00:00Stephanie, we had thought that supply risks, particularly in the oil market, were going away, right?
00:04But now they're very firmly coming back with oil prices these high.
00:08Yeah, I mean, so it's a challenge, especially being that we have seen some relief from the oil price.
00:12And the thing is, the inflation trajectory in the next couple of months
00:16will likely have some seasonal effects that bring it back down.
00:19The tariffs are starting to roll off.
00:21So our expectation is that even though you're seeing energy prices certainly spike,
00:25in terms of the actual feed-through to core, the main thing is going to be from airfares.
00:30Otherwise, we still see some disinflationary pressures coming ahead.
00:33So what does that mean for the Fed?
00:34Because the markets are increasingly signaling that perhaps July is not just live,
00:38but maybe advisable at this point.
00:40I think July is still off the table.
00:42We've got the really good inflation prints.
00:44There's going to be, of course, a couple of members that are likely going to be pushing for a hike.
00:48We certainly heard from Beth Hammock, Lori Logan last week.
00:51They are a lot more hawkish, but they are among the more hawkish members of the committee.
00:54So our expectation is they will set up the debate in the July meeting.
00:58And then it will depend on the path of Zeta through September.
01:02And it's really going to be the next two core PCE prints.
01:05Are they running somewhere below 0.25%?
01:08And then that will allow the Fed to be even more patient beyond that.
01:11If you end up with some surprises and we're wrong on our inflation trajectory,
01:15it comes in above 0.25, then we're talking about a different scenario in September.
01:18Well, we're looking at oil like $10 higher than it was just a few days ago.
01:21Now, that likely, well, will it have an impact on the next PCE data or will we have to wait
01:27for a couple of months before we see that?
01:28And again, oil is something the Fed tends to typically look through, but it can't here, can it?
01:33You know, it depends on what everything else is doing.
01:35If you're seeing disinflation from some of the other components.
01:38And by the way, airfares is really one of the few things that will show it in the near term.
01:42And when you're thinking about core PCE, of course, energy prices are going to show it, you know, rather somewhat
01:46immediately.
01:47But airfares is really the component that feeds through into core PCE most, you know, clearly.
01:53That has had an impact.
01:54Of course, it went up and then it has recently, you know, the gains have moderated a bit.
01:59That's really the only piece that will really be feeding into inflation.
02:03The fact that inflation is elevated today is not really related to the war.
02:06It's more related to tariffs that have had a notable impact.
02:10Our expectation is about 70 basis points on core PCE.
02:13And then on top of that, you've had AI feeding through in terms of chips.
02:17That's added about another 30 basis points.
02:19So inflation is really nearly about 100 basis points driven by higher than what it should otherwise be.
02:25Driven by factors that are not really related to the war or, you know, sort of anything tied to sort
02:30of this narrative.
02:31Therefore, those things should moderate at least on the tariff side.
02:35So the reason that inflation is high today is much less related to the war and much more related to
02:40sort of other factors that, you know, have other nuances and may fade a bit in the future.
02:44But you're pretty sanguine that a hike doesn't have to come in the near term.
02:48Even an insurance hike, it could wait.
02:50Would it be September or would it be beyond that?
02:52I think it's either they go in September or they end up being able to be much more patient and
02:57don't have to go at all.
02:58September, in my mind, is the critical point in which they're going to find out if that is ultimately going
03:03to have to hike or not.
03:03Because either we're in a scenario where the inflation data start to cool down a little bit.
03:08And by the way, seasonal factors tend to push down inflation in the second half versus the first half.
03:12So if we get through the September meeting and they don't have to hike, they probably don't ultimately have to
03:16hike in December either.
03:17And then by then we're probably sort of past this, you know, somewhat elevated inflation episode.
03:24Can I talk to you about these elevated yields?
03:26Because what is the market then saying?
03:28I mean, if, you know, everything you say turns out to be true, then maybe yields don't need to be
03:33this high.
