Hot Inflation Lifts Fed Rate-Hike Bets

[00:00:00] Speaker 1: Well, over and beyond that, when I talk about hard assets, I'm also thinking about commodities, principally base metals, pipelines, so a lot of energy infrastructure. That's not really an interest rate story. That is just purely based on future expected supply and demand curves and how they're going to look. I should throw gold in there as well. So it's over and beyond just, say, property. And in fact, I think residential property is not a good place to be in right now. But we just raised, actually, our allocation to bonds to 30%. So we like these yields, both normal and real, where they are right now, notwithstanding today's CPI number. [00:00:39] Speaker 2: So when you look at the market, are you really looking at it through the lens of an inflation-adjusted, a real investor looking at where inflation expectations are going, where they're going to be? And do you trust them? Do you trust what break-evens are telling you today? [00:00:51] Speaker 1: Well, I have no reason to think that they're not to be trusted. It's just a residual from the nominals. So why would you? I mean, I hear that. I don't trust the break-evens. You know, you had your previous guest talking about one-year inflation expectations. But when you're talking about long-duration assets, like equities and like fixed income and like real estate, why would you be looking at one-year expectations? [00:01:17] Speaker 2: Well, isn't a 10-year nominal just a collection of one-year forward rates? I mean, if you look at it that way, I mean, it's certainly... [00:01:22] Speaker 1: Yeah, but it's exactly one-year forward rate. So it's not just a one-year rate. It's a one-year that's rolled over over 10 years. 10 years, exactly. So the thing is that, look, there's a consistent story here because it's not just in the tips break-evens that have been really range-bound for the past five years. Where are, for example, collective bargaining agreements going right now? What are wage expectations doing? They were double where they are today back in that 2021-2022 non-transitory inflation period. Today, collective bargaining agreements are containing annualized wage increases of around 3.5%. That is not inflationary. And so when I look at the situation, again, going beyond today, what's still... I mean, energy still affects the core. Core came in a bit above expected. But you've got airlines in there. You've got travel. You've got other things that are first cousins to what energy is doing. But I'm looking at the dollar. Is the dollar telling us we have a big inflation problem? Is it telling us that the Fed's got a big credibility problem? The answer is no. Is gold reaching new highs? Is that an inflationary signal? No. Money supply growth over 5%. It was running double this time back in 2021-2022. No. Wages? Wages are decelerating. Nominal wages are decelerating, which is telling you that slack is building up in the labor market. No. And what about home prices? What about home prices? We've got existing home sales yesterday. Average prices were down 2.8% sequentially, and down each of the past three months. [00:02:43] David Rosenberg: David Rosenberg with us here. Jim Bianco and Rob Socken coming up. Across America, we're commercial-free this half hour as we look at America's inflation. Futures deteriorate, negative 25. VIX not out to 16. VIX actually pretty good, 15.76. Two-year yield now up a solid 12 basis points. For Paul Sweeney, we may get a 5%. I don't think Paul's coming home until we get a 5% two-year yield. The 10-year yield right now up nine, make it eight basis points, 5.29%. David Rosenberg with us. The big, big difference this time, David, and you are definitive in parsing inflation, is the technology boom, witness this odd nominal GDP, witness this morning's massive Chinese exports. How do you treat all that AI boom with the rest of America flat on its back? [00:03:39] Speaker 1: Well, I mean, you mentioned China, which is, and I was sending their PPI number today, they're battling excess capacity and deflationary, disinflationary situation domestically. The extent to which that's being exported to the rest of the world, of course, is being offset by what's happening on the energy side. So you have to disentangle all these forces. You know, I'll just say this, you know, we're freaking out over core inflation of what, 2.6%. When Paul Volcker left office in August of 1987, core inflation was running at 4.2%, and he was viewed as a hero. He was viewed as a hero. Today, you have a two-handle on core inflation, and everybody is just going hog wild. I mean, there's monuments and plaques and trophies