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Speaker 3: This morning, Mike McKay Drumrow, fantastic guests the random type
Speaker 3: with us to talk about Fed policy.
Speaker 4: Yes, and thank you very much, John, because we are
Speaker 4: pleased to welcome Neil Kashkari, the President of the Federal
Speaker 4: Reserve Bank of Minneapolis, to the table today. Thank you
Speaker 4: for coming in making the trip all the way to
Speaker 4: New York only for us. I'm sure nothing else There
Speaker 4: would be nothing else this morning, and except for Bloomberg Surveillance.
Speaker 4: You're kind of known as the guy who is the
Speaker 4: most hawkish. I don't want to characterize you exactly now,
Speaker 4: given how things have changed over the last couple of months,
Speaker 4: but you have left open the possibility of doing more.
Speaker 4: How much more would you think the economy might need?
Speaker 4: Are we talking about just that one leftover move from
Speaker 4: the dot plot in September, or if you have to
Speaker 4: start raising again, do you have to go farther.
Speaker 5: Probably.
Speaker 6: Well, first of all, it's great to see you, Thanks
Speaker 6: for having me. People are looking for certainty, and I
Speaker 6: wish I could give that certainty provided there's been so much,
Speaker 6: so much it's unusual about the reopening of the economy
Speaker 6: and the dynamics that led to the high inflation, and
Speaker 6: how long it has taken, and the dynamics as the
Speaker 6: disinflation process has taken hold.
Speaker 7: I wish I knew.
Speaker 6: We have to let the inflation data guide US, the
Speaker 6: labor market data guide US, just to point out the obvious.
Speaker 7: Our forecasts have not been great over the past couple of.
Speaker 6: Years, and so we just need to We're all committed.
Speaker 6: Everybody on the FORMC has committed that two percent is
Speaker 6: our inflation target. We have to get inflation back down
Speaker 6: to two percent over a reasonable period of time. Ultimately,
Speaker 6: the economy will tell us how much is needed to
Speaker 6: get there, And I just don't know.
Speaker 4: Well, at what point do you think you would believe
Speaker 4: you have tightened enough or not tightened enough? What is
Speaker 4: it that you're looking for.
Speaker 6: Well, I'll give you some good news is that core
Speaker 6: PC on a three month basis is running about two
Speaker 6: point five percent, and it's lower than the six month data.
Speaker 6: It's lower than the one year data. So that suggests
Speaker 6: that the disinflation is real. If we continue to see
Speaker 6: inflation numbers of that range two point five percent or
Speaker 6: lower on a go forward basis, that would tell me, Okay,
Speaker 6: we are now on a path back to two percent inflation.
Speaker 6: But three months data is still only three months data,
Speaker 6: and if we see that start to tick back up again,
Speaker 6: that would tell me our job is not yet done.
Speaker 4: Tick back up means what? In other words, we get
Speaker 4: another couple of CPI reports in a PCE report before
Speaker 4: your next meeting, a couple of tents higher. The chairman
Speaker 4: and others say it's going to be lumpy or does
Speaker 4: it have to be a significant move? In other words,
Speaker 4: what are you thinking about for December?
Speaker 6: Well, I think we could look at, as the chairman
Speaker 6: always says, we look at all of the data. So
Speaker 6: what surprises Over the past few months, We've been surprised
Speaker 6: by how strong American consumers have been.
Speaker 7: Consumer spending is held up.
Speaker 6: Remarkably well, we've been surprised by GDP growth. When activity
Speaker 6: continues to run this hot, that makes me question is
Speaker 6: policy as tight as we assume that it currently is.
Speaker 6: So if you saw inflation tick back up and you
Speaker 6: saw continued very strong economic activity on the real side
Speaker 6: of the economy, that would tell me, okay, we might
Speaker 6: need to do more. So it's hard for me to
Speaker 6: say this one data point needs to be here. I
Speaker 6: would be looking at the suite of data.
Speaker 3: Did we outsource doing more to financial markets? In the
Speaker 3: arts week? Have we outsourced doing more to financial markets?
Speaker 6: You know, this is a very complicated question on what
Speaker 6: has been driving the long end of the Yeld curve.
Speaker 6: Some people point to term premium, and I always joke
Speaker 6: the term premium is the economist version of dark matter.
Speaker 6: It's the residual of all the stuff we can't explain.
Speaker 6: It's not that our models are wrong, it's the dark
Speaker 6: matter is out there.
Speaker 7: So that's the term premium.
Speaker 6: And some people say, well, that's driven by fiscal If
Speaker 6: it was fiscal driving the term premium, I would.
Speaker 7: Have expected to see a week dollar.
Speaker 6: Usually when investors are worried about a country's fiscal position,
Speaker 6: their currency weekends our currency has been quite strong. It
Speaker 6: makes me wonder is it really fiscal driving the term premium.
Speaker 6: Another possibility is the path of policy over the next
Speaker 6: few years. That could explain both the stronger dollar and
Speaker 6: the weaker stock market going into the last meeting. Another
Speaker 6: one is that maybe the neutral rate is higher, or
Speaker 6: maybe it's a combination of all three of these.
Speaker 7: And so these are things that we're spending a.
Speaker 6: Lot of time trying to understand what the markets are doing.
Speaker 6: But just speaking for myself, I'm not comfortable saying which
Speaker 6: of those three it is, because which of those three
Speaker 6: it is determines what it means for policy. If it
Speaker 6: is the term premium, then it is doing some work
Speaker 6: for the FED. But if it's the neutral rate, or
Speaker 6: if it's the forward guidance of the path of policy,
Speaker 6: then we would actually have to follow through to preserve
Speaker 6: those rates.
Speaker 3: So how did this line end up in the statement?
Speaker 3: And I'll share it with that audience. The kind of
Speaker 3: financial and credit conditions for households and businesses are likely
Speaker 3: to wound economic activity, hiring, an inflation. Where's that coming from?
Speaker 7: Oh, that's been there for a long time.
Speaker 6: I mean, that's been in there since the Silicon Valley
Speaker 6: bank episode and the banking stresses leading to some tightening
Speaker 6: of credit conditions across the economy. So I think that
Speaker 6: that's right. I, for one, don't say that that means
Speaker 6: the recent moves in the old curve.
