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After reducing interest rates by twenty five basis points straight out of the gate in that news conference, asked an obvious question, why do this when you're expecting inflation to remain above target? The chairman acknowledging today was a closer call that we've cut interest rates by one hundred basis points across three meetings. The recalibration phase is over. We're in a new phase. Things of foggier, the darker you move more slowly. Well, this was the price reaction to
that in the market. Equities slammed down one point five percent on the S and P on the natstack, down by more than two the small caps. Some outperformance on the small caps going into the decision, real underperformance coming out of it, the small caps down by two point eight percent. In the bond market, big move at the front end of the curve, yields up across the curve twos, tens, and thirties on a two year up by more than
ten to four thirty four eighty two. And off the back of that and foreign exchanges, you might expect the dollar stronger against everything in G ten ripping up em you wrote dollar breaking down through one oh four and threatening to do the same to one oh three. You wrote dollar right now at one o three sixty four. We all had questions about the forecasts. Why have you bumped it up on inflation. Why are you projecting higher
inflation than you were projecting back in September. Why have you reduced the number of interest rate cards from four to two in the median dot for the dot plot in twenty twenty five? Is it about the data or is it about Donald Trump? Take a listen to the Chairman of the Federal Reserve.
Some people did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of policies into their forecasts at this meeting and said so in the meeting. Some people said they didn't do so, and some people didn't say whether they did or not. So we have people making a bunch of different approaches to that. But some did identify policy uncertainty as one of the reasons for their they're writing down more uncertainty around inflation.
Compare and contrast that to what you heard from the chairman back on November seventh. We don't guess, we don't assume. We don't speculate. December eighteenth, some of us guests, some of us assume, and Lisa apparently some of us speculate.
The we is doing a lot of heavy lifting at a time where clearly he's reflecting a splintering committee that is dealing with a whole host of different outcomes and potentially political leanings. And I just want to go here, this is going to be viewed through a political lens. Inevitably, it already was threatening to do so. Now there are
some people who are incorporating highly conditional estimates. I wish that we had learned more about what those estimates looked like and whether they all were inflationary or whether some of them were to slower growth.
Neil Datta wanted to jump onto the program. We can bring them into the program right now, Nil Detta of renmac neil. Is this federal resist on a collision course with the incoming administration.
I mean, it certainly feels like they're tempting faith, you know, I mean Powell's talking about he goes through a litany of indicators talking about how the labor markets are cooling, and then he, you know, in the same sentence basically talks about how they're dialing back rate cuts. So I
think that that's that's a problem. And you know, I think the the optimistic take around this is by making the forecast adjustments that they've made, they're actually, in some respects lowering the bar for additional action, you know, early next year. So like two point five percent on core inflation, I mean, that's a reasonably high number. And you know, given what we know about rental inflation, that's probably going to slow down, given what we know about you know,
consumer goods. You know, if you look at things like freight rates, it's probable that consumer durable goods price is moderated, you know, over the next couple of months, you know, just as the new administration's coming into office. So you know, I think they're signaling a pause. But it's also important to remember that by March the forecast might look a little bit different and they maybe they may have to cut again.
Neil, you were my Economics of the year two years ago. You were optimistic when few were. Now you've switched flat out switches, no other way to put it. How off is Atlanta GDP now at three point one percent? Is Powell know something we don't know, and those visible present numbers are just flat out wrong.
I never I never think. I mean, I don't think the FED really has an economic forecasting edge of any meaningful degree. You know, Tom, the FED doesn't have a GDP mandate. So it's interesting to see how much Powell was talking up gross domestic product, private final you know, domestic sales. I thought that was pretty interesting, quite revealing, actually, because that was sort of a way for him to
avoid the questions around the labor market. And we know that duration of unemployment as an example, has gone up by two to three weeks over the last couple of months. Leaving that aside, I mean, you're right, I mean I
am more cautious. I remember two years ago, around this time, the consensus was conditioned for you know, basically everyone was penciling in recession, and all I did was point out the fact that the labor markets were fine and housing stocks were moving up into the right Fast forward to today, it's literally the opposite situation. Everyone is sanguine on growth. It's very difficult to talk about recession. No one really wants to hear it. And at the same time, we
know that the labor markets are slowing by Powell's owned admission. Okay, and just pull up a chart of homebuilding stocks.
Well, meanwhile, Neil, I just want to point out the fact that other people are taking a different tack than you are, as you say, your contrarian thinking that there's more weakness in the market. Peter sheher saying this he doesn't think is necessarily political. He said, this is a fed that is worried that inflation isn't coming down fast enough. And well, it might play in the back of their mind. They aren't responding to fiscal potential policy on the margins.