built for Paul Volcker, the inflation dragon slayer, but when he left office, core inflation had a forehandle. So I think this comes down to, you know, I guess this sentiment that's emerged, I think actually more on Wall Street and more on the commentators that come on to shows like yours. Because like I said, you're taking a look at a bird's eye view of inflation. Right now, when you're taking a look at the situation, we've had four huge shocks within six years. We had the COVID shock, then coupled with the big fiscal shock, $2 trillion of fiscal stimulus checks, just as the economy was reopening. Then we had Russia-Ukraine shock. Then we had the tariff shock. Now we have this shock. And that's why I was encouraged, you know, when Kevin Morris was applying for the job. Right. He was telling us, doesn't talk about it anymore, about the Dallas Fed, the Dallas PC trim mean, right? It's what's it running at right now, 2.2%. [00:05:26] David Rosenberg: I got to squeeze this in before we do the interview of the year for us here. David Rosenberg with us, Jim Bianco, just walking into the studio. David, what do the Montreal Canadiens need? I mean, they need Dylan Larkin from the Detroit Red Rigs, right? [00:05:41] Speaker 1: Well, I totally agree. But, you know, what's the cost of that? Like, we're going to give up Hayes, Bull Duke, two first-round picks. I mean, I would love Larkin. I would love Larkin. I would fly to Montreal and take him out to Moise's Steakhouse for like three weeks in a row. [00:06:03] David Rosenberg: Little Cigar Bar where you overlook the Leonard Cohen wall, which is just huge as well. This is a joy. Let me frame this for you. One day at Davos, I'm sitting there with a laureate, Joe Stiglitz and Ken Rogoff shows up. And I interviewed Ken Rogoff and Joe Stiglitz at the same time with two massively different views about international economics. We have in the studio now, for those of you worldwide, including Chicago, James Bianco with a view on inflation and David Rosenberg from Toronto with a view on inflation. And I would say on a Venn diagram, we can find a common ground. Jim Bianco, you're going to reaffirm that inflation here is there. What's the Fed need to do off this report? Are they behind the eight ball and need to raise rates six times? [00:06:51] Speaker 4: Well, I think if you put it into perspective, from 2024 to 2026, the Fed cut rates 175 basis points in six meetings. And the 10-year yield went up 130 basis points. It's the first time in 50 years that we've seen an extended rate-cutting cycle produce higher long-term rates. The message was that the market was saying, you're too easy. And I think that that message is continuing right now. I think we're stuck in a 3-ish percent inflation world. We're not going up. But I think the reason we're going to have a hard time disinflating is from when China joined the WTO in 2001 to 2020, goods inflation stuff was deflationary. It's minus half a percent. Now it's nearly 2% inflation on goods. Right. And I think that that's because we've got deglobalization. We've got tariffs. We've got wars. We've got chronic supply chain problems. We're not going to get goods deflation again. And that's a choice. [00:07:50] David Rosenberg: The David Rosenberg, I want to discuss it. This goes back to David Malpass at Bear Stearns. The gimme is that we have a vector of disinflation in goods. Do you see that out there at some point? [00:08:01] Speaker 1: Well, you know what, the answer is that we are seeing disinflation in core goods. I didn't see what the year-over-year trend was today. I haven't gone through the important detail. But let's just say that through August, the year-over-year trend in core goods, CPI, was running at 0.7%. And this doesn't have hedonics or imputations. It's basically what you can see, touch, or feel. A year ago, it was 1.5%. So this is what I'm going to ask, Jim and I are good friends, opposite sides of the trade. But where did the big inflation come from, from tariffs? Because the experts were saying that after Liberation Day and the U.S. tariff rate went from 2% to 15%, that core goods inflation was going to go to 4% to 4.5%. We barely got above 2%. And now we're at 0.7%. What happened to the tariff inflation? Well, I'll tell you, it's because the labor market is weaker than commonly perceived. That's why nominal wages are decelerating. So this cost-push inflation is hitting a wall in the labor market. And you're not going to get sustainable inflation, with all due respect to today's report, unless the labor market plays ball, which it did in 2021 and 2022. So the question becomes, who ate that inflation from the tariffs? Because we know