Speaker 3: How fluid is that assessment? Can that change from month
Speaker 3: to month, meeting to mating, because some of those comments
Speaker 3: around that has inspired quite a move in this market
Speaker 3: over the last week.
Speaker 6: Well, you know, one of the things about the statements,
Speaker 6: we always have to be careful about putting things into
Speaker 6: the statement because they tend to be long lived and
Speaker 6: it's hard to pull them out of the statement because
Speaker 6: as soon as you take something out, then all of
Speaker 6: a sudden, people say, oh my gosh, they're declaring that
Speaker 6: all the banking stresses are over, as an example, and so,
Speaker 6: you know, I would look at all of the range
Speaker 6: of commentary that you get, look at what the chairman says,
Speaker 6: look at his press conference to get a read of
Speaker 6: the thought of the committee.
Speaker 2: You said that people want certainty that you can't give
Speaker 2: it to them, and I understand that, but people don't
Speaker 2: just want certainty, they also want some sort of guiding philosophy.
Speaker 2: Do you think that Fed Shir Powell has outlined some
Speaker 2: sort of guiding philosophy and where the bar is to
Speaker 2: cut rates and where the bar is to raise them further.
Speaker 6: Well, I think he's articulated very clearly that we're committed
Speaker 6: to getting back to two percent inflation.
Speaker 7: Right.
Speaker 6: There's been some chatter amongst economists that maybe we should
Speaker 6: raise the inflation target. I think he's done a great
Speaker 6: job saying that is not on the table. We're not
Speaker 6: going to do that. We're going to get inflation back
Speaker 6: to two percent, and we're going to let the data
Speaker 6: guide us. We've moved very aggressively. We've made a lot
Speaker 6: of progress on inflation. We're not done yet, meaning inflation
Speaker 6: is not back to our target, and if we need
Speaker 6: to do more, we will.
Speaker 2: There seem to be a feeling in markets that the
Speaker 2: bar to cut rates has been lowered over the past
Speaker 2: week or two weeks. Suddenly not only are we reaching
Speaker 2: a pause and have we seen a peek in the
Speaker 2: FED funds rate, but that also the Fed will cut
Speaker 2: next year, maybe surgically. Neil Dada is talking about that
Speaker 2: and he's coming up next. Do you want to push
Speaker 2: back against that? Do you think that the bar to
Speaker 2: cut is still just as high as it was.
Speaker 6: I have no idea where market participants are getting that.
Speaker 6: There's no discussion amongst me and any of my colleagues
Speaker 6: about when we're going to start preparing to cut rates.
Speaker 7: The only thing that's been.
Speaker 6: Talked about at all is that at some point, when
Speaker 6: inflation is well on its way back down, if we
Speaker 6: didn't back off a little bit, then real rates would
Speaker 6: be getting tighter and tighter and tighter.
Speaker 7: And that's real, but that's math.
Speaker 2: But is there enough weakness currently in the market in
Speaker 2: the economy, I should say to give you that sense
Speaker 2: at this point, look at the.
Speaker 6: Last GDP print. I mean, does anybody look at that
Speaker 6: and think, oh, my gosh. The economy we for the
Speaker 6: last twelve months GDP has been very strong. The labor
Speaker 6: market continues to be quite robust. Yes, the unemployment rate
Speaker 6: is ticked up to three point nine percent, but we've
Speaker 6: also seen a huge surge of labor supply, which is
Speaker 6: really positive come online. So I'm looking at this, I'm
Speaker 6: seeing consumers that are strong. My air by the way,
Speaker 6: my airplane that I came here on was one hundred
Speaker 6: percent full yesterday.
Speaker 7: It's going to be one hundred percent full.
Speaker 6: Today, I'm not seeing a lot of evidence that the
Speaker 6: economy is weaken.
Speaker 4: Well, whether you go higher or not, you are on
Speaker 4: board for longer. And so you must have modeled out
Speaker 4: some idea of how long you would need to leave
Speaker 4: rates unchanged before you could get down to a level
Speaker 4: low enough that you could take your foot off the
Speaker 4: break a little bit. How long do you think you'll
Speaker 4: be at five point five into twenty twenty four.
Speaker 6: Well, I think it's going to depend if we continue
Speaker 6: to see inflation prints similar to the ones we've seen
Speaker 6: the last few months, you know, and we end up
Speaker 6: with a year of a year at two point five
Speaker 6: percent core inflation and it continues to trend down, that
Speaker 6: constellation would give me evidence to say, hey, we ought
Speaker 6: to look at should we start backing off just so
Speaker 6: the real policy isn't getting tighter and tighter and tighter,
Speaker 6: because we're clearly on our way back down to two percent.
Speaker 6: But again, I don't want to just point to one
Speaker 6: data series. We will be looking at the suite of
Speaker 6: data to try to get a read of where the
Speaker 6: economy is headed.
Speaker 4: Well, not just data. You talk to businesses in your district,
Speaker 4: all the time, What are they telling you now about
Speaker 4: their view of growth and hiring and pricing going forward.
Speaker 7: It's moderating.
Speaker 6: So the labor market is still tight in my district,
Speaker 6: people especially in the Dakotas, really have a hard time
Speaker 6: finding workers. But in Minnesota, it's still a tight labor market,
Speaker 6: but it's not as tight as it was six months ago.
Speaker 7: It's not as tight as it was a year ago.
Speaker 6: So that kind of maps to the national data that
Speaker 6: we're seeing of a gently cooling labor market but one
Speaker 6: that's still very very warm. Same thing with economic activity.
Speaker 6: Depending on the sector, they're saying, Hey, we feel pretty
Speaker 6: good about things. We're a little cautious about the future. Obviously,
Speaker 6: they watch the news, they read the news. There's a
Speaker 6: lot of economic anxiety that is reported on that people,
Speaker 6: you know, factor.
Speaker 7: That into their own thinking and their own business planning.
Speaker 6: So I think the outlooks are still optimistic, but it's
Speaker 6: cautious optimists.
Speaker 4: Well are they still raising prices or think they need to?
Speaker 6: So it's funny there Still they still buy and large
Speaker 6: have some pricing power more than they had before pandemic,
Speaker 6: but not as much pricing power as they had six
Speaker 6: months or a year ago.