Some are, but he's saying in general they are not. Why do you disagree so fundamentally with that?
Just go through the go through the document, look at the balance of risk to the inflation forecast. It's a dramatic increase in the number of participants that see the risk to headline and core inflation eskewed to the upside. So, I mean, they can say whatever it is they want, but based on the data, it's very difficult to justify the distribution of risk that you see in the projections. And how are the risks to inflation going up at a time when labor is cooling and wages are slowing.
We know that recruiting intensity is down, we know that quits rates have collapsed. Okay, that probably implies that there's further cooling with respect to compensation growth between now and the next couple of quarters. The dollar is surging today because of what just happened, you have to start thinking about what that might mean for the emerging market space, because obviously these countries have a lot of dollar denominated debt and that's going to imply tighter financial conditions in
those economies. So okay, I mean, I think based on the data, it's really difficult to say that the distribution of risks have changed that much. And Powell even said that based on the inputs from core CPI and producer prices, you'll probably get a pretty weak reading on core pc inflation when that data are released on Friday. And the big story again out of the inflation data over the last week has been the normalization of housing rental inflation.
So I think, you know, to me, this is it feels a little bit like they're pre judging potential policy outcomes.
Em currencies right now getting hammered. Neil, I don't expect the caller. I don't expect the tide, but maybe just a jack in next time, Noil, maybe a jack hid you know, for some post fed show commentary.
In the studio.
Back in the studio, I'll put on you know, my my Gucci for you.
There we go. I'll make that happen, Neil, make it happen soon and Neil appreciate it, sir, enjoy the holidays. Neil Dutta there.
Showing up in a Christmas sweater.
I mean, next time, white t shirt was better. I've got one with a better bad joke on the back.
Do you really a number ten?
Produce Christmas hanging like.
Not with like you know, jingle bows going on.
Like lights, its lights. It serves Monday. I mean it serves.
Monday, Monday, definitely when I'm not here. Sarah House of Wells Fargo joins us. Now for more, Sarah, These forecasts some controversy around them. Neil Duttter making the argument that he believes that underpinning that shift in inflation higher in those dots for the dots coming down from four cuts to two, he believes as a real Trump effect in the forecasts. Sarah, is it the data or is it the incoming president.
I think it's a little bit of both. John, So, I think you've seen certainly there's been a little bit stronger momentum in terms of the inflation numbers. That's why you got the upward revisions to the Q four numbers here for this year. But I think when you look at just the magnitude of the change as well as the balance of risks. We heard pal say that at least some participants included some assumptions around policy, and some
didn't say if they were. So I think there is a little bit of recentering the risks around the forecast within these projections.
Sir, When you do all the math at Wells Fargo as you do with Jay Brice, and when you sum it up, what are you going to watch forward to the next FED meeting? I mean, Neil Dudda just said GDP is not part of the mandate. Do we watch the jobs report? Do we look at inflation? I mean, what really matters in the guestimate forward into late January?
Yeah, it's jobs and inflation. So I think after today's meeting it's a little bit more on inflation. So I think that's one of the big takeaways is we're seeing that emphasis shift back towards more of a focus on inflation after I think the labor market took more of the spotlight in the late summers. We had a couple week jobs report, unemployment rate going up pretty quickly there. But I think today's Today's message was they have less
conviction about that downward path of inflation. So I think the next few reports, especially getting through the first quarter, where there's a lot of questions about residual seasonality. So do we actually see enough of a slowdown where you start to see that twelve month trend which Paul talked about so much in today's press conference, do you see
that begin to come back down? But they are still looking at the labor market, and I think that did feature in not just today's cut, but also still what is an easy bias where they do have a couple more rate cuts penciled in for next year, because as you heard Paul also talk about in the press conference, they're still seeing that labor market.
Cool Right now, We're seeing markets respond pretty strongly to this and people forecasting that maybe at least this is the implication this could potentially make a more difficult circumstance, particularly for smaller companies. From your vantage point on the margins, if this is a FED that sees itself in a dark room full of furniture or in a foggy land that's moving more slowly that that on the margins is going to slow your expectations, Sarah, for growth next year, I think a little bit.
