00:00So the focus is, of course, following on from that hike just passed, what the Fed's going to do next.
00:06You think October, December, that seems quite hawkish. Talk us through the thinking here.
00:13Well, I guess in June, when we put the call for three hikes, September, October and December,
00:21we were really hawkish compared to the market. It was a very out of consensus call.
00:27And basically, the narrative remains the same. We are seeing very sticky inflation, in particular service inflation.
00:36We forecast core PCE around 3.3 percent by the end of the year.
00:43We think the economy remains pretty robust, strong investment driven by AI, of course, very robust consumption.
00:51The labor market has been improving recently.
00:56And therefore, in that dual mandate of employment and inflation, it makes total sense for the Fed to focus more
01:04on the inflation side.
01:05And I think that was a message, and it was a very clear message in the last FOMC that the
01:12Fed wanted to convey.
01:14So, absent a significant surprise to the downside on the inflation number, between now and the next meeting,
01:22we think the path of resistance is for the Fed to continue tightening.
01:27But there's also the sense that the hike just passed was really about establishing Fed credibility and perhaps, on the
01:35margins, yes, about inflation as well.
01:37Given how we've already seen that hike, would it not make sense to wait in October and then do something
01:43in December, potentially?
01:47Well, of course, hiking cycles are at least three or four hikes of 25.
01:55That's the reason why we have the calls or the hikes back to back.
01:59The risk of pausing is that if you don't come up with a very clear and credible narrative for justifying
02:11the pause,
02:12the market might misinterpret the pause.
02:15So, if you hike in October, hike in December, and then you want to pause,
02:21at least you establish already the credibility that you're serious about inflation,
02:26you are doing the homework, and then you want to see how the economy reacts to the initial part of
02:35the hiking cycle.
02:38Pausing in October is a bit too early.
02:40It can be misinterpreted.
02:42It's right before the midterm elections.
02:44So, it could cost a little bit in terms of credibility if not properly communicated to the market.
02:51So, that's why we think the path of the resistance is to continue hiking.
02:58What is this going to mean in terms of the signals for Asian central banks
03:02that already have been quite proactive in tightening in order to contain inflation?
03:09Well, if you compare, for instance, the price action and the trade-offs that you're having in the U.S.
03:17with Japan,
03:19you can see how the market has been reacting to the hiking cycle or the hikes of the Fed and
03:27the BOJ.
03:28And what we are seeing is that central banks hiking and the front end adjusting to that of the expectations
03:36of a continuation of hikes
03:38has helped to anchor the long end of the curve.
03:42So, given fiscal pressures that you are having in the U.S.
03:46and you are having in Japan, actually in other countries too,
03:51letting the central banks do their job helps rather than hurt containing the long end of the curve,
04:00which is probably what is the main focus from the political standpoint.
04:06But we are seeing a very good reaction.
04:08In particular, we saw it after the Fed hike that the long end traded very well
04:16and didn't overreact or didn't sell off or didn't bear steepen like some people might have been concerned about.
04:26So, contained in a way.
04:29Talk to us also about the revised economic outlook against that backdrop
04:34that you've also been coming up with for parts of Asia,
04:38given how maybe some of these risks are more contained than we previously thought.
04:46Well, I would say that the thing that we need to continue to monitor very carefully is the situation in
04:53the Middle East.
04:54Because the price of energy remains pretty volatile,
04:57not only the price of oil, but also the price of refined products.
05:05We are seeing an increasing gap between the price of oil and refined products.
05:12And one thing that concerns me particularly is the fact that every time there is de-escalation,
05:18the price of oil falls, but falls every time to a higher floor.
05:24So, that higher floor sends the signal to companies that that floor or that increase in price is more persistent.
05:32And therefore, there are higher chances of companies passing that through prices.
05:39So, that's something that needs to be monitored.
05:42And I think central banks are quite aware of that dynamic.
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