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Stocks and bonds rising. After an interim agreement between the US and iron was reached, the raid through coming ahead of fed'st June meeting, the first under new chair Kevin Walsh. Seth Carpenter of Morgan Stanley writing this, while the tariff impulse appears to be nearing completion, sustained disinflation ahead depends on the resolution of the conflict. We expect the FED to hold rates unchanged. Seth joins us now here in studio,
which is a wonderful thing. Hey, good morning, So is this enough for you to think that the inflationary pressure is probably going to be on a downward trajectory or is there something else to play here?
So probably how's that for an economist answer? Yes, Look, the path to a FED rate hike, in our view, was never going to be just about inflation, and absolutely not just about oil driven inflation. So historically in the US oil driven inflation it pushes up headline, but not that much typically passed through to core. This time could have been different. We'll still have to see how everything
plays out. But we were thinking if the FED was going to hike, it would be a combination of inflation, especially core inflation staying sustained, staying above three percent or so, and the underlying momentum of the real side of the
economy broadening out, firming up and keeping going. And if we look at say the last several jobs reports, something that we have been talking about so much, with oil prices being front and center, they've shown that the fall and hiring bottomed out, things are starting to pick up again. And so I think the real key here is going to be where is that underlying strength in the economy and is there more inflation momentum outside of oil prices.
We know that the path through from tariffs has essentially run its course, that's going to be a disinflationary force. Is there actually that much more fundamental, broad based inflationary pressure to overcome that terraff Disinflation.
On a certain level doesn't lower oil prices help the idea of broadening out and strength, they could potentially feed some of the other parts of inflation that can make the fed on easy.
Well, I mean it is a bit of a double edged sword that way, because if consumers in general feel freer to spend, they have more disposable income to spend on everything but gasoline, then just maybe there's a bit more resilience than to that aggregate demand. So I think that's a real risk. We just have to see how all of this plays out. And I have to say that the agreement's been announced, we haven't seen things signed, we haven't seen the increase in the flow of oil
actually happen. Yet, we haven't got to that critical point where there has to be an agreement on all the rest of the tricky details, as you were saying before. So I think it's too soon to have any conviction that we know exactly where things are going.
What would it take for you to have conviction? What do you want to hear out of this agreement where the two sides agree.
On Oh, well, I think there, I just want to see the actual flow of oil happen, and then I think there are a lot of questions that happen after that. What happens to the rebuilding of inventories around the world. If people were happy with their stock of inventories before this conflict started, are they going to look at that level and go in case this ever happens again, we need to have an even bigger inventory, in which case you can see a much greater surgeon demand once things
start flowing. We'll be looking at a natural gas how long will it take for the flow of the supply of natural gas to filter out around the world. The rebuild of inventories in lots of places there that's pretty seasonal can be pushed off for a while. It can't be pushed off forever. And we know that there was some damage sustained to cuttery production, and so I think there is a question about where will the market settle out once we have a clearer idea of supply and demand coming together.
How do you expect the new fetcher to talk about all of.
This Very cautiously. I don't think there is a lot for Kevin worsh to get out of being overly definitive here. It is a very fluid situation, and so him acknowledging that, I think makes it easier. He's been clear that too much forward guidance is probably not a good thing, and if ever that statement was true, it is right now
watching all the different paths come together. Coming into this year, we were pretty constructive on the underlying momentum of the economy, and then everything, the whole discussion was overtaken by what was going on with oil markets. I think we really do need to have some really close focus on that underlying momentum before they can decide is policy really in the right place.
It is Monday, which means it's marger Monday, and it comes at a time or despite some of the uncertain too, we've seen capital markets incredibly robust. Fox The latest news Fox is playing to buy Roku for one hundred and sixty dollars to share in a cash and stock deal. Goes on to say that Fox expects the deal to close the first half of twenty twenty seven, and Fox will re chain and believe about a seventy three percent
control of the combined company. It comes after the SPACEXIPO, It comes ahead of a whole host of deals that people are expecting. You see bankers incredibly enthusiastic talking about how this might be a record year, a banner year in all sorts of different areas. How much does that potentially affect the feasual reserve in how they look at Marcus, how they look at financial conditions, how they look at whether they truly are restrictive.
