 2: I think this equity self that we're seeing overnight only
Speaker 2: maybe furthers that call the sense that maybe the Fed
Speaker 2: is a bit behind the curve here. I think if
Speaker 2: the Fed had had this number on Wednesday when they
Speaker 2: were meeting, we might have seen a cut last week already.
Speaker 2: I think, especially the Doves, are just going to be
Speaker 2: increasingly focused on the employment side of that mandate. And
Speaker 2: it's not necessarily the one hundred and fourteen thousand jobs added,
Speaker 2: you know, as a bad number. Four point three percent
Speaker 2: unemployment rate is still generally low, but the trend will
Speaker 2: just be very concerning to Fed officials, and they're far
Speaker 2: from neutral, so yeah, you might as well start with
Speaker 2: some bigger rate cuts right off the bat.
Speaker 1: And to your point, we've heard from the market, to
Speaker 1: some extent pricing in sixty percent odds that the FED
Speaker 1: cuts rates this week, and some of your colleagues at
Speaker 1: JP Morgan Chase are calling for an emergency rate cut
Speaker 1: as well. Do you think that the Fed should cut
Speaker 1: rates before the September meeting?
Speaker 2: Yeah, I mean, that's that's definitely not our base case,
Speaker 2: but yeah, I would never say never in a situation
Speaker 2: like this. In terms of the economic data that would
Speaker 2: get them there, it does seem a bit unlikely. It
Speaker 2: really is going to be employment data that is the
Speaker 2: most important. We won't have another jobs report until early September,
Speaker 2: so that in that sense, there's not necessarily the economic
Speaker 2: data that would get them there, but something like equity
Speaker 2: you know, the decline in equity markets that we've seen
Speaker 2: that that is a big tightening of financial conditions that
Speaker 2: could get them a bit worried that things will be
Speaker 2: slowing even faster.
Speaker 1: Do you think that there's a risk of recession if
Speaker 1: the Fed doesn't cut rates to the levels that you're
Speaker 1: looking for?
Speaker 2: Yeah, to be honest, we actually even have a recession
Speaker 2: in our base case already. You know, these things are
Speaker 2: you know, they start very gradually and then at some
Speaker 2: point you can reach this non linearity and and things
Speaker 2: weaken much faster. It does kind of feel like we're
Speaker 2: on the tipping point of that right now, and it
Speaker 2: might be a bit too late to prevent that slowing altogether.
Speaker 2: So that's actually in our in our base case already.
Speaker 1: Is it just about the jobs market? This weaker than
Speaker 1: expected jobs report from last Friday or what else has
Speaker 1: you thinking that the Fed needs to make up for
Speaker 1: lost ground?
Speaker 2: Yeah, it really is about the labor market. That's where
Speaker 2: we're seeing, you know, most of the weakness. But of
Speaker 2: course that's probably you know, the biggest underlying support to
Speaker 2: the general economy as a whole. And if you see
Speaker 2: the labor market turning, especially if we get to that
Speaker 2: point where you are seeing the bigger layoffs, and that's
Speaker 2: really the last step, that's where it's almost a bit
Speaker 2: too late to prevent the weakening, you would expect to
Speaker 2: see spending pulling back even more, and spending already has
Speaker 2: slowed for a lot of this year. Manufacturing, you know,
Speaker 2: data on manufacturing activity has been a bit weaker, at
Speaker 2: least in the ism the survey indicators. It does seem
Speaker 2: that broadly things are slowing down.
Speaker 1: What if the FED sticks with the messaging that it's
Speaker 1: been putting out there up to now before we got
Speaker 1: this Job's report that twenty five basis point move in
Speaker 1: September is warranted, what would the impact on the economy be.
Speaker 2: Yeah, I mean at this point where we're certainly pricing
Speaker 2: you know that we're going to be getting those bigger
Speaker 2: rate cuts, so you would have to price that out.
Speaker 2: That move higher and yields is a tightening of financial conditions,
Speaker 2: which does seem probably like what the FED doesn't want
Speaker 2: right now if you're tightening conditions into a weakening. You know,
Speaker 2: I don't necessarily think they'll tell us right now that
Speaker 2: you know, yes, it's going to be a bigger fifty
Speaker 2: basis point cut, but we'll see the data over the
Speaker 2: coming weeks. You know, we have Jackson Hole towards the
Speaker 2: end of this month. That might be the avenue to
Speaker 2: signal that, yeah, we're we're going to start a bit
Speaker 2: bigger right off the bat.
Speaker 1: When it comes to the weakness that we saw in
Speaker 1: the jobs report last Friday. Are there seasonal factors that
Speaker 1: play there?
Speaker 2: Not particularly So. There was some speculation that maybe Hurricane
Speaker 2: Barrel that hit during the reference period for this July number,
Speaker 2: maybe that would influence things, Maybe that was causing people
Speaker 2: to miss work or temporary layoffs. But the BLIS actually
Speaker 2: told us that for payrolls there wasn't a big hurricane impact.
Speaker 2: A lot of the weakness we saw really was kind
Speaker 2: of across the board. It was not in sectors that
Speaker 2: you would expect to be impacted by by the hurricane.
Speaker 2: And there are a lot of just you know, fundamental
Speaker 2: ways that you know, employment should be slowing down in
Speaker 2: sectors like construction housing. You know, construction is pulled back,
Speaker 2: Restaurant spending has been pulling back, you know, leisure, hospitality
Speaker 2: employment might be slowing. Yeah, not nothing too idiosyncratic. I
Speaker 2: think this is just genuinely a weakening trend.
Speaker 1: Just thirty seconds left, your colleagues at Goldman Sachs raised
Speaker 1: their recession risk for the US to twenty five percent.
Speaker 1: I know you said recessions in your base case, but
Speaker 1: would you put a number on it?
Speaker 2: Yeah, I mean there, I think there's honestly probably a
Speaker 2: pretty elevated chance that we're in, you know, the start
Speaker 2: of a recession right now. Part of the issue is
Speaker 2: that the official definition of the recession, however, you know
Speaker 2: NBER defines it, We're not going to know that for
Speaker 2: a year, year and a half later. You always define
Speaker 2: the start in retrospect. But these types of you know, moves,
Speaker 2: you know in the unemployment rate, you know, much more
Speaker 2: quickly shooting up in the last couple of months. That
Speaker 2: is what you see at the start of recessions. So
Speaker 2: I would say there's a good chance we're already in
Speaker 2: the early stages of it.
Speaker 1: Okay, thank you for this, Veronica, really great having you
Speaker 1: on these days after your call of Veronica Clark us
Speaker 1: economist at City