the tariffs went up. Was it the exporter, not wanting to sacrifice market share in the U.S. market? Was it the importer of origin? Was it suppliers along the chain? Jim, were you surprised by this? I'll just make this point. Only 25% of that tariff shock, okay, made its way through to final inflation. And that was not expected at the beginning. [00:09:36] David Rosenberg: But does that get us from a 2.5% run rate, Jim Bianco, to a 3% run rate on inflation? Just the tariffs in place. [00:09:43] Speaker 4: Well, it's more than just the tariffs. It's also the chronic supply chain problems and the choice of deglobalization. When the San Francisco Fed came out with their study last week and said that tariffs accounted for most of the goods inflation, the implication in that was, see, if you just stop the tariffs, then the inflation goes away. No, we don't want to stop the tariffs. That's our policy choice. And because it's our policy choice, Dave, you're right, we're at seven-tenths on CPI core. We're at about 1.8 on PCE core. But we're not negative. And that's been the big push-up that's been keeping inflation for 66 months above 2%. And I think it's going to continue to keep it above 2%. [00:10:24] Speaker 5: Damian Sassauer with David Rosenberg and Jim Bianco. What a special treat. Well, Jim, David, I'm hearing everything you're saying. [00:10:30] Speaker 2: But, you know, let's look at the market here for just one second. I mean, you've got the 10-year up to 5.3% now. It's up nine and change, nine and change bips this morning. Only 11 of the economists in Bloomberg's survey of 73 thought we were going to see a 0.3 month over month on the core. So clearly the market is looking at this data and trading off of it. Are they right, David? I mean, is the market just trying to, you know, basically throw anything up on the wall and it's just basically, you know, I mean, what do you think? Where's the market now? [00:10:57] Speaker 1: For today, the market is right. As you just said, you've got a 0.3. Mark was looking for a 0.2 on core. I am not a big inflationist. And I thought 0.2 was actually sitting the bar pretty low. I think it's an outsized reaction. I don't think this puts the Fed back in play for the next meeting, but it probably raises the odds for December. However, it doesn't alter my fundamental view because I take, it comes down to what Tom Keene asked at the beginning about my inflation approach. I take a top-down view towards inflation. Today's reaction is natural in the bond market. Do I think that it's a little extreme because you missed by 0.1? Is that worth nine basis points? Well, not really, but it just shows you, you know, how the market was positioned. We were down like two beeps before the number. [00:11:49] David Rosenberg: Okay, let's do this. This is such a treat to have Jim Bianco and David Rosenberg from Chicago and Toronto in studio with us in New York. Jim, are you okay on your airplane you've got to catch? [00:11:59] Speaker 4: Yeah, I'm good. [00:12:00] David Rosenberg: Is the Gulf Stream going out of Teterboro or Middletown? [00:12:03] Speaker 4: I wish it was. It's going out of Terminal B. [00:12:07] David Rosenberg: Bramow has the Gulf Stream in Bangkok. In Bangkok, Mr. Warsh is going to speak. So let's bring this back to the Fed. Jim Bianco, let me start with you. There's a new Fed in town. There's a new messaging. How does he message this core creeping up? And as Damian mentioned, the two-year yield, 4.92%. Sweeney's coming home when it's 5%. [00:12:31] Speaker 4: So I want to build off of what David said in that he doesn't message. Warsh doesn't message. He doesn't want to give forward guidance. So in that vacuum, we look to people like Williams or Philip Jefferson, the vice chairman, and we assume that they're the new spokesman. When did Philip Jefferson ever move markets before? Is Waller a spokesman? Okay. Well, that's the question. Is Waller the spokesman? No, we don't know. And that's why he wants us, us being the collective of the market, not to overreact to one number. We're overreacting to one number right now is what we're doing. David, your thoughts on the new Fed? [00:13:08] Speaker 1: Well, I'll get to that in a sec. But just let's keep in mind that they focus on the PC deflator, right? Like his new metric, the percentage of items going above or below 3% is not the CPI. It's the PC deflator. Like right now, my team is going and slicing and dicing the data to see what the components mean for the PC deflator and the core. And then we'll have to get the PPI, especially the healthcare component, to get a view on that. So this is a hyperreaction, but not the first time that we've seen