I mean, I think that's a great question, and this could be part of the shift in personnel and thinking. With Kevin Warsh as chair, you know, I would say in standard academically trained economists, somebody like Ben BERNANKI would look at everything that's going on with mergers and see that as a result of the economy and other things
going on in the economy. You know, Kevin spent a lot of time talking to investors, talking to people in markets, and so could think of that overall sentiment, that the wave of M and A and that sort of thing as part of the sentiment that's going on that might be driving some of the momentum in the economy. I don't think it's going to be a watershed where it's sort of going to be all in one direction or
the other. But it does come down to at times like this where you're trying to get the signal tease out, the signal of where the economy is going. Do you lean a little bit more on some data, do you lean a little bit more on other data. I think that's part of what we need to learn as we see this turnover in leadership at the FED.
How much just AI driving some of the inflationary impulse, given that they are able to raise trillions of dollars of capital and invest it in assets that seem to be endlessly increasing in prices.
I mean, I think there we're seeing lots of measurement questions coming up. There's this discussion of so called chipflation, but even within that, the question has the BLS always got things right between software chips in terms of the
price indexes. I think the real key here for the inflationary side of things is more that overall momentum in the economy, it is undeniable how much capex spending there is going on from AI, and I think that's leading to things like more construction that's leading to a lot of imports for the chips and things like that, but it is helping to sustain the momentum of the economy. And for me, the real staying power for the inflation isn't going to be our chips price is going up.
It is going to be is that momentum in the economy with a fairly low unemployment rate. Is that thing that's going to sort of keep inflation core inflation at three percent or higher.
Something I was thinking about this weekend, especially as a number of the tie ups start coming to the foreign companies get bigger and bigger. Are more consolidated companies. Bigger companies good for the inflationary backdrop or bad for the inflationary path drop? Do they have greater pricing power or do they have greater efficiencies of scale they could potentially lower prices for consumer.
Yeah, I think all of the above could be true and at different points of a business cycle. Right now, our sense is that we have we're getting back to a point where there's going to be a little bit more discipline with respect to the ability with all of those sorts of things pricing power, and so I think we are looking for some disinflationary paths through over time,
primarily as tariffs have run their course. But we think overall we're going to settle back down to a little bit more stable inflation.
Stay with us multiple imberg surveillance coming up after this.
Hanata Treys of Beta Partners writing, the sixty day extension of the ceasefire with Iran is the last best chance for quote stimulus from Washington before the election. Henrita joins us now a more skeptical take, but this is what a lot of people are looking at in terms of the political backdrop and how that's influencing when this decision was being made. Why do you say the last chance at stimulus.
Yeah, First of all, investors are really looking for the president to do something to use the consumer before the election. I get that question. A lot people are thinking outside the back. So we're going to get a payroll tax holiday, we're going to get gas tax suspension. And Congress left town last week and they're not coming back until the twenty third. There are, by my count, sixteen legislative days between now and the August recess, and effectively we're then
in the end of September. So if there's anything that's going to happen. We've run out of time for a reconciliation bill. There is no bipartisanship to be had, as I'm sure y'all are very aware, and so if you were going to do any kind of stimulus, it needed to be in a third reconciliation bill, and Senator McConnell and Senator Collins kicked that to the curb last.
Week as well.
So this is as good as it gets. You know, if crude stays down in the eighty dollars range, that's great, but this is the most relief that the consumers are going to see. Pre election.
Speaker Mike Johnson also called them Republicans to act on social security reform before the midterms. What is going to do the midterm election for the Republicans, They's not exactly going to work.