Speaker 3: Can we finish on housic sure in the space of
Speaker 3: three years, we've had record low interest rates in the
Speaker 3: highest rates in several decades. Is this housing market broken?
Speaker 7: Well?
Speaker 6: I think since the pandemic, we have structurally underbuilt the
Speaker 6: number of units that we need to meet our growing population.
Speaker 7: And that's the factor.
Speaker 6: And that's really about regulation at the local level that
Speaker 6: are creating barriers to more supply coming in. The raid
Speaker 6: environment will settle out over time, but structurally we have
Speaker 6: to actually bring a lot more supply online to meet America.
Speaker 3: At the time, but it could be like twenty thirty years.
Speaker 3: I think this is the issue here. The legacy of
Speaker 3: this FMC could well be a generation of people look
Speaker 3: down to the housing market. Why do you say that
Speaker 3: there could be a generation of people with two three
Speaker 3: percent mortgages that never sound their home.
Speaker 7: Yeah, I don't know. People end up needing to move.
Speaker 7: It's funny when people.
Speaker 6: Don't tell their home because they're locked into a low mortgage.
Speaker 6: That's less supply, but that's also one less buyer. Most
Speaker 6: people who buy homes are leaving another home, and so
Speaker 6: that affects both the supply side and the and the demand.
Speaker 3: Side of That's why I set a generation look down
Speaker 3: because I'm renting and count by, so I'm not sounding anything,
Speaker 3: and that's the generation. I'm talking about that generation specifically,
Speaker 3: you concern that could be the legacy at the FORMC.
Speaker 7: Now.
Speaker 6: I think the legacy of this FMC is that we've
Speaker 6: dealt with the pandemic very aggressively. Then we were surprised
Speaker 6: by very high inflation, but then we move very aggressively
Speaker 6: to bring the inflation back down.
Speaker 4: I want to ask you about a story on the
Speaker 4: Bloomberg terminal today about all the financial CEOs from the
Speaker 4: US over in Hong Kong sounding very doer and down
Speaker 4: about the prospects for the economy. They suggest that things
Speaker 4: are pretty fragile right now, both in the economy and
Speaker 4: the markets, given everything that's going on around the world
Speaker 4: and in the shadow banking system as well as theirs.
Speaker 4: How worried are you.
Speaker 6: Well, I mean, we're always worried about things that can
Speaker 6: happen all around the world. We've got teams of people
Speaker 6: looking at different scenarios around the world. Ultimately, we have
Speaker 6: to focus on what we can control, you know, geopolitics.
Speaker 7: When Hamas attacked Israel.
Speaker 6: The first thing we thought of is what's it going
Speaker 6: to do to the oil market, what's it going to
Speaker 6: do to commodity prices. Remarkably, the response so far has
Speaker 6: been muted. But that's something we're obviously paying close attention to.
Speaker 6: But the broader geopolitical issues are just so far outside
Speaker 6: of our bounds of forecasting. You know, we have a
Speaker 6: hard enough time forecasting inflation trying to forecast where geopolitics
Speaker 6: is going.
Speaker 7: We just have to focus what we can control.
Speaker 3: Oil price is dropped. I mean, that's the crazy thing
Speaker 3: about the last month.
Speaker 2: Physically, it doesn't make any sense. And this is the
Speaker 2: reason why trying to get it right is just impossible.
Speaker 2: And then trying to get the idea of a FED
Speaker 2: put and whether they're going to respond. I'm just saying
Speaker 2: people are talking about that now, so.
Speaker 3: Yeah, talking about it in the last few hours. Yes,
Speaker 3: it's on this program. No, always a pleasure, Thank you,
Speaker 3: Sirving Neil, Cash County, the Minneapolis FED price Alongstide Plympecks,
Speaker 3: Mi M chab No Tatsa, the head of US economic
Speaker 3: research at Renaissance Macron. Nil, good morning to you.
Speaker 8: Good morning.
Speaker 3: Let's go straight there because my IB was lighting up
Speaker 3: with messages from you. We're not thinking about tapering. Two
Speaker 3: months later, we're a long way from neutral cutting a
Speaker 3: month later. What do you think is going on within
Speaker 3: the FBC. Where do you think this is going?
Speaker 9: Well?
Speaker 8: I think I agree that it doesn't pay much to
Speaker 8: forecasts right now. It's important just to look at the
Speaker 8: data as it's coming to you, and so I do
Speaker 8: sympathize with that. But at the end of the day,
Speaker 8: I mean, the unemployment rate is up above the fed's
Speaker 8: forecast for this year, and that's the first time that's
Speaker 8: happened since March of twenty twenty two. Now you know
Speaker 8: we're in. When you're in the thick of it, it's
Speaker 8: hard to know whether that represents the start of something
Speaker 8: much more onerous or whether it's just the normalization of
Speaker 8: the labor market. But I think for the FED, I
Speaker 8: think the doves on the FMC, and remember you know
Speaker 8: President Kashkari, he tends to lean on the hawkish side
Speaker 8: of the consensus at the FED. I think for the doves,
Speaker 8: they have all the ammunition they need to basically put
Speaker 8: the hawks in a casket. Okay, I mean, I think
Speaker 8: that's the way I would think about it. I mean,
Speaker 8: you can point to the pickup in productivity and what
Speaker 8: that's done to unit labor costs. You can point to
Speaker 8: what Powell has said, right, I mean, when when central
Speaker 8: bankers use proceed carefully risk management, that's code for doing nothing.
Speaker 8: And you know, finally, I mean the employment report was
Speaker 8: probably understating payroll growth. That's my view. I mean, there's
Speaker 8: a lot of strike activity and so far, but at
Speaker 8: the end of the day, average hourly earnings are running
Speaker 8: just over three percent at an annual rate over the
Speaker 8: last several months. So I don't think the hawks on
Speaker 8: the committee frankly, can use the labor markets as a
Speaker 8: rationale to be hawkish anymore. So that is over and
Speaker 8: so I think the doves can basically say that the
Speaker 8: labor markets have been rebalanced. And if they can say
Speaker 8: that just implicitly, it means that the door is a
Speaker 8: little bit cracked open for a cut. And you know,
Speaker 8: the point I'm making to you is, you know J Powell,
Speaker 8: it wouldn't be the first time he basically, you know,
Speaker 8: flipped on a dime. I mean, we're a long way
Speaker 8: from neutral. I mean a few months later he's cutting rates,
Speaker 8: We're not even thinking about thinking about tapering or hiking,
Speaker 8: and then we're hiking and tapering basically in the same month.