I mean, we're still looking for three rate cuts next year, so not terribly different from what the FED has penciled in, but of course when they come could have implications for
what happens with financial conditions over the coming months. So I think when we look at the inflation picture the rate picture, I think overall we're not seeing a meaningful dialing back of policy in the months ahead to the same extent that we were over the past four months, where you still have the real rates you know, closer to one and a half percent, so not much change there, and I think that is still likely to be ahead when particularly in some sectors like you know, Neil was
talking about home builders. So I think there's still certainly some pressure in some of those more rate sensitive sectors of the economy that are going to feel it a little bit more. If the Fed's not going to be cutting quite as much or quite as fast as what they were thinking a few months ago.
The next twelve months is going to be quite a ride. Sarah, thank you. I appreciate your time. Sarah House of Wells Fargo. This is the FED Decide to Bloomberg Savaded Special live on Bloomberg TV and on Bloomberg Radio if you are just joining us. A twenty five basis point reduction from the feder Reserve about an hour and thirty five minutes ago, followed up by quit a news conference with the chairman J. Powell.
Lots of questions about the forecast. They revised their forecast for inflation a bit higher for twenty twenty five and beyond, and they took down their projection for interest rate reductions for next year down from four in the medium dot down to two. Off the back of that, there were some questions about why cut interest rates at all. The chairman called it a close call, said the recalibration phase was behind us. We're in a new phase where we have to move more slowly. Off the back of that,
Equerry is just getting absolutely smoked right now. We're down by more than two percent on the s and P five hundred down by close to four on the Russell two thousand, some severe significant underperformance on a small caps If you check out the bond market, we'll just take a quick slice of it, the two year the yield higher at the front end by double ditchits. The two year yield pushing higher up by a round about ten basis points on my screen at the moment, cool eleven
now to four thirty five. That's cross over. Toma McKee was in the room in the news conference, Mike, you'll big takeaway walking out of that room.
Well.
A number of interesting things in the news conference, including the chairman talking about some members of the committee pricing in some possible effects from the new Trump administration fiscal policies. But the biggest takeaway that I had is that the Fed, including the Chairman, are less confident. He wouldn't say he's not confident anymore, but they are less confident about the path of inflation. He basically said, it's come down, so
we think it's going to keep going down. But it's not like we were seeing in the summertime, where they were very convinced that inflation was on the right track and headed to two percent, So that's really going to inform their decisions as they go forward. The other thing that I take away from this, John, interesting is we need to rename this show because you call it the FED Decides, but I would add the words the market disagrees.
If you look at the forecast now in the markets, there is only one cut fully priced in for next year. So we're going to have this tug of war back and forth between the markets and the Fed. It seems ongoing from here.
That tension continues. Mike, appreciate your time, sir, great work as always. Join us Now is Jeff Rosenberg of Blackrock. Jeff, I want your first thoughts. I asked the question to Bob Michael at JP Morkan Asset Management, and I said to him going into the news conference, are you more or less confident embracing risk given what you've just learned
from the Federal Reserve? And Jeff, I want to ask that question of you after that, are you more or less confident embracing risk into twenty twenty five?
Well, you can see, Jonathan, you know this is a surprise to markets, and so one of the things the markets had hoped for was a FED that was very much leaning towards easy financial conditions, focusing more on the labor side than on the inflation side, and that was pretty supportive to financial conditions and taking risks. So you see the market reactions that you just talked about not
what markets were expecting. And so certainly that's a little bit less favorable environment for risk taking because you have a FED that has really kind of surprised me. I think it surprised the market here in saying, hey, we're more worried or as worried about the inflation side now than we were about the labor markets, and that means we're not going to be as quick to cut. And it's the cut in the policy and the favoring of easy financial conditions that was so supportive to taking risk.
Jeff, the reviews are coming in. That was one of them. Here's some others. Steve Shivron worst performance worst power performance is twenty one. They overreacted to labor market data in September. Now they are overreacting to inflation data. Krishna MoManI, probably the worst Russer so far of his tenure, seems to support for this cut was quite spotty, but they went ahead with it anyway, Jeff, do you agree with that?
Yeah, you know a lot of the sentiments in there are about just how much the FED when they stopped forecasting and became data dependent. The problem is they're dependent on like as much as he said they're not trying to be, it feels like they're dependent on the last few data releases and so yes, going into September, it was all about labor markets. Now it seems it's all about inflation. I think one of the earlier guests end
and I would agree with this. You know, this is not going to be a great forecast for where the fed's future forecasts have been because they've been just so whipped around by short term movements in data. And that certainly is kind of frustrating. And Jonathan, you earlier question, you know, makes it makes risk taking a bit tougher because the FED signaling and what we're going to get out of the FED is just that much more uncertain.
Atche Frozenberg, Ellen Meltzer, you're Carnegie Mellon come runer up at Rock had a shadow Open Market Committee, which was the first rule was stability.
