00:00George Concalvis of MUFG writing,
00:02Inflation concerns have been misplaced, and rates may have seen the high prints for 26.
00:07That plus worse talking hikes off the table is about to unleash a bond rally.
00:11George joins us here this morning.
00:13George, great to see you.
00:14Great to see you.
00:15Happy Fed Day.
00:16Happy Fed Day, if you celebrate.
00:17A real question about how much this bond market can rally,
00:20given some of the inflationary pressures that, yes, are tied to oil,
00:23but also to some other issues as well.
00:25Yeah, look, I think we are entering a summer of the bond market.
00:28I think we probably have seen the high prints for rates for a whole host of reasons.
00:33Look, oil prices, even in the midst of literally a billion plus barrels of less production
00:39getting through the straight-up Hormuz, managed to stay contained, right?
00:42So this idea that you're going to see a second wave of higher oil prices,
00:46I don't buy that.
00:47We don't buy that.
00:48We've been skeptical of the move in general.
00:50And inflation has largely come from the oil shocks
00:54and then some second order round effects around some sort of pricing surcharges
01:00that were added to core prices.
01:02But in general, there's not really an inflation problem.
01:04Look at wages.
01:05Look at the way that the jobs market's behaving.
01:07It's still low-paying jobs.
01:08You're not seeing the sort of impulse of inflation.
01:11We think that we've kind of seen the highs in rates.
01:13So we'll get to the economic discussion later,
01:15because there's a lot of divergence even within prose about exactly whether all of that is true
01:20in terms of wages and some other aspects.
01:22Do you think that Kevin Warsh truly can unleash the summer of bonds,
01:26given the fact that ultimately he's really squaring off against credibility on one hand
01:32and the overhang of what could be coming from the White House on the other?
01:35Look, I think everyone has to temper their enthusiasm, including myself,
01:38because let's see what happens with the MOU and if that gets done.
01:42It's a done deal by tomorrow, I think, right?
01:45So let's see, I mean, or Friday.
01:46Let's see what happens there.
01:49But I think we're going to start off at 2 o'clock into 2.30, right?
01:532 o'clock, we're going to see, did A, Kevin Warsh participate in the dot plot submission process?
01:58Like, that's going to be a big deal.
02:00And, like, what are the dots telling us?
02:02Is there going to be, like, a removal of the easing bias?
02:05Guys, at the first blush, I think this is going to be a kind of gradual toe in
02:10to becoming more, like, a change at the Fed.
02:12But we don't see a drastic change at the Fed starting off today.
02:15But we do think that, you know, this is going to, he's going to start pivoting the Fed differently,
02:19and that's going to rearrange the focus and less forward guidance
02:23and a shift from focusing on other policies towards rate policy.
02:28I think that if inflation truly has peaked, if oil has peaked, if rates have peaked,
02:33then you're going to see, you can open up a window to cut rates at the end of the year.
02:37Does the labor market need to weaken further?
02:39I mean, it's not weak now, but does it need to weaken for him to be able to cut interest
02:42rates?
02:43I mean, I think we have to realize, we have to, like, look back and see if the labor data
02:46actually is honest.
02:47We've had two years in a row of massive revisions every single year.
02:51The later we get in the year, we'll get more clarity on the true health of the jobs market.
02:55So it doesn't have to necessarily weaken.
02:57I think it just has to be a combination of it's not strong as people think it is.
03:01And two, the inflation story probably has peaked.
03:04It gives a window for the Fed to cut.
03:06But they're not going to get back to their 2% target this year.
03:09So what is going to be the catalyst for them to really have that confidence,
03:12given the fact that there are a lot of members on the committee that are concerned
03:16that basically inflation prices are still too high and the labor market's not weak enough to have this bias?
03:22I mean, look, there's a whole host of things.
03:23I mean, depending on how you look at the data and you look at real pure cores,
03:27you can get down towards, you know, mid-twos by the end of the year
03:32and into projecting into 2027, you can start to get into the twos.
03:36So I think it's not about – and plus, by the way, the Fed's eased in the last two years
03:42with inflation well above their target, right?
03:44So it's more about what's your understanding of neutral.
03:47And that's why I think today's – A, we get the dot plot most likely,
03:50how the dot plot looks like, and then what is the glide path from this year,
03:56which we think they're going to remove the one potential cut that was in the last forecast or projections.
04:01And what is the path towards neutral?
04:03Because, like, they've been very gingerly moving up neutral rate to around 3 1⁄8.
04:08Are they going to move that up now at Kevin Walsh's first meeting?
04:11That would make no sense.
04:11So, like, they had to get down to neutral or redefine what neutral is.
04:15Well, that's something people are looking for.
04:17What is inflation?
04:18If you could choose your inflation, is it an inflation target that we're going to care more about?
04:22I'll choose one inflation target.
04:24How about anyone who's invested either in Cursor or SpaceX?
04:26And the new billionaires that have been minted, there's some inflation there.
04:29Given the fact that markets have absolutely been on a tear,
04:32how does that factor into the Fed's assessment of current conditions?
04:37I mean, look, it's – the going is great when it's going.
04:41The question is, how does it look like at the end of the year?
04:44We've had moments where we have these massive euphoric moves like we're in right now,
04:48and then they peter out and they burn out.
04:50So, the question is, if the momentum continues and stocks continue to make new highs,
04:54yes, then you're building in financial conditions easing,
04:57which takes pressure off the Fed to do anything.
04:59Or, like, at least in their calculus, it would be less of a need to ease.
05:03But that's really a judgment call on where you think markets are going to be at the end of the
05:06year.
05:06If you put this another way, is the summer of the bond going to be also the summer of the
05:11stock?
05:11Because we've seen correlations between stocks and bonds essentially go to one, right?
05:15They've been directly correlated rather than inversely correlated, as they have been historically.
05:20Why wouldn't any additional bond rally just continue to fuel an even bigger move in the equity market?
05:25I mean, for, like, the long-duration-type sectors, like technology, it probably would, right?
05:29I mean, until something breaks that correlation down completely,
05:32it probably would have kind of a self-reinforcing mechanism.
05:36But, you know, I do think that, you know, as we get towards the end of the year
05:39and we realize that collectively the market's more optimistic view on the macro is proven wrong,
05:47you're going to see the bond market end up winning out versus the stock market.
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