Speaker 8: So you know, to me, the fact that they're not
Speaker 8: talking about it is irrelevant. It's also in their sep
Speaker 8: for next year. The question is whether.
Speaker 3: These surgical cuts, what are surgical cuts?
Speaker 8: Basically a few cuts to stabilize the economy. I mean,
Speaker 8: I think the issue is is the extent to which
Speaker 8: cutting quickly translates into rapid economic stable So I mean,
Speaker 8: for as an example, I mean, let's see what happens
Speaker 8: with mortgage purchase demand. Over the next couple of weeks.
Speaker 8: We've seen mortgage rates basically come down to what like
Speaker 8: seven percent.
Speaker 1: Okay, I'm trying to wrap my head around this.
Speaker 2: Six months ago, you were talking about way more economic
Speaker 2: strength in the US economy than people had expected. Now
Speaker 2: you're talking about strategic or surgical cuts by the Federal
Speaker 2: Reserve to stabilize the economy. Are you saying that they
Speaker 2: are warranted because the economy.
Speaker 1: No, I don't think that they are.
Speaker 8: Part of the tention, Lisa, is that my job isn't
Speaker 8: to tell people what I think the Fed should do.
Speaker 8: My job is to try to get into their head
Speaker 8: and figure out what they will do. I mean, if
Speaker 8: I was there, would I be I would probably be
Speaker 8: more hawkish than the consensus on the FMC. But I'm
Speaker 8: not there.
Speaker 2: Well, but does this mean that you think the consequence
Speaker 2: of surgical cuts to fortify the economy will be prolonged inflation?
Speaker 8: Yes?
Speaker 1: Okay, So then how do you.
Speaker 2: Sort of arrange around that sort of what is the
Speaker 2: inflation rate? How do you sort of lean into the
Speaker 2: rally that we've seen in the bond market and say,
Speaker 2: wait a second, you guys have gotten ahead of your
Speaker 2: skis based on the game theory that the FED is
Speaker 2: playing and the way that they're likely to do Searga.
Speaker 8: I don't know that the bond market's getting ahead of itself.
Speaker 8: I think the bond market is sniffing out that the
Speaker 8: distribution of risks have changed. I don't know what the
Speaker 8: FED may do next. I mean, that's what I think
Speaker 8: the bond market is doing, and I think bond market
Speaker 8: investors are right to do that, because, as I say,
Speaker 8: you know, you think about it basically three prongs, right,
Speaker 8: the labor market, inflation, and then financial conditions. If the
Speaker 8: FED can look at the labor market and say the
Speaker 8: labor markets are rebalanced. Okay, that's check done. You can't
Speaker 8: use that anymore as a reason to be hawkish. So,
Speaker 8: if anything, if the unemployment rate's not going up a
Speaker 8: little bit, the distribution of risks are that they would
Speaker 8: cut because the labor markets. And right, if the labor
Speaker 8: markets are thawing, that's going to give them increased confidence
Speaker 8: that inflation will thaw and so and then finally, if
Speaker 8: that's the case, they're not going to be particularly concerned
Speaker 8: about the easing and financial conditions that you've seen since
Speaker 8: the last in the last week.
Speaker 3: Which is what we've been talking about through this morning,
Speaker 3: whether they are going to tolerate the easing we've seen
Speaker 3: over the last week. And it feels like perhaps they
Speaker 3: will help me work with me here. It feels like
Speaker 3: to me that you believe the world might have changed
Speaker 3: post pandemic versus pre pandemic. Do you sense that they
Speaker 3: still believe were still in the same old world pre pandemic?
Speaker 10: I do.
Speaker 8: I mean, I mean, if you listen to someone like
Speaker 8: New York Fed President John Williams, even Chair Powell, I mean,
Speaker 8: there's not much there's quite a bit of reluctance to
Speaker 8: just say that, you know, neutral rates are higher.
Speaker 3: I mean, why do you think that, is, Neil?
Speaker 8: You know, I don't know. I mean I think that
Speaker 8: maybe in their minds things haven't changed. I mean all,
Speaker 8: I mean, you saw Powell talk about this at at
Speaker 8: the press conference last week. I mean, oh, well, if
Speaker 8: we get to pick up in potential growth, it's a
Speaker 8: temporary pick up and potential growth, then we'll go back down.
Speaker 8: So if you don't think that the world has fundamentally changed,
Speaker 8: then you're going to be more sort of cognizant of
Speaker 8: overtightening risk. Right Like, So if the unemployment rate is
Speaker 8: starting to go up, you may have thought, well, maybe
Speaker 8: you overdid it, so you might be more willing to
Speaker 8: cut sooner as a result.
Speaker 2: So are you more bullish on the US economy but
Speaker 2: also expect inflation to remain higher and the FED When
Speaker 2: people look back, this will be considered a policy air
Speaker 2: that they weren't hawkish enough.
Speaker 8: Yeah, I mean I think that that would be Yeah,
Speaker 8: I mean that would be something I could be saying
Speaker 8: in twenty twenty five.
Speaker 3: What would you point to if you had this conversation
Speaker 3: right now? And I would love to get you around
Speaker 3: the table next time I have a FED official to
Speaker 3: work through somebody's issues.
Speaker 8: But what would you it sounds dangerous as.
Speaker 3: The number one thing that indicates to you that the
Speaker 3: world has changed, versus pandemic that ultimately they don't believe it.
Speaker 3: What would you point to, Well.
Speaker 8: I mean the first is just look at let's look
Speaker 8: at the obvious. I mean, you've done a lot, and
Speaker 8: yet the economy is still kind of hanging in there.
Speaker 8: I would say that things like household formation rates are
Speaker 8: running twice the rate they did after the Financial crisis.
