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Speaker 2: Staying bullish, three consecutive years of double digit games don't
Speaker 2: happen too often. Nevertheless, that's what we're expecting. We see
Speaker 2: the S and P five hundred increasing nineteen percent this
Speaker 2: year to seven thousand. However, we think it could be
Speaker 2: a bumpiercent than in recent years. ED joined us for
Speaker 2: more in the flesh. Good to see you, sir, Thank you.
Speaker 2: Happy new year. Let's start with that double digit expectation
Speaker 2: for twenty two twenty five with some volatility.
Speaker 3: What's different about this year compared to last?
Speaker 4: Well, I think we're starting off with more uncertainty. On
Speaker 4: both monetary and fiscal policies. We really don't know how
Speaker 4: all these different policies that the Trump administration will introduce
Speaker 4: basically from day one. Sure, there's going to be something
Speaker 4: like twenty twenty five executive orders.
Speaker 5: Coming very shortly after the inauguration.
Speaker 4: The problem is we don't really know how these things
Speaker 4: are all intermix. It's kind of like a doctor prescribing
Speaker 4: a whole bunch of different medications to you and didn't
Speaker 4: check the computer that some of them don't interact to. Well,
Speaker 4: so we'll see how deportation and deregulation and tax cuts
Speaker 4: and terrify increases and what that implies for the deficit,
Speaker 4: all mixed together. And meanwhile, the assumption is that the
Speaker 4: Republicans are in a position to get everything through. Well,
Speaker 4: maybe that's not quite the case. They've screwed it up
Speaker 4: before they could do it again, I suppose. So, Well,
Speaker 4: there's a lot of uncertainty on the administration's policies. And
Speaker 4: then monetary policy is on pause right now, and the
Speaker 4: question is how long?
Speaker 5: And I think for a while.
Speaker 3: Let's stop the administration.
Speaker 2: What are the assumptions that you've might have any they
Speaker 2: come into your forecast.
Speaker 4: Well, I'm basically acknowledging that I don't know how it's
Speaker 4: all going to end up, but my gut feel is
Speaker 4: that when you add it all up together, it'll be
Speaker 4: unbalanced positive for the economy.
Speaker 5: I think the other thing.
Speaker 4: That's important to recognize, especially after the past three years experience,
Speaker 4: is that the economy hasn't been, as you mentioned, as
Speaker 4: Lisa mentioned, remarkably resilient to high interest rates, and so.
Speaker 5: We really need you know, the economy is kind of like.
Speaker 4: The Rodney danger field of all this doesn't get enough respect.
Speaker 4: It's kind of its own dynamics. It's not totally dependent
Speaker 4: on what happens in Washington, DC, and so I think
Speaker 4: we are going to see a productivity boom, which I
Speaker 4: think has already started, and that'll keep the economy movement
Speaker 4: at a faster than expected pace, and that'll keep inflation down.
Speaker 1: Do you think that rates and are fairly valued, even
Speaker 1: though some people are saying, actually, maybe they're looking a
Speaker 1: little cheap after the recent rise at the end of
Speaker 1: last year.
Speaker 5: You're talking about interest rates.
Speaker 4: Well, on the interest rate front, I was not in
Speaker 4: the camp expecting several rate cuts last year, and then
Speaker 4: at the end of the last year, especially around September,
Speaker 4: when the FED chair started talking extremely dubbishly. I couldn't
Speaker 4: understand that. I mean, the economy is doing fine, Inflation
Speaker 4: is pretty close to two percent, So what's the need
Speaker 4: for lowering interest rates? I think we're I think we
Speaker 4: are at neutral. I think we are where interest rates
Speaker 4: should be. The economy is doing quite well with it,
Speaker 4: and there's a lot of consumers, individuals, households that really
Speaker 4: enjoy having interest rates at these levels, a lot better
Speaker 4: than getting nothing for your money market funds, which is the.
Speaker 1: Reason why somebody people have been piling into cash. It
Speaker 1: raises a question, if we do see a third year
Speaker 1: of double digit returns of the nineteen percent gains that
Speaker 1: you foresee, is that going to be concentrated again in
Speaker 1: the same leadership, given the fact that a lot of
Speaker 1: the equal way, the broadening out types of beliefs really
Speaker 1: stemmed from the idea of lower interest rates.