No, that is not even remotely going to work. And also you can't touch the Social security via reconciliation, so you need to get bipartisanship. And when I talk to either Democratic staff on ways and Means or Republican staff and Senate Finance, they are actually unified in the view that nothing is going to happen. Whether that's housing, whether that's crypto Social Security and other reconciliation bill, We've got what we're going to get.
When it comes to the Iran deal, potentially Congress would have to okay some of the lifting of these sanctions. And this goes back to what happened with the Obama era and the JCPOA. Do you see Congress giving a green light if this administration were to lift sanctions on Iran?
That's such a fascinating dynamic. Lindsay Graham is very adamant that Congress needs to approve whatever this deal is, but all I think of is the USMCA. There's also a very adamant view amongst Senator widen Bringing, member of Senate Finance that the President needs to go through Congress in order to reaffirm the USMCA or even to withdraw, and
the administration totally disagrees. So when you speak with the trade negotiators in Canada or the trade negotiators in Mexico, they'll tell you that there's a disagreement between who they talked to on the Hill and the White House. And I think the takeaway from the last eighteen months or whatever is the President is going to do what he wants to do, and he's not going to ask Congress for their approval of this deal. Yes, you will need it for sanctions relief, but they have other ways to
get around it. You've seen them go to foreign nations and say, well, unfree some assets that they're held overseas. They'll find a workaround. I do not expect Congress to get to yes on any deal.
This is the reason why I find the attendance of the G seven meetings so interesting this year. It isn't just the G seven leaders, it is also Middle Eastern leaders that want to have influence over this deal in
certain capacities. And it's also the leaders of technology companies, including Anthropic, that are discussing some of these issues that have been circulating to the four With all of the leaders who are going to be in those rooms, what do you make of the recent crackdown on Anthropic in particular over in the UK on social media and the fact that these leaders are going to be in that room over in France.
Well, it's just another opportunity for US, the EU, and NATO nations to have a completely different view of how to tax United States tech companies, how to regulate United States tech companies what they can have access to or not. And I think it kind of gets to the point you were making earlier Amory, which is they get a say here, you're not doing this in a vacuum. The EU nations, NATO nations, they don't want to communicate with Iran and have the straight be closed and have to
coordinate to get to the strait of hormus. And that is what the United States has created. And with anthropic and tech issues as well, these are parts of all the trade agreements as well, whether there's taxation possibilities and that puts tariffs back front and center, and of course un July twenty third, we need to have that whole conversation all over again.
Specifically with anthropic Do you think this is the first salvo in a true crackdown or a true enforcement push when it comes to the AI build out from President Trump in this administration.
Yeah, I think we're just at the very start of AI regulation right now. The way I think about it is pre election and post going between now and November three, the United States public and therefore the political parties are just going to talk about affordability immediately. Thereafter all the new surge of lawmakers, of which there are sixty three. I think they are AI focused. They are regulation focused.
They're going to start with the consumer and children and use that to carry a much heavier regulatory weight that I think will be the topic of the twenty twenty eight election.
Were you surprised on the export controls on anthropic that we had over the weekend, Given the fact that this administration, for the most part, wanted to let AI companies have intense competition and really let the sector rip.
It seems very extreme. I know that the industry is treating it's very extreme. When you have those late night, very muted details and no leaks, that's how you know. I think that something very serious is going on. But Congress is going to want a way in there. They will not at all this summer in pre election, but I think as soon as we get to November fourth, they're going to want all the information there.
Stay with us. Multilemberg Savannah's coming up off to this.
Liz Thomas is so far writing this. We are still in a bull market. Investors are still hungry for growth opportunities, and companies are still willing to spend to create it. Rotations can be healthy, but they are rarely smooth. Liz joins us. Now for more, Liz, great to see you,
Thank you for being with us. Let's start with the concept of lower oil prices and whether that portends some sort of rotation into the areas that haven't been gaining i e. Everything other than tech, or whether this really just causes people to double down on the AI trade.