Speaker 8: I mean, to me, I think it's much easier to
Speaker 8: tell the story about why the post financial crisis period
Speaker 8: was actually the anomaly than not. So I think we're
Speaker 8: actually going back to the old normal more so than
Speaker 8: anything else. Obviously, you think about all those people during
Speaker 8: the financial crisis period or the years after that, we're
Speaker 8: saving up for retirement. A lot of them have now
Speaker 8: since retired and they're now dissaving, which is you know,
Speaker 8: implies higher neutral rates. You think about income inequality, it
Speaker 8: was something that we were talking about all throughout the
Speaker 8: twenty tens. Well, it's coming down now. People at the
Speaker 8: lower end of the wage spectrum. We're seeing more rapid
Speaker 8: growth in their wages. You see more increased sort of
Speaker 8: union activity and unions getting big wins for blue collar workers.
Speaker 8: I mean, these are not things. I mean, and those
Speaker 8: folks have a much higher propensity to spend. And so
Speaker 8: I think it's it's not right in my view to
Speaker 8: say that things haven't changed. But if that's what the
Speaker 8: FED believes, then you have to be recognizing what that
Speaker 8: implies for what they might do later. And so I
Speaker 8: think just because they're not talking about cuts now does
Speaker 8: not mean they won't be talking about cuts in three
Speaker 8: six months. That should be in the realm of possibility,
Speaker 8: and I think the market's Frankly, I'm not willing to
Speaker 8: fight the move yet.
Speaker 3: I mean, okay, no a clinic as always. You know
Speaker 3: you're one of my favors. I think everyone knows that.
Speaker 3: No data, every nice loose Macro, No, thank you joining
Speaker 3: guess now. Katy Kaminski, chief research strategist over Alpha Simplex. Katie,
Speaker 3: it's the number one question for us. Are you still
Speaker 3: short treasuries?
Speaker 11: Yes?
Speaker 5: Why?
Speaker 12: Well, this is because for trend falling, it's not just
Speaker 12: about a couple of days, It's really about persistent trends
Speaker 12: in the market, and I just want to point out,
Speaker 12: and this is something interesting, trend falling signals have been
Speaker 12: net short for nine quarters. This is the first time
Speaker 12: in many decades that this has been the case.
Speaker 11: And so the reason I'm.
Speaker 12: Pausing right now is because we've been saying short, short,
Speaker 12: short all year, and for the first time, it's starting
Speaker 12: to feel like we already got that short come through.
Speaker 11: What's next? What does the market do now?
Speaker 12: Buy are coming in because yields are at interesting levels.
Speaker 12: They're probably thinking, maybe we've finally hit that point.
Speaker 3: Do you think something changed fundamentally to lead to that
Speaker 3: in the last few weeks.
Speaker 12: I do, And then I think that the data has
Speaker 12: come out to support the narrative for investors. But I
Speaker 12: also think a narrative that has made sense to me
Speaker 12: is that investors have woken up to the idea that
Speaker 12: five percent yields at some point there's a buying point
Speaker 12: where you think, well, there's a chance this could actually
Speaker 12: go down. And now you start to see this equilibrium
Speaker 12: occur where you're seeing the disinverted curve, which is something
Speaker 12: we've been looking for since the beginning.
Speaker 5: Of the year.
Speaker 2: So Katie just to put a bow on this, are
Speaker 2: you now not short treasuries and actually starting to see value,
Speaker 2: particularly if yields get up to that five percent level
Speaker 2: in the tenure.
Speaker 12: So we're still short in terms of the overall frequency
Speaker 12: that we see signals, but we are seeing consolidation in
Speaker 12: those signals, so there's a reduction in that particular conviction.
Speaker 11: But what I will say is that I'm seeing more and.
Speaker 12: More positive signals on higher frequency, and so I think
Speaker 12: on the shorter term you're going to.
Speaker 11: See more and more potential buying for treasuries.
Speaker 12: But I do want to remind everyone inflation is still
Speaker 12: an issue. Rates could be higher for longer, so there's
Speaker 12: still really a good chance that we're going to see
Speaker 12: a lot of volatility instead of a new trend per
Speaker 12: se that starts to emerge.
Speaker 2: Yet this raises this question of which particular data points
Speaker 2: are going to be the real action drivers, like what
Speaker 2: we saw over the past ten days. Is it going
Speaker 2: to be basically every inflation read that we get, or
Speaker 2: do you really buy into this idea that it's treasury
Speaker 2: supply that's been dictating a lot of the volumes and
Speaker 2: a lot of the angst that we felt over the
Speaker 2: past month.
Speaker 12: It's really interesting that you bring this up, Lisa, because
Speaker 12: we've been talking about the supply issue.
Speaker 11: I mean, how often do people actually talk about supply.
Speaker 12: They're only talking about it because I think people are
Speaker 12: trying to understand the equilibrium of where people sit and
Speaker 12: what yield should cost, I mean, what should be the
Speaker 12: right yield.
Speaker 11: And I think from our.
Speaker 12: Side on the technical side, what we're looking for is
Speaker 12: potential breakouts so that we're seeing a steeper curve.
Speaker 11: At some point.
Speaker 12: Our view is it's going to depend on really what
Speaker 12: happens with the economic data of whether we end up
Speaker 12: with tighter conditions or if we actually see something very
Speaker 12: extreme where we actually saw higher yields.
Speaker 11: Again, that to me seems very unlikely right now, but I.
Speaker 12: Think it's really a point to start watching every data
Speaker 12: point to see which direction the yield market is going
Speaker 12: to go or which direction the yields go, because it's
Speaker 12: definitely an inflection point than.
Speaker 3: Katie, were going to catch up with Nil Kashgari in
Speaker 3: about twenty minutes time. I think we're all looking forward
Speaker 3: to this conversation. There is this second paragraph in the
Speaker 3: statement that they put out last week on kind of
Speaker 3: financial conditions it reaches follows. I'm sure you're familiar with it.
Speaker 3: Time of financial and credit conditions for households and businesses
Speaker 3: are likely to weigh on economic activity, hiring, and inflation.
Speaker 3: Could you still write that same sentence today? After the
Speaker 3: move we've seen in the last week, what's that on
Speaker 3: the movement we've seen in the last month, for the last
Speaker 3: six months, what do you think it is?
Speaker 7: Well?
Speaker 11: I think the.
Speaker 12: Challenge is that these numbers come in at different frequencies.
Speaker 11: Last week we had a massive.
Speaker 12: Buying but this could also be somewhat of a relief
Speaker 12: rally given how much movement we've seen downward, especially in equities.
Speaker 12: And let's just be honest, like I said, at a
Speaker 12: five percent yield started to get exciting, people said, oh
Speaker 12: I better get in there.
