00:00You say we're on hold, but does that also include December? Because that's not what Stuart Paul just told us. He thought maybe making for a smooth transition to the next Fed chair would call for maybe a cut.
00:12Absolutely. And good morning. No, high conviction here that they go ahead in December. I thought the whole hawkish narrative from the Fed a week or two ago was a little bit silly given the situation that we're witnessing in the labor market figures.
00:24Whilst they argue that they're kind of flying blind without enough official government data. What we've been seeing is private level data such as the ADP figures and a few other surveys suggest that the weakness in the employment situation for the U.S. continues.
00:38And whilst the Federal Reserve has an inflation target and we're still too comfortably so too uncomfortably near three percent rather than two. The labor market always trumps the inflation data and I can see the problem getting worse.
00:50And from the NFP that we saw last week the unemployment rate rate rising even though it's stale data confirms the trend that was already in place. So for us it's a high conviction December goes ahead.
00:59It's just that in Q1 and Q2 we do expect the growth figures to come in pretty strong for the U.S. You've got fiscal stimulus helping that with the one big beautiful bill but also globally you're seeing credit expansion and fiscal stimulus in Europe for example and now Japan.
01:13And then you've had the monetary easing from the Fed and other central banks. So it's really hard to say we've got a recession in Q1 and Q2 next year and it might be the case that we see less Fed cuts than what's priced.
01:24But once the new Fed chair comes in Bonnie it is it is open season for the new Fed chair. If they really want to push us towards pointing towards the weakness in the labor market for the direction of rates there's an argument that they can go further.
01:35But Jordan we know that this is a strange labor market. The Fed chair himself has said that that it's a curious dynamic that we're seeing because supply is down as well as demand.
01:45So do we read the unemployment rate the same way as we would have done say last year or the year before and does that continue into next year.
01:54So do we have to sort of you know make adjustments to our view of the labor market because of all of that.
01:59I think it's a cycle like no other. We're talking as you say about the lower immigration figures making non-farm payrolls numbers harder to digest because we're used to seeing the growth rates 100,000 K each month being the sort of break even point for unemployment.
02:14But now that's much lower thanks to lower immigration and estimates vary between 35,000 to 50,000. Anything above that the unemployment rate might not go up.
02:22But we're seeing as well the implementation of AI constantly every morning. I look at my Bloomberg and there's another story about another firm laying off workers or reducing hiring.
02:33And there's always quoting AI in those stories. And I think that this could be a cycle like no other.
02:38What we have seen is the youth unemployment rate in the U.S. has spiked significantly higher.
02:43And we've never had a cycle where unemployment rates go up for the youth faster than the rest of the economy.
02:50It's something that's quite different for this cycle. So I do worry that we do have this immigration story, but we also have an AI sort of angle to it that we might not have seen before.
03:00So I think the Fed will worry about that more than inflation, where I'm not too worried about inflation either.
03:05The pass-through of tariffs hasn't been that strong as expected.
03:09And the housing sector is slowing down. I actually think Stephen Myron's got a good point.
03:13OK. So how much lower can rates go then without igniting troublesome inflation again?
03:20Well, the market has typically bounced off 3 percent.
03:24If you look at the U.S. one-year, one-year pricing for where the Federal Reserve could get to in a year's time, usually when we get to 3 percent,
03:31that's the sort of anchor point for when the U.S. economy starts to rebound.
03:34And that's why U.S. rates have been so range-bound for about two to three years now, because every time we've got a very dovish market and we've got down to 3 percent,
03:42then all the data surprises accelerate, because that's usually the level where the U.S. consumer comes back in and industries rehire.
03:49But consider the situation that we're in now. We've been around 3 percent for some time now, and still the labor market is weakening.
03:57So we might start to see put that push to 275, 250. We're expressing that with Z5, Z6 flatteners in the software curve.
04:04We do think that the market will toy this new Fed chair, teasing of the idea of lowering the dots for the neutral rate assumption for the Fed,
04:11which is currently at three, which is why it's been that anchor.
04:14Lowering them to two and a half, 275?
04:17It will happen in stages. So in 2024, the neutral rate wasn't at 3 percent in the dots as it is today.
04:26It was slightly lower, around 2.6, 2.7. And they raised it up by 10 to 20 base points sequentially at each update of the dot plot.
04:35So I think we could see something like that play out in the second half of next year.
04:39I have to ask you about Chancellor Rachel Reeves. She is going to be taking the podium in, what, less than two hours now with her budget.
04:46Of course, Liz Truss is always in the background here. And that's, you know, what Van Ram pointed out to us earlier,
04:51that she has to make sure that this entrenchment of the risk premium in the gilt market, you know, goes away, that it stops being entrenched.
04:59Can she do that today, Jordan? Indeed. Today is the only time an MP is allowed to have a glass of alcohol in the House of Commons.
05:07I think it's been a while since the Chancellor has taken the opportunity to have a whiskey.
05:11And I don't think Rachel Reeves is going to be reaching for the champagne.
05:14When it comes to today, I think a lot of the sort of budget sort of big movers have been leaked already, such as VAT cut on energy not happening,
05:24the income tax hike on everybody not happening.
05:26So it's going to be a smorgasbord of lots of various different measures of raising taxes on capital
05:31and hopefully less mobile forms of income, so-called wealth taxes.
05:38So raising property taxes by council tax is one way they aim to do this.
05:42I think the market's looking for a fiscal headroom number of 15 to 20 billion.
05:47That's nearly double what it was at the last budget, because what's been happening is she's been giving herself such little leeway on the fiscal headroom.
05:55This is the amount of money she has to play with before she breaks her fiscal rules.
05:59And that leeway has been historically very small.
06:01So you just get small sell-offs in the gilt market or big moves elsewhere,
06:04and that leads to her having to come back in six months' time and raise taxes again.
06:08So if the number's smaller than 15 to 20, expect a gilt sell-off,
06:12because that means that she'll have to probably come back to the market in six months' time.
06:15But I think she's very much aware of that.
06:18She's learned her lessons from it, and her aim today will be to try to get positive headlines,
06:21either politically or via the financial markets.
06:24It feels very consensus, though.
06:26I do feel like the market's going into this long gilt, but that's the way we'd like to position it as well.
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