Speaker 4: Yeah, well, look, I think that lower interest rates certainly
Speaker 4: help smid caps, small and mid cap stocks, and we
Speaker 4: had a couple of instances last year where all this
Speaker 4: excitement about rates coming down got them to do reasonably well.
Speaker 4: And then it's all kind of fizzled the part in
Speaker 4: December as great expectations changed and suddenly maybe the FED
Speaker 4: is not going to be lowering interest rates as much,
Speaker 4: and so okay, everybody piles back in into the Magnificent seven.
Speaker 5: But I like the S and P four hundred and
Speaker 5: ninety three.
Speaker 4: They've lagged behind. And you know, I think when you
Speaker 4: look at an S and P five hundred portfolio, the
Speaker 4: way I look at it is all stocks, and there
Speaker 4: are technology stocks. They either make it or they use it.
Speaker 4: If you don't use it, you're gonna lose it. You're
Speaker 4: not going to be competitive. So I think we have yet.
Speaker 5: To see.
Speaker 4: Companies announce and demonstrate that all these technologies that are
Speaker 4: out there, not just artificial intelligence, but robotics, automation, and
Speaker 4: just thinking about changing your procedures in a way that
Speaker 4: makes workers more productive. A lot of that's going on,
Speaker 4: and we are actually seeing it in the data.
Speaker 5: My projection that we're.
Speaker 4: In a productivity growth boom is really not so much
Speaker 4: a forecast as it is an extrapolation. We've already seen
Speaker 4: a pretty significant pickup in productivity.
Speaker 5: I think it keeps going.
Speaker 2: We'd love your thought on us Stale as well, so
Speaker 2: that thought will comes to you in just a moment.
Speaker 2: US Stale right now negative in the pre market has
Speaker 2: been all morning off the bank and reporting the President
Speaker 2: minding would block this Stale getting confirmation find it blocking
Speaker 2: nip on Stale's proposed takeover of us Stale. The President's
Speaker 2: saying the following, we need major US companies representing the
Speaker 2: major share of US steel making capacity. That is why
Speaker 2: I'm taking action to block this deal. He goes on
Speaker 2: to say, US Steel will remain a proud American company
Speaker 2: when this American owned, American operated by American union steel
Speaker 2: workers the best in the world.
Speaker 1: This raises the question of how this will be interpreted
Speaker 1: next year. This seems to be in line with what
Speaker 1: President elect Donald Trump was talking about that he also
Speaker 1: would block this deal. But it comes at a time
Speaker 1: where everyone is expecting a whole host of mergers and
Speaker 1: acquisitions as a result of a loosening in some of
Speaker 1: those parameters, and it raises a question what's national security,
Speaker 1: what becomes political and what we'll get through at a
Speaker 1: time when ostensibly this is going to be an administration
Speaker 1: more amenable to mergers.
Speaker 2: Stock is down in the free market by a round
Speaker 2: about eight percent. And to bring you back into the conversation,
Speaker 2: to build on what Lisa was saying, what's the signal
Speaker 2: you take away from this.
Speaker 5: From the steel announcement.
Speaker 2: Blocking the deal? Tell what handket down, what countcat down?
Speaker 4: I mean, I guess we have to conclude that the
Speaker 4: Biden administration is still still in business. They haven't closed
Speaker 4: the shop yet, but it is consistent with what Trump's
Speaker 4: been pushing for, as you said, and it's also consistent
Speaker 4: with a regime change in the Biden years and Obama years.
Speaker 4: I think you could kind of combine those years together.
Speaker 4: We had a lot of globalization, the idea that America's
Speaker 4: interests were identical to global interests and we all had
Speaker 4: to work together, kind of a Kumbayah kind of approach.
Speaker 4: Now we have no Everybody pursues their own national interests
Speaker 4: and we can talk about it and negotiate and work
Speaker 4: things out, but you know, we're going to push for
Speaker 4: our national interests. You push for your national interests. We'll
Speaker 4: use our economic power to get what we want and
Speaker 4: to try to cut back what we have to give
Speaker 4: in return. And that's kind of the environment we're in
Speaker 4: right now.
Speaker 1: Real tension developing, especially at a time where people are
Speaker 1: talking about potential external foreign investment in the United States
Speaker 1: in order to gain a presence here at a time
Speaker 1: where people are talking about mergers and acquisitions, the boom
Speaker 1: that possibly could really lift banks in other financial firms,
Speaker 1: how do you put that together with a real existential
Speaker 1: question about what is national security?
Speaker 6: What is going to be politically viable?