Speaker 11: So I think there's really still This could just be.
Speaker 12: The tip of the beginning of understanding how serious financial.
Speaker 11: Conditions have changed, and.
Speaker 12: If it's enough to actually warrant a point where we
Speaker 12: might actually have cuts at some point earlier than some
Speaker 12: would would have thought, like myself, who's been very pessimistic
Speaker 12: about rate cuts.
Speaker 3: Hey, Ketty, do you have a decent understanding of the
Speaker 3: conditions that would lead to those cuts.
Speaker 12: Well, usually in terms of this, I think we'd have
Speaker 12: to see pretty severe deterioration in financial conditions to see
Speaker 12: rate cuts, given the mandate of the FED and the
Speaker 12: fact that the other factors that are really focused on
Speaker 12: have not come down to their target level. So the
Speaker 12: fact that inflation is sticky, and the fact that we
Speaker 12: have a strong workforce and that we have all of
Speaker 12: these conditions putting us in a good place.
Speaker 11: They have been pretty clear that they're.
Speaker 12: Going to keep us higher for longer until we can
Speaker 12: sort that out. On the other hand, if we had
Speaker 12: some sort of very severe draw down or deterioration and
Speaker 12: credit that was clear, I.
Speaker 11: Think that they would have to act.
Speaker 12: So that to me would be the situation where we
Speaker 12: would see those rate cuts. Is if you saw something
Speaker 12: in the credits markets or something in terms of consumers
Speaker 12: really struggling that would cause them to actually react.
Speaker 2: So the FED put still exists, just at a much
Speaker 2: higher pain point, I would.
Speaker 11: Say probably yes.
Speaker 12: I mean, I think it always exists somewhere, but it's
Speaker 12: definitely moved a lot compared to what we liked in
Speaker 12: twenty nineteen and before.
Speaker 3: Kelly Let's finish what we started. Given the uncertainty you
Speaker 3: now have about your position, why maintain the shot? That's
Speaker 3: what I'm going to walk away from this conversation scratching
Speaker 3: my head about why maintain the short when it can
Speaker 3: be as expensive as it was on weeks last week.
Speaker 11: So this is the point of trend falling.
Speaker 12: Systematic trading is about not double sort of using your
Speaker 12: emotion in the moment. And I think what works with
Speaker 12: trend falling is following the data, and we just need
Speaker 12: more data to know the answer, and over longer periods
Speaker 12: of time, it turns out the market is actually quite
Speaker 12: good at giving us indications of where things are moving,
Speaker 12: and it's particularly short term movements where they disagree. Where
Speaker 12: you want to lean on your own gut, but you shouldn't,
Speaker 12: because that's what systematic trading is really about. It's about
Speaker 12: measuring and falling the markets and allowing the markets to
Speaker 12: tell you what the market where we're going, as opposed
Speaker 12: to sort of my own personal view.
Speaker 3: Unfortunately, Katie, thanks for the clarity on that point. I
Speaker 3: appreciate it. Katie commenced you that of aphasimplex, two major
Speaker 3: political parties remain unpopular in the United States, fifty six
Speaker 3: percent of Americans viewing the Republican Party unfavorably, fifty eight
Speaker 3: percent saying the same thing of the Democratic Party. Mohammed Junis,
Speaker 3: the editor in chief at Gallop, joined us now, Muhammad,
Speaker 3: help us out. I've been rinting through this piece. Neither
Speaker 3: party is well liked. You guys have pointed out that
Speaker 3: the GP has an edge on certain issues. Can we
Speaker 3: just talk about the likability of both parties right now, Muhammed?
Speaker 3: How unusual is this?
Speaker 10: Unfortunately, you know at harkens to your Amtrak conversation earlier.
Speaker 10: We're at a state right now in the United States
Speaker 10: when both parties are really not doing that.
Speaker 5: Great in terms of their favorability.
Speaker 10: It's nothing new, Unfortunately, It's been quite a while since
Speaker 10: Americans had a favorable view of either party in the majority.
Speaker 10: We're also at a time where there's a record high
Speaker 10: of Americans saying that they'd like to see a third
Speaker 10: party in American politics.
Speaker 5: Of course, easy to say I want more.
Speaker 10: It doesn't necessarily mean that that party would exist or
Speaker 10: actually be powerful. But we're also at a time, John
Speaker 10: and Lisa where there's a high of people that identify
Speaker 10: as independents.
Speaker 5: And that is important not.
Speaker 10: Only in the current moment, but also in our analysis
Speaker 10: over generations. What we find is that younger Americans today
Speaker 10: are actually sticking with that independent id much further along
Speaker 10: their lifespan than previous generations young folks. So, certainly America
Speaker 10: is highly dissatisfied with national government.
Speaker 5: We've talked about that a lot.
Speaker 10: They're really, in some ways most dissatisfied with both parties.
Speaker 5: That being said, today is a local election.
Speaker 10: It's really, I know, it's so tempting for us to
Speaker 10: jump to twenty twenty four. Americans line up today to
Speaker 10: vote on local issues, and there's a huge difference in
Speaker 10: the way people perceive local government versus the national government
Speaker 10: here in the United States.
Speaker 3: SOMEHOWMA just explain that a little bit more. What is
Speaker 3: the big difference between the two currently?
Speaker 5: Basically and coetence.
Speaker 10: Americans have very low trust and competence in the national
Speaker 10: government and national institutions. Perceptions of corruption are astronomically high.
Speaker 10: When you come to local government, though, people have a
Speaker 10: much more positive perspective on local government, whether it's the efficacy,
Speaker 10: transparency of local government and corruption, but also how they
Speaker 10: feel about their local governing officials. So Americans light up
Speaker 10: at the ballot box today, they're hearing a lot of
Speaker 10: echo chamber on the national what this means, we're twenty
Speaker 10: twenty four, but really what they're going to be focusing
Speaker 10: on our local issues, and the national conversation.
Speaker 5: Certainly will inform that.
Speaker 10: That's why things like abortion, things that implicate attitudes about
Speaker 10: big and small government, for example, they're on the ballot box.
