00:00Priya, you're not expecting a hike today, but how confident are you in that view?
00:04The last few days, have any doubts crept into your mind that we might actually see a hike
00:08given the return to hostilities, the escalation in oil prices, and so on?
00:12Right. So I think conviction level has to be lower because the committee is divided.
00:16There's a lot of uncertainty around the war, around even whether tariff inflation has peaked.
00:21So I think there is that concern.
00:22And then we have Chip Warsh that doesn't believe in forward guidance,
00:26and he wants a good family fight.
00:28And the committee is divided.
00:29So I think conviction level is lower.
00:31But, you know, I take a step back and I think about data over the last six weeks.
00:35And the data, whether it was the jobs data, whether it's wages, whether it's inflation,
00:40PCE, PPI, CPI, it's all come in a little bit softer.
00:44So if the Fed is truly data dependent and, you know, they've got another meeting just seven weeks away,
00:49I think they can buy time.
00:51They can reiterate the commitment to price stability.
00:53I think you're going to get a couple of descents, two or three descents.
00:56So that will indicate that the Fed is very much focused on the fact that inflation has been above target
01:00now for a while.
01:01But the urgency to act today is a little bit lower.
01:06The data has been weaker and they've got another meeting.
01:08I don't think we'll get any forward guidance that they are not going to hike or they're going to hike.
01:12They're just going to remain data dependent, which is why we ultimately think they don't go.
01:16But the market's going to keep these hikes priced in because the inflation backdrop just has been higher than that
01:222% target.
01:24So how many, if any, descents will we see and what will they be based on?
01:28I think the descents are ultimately based on inflation credibility and the fact that inflation has been above target for
01:33a while.
01:33You know, I'm thinking President Hammock, President Logan, very likely, maybe even President Kashkari.
01:39So you might get three. And I think this is where Chair Walsh is likely to suggest that there was
01:44a good discussion of a hike,
01:45which is why I think the market's going to keep these hikes in there.
01:48If they don't hike today, well, they can absolutely hike, you know, in September, in October and beyond.
01:55And so I think that's why the descents are important to suggest that this is not just him driving the
02:01decision.
02:01This is a committee decision.
02:03So, you know, I think the market's expecting two, I would say three.
02:06Now, they do. It is a committee. It's a democracy.
02:09So I think if it's more than that, I think then the market does get concerned and a sense of
02:14why the hikes.
02:15And, you know, I know Chair Walsh doesn't want to give us forward guidance, but is this a hiking cycle?
02:20In our view, this might be taking out the rate cuts from last year, not a full-on hiking cycle.
02:25Is there a risk that if they wait for the next time or even the one after that, that they
02:29are missing the boat?
02:30Because, sure, while, you know, this might be temporary in terms of the escalation of hostilities and oil prices and,
02:35you know, gas at the pump being back above $4 a gallon and so on,
02:39there are other factors, too, such as maybe the wealth effect is coming off if we continue to see stocks
02:44sell off and less confidence in the AI trade.
02:46Right. I'm glad you bring this up because I think it's the entirety of the issue.
02:50So the point that, you know, would it be too late?
02:53Well, I think, you know, financial conditions have tightened.
02:56You look at real rates.
02:57This move higher in rates has all been driven by real rates, and that's part of the tightening in financial
03:03conditions.
03:03Then some of this optimism around the AI trade, more capex is always good news.
03:07No, I think the market's now looking for monetization, use cases, things like that.
03:11So I think some of that wealth effect might be, you know, coming off.
03:14And, again, I look at inflation expectations, whether you look at break-even surveys, the Fed has credibility, you know,
03:22without hiking right here.
03:23Now, I think, you know, does that credibility go away if six months from now inflation is still here?
03:28You know, it can start to wane.
03:30But I think right now the market's giving the Fed benefit of doubt that they would hike if inflation has
03:35not peaked.
03:36Our view is inflation is likely peaked.
03:38You know, energy might still remain high.
03:40Oil prices might stay at this while, but it's not going to be a source of inflation.
03:44And the labor market's not a source of inflation.
03:46And the consumer seems resilient, at least according to many of the companies that we've heard from, from Hilton to
03:51Royal Caribbean.
03:52Right.
03:52Is there a risk of upsetting the market if the Fed hikes today?
03:57So even if the Fed share were inclined to potentially hike today, this market seems a little fragile right now.
04:03It does.
04:04And I think the tricky part is, if they start hiking, is the hike primarily because inflation is above 2%.
04:10That's what, if you listen to the hawks, that's their argument.
04:13Well, then why stop at two or three hikes?
04:16And so the market has to broaden the distribution of maybe this is four hikes.
04:20Are we taking out the rate cuts from 24 and 25?
04:23I think that's why I think the market's a little vulnerable.
04:26Without a dot plot, without getting much forward guidance from Chair Wash, I think it's just the concern.
04:33Risk premiums will rise.
04:34And that's obviously important for interest rates, but credit spreads, equities.
04:38So this is why I think the market is vulnerable.
04:41A hike without telling us the end point or even giving us a sense of the reaction function.
04:45That's what I'm hoping we get a little bit of.
04:47We need not get forward guidance.
04:49But what exactly is the Fed overall looking for in terms of how much more are they going to hike?
04:54I think that's what we'd be looking for if we do get that hike.
04:57The Treasury auctions that we saw this week, what did they say to you?
05:00We had plenty of demand at the very front end and, you know, even maybe out as far as the
05:04two-year and then not so much.
05:06So, I mean, they were not terrible, but there was that little bit of a tail.
05:10And I think it's telling us that there is a competition for capital, you know, globally from sovereigns, energy independence,
05:17you know, just energy security, things like that with the different conflicts.
05:22You also have now competition for capital from the AI-related debt boom.
05:28You know, the AI party has come to the bond market.
05:31And I think as supply comes in, high-quality companies issuing further out the curve.
05:36Now you've got, you know, we've got global sovereigns issuing.
05:39You have all the hyperscalers in the entire AI ecosystem issuing plus U.S. Treasury issuance.
05:45I think that's where the competition is coming in.
05:48And people have to see the value in treasuries relative to some of these really high-quality, you know, AI
05:53companies.
05:54You know, one of the reasons cited for the AI trade coming off has been that hyperscaler debt has been
06:00getting just a little bit more expensive, right?
06:01But that's also a factor of just the amount of issuance.
06:04And if, you know, investors are going to continue to take it on, they're going to want to get paid
06:07more.
06:08Have you at all looked at some of these offerings and how much more complex they're getting?
06:13Would you be interested at all?
06:15Well, we find value across the, you know, AI ecosystem, as we're calling it.
06:19So it's not just the hyperscalers, it's chips, it's power.
06:23And to your point, they're being extremely creative, which I think is the right thing to do.
06:27Because if they have that much in funding needs, just straight-up unsecured debt, you know, you might exhaust the
06:32market.
06:32So whether it's an SPV-type structure and then paying us for different risks, if it's a construction risk, if
06:39there's amortization in the schedule.
06:41So there's a lot of, there's a macro view that these companies are strong.
06:45We think the AI trade is there.
06:47But then there's a lot of under the hood.
06:49Are we getting paid for all the risks we're taking?
06:52What spread levels?
06:53How much more supply is there?
06:55Absolutely.
06:55We love some of the AI-related debt.
06:59But you have to be very careful in terms of what you're buying.
07:02Well, that made you so happy, Priya.
07:04There must be a lot of opportunities out there.
07:05There must be a lot of opportunities out there.
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