Speaker 1: Will this administration, the Trump administration, be excited about the
Speaker 1: idea of tie ups even in the tech space, Well, I.
Speaker 4: Think that it'll be more leslie fair than we had
Speaker 4: under the Biden administrations, as certainly we'll have more M
Speaker 4: and A activity. I think it's been going on kind
Speaker 4: of quietly in the tech field. It's just not public
Speaker 4: because a lot of the deals are Microsoft buying.
Speaker 5: A private company.
Speaker 4: That's one of the frustrations that small cap managers have
Speaker 4: is they spend all this time putting together a portfolio
Speaker 4: of twenty great little companies and they expect that, you know,
Speaker 4: only a few of them will become the next Microsoft,
Speaker 4: and it never happens because Microsoft buys them. So I
Speaker 4: think there's still a lot There is a lot of
Speaker 4: M and A going on even now, But I don't
Speaker 4: think the government's going to be as interventionists as we've
Speaker 4: seen under Biden.
Speaker 1: So you're unabashedly bullish. You do expect this to be
Speaker 1: continue to be the roaring twenties. What is the potential
Speaker 1: risks that you see out there at a time when
Speaker 1: we're talking to some people about gold, some people about
Speaker 1: the possible dissolution of some of the m and I.
Speaker 4: Furvor, Well, you did mention that I'm looking for a
Speaker 4: bumpy year, and I would say that a lot of
Speaker 4: those bumps are going to be occurring over the next
Speaker 4: few months. We certainly have the uncertainty about monetary and
Speaker 4: fiscal policies, the bond vigilanties, my friends, the bond vigilantes
Speaker 4: are acting up again, and the bond deals around four
Speaker 4: and a half percent and getting a lot of questions,
Speaker 4: not just only can we go back to five percent,
Speaker 4: but could we breach that and go to six percent.
Speaker 4: I wouldn't be surprised if we saw five percent, and
Speaker 4: I would spook the market a short term basis, but
Speaker 4: I think we'll find plenty of buyers at five percent,
Speaker 4: just the way we did last time. And then of
Speaker 4: course there's geopolitical concerns. The Middle East is still a mess.
Speaker 4: You know, we have yet to see what Israel is
Speaker 4: going to do next with regards to Iran and what
Speaker 4: Iran will do next with regards to Israel, so that
Speaker 4: that confrontation is still ongoing, as is Ukraine in Russia.
Speaker 4: So I think, you know, you put it all together,
Speaker 4: and at least for the first few weeks of the year,
Speaker 4: I think there's a potential for the market two weekend
Speaker 4: and maybe perhaps even a correction, but I would I
Speaker 4: would view that as a buying opportunity.
Speaker 3: Certainly weave for the last week.
Speaker 7: ED.
Speaker 2: It's good to say, sir, thank you. I did this
Speaker 2: more often in person, absolutely thanks for being here at
Speaker 2: any day of any research advestors looking at hats of
Speaker 2: keydanks this month with next Friday's payrolls report followed by
Speaker 2: CPI and a Federate decision at the end of the month.
Speaker 2: Claudia Salm of New Century Advisors noting the FED summary
Speaker 2: of Economic projections isn't living up to promises, writing tension
Speaker 2: has been building around the SEP at the Power Feed.
Speaker 2: The FED has long been data driven in its decisions,
Speaker 2: but the complexities of the post pandemic economy have led
Speaker 2: it seemingly to rely on data over forecast. Powell even
Speaker 2: admitted as much at the press conference. Claudia jointed just
Speaker 2: now for more, Laudia, welcome to the program and a
Speaker 2: very happy new year to year. It's good to see
Speaker 2: you once again. How is this complicating decision making on
Speaker 2: the f WEBC.
Speaker 8: Well, I think, you know, a real theme of the
Speaker 8: last FMC meeting was how much uncertainty there is about
Speaker 8: the outlook for twenty twenty five, and a lot of
Speaker 8: that comes from policy uncertainty out of fiscal policy.
Speaker 9: But you know, the FED has.
Speaker 8: Increasingly underpower become very data driven, and it's hard to
Speaker 8: believe it, but I think we're actually going to see
Speaker 8: a year where the data plays an even bigger role,
Speaker 8: and we already know that that can create a lot
Speaker 8: of unnecessary volatility because it's hard to measure a thirty
Speaker 8: trillion dollar economy in real time with a lot of accuracy.