Speaker 10: They will be discussed. They're going to be they have
Speaker 10: been a focus of the campaign. We know in Ohio
Speaker 10: there's a really big push on abortion. It'll be a
Speaker 10: really important weather vane in terms of whether or not
Speaker 10: Roe v. Wades overturning has sort of faded, The impact
Speaker 10: of that has faded or.
Speaker 5: Is still with us.
Speaker 2: I have to say, as you're talking about local elections
Speaker 2: and how different they are than the nationals, I think, well,
Speaker 2: they're probably not on TikTok, the local elections, they're probably
Speaker 2: not on Facebook. How much is it the social media
Speaker 2: echo chamber that polarizes people and gives them a worse
Speaker 2: and expected view of national politics in a way that
Speaker 2: local politics might be slightly immune.
Speaker 5: I think that's a great point.
Speaker 10: Lisa it's much easier to sort of check the bs
Speaker 10: if you will. On a topic or an issue. When
Speaker 10: it's about where you live, you know that reality. You
Speaker 10: have direct information from people you know where you live.
Speaker 10: You can talk to your neighbors, you can talk to
Speaker 10: your local religious leaders or community leaders. With national politics,
Speaker 10: it's a very different thing. It really tends to have
Speaker 10: now become sort of a war of the propaganda's if
Speaker 10: you owe both parties where truth is very hard to identify,
Speaker 10: but both sides are absolutely out there to religiously convict
Speaker 10: you excuse me, to religiously convert you to their worldview.
Speaker 10: So that's certainly a factor. But look, when it comes
Speaker 10: to twenty twenty four, and it's important for us to keep.
Speaker 5: Our eye on that mark.
Speaker 10: Everything that we've done with regards to national elections really
Speaker 10: comes down to one thing. Americans focus on the economy.
Speaker 10: The economy is king. It's not only king, it's king,
Speaker 10: queen and bishop when it comes to picking a president
Speaker 10: here in the United States. And that's going to be
Speaker 10: a huge factor in where people place their votes.
Speaker 5: In November twenty twenty four.
Speaker 10: But as you all know, we are light years ahead
Speaker 10: from where that is in terms of assessing where the
Speaker 10: economy is going to be then, and that's going to
Speaker 10: be the major factor when it comes to party advantages.
Speaker 10: The Republicans definitely have maintained their historic advantage in terms
Speaker 10: of Americans viewing them as more competent in keeping the
Speaker 10: country prosperous, keeping the economy booming, and keeping the country safe.
Speaker 2: That's said, how much are you looking to Glenn Youngkin today?
Speaker 2: And maybe there is going to be very much local
Speaker 2: issues that are decided, but the local issues have implications
Speaker 2: for their glens might be the Republican con candidate for presidency.
Speaker 1: Do you think that's a stretch.
Speaker 5: I think looking at the polls right now, that is
Speaker 5: a stretch.
Speaker 10: It's hard to argue that President Trump is not the
Speaker 10: front runner of the Republican Party. You know, every poll
Speaker 10: you do, every poll, what we've done. We don't do
Speaker 10: too many political polls anymore, but there are good polls
Speaker 10: out there. It's really hard to see somebody sort of
Speaker 10: astronomically jump ahead of him. Now that being said, we
Speaker 10: haven't had a president in modern time that's facing the
Speaker 10: legal challenges that he's facing, and that's a.
Speaker 5: Whole other sort of curveball that's being thrown here.
Speaker 10: It's not clear exactly what his situation will be come real.
Speaker 10: Kind of rubber meets the road in terms of November
Speaker 10: twenty twenty four. But you know there are still we
Speaker 10: heard from David Axelrod this week about the Democratic side.
Speaker 10: There's still a lot of movement in this race, and
Speaker 10: I wouldn't rule out any surprises or sudden departures on
Speaker 10: either side.
Speaker 3: Up against the clol kid. Just to squeeze it in
Speaker 3: and finished where we started. You do mention in the
Speaker 3: piece of the GP holds advantages on certain issues. Can
Speaker 3: we just bring some life into that, Mohammad? Which issue specifically?
Speaker 10: There are really three issues In specific one is keeping
Speaker 10: the country prosperous. Republicans have a pretty sizable advantage to
Speaker 10: Democrats in terms of perceptions of keeping the country prosperous.
Speaker 10: The other one is keeping the country safe. As you know,
Speaker 10: we're now very focused on too pretty significant conflicts across
Speaker 10: the world. Hopefully that doesn't become a reality for us
Speaker 10: here in the United States, but as Americans focus more
Speaker 10: on security issues, Republicans do have that advantage in our polls.
Speaker 10: The final one is who's most competent to handle the
Speaker 10: most important problem facing the country. And what's fascinating about
Speaker 10: that question is that the most important problem facing the country,
Speaker 10: as I have said on this show many times right now,
Speaker 10: is actually poor leadership and government. So Americans identify the quality,
Speaker 10: the low quality of national le as the most important
Speaker 10: problem facing the country.
Speaker 5: So it's the most of our problem. The economy and
Speaker 5: keeping America.
Speaker 3: Safe fascinates in gright. To catch out Mohammed azoh Wis,
Speaker 3: He's going to say, Mohammed unus of gallop.
Speaker 2: Everyone's been pointing to oil prices. Why have they not
Speaker 2: caught up given that there is a sort of existential
Speaker 2: risk and threat that seems to be escalating every single
Speaker 2: day in the Middle East? Joining us now to help
Speaker 2: us understand what exactly to look for. Nadia Martin Wiggan,
Speaker 2: Director ats fell in Capital, Nadia, I just want to
Speaker 2: start there. What do you make of the fact that
Speaker 2: we're seeing crude traded on the NMEX blow eighty dollars
Speaker 2: a barrel again today despite what's going on in Israel
Speaker 2: and in Gaza.
Speaker 9: Hello, great to be on. I think what we saw
Speaker 9: last week is that Hezbollah and Iran for right now,
Speaker 9: they're on the sidelines, right, They don't actually want to
Speaker 9: show an escalation of the war going on in Gaza
Speaker 9: right now. So that has taken off some of the
Speaker 9: risk premium. For the last ten days, we actually see
Speaker 9: the implied volatility in the options market come down. So
Speaker 9: it's not even something that's happened just today, it's been
Speaker 9: for the last ten days that trend.
Speaker 11: I think.
