00:00Molly, first of all, give us your reaction to the CPI numbers and how much relief
00:04this can actually bring the Federal Reserve.
00:09Thanks so much for having me. It definitely does bring some relief in terms of does the Fed need
00:15to provide more restrictive policy at this point. But as you saw in the market reaction,
00:21we just priced out a bit in September, kind of a bit out of the cycle. I don't think we're
00:27out
00:27of the woods by any means at this point. The bar for the Fed to deliver a hike at some
00:33point has
00:34certainly lowered. However, this report has been supportive of a Fed hold, at least in the near
00:41term. I think that goes along with the payrolls report that we saw last week. So we keep seeing
00:48this data come in and markets are kind of on their toes here at each incoming data point at this
00:54point, just to see if anything will come in that will be enough to tip the Fed towards hiking.
01:02At least when it comes to the combination with the weak labor numbers that we got recently,
01:06does that help in sort of positioning the market towards a hold from the Fed? And at the same time,
01:12what does that tell us about the long end of the Treasury curve? Because at the same time,
01:16there are concerns about supply, about the fiscal landscape as well.
01:22Right, definitely. I think that the combination of payrolls and inflation right now puts the Fed in
01:30a good spot to continue waiting. As long as we are further out from a Fed meeting, you are going
01:38to
01:38see some amount of odds of a Fed hike priced in, especially if we are having less forward guidance
01:45coming out of the Fed in terms of their reaction function. So we will still be seeing some amount
01:52of hikes priced in, which has pushed up, as you said, the long end of the curve. We did get
01:57the
01:58Treasury refunding last week as well. And there were hints that we might actually see the supply in the
02:06long end actually decrease. We don't think it will happen anytime soon. But there were hints that
02:13they may, we may see supply on the long end actually decrease rather than increase going forward.
02:19So that should help to support the long end to some extent.
02:23How closely are you watching the 30-year sale on Thursday, especially given that we're coming off
02:28the 10-year auction as well?
02:31Yep, the 30-year will definitely be important tomorrow in figuring out demand for the long end.
02:37We will get PPI as well before that. And that will be key in terms of determining on what is
02:44the
02:44pass-through of the July CPI and PPI prints in the core PCE. So I think it'll depend on kind
02:51of what
02:52we're seeing going into the auction tomorrow. But we'll see how markets decide to take this down.
02:59At current levels, they seem pretty attractive, given how high they are. But some investors seem
03:07to not want to take the risk just with concerns around how do geopolitical shocks play out in the
03:13near term, as well as the fiscal story.
03:19We do also have July retail sales to contend with. What is this telling us about the health of
03:27the consumer in the U.S. and the potential implications also about how markets will really
03:33reframe this?
03:36Yep. So on Friday, we're actually expecting a relatively lower print. We're expecting a negative
03:42number here. So that should kind of play along with what we've seen in terms of the CPI and the
03:48payrolls print at this point. Supporting kind of a Fed hold at this point, we should see some amount
03:55of hikes priced out on Friday when we do get that retail sales print.
04:02What was interesting about the CPI number this time around, too, was trying to figure out what
04:06the memory shortage is doing when it comes to those inflationary pressures. Is that anything
04:10that you're watching that could potentially give us a trajectory of where prices go from here?
04:18Yeah, the the AI story, I would say, is definitely a key one that the Fed is watching and seeing
04:24how
04:24that plays out in the data. Some of the some of the impacts of AI in terms of the Fed
04:29mandates
04:30does seem longer out like on the labor market. But we are seeing some of this kind of pass through
04:35in terms of inflation. And that is certainly something that the Fed officials are watching
04:40going forward. If we see any, you know, contributing strengths that's coming from from that part of
04:47inflation, that also keeps the Fed on their toes. And that's one of the concerns that's leading a lot
04:53of Fed officials towards this hawkish shift where they're kind of ready to potentially hike
05:00in September. Three were ready to hike in July. So it doesn't take that much in order to shift enough
05:07over the edge in order to actually deliver a hike in the near term.
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