00:00 Lou Hutton, the former economist at the CME, joining us here a day after CPI.
00:09 Happy Valentine's Day to you.
00:11 Wow.
00:12 What a reaction to the CPI numbers.
00:14 And after I saw it, after the market tanked like it did, and Dennis came back on, and
00:21 we're talking about, it was higher.
00:24 It was hotter than expected.
00:27 Talk to us about your expectations for the number and how the market reacted.
00:34 Well, I wasn't expecting it to tick up the 1/10th it did on the month over month.
00:39 So it was a little hotter for me too.
00:43 But when you look at it, I mean, these numbers, economists aren't that good at getting every
00:47 1/10th right.
00:48 And there's a decent amount of volatility in the monthly numbers.
00:52 So I don't see anything really different going on.
00:57 If you look at the year over year numbers, they actually improved a little bit.
01:01 It was the month over month that surprised people.
01:04 People are looking at the month over month now more than the year over year because Jay
01:09 Powell told them to.
01:11 He said, I got to get more confidence.
01:14 And so you get more confidence each month.
01:16 But if you look at the year over year in the CPI, not even the PCE, but the CPI, and you
01:23 take out shelter, you've been under 2% for like six, seven months.
01:30 And you're still there.
01:31 Didn't change yesterday.
01:33 The problem yesterday was in shelter, not shelter, services, sorry.
01:38 And services are going to be higher than goods.
01:41 There is no goods inflation left.
01:43 So you're just averaging services with goods and you're getting your inflation rate down.
01:50 So I didn't see any major change.
01:54 Jay Powell already told us they're not cutting rates in March and an amazing number of people
01:58 didn't believe him, but he was pretty adamant.
02:00 So I think they believe him now.
02:02 That's what came through yesterday.
02:04 It could be July before they actually start cutting because they definitely want to see
02:09 a few more months.
02:10 Okay.
02:11 I just got your charts here.
02:13 Aaron, if you could share my chart here.
02:16 The annualized inflation based on the last six months, pretty accurate description here.
02:22 So it really, you know, the core, it was a little bit hot.
02:27 You mentioned the shelter there.
02:30 Let's move on here.
02:31 Wait a minute.
02:32 Stay on this one just one second.
02:33 Sure.
02:34 Go ahead.
02:35 This chart is becoming more important because of the idea that the Fed needs to gain confidence.
02:42 So we're just looking at the last six months of data, looking at the month over months
02:48 and annualizing that.
02:51 And so you can see the CPI core is just a touch higher than the CPI, but you take out
02:56 shelter and you're in great shape.
03:00 So that's what people are looking at to gain confidence.
03:02 By the way, the Fed does not target the CPI.
03:06 It targets the PCE core inflation rate, which is lower.
03:12 Okay.
03:13 It looks like, yeah, go ahead, Christian.
03:16 Yeah.
03:17 I mean, it's a great point.
03:18 I mean, the CPI is not the only measure, you know, certainly out there and, you know, blue
03:24 hits the nail on the head.
03:25 I mean, their favorite inflation gauge is the PCE deflator.
03:30 Now, of course, like the market for whatever reason has been more focused on that number,
03:35 but we'll see.
03:37 And, you know, we've got a number, you know, clearly the expectations for our March cut
03:41 really moved down into basically nothing, which is, I think is good that the market's
03:45 not implying that that's going to happen anymore.
03:49 But that said, I mean, we're going to get so much more data that comes out too.
03:52 We don't know if this report is a one-off and, you know, as Dennis said yesterday, it's
03:57 a tenth of a percentage point of expectations.
04:01 It's really, you know, in all things, it's not that big of a deal to see just one tenth
04:08 of a percentage point higher.
04:09 Oh, yeah.
04:11 If you get focused on a one tenth, you're not paying attention to the volatility of
04:16 the data.
04:17 You know, it's like asking a weatherman to get everything exactly right.
04:21 You know, they're not going to do that.
04:22 Neither the economists.
04:23 By the way, this chart is the PCE core, and this is the one the Fed watches, and it's
04:28 been below 2 percent on the six month basis for all of one month.
04:33 And that data comes out at the end of the month.
04:36 So, you know, it could easily tick up one tenth to and, you know, be back there.
04:41 But what it's telling you is inflation really is pretty close to 2 percent on the core basis
04:47 that the Fed looks at.
04:49 They're not far away.
04:50 They just want more confidence.
04:53 But why do they why do they act like they're so far away?
04:56 And then in the same breath, you know, so ready to talk about cutting interest rates?
05:02 Well, if if a recession were to develop, then they would have to cut rapidly.