Speaker 9: So they were going to continue to see this.
Speaker 8: Real overreaction, and we saw this yesterday with the initial
Speaker 8: claims for unemployment data to just you know, these little
Speaker 8: scraps of data we get on how how strong labor
Speaker 8: market is how hot inflation is, you know, So buckle up.
Speaker 3: Well, Claudie.
Speaker 1: This is a reason why people can't liken the moment
Speaker 1: that we're into a dark room with a blindfold on,
Speaker 1: with lots of furniture, going around and trying not to
Speaker 1: bump into anything because the data is messy. We keep
Speaker 1: talking about distortions, but forecasts have been wrong and the
Speaker 1: whole concept of transitory is a huge scar over this fed.
Speaker 1: So is there a forecast or an economic model that
Speaker 1: they should be following. And I'm asking you of this
Speaker 1: some rule who has come out and talked about how
Speaker 1: every rule has its exceptions and it's difficult to really
Speaker 1: come up with these.
Speaker 9: Right, Yeah, this is the past for a half year.
Speaker 8: Have not been kind to rules or rules of thumb
Speaker 8: or how it's usually in the past. But we also
Speaker 8: can't become hamstrung by a mistake or a misjudgment that
Speaker 8: was made in twenty twenty one about inflation.
Speaker 5: Right.
Speaker 8: We have moved forward and there are we've seen the
Speaker 8: economy slowly overtime heal. We're seeing patterns that make a
Speaker 8: lot more sense than they did in the early days
Speaker 8: of the post pandemic recovery. So the FED, Yes, and
Speaker 8: that's exactly how it feels in a dark room moving
Speaker 8: We know there's furniture, but part of the Fed's job
Speaker 8: is to help turn the lights on and at least
Speaker 8: chart a path.
Speaker 9: And yes, that could mean redirecting.
Speaker 8: But to just well, you know what we do This
Speaker 8: next year is going to be all about the data
Speaker 8: points we get. That really sets up I think a
Speaker 8: lot of unnecessary volatility, Like the FED is injecting volatility
Speaker 8: because it's saying, just follow those data points, and we
Speaker 8: know we get bounced around by them, so you kind
Speaker 8: of you need to have a grand plan in terms
Speaker 8: of how you're working your way through the years. It's tricky,
Speaker 8: like the policy uncertainty is real for this for the FED.
Speaker 8: So I'm not saying like I have an easy solution
Speaker 8: for them, But now is not the time to back
Speaker 8: away from some of the forward looking the heuristics that
Speaker 8: we have.
Speaker 1: Mom and Elerian I would agree with you, and he's
Speaker 1: talked about this as much the whole over data point dependence.
Speaker 1: What patterns are you observing that you think are going
Speaker 1: to be important and prescriptive for what's to come in
Speaker 1: the US economy?
Speaker 8: Right, So I tend to I keep all eyes on
Speaker 8: the labor market, and that's such a linchpin to the
Speaker 8: resilient economy we've had and the ongoing recovery. In addition
Speaker 8: to you know, millions of Americans lives really depend on
Speaker 8: their paychecks. And this is one where I worry that
Speaker 8: the FED is somewhat come placent. I think they're being
Speaker 8: hyper visional mot inflation, as we know the FED often
Speaker 8: is and should be. But their outlook that most of
Speaker 8: the officials laid out in the last summer of economic projections,
Speaker 8: there's a pretty optimistic one on the labor market and
Speaker 8: basically saying, hey, we're back, We're back to normal, We're
Speaker 8: back in think Mary Daily even use the words kind
Speaker 8: of an equilibrium. Got one vacancy for one unemployed worker,
Speaker 8: and it's close to what the FED things the long
Speaker 8: run unemployment rate is, and they project that to stay
Speaker 8: with us, like, hey, we've got back to equilibrium, We've
Speaker 8: got back to a good place.
Speaker 9: We're going to stay there.
Speaker 8: And I think there's a lot of other dimensions you
Speaker 8: can look at the labor market, particularly the differences between
Speaker 8: the hiring and the firing.
Speaker 9: When the hiring doesn't look so good.
Speaker 8: The firing looks really pretty great, Like that's not typical
Speaker 8: for a labor market, you know, that's in balance, that's
Speaker 8: in equilibrium. And so I think there are some signs
Speaker 8: and that's why we have to keep an eye on
Speaker 8: out or the places where it doesn't make sense.