Stability.
I don't see stability in EM I don't see stability. Granted, it's a different story in generic China ten year.
They're going to open here in three or four hours.
Is Blackrock internationally concerned about the Asia opening here?
Call it seven pm our time?
So, you know, Neil mentioned it in his comments about the impact. You know, the FED sets monetary policy based on domestic US conditions, but the impact on the rest of the world is as important, particularly when it flows back into the United States. And how is the channel for that flowing back. It's through the potential of tightening and financial conditions. I think the tightening and financial conditions from the dollar increase is going to be much more
front and center in emerging markets. What Powell talked about is the exceptionalism. What no one really talked about was what is the source of that exceptionalism? What is the source of that exceptionalism. Partly, it's this incredible technology AI wealth creation story that is feeding into positive animal spirits. It's feeding directly into consumption through the wealth effect, and so that creates a little bit of a buffer around the US economy around some of the blowback issues you
raise in terms of currency open and Asia. So I think, you know, we keep an eye on it, But so far it's really this much bigger story about American exceptionalism, which has a kernel a really important point of that about this incredible wealth creation we're seeing coming out of technology.
Jeff, I'm pleased that Tom brought this up. The move we're seeing on the screen, the phone exchange screen on the Bloomberg terminal really lighting up. We've got a three percent move on the Brazilian currency. Yet today we're talking about a move of twenty three percent on the Brazilian currency, twenty one on the antentigin PA. So we're looking at
something like seventeen percent on the Mexican pay. So, Jeff, as I look around the world beyond DM, not just the Europe, but including Asia and China specifically, China is looking at a disinflation rebust potentially. The chart of the yields government bond yields in China just lower, lower, lower, and rolling over into year end. Jeff, how much divergence do you expect for the US versus the rest of the world in twenty five.
Yeah, you know, we're really exiting.
We talked about exiting the phase of monetary policy. We're also exiting this phase of kind of harmonized macroeconomic implications for inflation that was then feeding into harmonization for central bank policies, and so as kind of the reasons that Powell talked about for that decline in inflation without kicking up unemployment rate, it was really about the restoration of supply chains and the post COVID impact that was a global impact that's now starting to dissipate, and what's coming
in and the aftermath of that are a lot more of the idiosyncratic country specific fundamentals driving those economies performance the currency you mentioned a bunch of different countries there, from Brazil to Argentina to China. That's really all about
domestic economic policies economic performance that is driving. And so that's really a market environment of divergences rather than convergences, and so that's really affecting the investment outlookause, particularly for investing between the markets in what I call a cross section that's actually a better investment environment. It takes out kind of the directional call is the dollar going up,
is the dollar going down? You have a lot more opportunities within that global cross section of investing both in currencies FX curves. It actually creates a better environment in some sense for alpha creation, because divergences create more alpha opportunity.
Jeff, you've said a number of times that because of the increase in uncertainty at the FED to reserve, an increase and uncertainty as to the path of their policy, that it makes you less inclined to take risk on the margins, which risk in particular looks most vulnerable to you or less attractive as a result of increasing uncertainty on the FED.
Yeah, and if I get I want to pair that to my last answer, because you know that's the directional call, right, So is the FED easing financial conditions, raising the value of prices makes risk taking more supportive? Then that's really talking about risk taking in in the beta sense, in the directional space. So where are you more vulnerable just to your beta exposure, beta exposure to directional rates, beta
exposure to your directional equities. But the divergences question earlier about the impact thinking about globally that actually makes risk taking better in the alpha and the cross sectional space. So it's about portfolio construction and it's about how much am I putting risk on in terms of directional space. That's really where the FED today that you want to be taking down the flip side is in the alpha space in the cross section. It's actually a better environment.
That's where you want to be adding risk into the portfolio.
HF.
I appreciate your time, Sir Jeff Rosenberg of black Rock. Enjoy the holidays remaining the team will take you through the clothes in just the moment. Tesla's want to watch going into the close down ten percent of the moment in this session, have to sort of acknowledge that we're up still about twenty percent this month alone. A couple of things to note here, Lisa, the year so far Q one, inflation headfake Q three, labor market head fake Q four. This FED looking just a little bit lost.
And honestly, the market is responding to being a little bit lost by selling off in a dramatic fashion.
I'm speechless.
I think it's going to be interesting, particularly on watching FX into the Japan open.
Could not agree more. This dollar is a whole lot stronger. Just how much oxygen is left up here? Your equority market's down as session loads with a negative two point nine percent from New York. Thank you for choosing Bloomberg
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