03:34And yet we've got such an amount of issuance out there.
03:36We have treasuries competing with corporate issuance and so on that you have the 30-year yields at, you know,
03:41above 5% for 27 days this year.
03:44Yeah, I mean, so I think it's buyers are just not really interested right now because risk at the moment
03:49are to the upside.
03:50That said, if rates continue to climb in the near term by probably about 10 basis points or so,
03:55I would be pounding on the table that rates are probably headed lower rather than higher.
03:59Because at some point you're going to be at a level where, one, the administration is going to be very
04:04uncomfortable with how markets are trading.
04:05And two, it becomes very asymmetric.
04:07At some point rates are going to rise so much that it's going to create a big risk off in
04:11broad assets and you're going to see rates come back down.
04:15So we're approaching the level where rates can't really move that much higher before they're sort of mitigating factors.
04:22Would a broad risk off move send rates lower?
04:25Because things haven't been that closely correlated for some time.
04:29Yeah, they haven't.
04:29And there were times earlier at the start of the war where you had stocks selling off and rates moving
04:35higher at the same time,
04:36which is obviously not a great environment for sort of any risk manager.
04:43But at some point it becomes a problem.
04:45Rates rise too high such that it creates problems.
04:47So after we move through the big earnings week next week, the market focuses a little bit less on earnings
04:52and how solid that backdrop is.
04:55Focus may again return to rates are high.
04:59And that could really slow down growth and cause some other problems.
05:02So I think maybe in the next week or so we might see the stock bond correlation kind of be
05:08somewhat less correlated than normal.
05:10But I think that might return where you might be in an environment where bonds again protect you,
05:14but perhaps not in the next couple of days.
05:16How concerned are we that Fed independence is once again at risk with this whole SEB investigation and the potential
05:24for an attack on Michael Barr?
05:27Yeah, I mean, certainly it's not a good thing.
05:30The markets certainly don't like when Fed independence gets questioned.
05:35I think what we'll probably see is, you know, however this plays out, you know, really the decision around independence
05:43is going to come down to the path that war sets out.
05:47And he's proven to be a lot more independent than I think many expected.
05:51He's come across as much more hawkish.
05:53The market doesn't know at the moment is he hawkish because he wants to sort of set expectations and come
05:58across as credible or does he genuinely want to hike rates.
06:01I think he probably would prefer not to hike rates, but if he has to, he will.
06:05And I think that's going to be realistically what matters for when we're thinking and markets are thinking about, you
06:10know, broad-based Fed independence.
06:12And, you know, some of the stuff that happens on the surface, of course, is not great for markets and
06:17risk assets broadly.
06:19But we have seen this story before and, you know, courts to some extent have been sort of supportive of
06:25the Fed independence idea.
06:28So am I worried about it?
06:30Not in a big way, especially since the chair at least has set a tone that is fairly independent.
06:36Yes.
06:36Stephanie, we know now that there is going to be a news conference.
06:39At least there was a question mark over whether he might even come out at all, Kevin Warsh, but he
06:44will come out.
06:44But what will he tell us this time around?
06:47I mean, is it going to be, like, updates on the task forces or are we actually going to get
06:50some guidance?
06:51I think it's going to be updates on the task forces.
06:53I think it's going to be a lot of circularity.
06:55I don't expect to learn a whole lot about the reaction function or, you know, what the path is going
07:02forward.
07:02I think we're going to ultimately have to rely on conversations or speeches from governors like Waller, who is, you
07:10know, much more transparent about sharing his views about the reaction function and how the Fed is looking at the
07:16backdrop.
07:17So from Warsh, we're going to hear probably more of what we heard from last week in terms of, you
07:23know, they're watching the data.
07:24The most recent data print doesn't make a trend necessarily unless we have more of that.
07:30Of course, there's going to be a lot of questions that are asked of him that try to poke holes
07:34at his, you know, lack of forward guidance.
07:36But he's proven to be very good at not answering the questions he doesn't want to answer.
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