Well, I think it supports the rotation that we started to see on or around June second, when we started to see the pullback in many of those big tech sectors, semiconductors in particular, and a lot of the stocks that had done so well in the three to four weeks leading up to that point. So I think lower oil prices and lower inflation expectations with emphasis on the wordecations, is going to fuel hopefully more of a rotation into
some other places. That being said, obviously, the SpaceX IPO and the excitement that we saw around at, the hype that we saw around it, and frankly the success of it on Friday is driving a lot of a rebound in tech stocks today and what we'll probably see for the remainder of the week, barring any big surprises from the Federal Reserve.
Lis, are you surprised that we aren't seeing a greater rally on the heels of the truce that was announced between Aroun in the US.
Well, I don't think we've really had a chance yet. So it's possible that once the market opens today and if we get confirmation that this will actually reopen, the strait of horror moves because we still have to wait a few days to see that that's going to happen. I think towards the end of this week and even leading up to it, if things continue to fall in place, we will see relief in certain areas that have been struck by inflation fears, and we'll probably start to hear
commentary about businesses being less concerned about inflation. But I want to make a point that I alluded to in the first statement, is that the Federal Reserve is concerned with inflation expectations. Yes, of course they look at the data as it's reported, which is backward looking, but they are also very concerned with expectations and making sure that
those expectations remain anchored. So oil prices coming down certainly helps that cause and makes Kevin Worsh's job on Wednesday, slightly easier than it was without this piece deal.
Yeah, it brings down the temperature just a little bit. At the same time, MRSK is saying at this stage no change is to their operations. Then the announced agreement is welcome, but they need to wait before they start moving some of these vessels through. What is going to be for you, the most important aspect of this deal to learn and you think potentially could be very bullish for the market.
Well, when you look at what's most important, I think the obvious answer here is that the Strait is reopened, that oil starts to move closer to a volume that it was pre war. Yes, there have been some more barrels moving through the strait, but not nearly what the world needs. And there have been now fifteen weeks of an oil supplied disruption. It doesn't necessarily start flowing and
reach its final destination very quickly. So that's why I'm sort of hedging the commentary because it's going to take a while for that supply to come back online, and there will still undoubtedly be some disruption in prices, some disruption in operations for certain businesses. MRSK being an example of a business that might be disrupted by that, at
least in a short term period. So I think companies are being careful to hedge their commentary as well and make sure that they're allowing for what still could last as a price disruption for a couple months to come.
As the market though, starts to put this behind behind us, and they almost have been for a few weeks now, what's kind of the biggest risk for you going to your end?
The biggest risk here is that we hear some sort of commentary from tech companies that they're slowing down capex. I don't see that coming as a likely scenario. But regardless of a rotation in the market and cyclicality that might return, this market is still very dependent on the AI trade, and particularly now at this phase, on the AI trade proving productivity, proving earnings, and proving that it can start to reach into other sectors and increase productivity there.
So not just benefiting the tech sector, and that's one of the reasons I've been talking about healthcare this still being a good entry point. Healthcare has seen decent return since that June second time that I talked about where technology started to pull back, But I do think healthcare can do well through the end of the year looking forward to that productivity gain, and it serves as a defensive growth sector, particularly in a time when midterm elections are coming up.
Liz, how concerned would you be if there was a hawk as shift at the Fed this week on Wednesday, despite the expectation that Kevin Warrish will try to take the most devish approach to maybe each dropping the easing bias.
Well, with one hike already priced into the market, I don't think that there would be too much of an overreaction in the market. I think that the Fed will do what they can to leave flexibility in the statements, much like Jerome Powell did on different occasions, trying to leave the door open to we will react however we need to given the data. I think there's actually a higher chance that Kevin Walsh has already been expected to say something hawkish, but he comes out and actually says
a few things that are more dubvish. The other thing that I would be listening for on Wednesday is for him to make note of the fact that it's not just interest rate policy that they plan to affect. He has been very clear that he wants the FED balance sheet to be lower, and there is a chance that maybe they use some of those tools rather than interest rates to affect the market, So that may even be seen as a dubvish comment. If people start to price out the idea of a rate hike.
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