00:00The June inflation data, whether it's CPI or PPI, you look at the market reaction in the rates market.
00:06The 10-year yield, basically unchanged so far this week. The 2-year yield, a bit lower.
00:10So we've got a seeping yield curve. What does this signal?
00:13Is the market not totally convinced, Tony, that the inflation genie has been pushed back into the bottle?
00:17I think the market got some good information, but when you think about what's happening in the Strait of Hormuz
00:22with kinetic activity back, oil prices are really a big wild card.
00:26To the extent that oil prices remain at this kind of $80 or higher level, inflation is going to be
00:32far stickier than expected.
00:33Even with oil prices coming down, our view is that inflation is heading in the right direction,
00:38but it's going to be a very, very slow decline.
00:41So we're thinking still kind of core PC at 3% at the end of the year, 2.5%
00:47at the end of next year.
00:48So heading in the right direction, in our minds, allowing the Fed to be uncomfortably patient,
00:53not needing to hike, but hoping that that outlook kind of is realized.
00:59And then they can basically be, you know, off the table for the rest of this year.
01:04We think eventually maybe even beginning to cut rates in the first half of next year.
01:09What about you, Kay? Where do you stand?
01:11So I really liked a couple of points that Mike McKee made about the family fight.
01:16And I think we've got a, my family gets along really well, so we don't have a lot of family
01:20fights at home.
01:21But I think what you really could argue about is what the data shows about history versus what's going to
01:27happen in the future.
01:28The future is unknown and uncertain.
01:30And I think Chairman Warsh is talking about what is the future data going to say.
01:34So I completely concur with Tony on the data that we've seen so far.
01:39It sure looks like that inflation has been, I'm going to use a word I don't think we're going to
01:44see Chairman Warsh use, transitory.
01:46It sure looks like it's been transitory.
01:48It's such a loaded word.
01:49It's unfortunate because in this case, I think it's apt given the supply shock from the activity in the Strait
01:55of Hormuz.
01:55So I agree that, you know, I thought you had a great chart also that we've got a couple of
02:01things.
02:02CPI is now lower than it's been since pre-COVID and inflation break even.
02:08So expectations about future inflation are, I was only going to say they've lower than they've been all year.
02:14And you went back to last year.
02:15So that is a much better setup.
02:17The question is what happens from here.
02:19But I completely agree.
02:21The Fed's on hold this year.
02:22He doesn't need to do anything.
02:23And I think this, I agree, it's not quite mission accomplished.
02:26But I think we can, you know, the market's still pricing in one hike this year.
02:32I think that will get priced out in the coming months.
02:35The market, it's not mission accomplished when it comes to inflation.
02:38And that's because of oil.
02:39And we're looking at WTI approaching $80, Brent above $85.
02:43I feel like, Tony, we're back at levels where oil starts to dictate moves in the rates market.
02:48For a while, that was definitely happening.
02:50And then it kind of faded.
02:51But now we're back to that kind of dynamic again.
02:53Yeah, and that's because you get the double-edged sword.
02:55You get the immediate impact of inflation being higher.
02:58But you also have the impact on consumer spending because of elevated gas prices.
03:03We're now kind of inching back towards that $4 kind of magic level.
03:07So I think that's why it comes front and center.
03:10When you think about the inflation story, you know, core goods back to being negative.
03:14Shelter declining again.
03:16So some of the really more medium-term impacts on inflation are really moving in the right direction.
03:21It's this energy story that has this double-barreled effect both on inflation and on the consumer
03:27that I think the market is grappling with and the Fed's going to have to grapple with over the next
03:31couple of months.
03:32In the Bank of America Global Fund Manager survey, a record 54% of respondents predict no landing for the
03:39economy.
03:4139% see a soft landing and 2% see a hard landing.
03:45Kay, does that generally end with inflation and higher rates?
03:48Have you yet no landing?
03:49Sue, I think it kind of depends on how things kind of unfold.
03:54And I think what's really interesting about this week and the data that we've seen this week is,
03:59well, retail sales is a little bit of a non-event.
04:01It's not a major data point that the Fed looks at.
04:05But if you go back and look at Q1 GDP that came out a couple of weeks ago,
04:08what we're seeing is a transition in GDP growth from growth in consumption in terms of contribution
04:14to growth in business investment.
04:17So I think the no landing camp is that maybe we're passing this baton,
04:23and what the consumer does going forward is less important than all of this business investment.
04:29Now, of course, to date, something like 90% of that business investment has been coming from AI-related sectors.
04:36So I think the more interesting thing now is we're pivoting to earnings.
04:39We had the Bank Start earnings on Tuesday, I guess it was.
04:43And so far, that's a very robust outlook.
04:46And it's more, what's the broader economic growth here?
04:49Are we going to see this business investment expand beyond AI sectors?
04:53We've started to see some of that into other sectors.
04:56And I think that's a backdrop that can continue into, you know, trend-type economic growth.
05:02So next week features the hyperscalers' earnings.
05:04I believe Alphabet is the first to report.
05:06And then the following week, everyone else reports.
05:09Tony, is the AI build-out inflationary?
05:12I think in the near term, it certainly is.
05:14You're seeing that, obviously, in chip prices, for example.
05:16So, yes, in the near term, clearly, the demand, because this is such an unprecedented amount of capital investment.
05:22We're talking about $800 billion this year, $1 trillion next year.
05:25But in the medium term, we think it's unlikely to be.
05:29That's going to be more of a monetary policy story.
05:31And if, in fact, the Fed is, you know, true to its word,
05:35then we're pretty comfortable that this is not going to be a sustained inflationary impulse
05:40coming from the AI, you know, story, the hyperscaler story.
05:44Where do you want to be on the curve, both of you?
05:46Tony, I'll start with you.
05:47Sure.
05:48Well, we happen to think the long end is kind of pretty stuck where it's going to be.
05:50We think fair value is going to be in the 4.25 to 4.5 range for the 10-year,
05:54closer to 5% for the long end.
05:57We're a little bit above that, so maybe slightly cheap.
05:59But we think it's going to be very sticky.
06:01So we like the intermediate to 10-year part of the curve.
06:04We think we're getting a lot of good carry there.
06:06We think there's some possibility for the curve to modestly steepen
06:10as maybe that one Fed hike gets priced out.
06:13And then as we move into next year.
06:15So right now, it's that intermediate part of the curve that's more attractive to us.
06:19Kay?
06:19Yeah, I agree with Tony's that.
06:21I might have a slightly higher band on the higher end of the range on the 10-year.
06:26I think duration is less interesting here.
06:29I think we've got more conviction in investing on the consumer side.
06:33So consumer loans, we continue to see strengthening the consumer.
06:36And then you mentioned some of the hyperscaler issuance.
06:40I think it's less about a particular sector and more about there have been a couple of
06:44issues coming in the investment-grade market.
06:47And maybe the market's less receptive to quick, fast deals.
06:50You've had some deals that have come at not as high of, at much wider new issue concessions
06:57than the kind of two BIPs that we've been running.
06:59But overall, the backdrop for fixed income remains strong.
07:02And we continue to see very strong flows.
07:04So we're more looking at opportunities to put that to work to find good carry in portfolios
07:09than focused as much on the duration curve here.
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