Speaker 9: And in other big.
Speaker 8: Pieces, we've had a big push from the increase in
Speaker 8: labor supply from the immigration into this country, which has
Speaker 8: been extraordinarily high in recent years.
Speaker 9: And that that's turning.
Speaker 8: Or even if we don't have mass deportations, we're not
Speaker 8: going to have a big push from the outside immigration.
Speaker 8: And that's an important that's been an important dynamic at
Speaker 8: the labor market. We're going to watch it on Why
Speaker 8: so I don't think things are as calm in the
Speaker 8: labor market as the FED kind of in their latest.
Speaker 9: Projection seems to view.
Speaker 8: And I mean, you know, we're going to get our
Speaker 8: first taste of the data next week for the with
Speaker 8: the report.
Speaker 2: Irol's coming on January tenth. Just quickly, Claudia, how unusual
Speaker 2: would it be for unemployment to stabilize at these levels
Speaker 2: after coming off the lows to the extent that they have.
Speaker 8: It would be very unusual to stabilize and hold in
Speaker 8: this place for like the next three years, which is
Speaker 8: essentially what the FED is projecting. But that's saying that
Speaker 8: we're in a good place and we're going to stay there.
Speaker 8: But we have there is a sense that, you know,
Speaker 8: barring a lot of this policy uncertainty, this year twenty
Speaker 8: twenty five really.
Speaker 9: Could could be. It still could be, but it was
Speaker 9: don't have to be.
Speaker 8: Like we get to the sustainable place, we work out
Speaker 8: some of the last disruptions.
Speaker 9: So we'll see.
Speaker 3: I hope you're right.
Speaker 2: Clodia Samp of New Century Advice is Cludia, appreciate your time.
Speaker 3: Thank you.
Speaker 2: I think we all hope Clodius right. Stephanie Roth the
Speaker 2: full free search market banner of Banks of America joining
Speaker 2: us run a table to the turf you.
Speaker 3: Good morning and a happy new year.
Speaker 7: Good morning.
Speaker 2: Let's see you both. Let's start with you, Stephanie. Expectations
Speaker 2: for a week today in a payrolls report.
Speaker 10: Yeah, so we're looking for one seventy five on payrolls,
Speaker 10: which sounds a little higher relative to expectations.
Speaker 6: But I think the surprise from the report.
Speaker 10: Just given where markets are, is that it could come
Speaker 10: into the soft side forgetting about the headline number. There
Speaker 10: could be download revisions to the prior two months, And importantly,
Speaker 10: we're looking for an unemployment rate that could take up
Speaker 10: a little bit higher than what expectations are looking for.
Speaker 10: So there might just be some soft pieces of the
Speaker 10: report that at the margin could put some downward pressure
Speaker 10: on yields.
Speaker 3: Where's the weakness come from?
Speaker 2: Because I think the book was right now would say
Speaker 2: claims to low lay off the low things look pretty good.
Speaker 3: What looks bad?
Speaker 10: The breath hasn't been very good in terms of hiring.
Speaker 10: That's been quite disappointing. A lot of the gains have
Speaker 10: been driven by healthcare and government, and that's not a
Speaker 10: sign of a really really strong labor So we think
Speaker 10: the lead market is fine. We think the underlying trend
Speaker 10: is one hundred and forty thousand, but at the margin
Speaker 10: that's probably a little bit softer than where consensus is
Speaker 10: at the moment mark.
Speaker 1: We were talking earlier with Claudia sam and she was
Speaker 1: talking about how the FED has really injected a lot
Speaker 1: of volatility into the market and the rates of market
Speaker 1: in particular, as a result of its data point dependence.
Speaker 1: Do you expect there to be quite a bit of
Speaker 1: volatility either way, if there is any kind of surprise
Speaker 1: whatsoever on Friday's payrolls.
Speaker 11: We do we also think that volatility is going to
Speaker 11: be a little bit higher in the rates market this year,
Speaker 11: simply because the FED is so data dependent and there's
Speaker 11: still so much we don't know about next year, how
Speaker 11: will all these economic policies take shape, what will the
Speaker 11: impacts be, and so we do think that a very
Speaker 11: data dependent FED in that context, we'll just keep ratevall
Speaker 11: a little bit higher than it otherwise would have. Now,
Speaker 11: if we get the kind of number that Stephanie was
Speaker 11: talking about, if we see some softness in the underlying data,
Speaker 11: we do think that there's pretty good potential for rates
Speaker 11: to move quite a bit lower, largely because we think
Speaker 11: that there's so much good news that's priced into the
Speaker 11: market right now, there's so much optimism about US growth
Speaker 11: remaining strong, about around elevated risk asset valuations, that if
Speaker 11: you start to see any wobbles in the economy, then
Speaker 11: we do think that there's a fair amount of reassessment
Speaker 11: that's going to have to happen, and that should mean
Speaker 11: lower rates.