Speaker 9: In addition, when that premium, that initial shock goes away,
Speaker 9: as we saw was the case with the war in
Speaker 9: Ukraine by Russia, eventually you know, the market starts to
Speaker 9: think about how to work around that. And for example,
Speaker 9: we've seen that freight rates have gone much higher, and
Speaker 9: part of that is when you look at it, it's
Speaker 9: almost like a risk balancing that, Okay, if we can't
Speaker 9: flow through the Suez and we have to go around,
Speaker 9: then let's de risk ourselves if things were to take longer.
Speaker 9: And we see that the freight market has actually priced
Speaker 9: that in as if they have to avoid the Suez,
Speaker 9: which they haven't had to do. So as a result,
Speaker 9: things have come down also.
Speaker 11: In the oil market.
Speaker 1: Okay, so let's take a step back for a second. Nadia.
Speaker 2: If you're looking at freight producers, that already come up
Speaker 2: with alternate roots that avoid the suz Canal to avoid
Speaker 2: potential or the straits of our moves to avoid potential
Speaker 2: blowback from Iran. Does this mean that oil prices are
Speaker 2: actually higher than where they would be at this point
Speaker 2: if there weren't this geopolitical overhang, because it's actually being
Speaker 2: priced into the market in a material way.
Speaker 7: Yeah.
Speaker 9: If we look at what was happening to the market
Speaker 9: in oil before the October seventh attack, we could see
Speaker 9: that prices were coming off right. We had a lot
Speaker 9: of pressure on refinery margins. We had physical creed trading poorly.
Speaker 9: You know, we've had the largest overhang in the West
Speaker 9: African market that we've had in years. We had more
Speaker 9: than twenty twenty five million barrels unsold out of the
Speaker 9: November loading program. So we saw that kind of weakening
Speaker 9: and then this is where the market would like to rebalance.
Speaker 9: We saw the physical premiums come down for those grades,
Speaker 9: but the futures market has remained quite strong, and this
Speaker 9: is where we have to see that kind of reb ballancy.
Speaker 9: When we look at kind of the momentum and what
Speaker 9: is happening to pure speculative traders, you know, the CTAs
Speaker 9: and so forth. That short term momentum has been downwards, right,
Speaker 9: and that is put pressure bringing us down to where
Speaker 9: we are now in WTI, you know, just above the
Speaker 9: two hundred day moving average. If we look at that
Speaker 9: long term momentum, it's still intact for a strong market, right.
Speaker 9: So there are still those longs in the market that
Speaker 9: we've had in since before all of this started. But again,
Speaker 9: the market is preparing in case something were to happen,
Speaker 9: because you know, things had been taking along well in
Speaker 9: the Middle East and we were about to have a
Speaker 9: deal between Saudi Arabia, the US and Israel recognizing Israel,
Speaker 9: which would take off potentially a premium right, and instead
Speaker 9: we've moved in the opposite direction.
Speaker 2: How much is the US becoming the swing producer at
Speaker 2: a time where there is consolidation in the shale patch
Speaker 2: and you are seeing companies try to realize the value
Speaker 2: from their stores, basically pump the oil while it's still
Speaker 2: valued in the world.
Speaker 9: The deal of Exon, for example, buying Pioneer right, that
Speaker 9: really shows that they are focusing on the Permian right.
Speaker 9: And what interestingly Exon announced in their earnings call is
Speaker 9: that they believe that with their equipment and knowledge, they're
Speaker 9: able to bring in a total of one billion barrels
Speaker 9: of oil more out of those same assets that Pioneer
Speaker 9: was able to. So, when we think about the terminal
Speaker 9: regular production rate in the US, that goes from around
Speaker 9: fourteen and a half million barrels per day to maybe
Speaker 9: fifteen and a half million barrels per day, and the
Speaker 9: question is when do we reach that. Right August production
Speaker 9: was thirteen point one million barrels per day. It will
Speaker 9: probably take two years, but of course that depends on
Speaker 9: the short term oil price and the signals short term
Speaker 9: meaning monthly, quarterly, and the signals that that yields to
Speaker 9: shale producers in terms of activity. Right, a weaker oil
Speaker 9: price will slow that down. A strong oil price we'll
Speaker 9: speed that up.
Speaker 2: So right now, given more prices are do you expect
Speaker 2: more consolidation to be expedited currently or do you think
Speaker 2: that people are going to wait until prices go up
Speaker 2: a bit further.
Speaker 9: Well, prices are reasonably strong, right, the whole oil complex
Speaker 9: is in a good situation and making money. So when
Speaker 9: what we saw at the start of October is that
Speaker 9: demand was starting to get hit, right, we had producers
Speaker 9: selling crewed for more than one hundred dollars a barrel,
Speaker 9: and then we saw, for example, companies like India really complaining.
Speaker 9: Part of that is because Russian crudis continued to flow
Speaker 9: and we had price caps breached, right, so you were
Speaker 9: paying more than sixty dollars a barrel, maybe you were
Speaker 9: paying seventy dollars a barrel, and then on average, facing
Speaker 9: more than one hundred dollars a barrel was becoming difficult.
Speaker 9: So I think we've been in a pretty comfortable space,
Speaker 9: you know, in the eighty dollars range for everyone to
Speaker 9: make money, so it makes it ripe for consolidation and
Speaker 9: valuable resources. We don't really need things to move much higher.
Speaker 2: Do you think that all things being a well, this
Speaker 2: is going to be the range for the foreseeable future,
Speaker 2: just because of the pushes and the pulls that seem
Speaker 2: to be working in equilibrium from.
Speaker 9: A technical level, yes, But of course things can suddenly
Speaker 9: change very quickly, both in the Middle East, you know,
Speaker 9: towards the negative towards a positive, so that can really
Speaker 9: shift things. And the number one thing to keep track
Speaker 9: of is that inventories were expected to draw quite steeply
Speaker 9: in the fourth quarter, and so far in October they
Speaker 9: only drew on land around three hundred thousand barrels per day.
Speaker 9: So the market is waiting for evidence that actually we
Speaker 9: have tightness led by these supply cuts and demand isn't waning,
Speaker 9: Whereas you know, on the other hand, if it continues waiting,
Speaker 9: then we could see.
Speaker 11: For the falls and price.
Speaker 2: Nadie Martin Wigan of Spell and Capital, thank you so
Speaker 2: much for being with us.
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