Speaker 1: Lara Ram, chief US economist at FF Investment, saying this,
Speaker 1: it is incredible how long it has taken the market
Speaker 1: to let go of hopes for a March rate cut.
Speaker 1: My expectation is that we get two to three rate
Speaker 1: cuts in the second half of this year. Lara's calling
Speaker 1: them surgical rate cuts. Lara and pleased to say, joined
Speaker 1: us now for more. Let's get into what's happening in
Speaker 1: this bond market, Lara. We've had a big reassessment of
Speaker 1: what is happening with the Federal Reserve, and yields have
Speaker 1: climbed on a ten year over the last two sessions
Speaker 1: by double digits. Are you surprised by how little we've moved?
Speaker 1: Do you expect us to move even more based on
Speaker 1: the data we've had so far.
Speaker 2: Yeah, you know, I think it's been a reassessment. But
Speaker 2: given that we were at five percent as recently as October,
Speaker 2: I think there is.
Speaker 3: Room to have even more of a reassessment.
Speaker 2: I think this idea that we're sort of, you know,
Speaker 2: just pushing rate cuts out month by month by month.
Speaker 2: To me, Ben's the question of how we're really stepping
Speaker 2: back and reevaluating as investors the impact of a higher
Speaker 2: yield world, and you know, you add up the you know,
Speaker 2: the sheer supply of treasury coming online, we're gonna be
Speaker 2: able to get those auctions done.
Speaker 3: But all else people, well, that's higher yield.
Speaker 2: The inflation genie is not fitting back in the bottle.
Speaker 2: That's a higher yield story.
Speaker 3: And then the growth. At the end of the day,
Speaker 3: I'm actually surprised yields aren't higher than they are.
Speaker 1: Lara, With that in mind, why do you think is
Speaker 1: better to express the stronger data through the bond market
Speaker 1: the longer ended a curve and not necessarily at the
Speaker 1: front end.
Speaker 2: Well, I think the inversion and the fact that short
Speaker 2: term mualds are so much higher than long term yields
Speaker 2: is really still a signal that the bond market is
Speaker 2: nervous about some coming slow down, or it's also muscle
Speaker 2: memory from the fact that when we do have problems,
Speaker 2: the FED slams rates down to zero. I think the
Speaker 2: FED is in a place, maybe a good place it
Speaker 2: hasn't been in for a long time. If the economy
Speaker 2: slows more more than sort of a Goldilocks landing. And
Speaker 2: I agree with Lisa that phrase is feeling overused at
Speaker 2: this point, the Fed has room to cut rates maybe
Speaker 2: a little bit more, but these six rate cut forecasts,
Speaker 2: to me, it need to come with some more significant
Speaker 2: economic slowdown, which wouldn't be great for equities.
Speaker 4: Laurie, you were talking about higher yields ahead, particularly in
Speaker 4: the long end. How much higher could you foresee at
Speaker 4: a time where a lot of people think we're kind
Speaker 4: of range bound for the foreseeable future.
Speaker 2: You know, you look at long tracks of a history
Speaker 2: when nominal GDP aligned.
Speaker 3: Pretty closely with long term yields.
Speaker 2: I don't want to make some insane forecasts of yields
Speaker 2: going up above six percent, but you look at where
Speaker 2: we're growing today and say we settle around five percent
Speaker 2: nominal GDP growth, I don't think it's out of the
Speaker 2: question that we would hit five percent on the tenure
Speaker 2: at some point this year, and I just don't think
Speaker 2: markets are prepared to that for that. The complacen see
Speaker 2: that we're seeing is coming from two places. It's coming
Speaker 2: from expectations that growth is just going to be very
Speaker 2: optimistic and that inflation's going to come down.
Speaker 3: But it's also coming from complacency that yields are going
Speaker 3: to stay low.
Speaker 2: You know, long term meals are going to stay low,
Speaker 2: and I just think we need to prepare ourselves for
Speaker 2: a lot of yield volatility.
