00:00This week, attention shifts to the July inflation report.
00:03CPI coming in on Wednesday, and the PPI, get ready for all your acronyms, that's coming in on Thursday.
00:08While they are expected to show inflation still above that Fed target of 2%,
00:12the exact number could further calm calls for an interest rate hike.
00:18This now is Neil Dutta. He's the head of economic research at Renaissance Macro.
00:20Neil, great to see you. I've got my latest copy of Dutta's Economic Daily here,
00:24and I want to start, if we could, by looking backward before we look forward.
00:27So let's start with the jobs report that we got last week.
00:3023,000 jobs lost. Saw the unemployment rate tick down.
00:33Brings up this question about the break-even level.
00:36Want to get your thoughts on that.
00:38Before we get there, let's play a bit of sound here of Kevin Haas at the President's Economic Advisor
00:41talking about the break-even. Here's what he had to say.
00:44Labor force participation is kind of on a downward trajectory,
00:48which means that the break-even jobs number, that is, the jobs number you need
00:52so the unemployment rate doesn't go up, has gone from maybe $120,000, $130,000 a few years ago
00:59to maybe about $40,000 now.
01:01And so what it means is that what the market is used to looking at,
01:04oh, it's like a normal tread-the-water kind of jobs number if it's around $100,000, is no longer
01:10true.
01:10No longer true. The smiling countenance of Kevin Haas.
01:13They're talking about this. Neil, what's your reaction to that?
01:16How have you seen this evolution and sort of what worries, if any, were sparked for you
01:20from the jobs report that we got on Friday?
01:23Well, I mean, I think for me as a Fed watcher, all it really does is reinforce the notion
01:30that they had to begin the year, which is at the break-even level, you know,
01:34the number of jobs you need every month to hold the unemployment rate flat,
01:38that number is going down, right?
01:41So if you look at, you know, just so far this year, we've been averaging about 50,000 to 60
01:46,000 jobs a month,
01:47and during that time, on average per month, the unemployment rate has been going down,
01:54you know, just, you know, 0.04%, so percentage points per month on average.
02:00So, you know, it kind of speaks to this idea that the break-even level is lower.
02:05And that just means you're going to get negative jobs numbers more often, right?
02:12Just, you know, it's like sort of a statistical artifact of that, right?
02:15I mean, if the break-even level is lower, you're going to be bobbing around the zero line more often.
02:20So we are expecting CPI and PPI out next week.
02:23Our chief economist for the U.S., Anna Wong, says she's expecting those to be pretty soft,
02:28not really impact, and she expects the Fed to hold rates in September.
02:31Last month, before the Fed decision, you were predicting a rate hike,
02:35and now you've said, you know, if you're going to end up hiking rates by September, might as well do
02:40it now.
02:40Given these new numbers, is that still your prediction, or do you think they're going to hold again?
02:45Well, I think it's important to note that just on the face of it,
02:48the last employment report actually pushes the Fed further in the direction of hiking, not away from it.
02:53So I think that that's a bit of a misconception in the marketplace, given the bond market reaction.
02:59You know, to borrow from Janet Yellen, the unemployment rate is the single best indicator of labor market health.
03:05And what happened with the unemployment rate?
03:06It fell. It fell.
03:08So if you, you know, when you look at, you know, every few months the Fed releases their summary of
03:13economic projections,
03:15their DOTS plot, go in and look at what they, they don't forecast the rate of growth in non-farm
03:20perils.
03:20They look at the unemployment rate.
03:22That's the slack measure that they focus on primarily.
03:26And to the extent that it's going down, it's going to push the hawks, you know,
03:32to be even more aggressive in pushing for hikes going forward.
03:36So I don't really buy the idea that the jobs number pushes them away from anything.
03:39If anything, it pushes them towards it.
03:41Now, with respect to inflation, you know, look, we've, if you think about it,
03:49if Anna's right and you get sort of 0.2 on inflation month in and month out between now and
03:56the end of the year,
03:57she's probably right.
03:58The Fed's not going to hike.
04:01I would accept that.
04:03But in order for that to happen, you're basically talking about a scenario that's had less than a 10%
04:09chance over the last three years.
04:12I mean, getting 0.2s, that's happened maybe less than 40% of the time over the last three years.
04:22And then expecting it to string along for several months in a row, the probability of that's even lower.
04:27So to me, you know, the distribution of these inflation reports has generally skewed higher in recent years.
04:33And when you look at the last number, you know, there were big declines in lodging away from home,
04:40communication services, motor vehicle insurance.
04:43In other words, I think the distribution was somewhat narrower in scope.
04:48That's why median inflation was somewhat higher than traditional core inflation in June.
04:54So if that unwinds, it's very easy to see, you know, maybe a 0.3.
04:58And, you know, then at that point, all bets are off.
05:01So I just think the odds still favor a hike.
05:05It's almost like if it's really, really cloudy outside, you should assume that lightning will probably strike at least once.
05:12And that's kind of how I'm looking at these meetings.
05:16I mean, you assume that every meeting between now and the end of the year is effectively a coin flip.
05:21And if you're flipping a coin that many times, it's probably going to come up hike at least once.
05:24Neil, can we get existential here?
05:26You mentioned, you know, long time.
05:28Should I get comfortable?
05:28Get comfortable.
05:29Long time Fed watcher.
05:30And I'm curious how you're processing the kind of new war-ish regime when it comes to communication.
05:34So you mentioned the dot plot, some of the economic projections, all these things, which I guess have perhaps dubious
05:40longevity.
05:41I mean, I don't know sort of what that's going to look like in a year's time.
05:43But we've heard from those dissenting votes in recent days.
05:48Got their take on what's happening.
05:49Heard about the incrementalism from Neil Kashkari, for instance.
05:52They, I imagine, take on more primacy.
05:54You're going to pay more attention to their comments going forward here in the absence of what we're going to
05:57hear in all likelihood from the chairman.
05:59How does your job, how does Fed watching change notionally here going forward in light of what we've seen Kevin
06:04Warsh propose?
06:07Well, look, I mean, I think for me it's first you always have to let the data drive your views
06:12of what the Fed will do.
06:13Because I think for most of the people on the committee, it's the data that ultimately drives them towards an
06:18action or not.
06:19I think what's notable is that it feels like the dissents are or the hawkish shift is mounting not just
06:28from regional Fed presidents, but also from within the board of governors.
06:33I mean, you're talking about people like Lisa Cook, you know, potentially getting on board for a rate hike in
06:40September.
06:40So, you know, if the governors begin to open up to the idea of hiking, and, you know, it's going
06:50to be very difficult for Warsh to keep them at bay.
06:53So the reason why I sort of suggested, hey, you should just get out in front and hike in July,
06:58it's much better to do it when you have control than to kind of go into it kicking and screaming.
07:04So, you know, people are talking about, well, maybe he'll say something interesting at Jackson Hole.
07:09At this point, he may not have a choice but to kind of shift by Jackson Hole because everyone's already
07:14there.
07:14So does he really want to be getting out there in the September FOMC press conference explaining a decision where
07:22they all hike and he dissents?
07:24I mean, that seems to be a little bit ridiculous.
07:26So it's almost like a tail wagging the dog situation.
07:29But, you know, the short answer to your question is basically it's almost unilateral disarmament from the chair.
07:38So if he's doing that, then you have to kind of overweight the views of everyone else.
07:41You either think Kevin Warsh is in control of the FOMC or you think the FOMC is in control of
07:48Kevin Warsh.
07:49And if you think the latter, that probably means that the yield curve is going to flatten as we get
07:53into the fall.
Comments