it. My view on this Fed is, you know, I roll my eyes a lot at the stuff that Morse talks about the economy. You know, he basically, at Jackson Hole, talked about how the economy is resilient and strong and solid, and then goes on to mention AI eight times. Mentions housing once. Does anybody talk about housing? Do we actually live and watch TV in a data center? I mean, home prices are deflated. You knew home prices are down 7.5% year over year. Home prices are cracking. It's a $50 trillion asset class, and here's the thing that we're not talking about is how the BLS calculates shelter, OER, rent. All the deflation that we're seeing in rents and in home prices are not filtering just yet. They will, with the lag, into the CPI data. Let me just give you an example. All you're talking about today is core, core goods. But let's take a look at ex-shelter core CPI. Okay? It's running 2% on the nose year over year. So I don't know. Like, basically, Powell, when we had the tariff shock, appropriately said, when you're in a dark room, you stand still so you don't trip. Did he raise rates because of tariffs? No. And he was right not to, in my opinion. But what really unnerves me is here we had Warsh. When he was applying for the job and cozying up to the president, the Dallas Fed's trim mean core PC deflator, which excludes the idiosyncratic noise in both directions in the data, is running at 2.2%. And he never talks about it anymore. [00:15:18] Speaker 5: And to be fair, Powell was very big on the trimming. Damien Sassar with Jim Bianco. Yeah, Jim, you know, I mean, we have midterms coming up in less than a month here. [00:15:25] Speaker 2: And I'm just looking at real average hourly earnings falling 0.7%, you know, year over year. And then you see the CPI data coming in hot. I mean, how do you sell that through ahead of the midterms? [00:15:35] Speaker 4: You have a very difficult time selling that through the end of the midterms. And I'll just feed off of what David said. You know, when you were talking about what Warsh was saying in Jackson Hole, my question to you is, was he speaking to an audience of one, the president, or was he speaking to everybody? Because mentioning the economy is great and mentioning AI eight times sounds like he's speaking to the president during that speech more than he was speaking to the larger audience. And this lies into your question, right? Why do a lot of people think the Fed's not going to raise rates in October but raise rates in December? I've read a lot of street research, and their argument is it's a week before the midterms. So they're openly saying we're going to make a political decision. And so the Fed seems to be more politicized than we've seen in a long time because of this. [00:16:23] Speaker 2: Well, we have retail sales coming up at the end of the week. I mean, does this take a little bit of the pressure off of that data? I mean, like, again, you know. [00:16:30] David Rosenberg: It's a boom economy. Can you stay? I'm really worried about your plane flight. You okay? I can stay. Okay. We're going to do this, folks. I'm making it up as I go. Jim Bianco, David Rosenberg now, Rob Sacken's people, steam coming out of their ears at PGM right now. We're going to have Rob Sacken top of the 9 o'clock hour as well. So we're going to continue with Jim Bianco and David Rosenberg and go from there. I want you two to answer my arch question. None of us have seen a nominal GDP like this that we all know must come down. Let me start with you, Jim Bianco, so then you can stand up and leave to get the Gulfstream. How will our nominal GDP come down to something normal for David Rosenberg? [00:17:15] Speaker 4: I think it is normal, for starters. Six and a half percent? Oh, well, the latest quarterly number. [00:17:21] Speaker 2: It's the old normal. [00:17:22] Speaker 4: But, yeah, the latest quarterly number is a little bit hot. I was thinking more of, like, a longer-run average of around five-ish or so, which is three-ish something inflation, two-ish something. [00:17:32] David Rosenberg: What's the damage to the stock market if we pull it down to five-ish or 4.8? [00:17:37] Speaker 4: Nothing. And the reason I would argue it's nothing is we are anchoring ourselves to 2010 to 2020. We had zero interest rates for all those years, and somehow we think it's normal. And now we look at five, and we freak out that this is crushing the economy. It's not. This is normal. Zero was abnormal. How do I know that everybody's anchoring themselves? The president is demanding zero on the funds rate zero to one. The Treasury Secretary is talking about financial repression by being in the House to bring rates down.