Speaker 1: Do you think that that's the bigger potential surprise is
Speaker 1: actually some weakness that spurs a rally just based on
Speaker 1: the positioning so far a rate rally.
Speaker 7: Yes.
Speaker 11: Look, we generally perceive that right now optimism in the
Speaker 11: market is extremely elevated, and we've seen that over the
Speaker 11: last few months. There's a great deal of expectation that
Speaker 11: this is going to be a super growth friendly administration
Speaker 11: and that their scorecard is going to be the SMP.
Speaker 11: And that's essentially we think driven risk assets to very
Speaker 11: very elevated values, whereas we think that the range of
Speaker 11: outcomes next year is much wider. We don't know exactly
Speaker 11: what the policies will be, we don't know what the
Speaker 11: impact on the economy will be, and as a result
Speaker 11: of that, we think that there's a little bit of
Speaker 11: a mismatch there elevated optimism versus a very wide range
Speaker 11: of outcomes, and we do think that should be supported
Speaker 11: for d at least in the early part of next year.
Speaker 2: Stephaniel one policy, what assumptions if you made about policy
Speaker 2: changes from the Incomic administration for the next year or so.
Speaker 10: So for this year, we think it'll be mostly that deregulation,
Speaker 10: which is a positive for growth.
Speaker 6: The tariff thing is, of course one of the biggest questions.
Speaker 10: We don't think that will happen until later this year,
Speaker 10: partially because they want to tie that to TCJA, And importantly,
Speaker 10: like like Mark said, there's a ton of uncertainty when
Speaker 10: we're thinking about policy, but we think a lot of
Speaker 10: it's going to be relevant for twenty twenty six rather
Speaker 10: than twenty twenty five.
Speaker 6: But it's not likely to be that stimulative.
Speaker 10: Right.
Speaker 6: The TCJA is a four trillion dollar.
Speaker 10: Tax bill that's going to be just keeping policy as is.
Speaker 10: It's just to keep policy largely steady. There's going to
Speaker 10: be a couple of things that could at the margin
Speaker 10: be growth positive, but then we have tariffs, which are
Speaker 10: a massive headwind.
Speaker 3: Well just on tariff.
Speaker 2: So you're saying that the primary objective of tariffs will
Speaker 2: be for revenue raising purposes from the incomic administration. Is
Speaker 2: that what you're suggested when you're saying that two will
Speaker 2: be tied at the end.
Speaker 3: Of next year.
Speaker 10: I don't know if it's necessarily the primary objective. I
Speaker 10: think the primary objective is you know, Trump genuinely believes
Speaker 10: in tariffs, but then they do raids a lot of revenues,
Speaker 10: and that's something that they're going to need a whole
Speaker 10: lot of when they're thinking.
Speaker 6: About the stack back.
Speaker 2: But as you mentioned this, and I think it's important
Speaker 2: policy changes if one think anticipating the economic consequence of
Speaker 2: them is quite another. It's not obvious to me how
Speaker 2: inflationary or not tarris would be depends on how they're
Speaker 2: put together, how they're executed, whether you get retaliation also
Speaker 2: completely depends on what happens olsewhere in foreign exchange, investment
Speaker 2: decisions made by companies ousewere that want to be in
Speaker 2: the United States, and one exposure to the US economic story.
Speaker 2: What kind of assumptions can you make on changes in consequences.
Speaker 11: I think it's really challenging for Stephanie and other economists.