Speaker 3: We saw that last year. I think that carries forward.
Speaker 4: One of the big things that people have been struggling
Speaker 4: with is what is the neutral rate?
Speaker 3: Right?
Speaker 4: Because if it is much higher, rates could stay at
Speaker 4: that level for longer and you could see things kind
Speaker 4: of chug along. Do you have a sense of whether
Speaker 4: five percent ten yure yields would be incredibly restrictive? Are
Speaker 4: four percent yields restrictive?
Speaker 3: When do we know? You know?
Speaker 2: This is something that I have debated heavily because to
Speaker 2: a large degree, we don't We can't measure the neutral rate,
Speaker 2: and if you look back at history, we've never actually
Speaker 2: that at a neutral rate for any length of time.
Speaker 2: The Feds always in very restrictive territory. We're always in
Speaker 2: accommodative territory. We don't tend to just hang out around
Speaker 2: two and a half to three and a half percent
Speaker 2: FED funds rate. So I think, you know, every FED
Speaker 2: cycle starts because we've had a shock, either you know,
Speaker 2: a very strong growth shock or a very weak shock.
Speaker 2: And today we're sitting still carrying the momentum from a
Speaker 2: very strong shock. So I think it could be another
Speaker 2: six quarters before we really get a sense of where
Speaker 2: we are. And in the meantime, wow, wage pressure, inflation pressure,
Speaker 2: it's all creeping higher again.
Speaker 1: So, Lara, last year, I remember our conversation. You said
Speaker 1: inflation may not make the last mile. That's what you
Speaker 1: said last year. Here we are you still seem to
Speaker 1: believe that's the case. We could sense with Chairmen Powell
Speaker 1: in the news conference last week, he wasn't quite comfortable
Speaker 1: to say on behalf of the whole committee that they
Speaker 1: had greater confidence that we were indeed heading back towards
Speaker 1: two percent, and they want to see more data, more
Speaker 1: of the same, perhaps not better, just more good data.
Speaker 1: He was concerned that perhaps the that movement we've seen
Speaker 1: over the last six months might have been down to
Speaker 1: one off factors, not as base case, but the concern
Speaker 1: exists clear to me that you may think it is
Speaker 1: actually down to one off factors. What is it about
Speaker 1: the last six months that you see not repeatable in
Speaker 1: the next six months.
Speaker 2: Getting from you know, six percent to three percent I
Speaker 2: think has been a lot easier. I've been sort of
Speaker 2: using that analogy of like a long road trip with
Speaker 2: a bunch of kids in the back of the car.
Speaker 2: If a couple of them start acting up, it makes
Speaker 2: the whole trip really difficult. And I think we're starting
Speaker 2: to see am act up again. And we've just I
Speaker 2: think had a nice period where a short period where
Speaker 2: we were seeing you know, the energy, the goods prices
Speaker 2: and progress on services moving together. But services is starting
Speaker 2: to creep higher.
Speaker 3: I think goods.
Speaker 2: Deflation may have run its course, and I think energy
Speaker 2: is very open to geopolitical risks. There are growing I think,
Speaker 2: you know, influences that are going to cause a couple
Speaker 2: of the kids to throw tantrums in the next six months.
Speaker 1: Journey. Who are the kids in the back of the car?
Speaker 1: Name them fed officials, a handful of them or is
Speaker 1: this market participants?
Speaker 2: No, I think the kids are what's driving inflation higher.
Speaker 2: It's you know, the shipping costs creeping higher. It's services
Speaker 2: wages creeping higher.
Speaker 3: It's coming from.
Speaker 2: The fact that food prices are still I think too
Speaker 2: high for consumer comfort.
Speaker 3: It's coming from a lot of places now.
Speaker 1: Lara Ryan, thank you Lara of FS Investments. That was
Speaker 1: prittiant