00:00It really feels like some sort of switch was flipped. This handoff from worrying about inflation sending yields higher to
00:07now the market seems very concerned with gross
00:09prospects growth prospects sending yields lower. I wonder what you think the proper reaction function is right now. Yeah we
00:16think there's risks to both sides. And I think it makes sense that over the first four weeks or so
00:22it was an inflation story. But I do
00:24think the longer that the conflict goes on like we're seeing right now that we're in week five I think
00:29the negative consequences of the war are going to trickle away into the economic outlook. And I think that makes
00:35sense today if you're looking at the movement in the bond markets Treasury yields down a pretty good amount on
00:42a day when the price of oil was up. So you know that should result in higher inflation yet we're
00:46seeing the opposite happen. I think if we go back a few weeks to that Fed meeting if we look
00:51at most of the questions that Powell got at the press
00:54conference. A lot of them were focused on inflation. And if you look at the big level the high level
01:00points of the summary of economic projections it painted a relatively rosy picture of the economy which tells us that
01:06and that was probably a pre-war projection from a lot of committee members. But if you dig deeper into
01:12that into that document you can take a look at how the committee is looking at the balance of risks
01:17and they have a few diffusion indexes back there. And I don't think that has made enough headlines where if
01:22we look at the risks to both the
01:24inflation mandate and the growth or label labor market mandate there's risks to both sides. And even though you know
01:30we're concerned about the rise in inflation that's where the focus of the Fed meeting was. If we look at
01:35the committee members and participants how they're viewing the risks to the downside risks to economic growth that was high
01:41as well. But that just didn't make a lot of headlines. So I think this makes sense. We're not we're
01:45not expecting a recession in the near term and a huge plunge in Treasury yields. But there are two risks
01:50out there right now. Yeah absolutely. And I wonder you know how
01:54you think that should be expressed along the yield curve because it's been interesting to see some of the reaction
02:00when it comes to you know how the curve has sort of been trading this the different sort of function
02:06at the front end versus the long end. I think over time we'll probably see yields come down at least
02:12on the short end. I think the expectations for rate hikes became a little bit overblown and we saw that
02:18today with if you look at the warp function on Bloomberg it's back to a negative sign for the rest
02:22of this year. I think that makes sense.
02:24The bar for a hike seemed really high given the state of the economy where we are today versus where
02:30we were a few years ago in the labor market stable but a little softer than it's been over the
02:35past few years. Inflation not as high as it was back in 2022 for example.
02:38And I think if we do start to see those negative consequences that could give the Fed cover later this
02:45year to maybe cut rates. I say maybe because I think they're probably on an extended pause for now.
02:50But I think the risks again if this goes on for a while we will see that negative impact especially
02:55if you see gas prices near four four dollars or so. That's a big jump.
02:59And the longer that goes on that's just more money out of our consumer pockets.
03:04Yeah Colin you make a great point and one of the things that I'm interested in keeping an eye on
03:07as it relates to economic data.
03:10Joel's release employment situation. We get a big update or a couple big updates this week.
03:15How important are those data points and I guess to your point when we're thinking about the ultimate impacts of
03:20inflation of the ongoing war.
03:22Or is it just a part of the equation that really plays kind of a backseat role.
03:28Yeah it is part of the equation that the challenge right now and as we're coming up with our outlook
03:32to our Schwab clients is how do we balance the economic outlook and fundamentals with the uncertain nature of the
03:38war.
03:38And it is admittedly a challenge. But we do have you know a pretty heavy week of economic data.
03:44We have jolts tomorrow but that might not be too important because it's from February.
03:48So that's kind of old news by now and not and not taking into account any of the effects of
03:53the war.
03:54I think the March payrolls report will be important even though it doesn't account for the whole month.
03:58We'll get an idea of how companies were hiring or firing over the course of the month.
04:04We'll be focusing on that unemployment rate hoping that it it stays around that 4.4 percent level that we
04:09saw last month and what the consensus expectations are.
04:12But I think equally important is the is the ISM manufacturing index.
04:15That's a survey of businesses. So just like with the payrolls report where it takes into account part of the
04:22month.
04:22We'll get an idea of how businesses were dealing with the uncertainty if it was impacting their hiring plans their
04:28ordering plans.
04:29So I think all those were finally getting an impact and a look into what this all means to the
04:35economy and how that will translate to growth.
04:37You know strong or slow over the next few months.
04:39Well you make a great point and one thing I want to come back to is what the economic picture
04:43and what the employment picture looks like when we're still seeing or at least dealing with the potential repercussions of
04:49a broader rollout of artificial intelligence and how that could impact jobs.
04:52So how are you thinking about that?
04:54Yeah that's that's one piece of the puzzle just like we're looking at everything together.
04:58Now when we look at the the labor market right now at least personally I focus on the unemployment rate
05:05and household employment more so than I'm looking at the monthly payrolls data.
05:10When we're this late in the cycle we're going to see ups and downs and it seems like we're we're
05:15in this you know low fire low higher period.
05:19We want to make sure we're not seeing a pickup in fires though and layoffs.
05:22I think that's where you might start to see the impact of AI come in so far we haven't seen
05:28that too much again it's been pretty volatile if you look at the monthly payrolls.
05:31If you look at initial jobless claims they're still relatively low right now but it is a risk down the
05:37road but for now we think it's kind of holding stick.
05:40And Colin before we let you go I do want to talk a little bit about what we're seeing on
05:43the corporate credit side of things because you take a look at spreads not too much reaction relative to some
05:49other markets.
05:49But high yield bond spreads for example a little bit more movement there.
05:54Do you think that there is more runway for some of that widening or you know is corporate credit well
06:00insulated here.
06:02Probably a little bit of both.
06:03I think high yield credit is somewhat insulated and that's what we've been telling our clients where the leverage finance
06:09markets have evolved a lot over the years.
06:11And if you look at the high yield bond market it's relatively highly rated within the realm within the scope
06:17of it being junk or sub investment create you know 55 percent of the indexes is double B.
06:22So we think it's it's relatively well insulated but that doesn't mean there can't be spillover effects.
06:27And where we see spreads right now around 3.3 percent or so on the broad high yield index.
06:31We saw a big jump at the end of last week and it's up about 80 basis points or so
06:36from the January low.
06:38One thing we look at Katie is that break even spread how much spreads would rise and then hold there
06:44over a 12 month span where that where excess return gets wiped out where the the actual spread gets wiped
06:49out.
06:50It's usually around a hundred basis points for high yield bonds.
06:53So we're pretty close to that from those January lows and that that's a challenge for investors when they see
07:00those you know potential declines relative to treasuries.
07:03But we do think there's more risk out there especially if we get headlines about redemptions even though I think
07:08it's very different comparing public high yields versus private credit.
07:13The headlines itself can cause some concern for investors and I think maybe we see spreads continue to rise.
07:18Right now we're neutral we think volatility could pick up but if we see no rise to maybe four four
07:25and a half percent or so high yield would probably become a bit more attractive.
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