Speaker 11: Look are economists, I think have done a very good
Speaker 11: job trying to dimension, to the best of their ability
Speaker 11: what the key considerations are. But they'll be the first
Speaker 11: to tell you that the range of outcomes is extremely
Speaker 11: wide and that their confidence around these assumptions that they're
Speaker 11: making is extremely low. And you're right, Jonathan, there are
Speaker 11: so many other things that can impact the potential inflationary
Speaker 11: consequences of tars. Look at CNY overnight right seven point three,
Speaker 11: So you're starting to see the FX markets some of
Speaker 11: this in and to have a lot of confidence around
Speaker 11: what the overall economic outcome will be is we think
Speaker 11: very very it's very, very difficult at this point in
Speaker 11: time now to be overly concerned around inflation. Yes, some
Speaker 11: of these policies could indeed be inflationary, they were not
Speaker 11: terribly inflationary last time. And what we think the market
Speaker 11: should be spending a little bit more time is trying
Speaker 11: to think about, Okay, well, what is the Fed's reaction function.
Speaker 11: Last time, their bias was to look through any potential
Speaker 11: inflationary impact or released us what the transcripts tell us.
Speaker 11: This time, of course, the macro backdrop is different, core
Speaker 11: PC is more elevated. We just went through a very
Speaker 11: inflationary period. So will their reaction function be the same.
Speaker 11: We don't know yet, but to me, that's what I'm
Speaker 11: going to be looking for to think about what the
Speaker 11: impact is to the bond market. And right now my
Speaker 11: bias is still to believe and our team's bias is
Speaker 11: still to believe that the fed's likely impact will be
Speaker 11: to look through to the extent that they can especially
Speaker 11: if they start to see that tariffs have any type
Speaker 11: of negative growth impact. Finally, look, just to go back
Speaker 11: to some of the points that Stephanie made, I think
Speaker 11: they're really good.
Speaker 7: Just think about where the market.
Speaker 11: Narrative is right now, and what Stephanie said, the policies
Speaker 11: are probably not going to be all that stimulative impact
Speaker 11: mostly in twenty twenty six, not twenty twenty five. Where
Speaker 11: is the market right now? Look, you two talk to
Speaker 11: a lot of people. You'll know probably better than me.
Speaker 11: I talk to a lot of clients as well. I
Speaker 11: generally think that client's mind frame is that these policies
Speaker 11: are going to be impactful near term and that they
Speaker 11: will be quite stimulative. And again that's where we think
Speaker 11: market optimism is. Range of outcoms is a lot wider,
Speaker 11: and again for me as a rate strategist, I think
Speaker 11: that probably means lower rates as you see some convergence
Speaker 11: in this.
Speaker 1: Well, we were just speaking of Edie Danny and he
Speaker 1: actually came out with this fantastic analogy, which is essentially
Speaker 1: that this is a doctor who prescribed all this different
Speaker 1: medication without running it through without running it through the
Speaker 1: computer to say which interacts with which raises this question
Speaker 1: of how important is that mix of policies based on
Speaker 1: where the economy is right now, Stephanie, from your vantage point,
Speaker 1: Mark's talking about how he things too much optimism is
Speaker 1: baked in from policy perspective. Is there too much optimism
Speaker 1: baked in with respect to the economic data that we've
Speaker 1: already gotten in terms of where we are coming from
Speaker 1: and how much uh inflation is still in the economy
Speaker 1: and how much momentum there is.
Speaker 10: Yeah, I think that's totally fair. The part part of this,
Speaker 10: these things go hand in hand. So what's making to
Speaker 10: the rates market is the expectation that the economy is
Speaker 10: running on all cylinders r quite quite strong, and like, yeah,
Speaker 10: it is, but it's probably not quite as strong as
Speaker 10: a as as the outlook suggests. And the FMC kind
Speaker 10: of introduced a little bit of uh uh, you know,
Speaker 10: extra optimism about the economy that's probably gonna gonna disappoint
Speaker 10: to some extent. We'll probably see payrolls running a little
Speaker 10: bit slower, allow them to actually cut certainly two times
Speaker 10: this year, and the market's pricing in a little bit
Speaker 10: less than that.
Speaker 6: So the economy's running just fine, but the expectation.
Speaker 10: Is similar to what Mark just said, that Trump's policies
Speaker 10: are gonna be incredibly you know, growth positive, and they're
Speaker 10: gonna be happening right now, and they're probably not. It's
Speaker 10: gonna take a while for a lot of the stuff
Speaker 10: to play out.
Speaker 1: Do you agree with Mark that the Fed's bias is
Speaker 1: going to be to look through any of the temporary
Speaker 1: effects of some of the tariffs.
Speaker 10: I think that's what they should be doing, in the
Speaker 10: sense that if they don't and they start becoming notably
Speaker 10: more hawkish as a result, that could be a recipe
Speaker 10: for a recession. In the sense that we are largely
Speaker 10: of full employment, this.
