Global Data Pod Weekender: Wobble, wobble

Welcome to the JP Morgan Weekender. I'm Bruce Kasman and with me this week, this long weekender, not long I hope, because we're going to talk that long, but long because it's a long weekend in the United States. Is Joseph L. Lupton. Hey Joe. Joseph L optin, what's my middle name now? Do you change it? Oh, it's a P, right? Yeah. I'm sorry. My Irish heritage, my Patrick uh

I'm sorry. Forga forgetting your your middle name is unforgivable, Joe. So anyway, let's uh not dwell on that. So I think there's there's a Interesting conversation about about risk here. Uh, you know, our baseline view's got a a balancing act, I'd say both um Um you know, on growth with a sense of the same thing. You know decent drag from the Middle East conflict, but cyclical lift.

coming out of what we've been expecting and with a little bit more oomph than we've expected in terms of the tech spending upturn and the rebound we've been looking for in non tech business. Um We've taken a little bit off growth this year in that balance, but we still have uh a global economy that downshifts to something like trend uh in the next couple of quarters. And I guess, you know, one of the questions is how are we tracking that? We started the year off strong.

Uh so some downshift would have been natural here. And then we get the data this week, which we have a pretty, you know, decent further drop in the flash PMIs for May, and we have the China uh April activity that disappoint quite broadly. And we're asking ourselves, is this, you know, changing our perception of risk here? Uh I think that's that's one issue. Um and I and I I'm gonna let you kind of expand on that and from your perspective in a second. I just also wanna say

you know, made very incremental changes also to our core inflation forecast for this year. But I would say that in the context of what we're seeing in the data on price pressures and I think in the goods space there's some significant core pressures building. in the space of what our energy price forecast is, which is we're not gonna keep going up, but we're also not planning on going down. And if we assume this growth forecast is right that we slowed a trend but don't go below it.

I'm getting more worried that our starting point, which is that core inflation stays sticky around three percent, is just gonna be too too low for this year. And that obviously not only Uh, would be at odds with what had been clearly expectations which below were below our forecast coming into the year by both central banks and markets. