00:00Mike McKee, triple digits on crude again on WTI, on Brent, something we haven't seen since May.
00:07Mike, we're seeing it in crude product as well, and it's been elevated. It's been painful
00:10for months now. Mike, you understand the Fed better than most. I imagine that most of them
00:15wanted to look through this negative supply shock. Is that getting harder, Mike, given that this is
00:18month seven and counting? It's absolutely getting harder. And the problem becomes that it's starting
00:23to spread throughout other areas of the economy in terms of the effects of these energy price
00:29rises. Remember, I said this PPI only captures prices through August 11th. But now in looking
00:36at the detail here, the price of diesel fuel in that period jumped 24 percent. And goods prices
00:45overall were up 1.1 percent. Jet fuel, gasoline, home heating oil also up significantly during the
00:51month. Final demand services, the one bit of good news, up a tenth of a percent overall. And a lot
00:57of the hawks have been looking at services prices. But prices for truck transportation of freight up
01:032 percent. So we're starting to see this spread. And if that continues, it's going to be very hard
01:09for the Fed to come up with some reason not to raise rates. Now, the other thing is we're going
01:15to
01:16be watching to see how this PPI translates into PCE. And as I mentioned, talking with Omar Sharif,
01:21he says it's going to take a little longer for economists to do this, because we did have changes
01:25in methodology for a number of the different categories, including portfolio management. So
01:30we'll have to see first how they translate that and then how that works into PPI. And of course,
01:36a lot of that will depend on what happens tomorrow with CPI. But it does set everybody
01:41up to wonder what's going to happen next with inflation.
01:45Mike McKee, thank you, buddy. Mike Reed of RBC joining us around the table. Mike, good morning.
01:50Just look at those prices this morning, never mind the data, because the data is going to follow
01:53this ultimately. 106 almost on Brent, triple digits on WTI. How squeezed, how cornered is
01:59this Fed into next week? This is a tough spot for the Fed. You know, we're talking about energy
02:04prices. That's the number one concern. Let's not forget, we still have tariffs on the table,
02:09which are adding pressure that's showing up in PPI. And ultimately, this is going to pass through
02:13from PPI into CPI. Rather like the ECB, you hike once. What do you signal beyond
02:19that? What can you signal beyond that? You know, one hike we just don't think
02:23would be enough in this case. You know, if you really want to start to bring down the
02:28demand side of the inflationary pressures, it's going to take more than 25 basis points
02:33of hikes. You know, the way we're looking at it is if the Fed were to go, you have to
02:38think about the labor market right now, which has really shown signs of reversing from that
02:43weakness last year when they had those insurance cuts. So at a minimum, they should be putting
02:47at least three cuts back in if their belief is the labor market's fine and this inflationary
02:52pressure continues.
02:53Usually people take a look at higher oil prices as a stagflationary shock, where in the short
02:59term it raises inflation, but in the long term it could potentially lower inflation because
03:02of the suppression of growth. And yet we're seeing yields across the board rise almost in
03:07tandem. Does that make sense to you?
03:10I think you have a lot of cross currents going on. And when you think about the demand side,
03:16there's certainly a tailwind coming from this, you know, we'll call it the government transfer
03:22aging of the population segment. There are things that folks, especially here in the U.S.,
03:28will continue to buy. And a lot of that comes from Social Security, Medicare, Medicaid. And in
03:35particular, when you think about Medicare, all of these programs are adjusted for inflation.
03:41Social Security income is adjusted for inflation. So it's really inflation protected. What's that
03:46doing? That is adding to the deficit. And so when you're thinking about the long end of the curve,
03:54you know, that's where a lot of this pressure is coming from, the realization that this is not a
03:57problem that is easily solved.
03:59Can you give us a sense of the evolution of your own thinking about whether rate hikes are necessary
04:03and how many are necessary and how quickly it's been evolving as the personnel have changed and as
04:09the data have changed as well? I mean, look, right now our base case is that the Fed remains on
04:15hold.
04:15And a big part of that is when you look at the economy, you know, I just mentioned that the
04:21kind
04:22of older cohort, you do have a younger cohort, a lower income cohort that is feeling pain already,
04:28even before this energy shock. They're disproportionately feeling the inflation shock.
04:35When you look at non-mortgage personal interest payments as a share of disposable personal income,
04:40it's about 2.5%. That has not seen significant improvement over the last year or two. And that's
04:47concerning. That's even with hikes. So what that says to us is you have a very large share of the
04:52consumer base that is relying on credit. And if you start hiking with a blunt tool, that is going
04:59to impact those folks, again, disproportionately. So there's a risk that you could really crush demand
05:05in a consumer base that is already feeling this pain. And at the same time, you have this retiree
05:11population that has very little exposure to debt, in many ways could benefit from rate hikes through
05:17interest income. So, so it's a really difficult situation to figure out which part of that K
05:24you really want to support. At what point do you think you would have to change your thinking?
05:28What, what would you need to see and be like, they're going to go and they're going to hike?
05:33Well, tomorrow's going to be a big clue. You know, we'll see how CPI looks.
05:38But a big part is what's going on with energy markets. You cannot ignore that pass through from
05:43energy. You know, we were talking about that truck transportation, freight transportation.
05:47That's going to bleed through into the goods space. If goods start heating up in PPI, that's going to
05:53get passed through to CPI. And we've seen that. PPI is a really good indicator when you look at the
05:59the trade services margins. They've largely been positive over the last year, year and a half.
06:05That suggests there's still room to pass through higher prices to consumers. So if this is showing up
06:12in CPI, in PCE, you're going to get goods heading in the wrong direction. We think services, you know,
06:19it's come down, but you're not going to get much deflation there. Historically, you look back,
06:24you're just not going to get help. And so you need goods to move lower. And that's the problem is
06:30you're not going to get directionally the right move. Mike Reed of RBC. Mike, thank you, buddy. Appreciate it.
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