Speaker 6: Could become a real problem.
Speaker 10: If we start to see, you know, the FED reaction
Speaker 10: function look quite different than what it was last time,
Speaker 10: we might have a real problem, in which case growth
Speaker 10: is likely to slow down notably as a result of
Speaker 10: these terriffs.
Speaker 6: Sarah's are seculationary.
Speaker 1: Mark, I'm just curious when you take a look at
Speaker 1: the fed's reaction function. We were talking with Claudia sam
Speaker 1: and she was saying that they have introduced as volatility.
Speaker 6: We were just speaking about that.
Speaker 1: She was saying that they should follow models a bit
Speaker 1: more and in particular some of what she's seeing in
Speaker 1: the employment market. What would you be following if you
Speaker 1: were on the FED as your sort of load star
Speaker 1: for where the economy was heading.
Speaker 11: Yeah, look, in periods a very elevated uncertainty, which I
Speaker 11: think we are in and are going to continue to
Speaker 11: be in the early part of next year. We think
Speaker 11: the most basic monetary policy rules can be very instructive,
Speaker 11: like the tailor rule. Now, any model is only as
Speaker 11: good as the assumptions that you want to make and
Speaker 11: the inputs that you have into that. But we do
Speaker 11: think that tailor has been a pretty good guide over
Speaker 11: recent years. The FED does not, nor should they follow
Speaker 11: it blindly, but they should use that as a meaningful input.
Speaker 11: Other FED officials Chris Waller has talked about how they
Speaker 11: do indeed do that, and right now at least they've
Speaker 11: pretty much converged to near where Taylor suggests that they
Speaker 11: will be. And the big question is what does the
Speaker 11: data imply from here? The market thinks that the FED
Speaker 11: will only need to cut about forty basis points more
Speaker 11: and then they'll be done. But if you actually use
Speaker 11: the FED zone economic projections in their SEP, the medians
Speaker 11: and the unemployment rate as well as on inflation core PC,
Speaker 11: it suggests that they should really be cutting, probably something
Speaker 11: more close to one hundred basis points, And so it
Speaker 11: really depends upon again, what are the core you can
Speaker 11: assumptions that you have.
Speaker 7: The market's very optimistic right now.
Speaker 11: I think that growth is going to remain strong, the
Speaker 11: unemployment rate won't rise much above four point two, maybe
Speaker 11: four point three.
Speaker 7: Inflation is going to stay sticky.
Speaker 11: But if you do see inflation move down, or if
Speaker 11: you do see the unemployment rate tick up a little
Speaker 11: bit more, then the market's going to be talking about
Speaker 11: a FED that could potentially be cutting a lot more
Speaker 11: than what is currently pressed. Look just final point for me,
Speaker 11: when I think about the Fed's reaction function more broadly,
Speaker 11: and I think we in the rates team agree with this.
Speaker 11: We generally believe that the Fed's going to overweight labor data,
Speaker 11: and John, You're right, the labor market right now is
Speaker 11: really strong.
Speaker 7: Breadth is kind of narrow. We think that the labor market.
Speaker 11: Can best be summarized as one where there's not a
Speaker 11: lot of firing, but there's also an increasingly slower pace
Speaker 11: of hiring, and the claims data very much points to
Speaker 11: that it's still a very healthy labor market overall, but
Speaker 11: continuing claims really, you know, if you look at a
Speaker 11: four week moving average, they continue to edge up over
Speaker 11: time while initial claims stay stable. And if that trend continues,
Speaker 11: I do think that the Fed's going to be seeing
Speaker 11: a labor market that maybe has less breadth than a
Speaker 11: little bit more concern than at least what the most
Speaker 11: recent FED meeting will be.
Speaker 2: This I'd be the first one we acknowledge that it
Speaker 2: won't say much much for downside surprise next week for
Speaker 2: a lot of people who start pricing in more rate
Speaker 2: cuts from the Federal Reserve.
Speaker 1: Well, that's an interesting kind of dynamic that's changed in
Speaker 1: terms of where the bias is for this rates market
Speaker 1: and whether it's sort more for a rally than say
Speaker 1: a sell off.
Speaker 2: Mark Stephanitie to the two of you. Thank you, go
Speaker 2: to see you both. Mark O Banner of Bank of America,
Speaker 2: Stephanie Roth of Wolf Research. This is the Bloomberg Surveillants podcast,
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