05:11 But if the recession does not develop and it looks like we're going to cruise into the
05:16 first and second quarters of this year doing just fine, labor markets are fine, then that
05:22 buys them the time.
05:24 And they really don't want to make a mistake.
05:27 They would rather be late because they don't feel any urgency here.
05:31 The economy's doing fine.
05:33 They don't need the urgency is not there.
05:35 So they they think they can take their time.
05:38 I really wouldn't argue with that.
05:39 I mean, if you know, I would probably have cut sooner because I'm already convinced,
05:44 but they're not.
05:45 So they can wait.
05:48 Just as they were slow to react on on raising rates and you're kind of foreseeing that that
05:54 same scenario here, you know, they were late on, excuse me, raising rates.
06:00 You think they'll be just equally as slow and bringing them back down?
06:05 As long as we don't have a recession, the answer to that is absolutely yes.
06:11 You know, the thing is that what we saw in the market yesterday just reminded us of how
06:16 important rates are to the market.
06:19 But the rates are not that important to the economy.
06:23 You know, the economy, the jobs market is dancing to a very different drummer than the
06:30 S&P or the Nasdaq, things like that.
06:32 So, you know, if they're slow, they slow on raising rates and slow on cutting rates.
06:38 Doesn't matter to the economy, but it does matter to the equity markets.
06:43 By the way, this last chart is kind of fun.
06:46 This one is takes you back to 1960, compares the federal funds rate, which is the lighter
06:53 blue line on top of PCE core inflation.
06:56 And it really tells you that the last decade is the outlier where, you know, they kept
07:04 rates just so low for so long.
07:06 And that's why, you know, we had such great bond and equity markets until they started
07:10 raising rates.
07:13 And I think what the markets, the equity markets have to really consider is do we need to get
07:19 out of worrying about whether rates go up or down a quarter of a point and really focus
07:23 increasingly about earnings, because the Fed's going to keep the Fed funds rate above the
07:29 rate of inflation, just, you know, not quite as much as it is right now.
07:34 So, you know, I think we're in a transition period for the stock market where, you know,
07:39 we're going to learn not to be quite as skittish, if you will, about one tenth of one percent
07:45 on the inflation like yesterday and really start, you know, like where are we going to
07:51 be on a couple of years out earnings?
07:54 Which are the industries that are going to make it?
07:56 Which industries are AI going to disrupt more than others, you know?
08:01 And so I think we're about to head into a much more earnings driven conversation, which
08:05 I will certainly welcome.
08:07 Lou, just a quick question for you.
08:09 I mean, do you considering that it was just a tenth of a percentage point higher than
08:14 expected, do you think it was just more about that the markets had been on such a nice run
08:18 and were basically priced to perfection going into that report?
08:23 I won't argue with that.
08:26 They were definitely on edge because, you know, there were plenty of people worried
08:31 that this rally couldn't continue.
08:33 And they got that one little trigger of information and wow, did they sell fast.
08:38 But, you know, we're grinding a little bit back today.
08:42 The other market that got hit, interestingly, is gold.
08:48 The higher for longer on rates is not good for gold.
08:52 And the stronger, the healthier economy is not good for gold.
08:56 So I think we're down below 2000 again on gold.
09:00 So that's another one that's impacted here.
09:04 Just before we let you go, Bluett, you know, we got to talk about, you know, the banking
09:09 system.
09:10 We got to talk about what went on with NYCB looking at this is or the street, at least
09:15 is reacting that it's just a one off.
09:19 You know, the higher the rates stay up here, the more these banks are going to be, you
09:23 know, upside down on their loans.
09:26 And, you know, we all know, you know, it's not the biggest part of the market here, but
09:32 they don't look at it, the financial sector, you're not looking like any individual names.
09:36 I mean, this is this is not good for them, right?
09:40 Well, the the regional banks that have a very, very large exposure to commercial real estate
09:47 in the largest cities, they're in big trouble.
09:51 But regional banks that are outside the big cities, they'll turn over their loan portfolios.
09:58 They're not going to have much increased credit risk.
10:01 They're going to be fine.
10:04 Not great, of course, their earnings are not going to be as good as you might want.
10:07 But, you know, we're not talking systematic risk here or anything like that.
10:12 So and I can't figure out who hadn't gotten the message that commercial real estate in
10:17 the big cities was in trouble.
10:18 I mean, I was having a conversation with my dog the other day and he couldn't figure out
10:23 why people didn't already know that.
10:26 I mean, that email's been out there.
10:28 Yeah, it certainly has.
10:30 So all right, we're going to we're going to let you go here.
10:33 We've been on the line with Blue Putnam.
10:35 He's the former chief economist at my old stopping grounds, the CME.
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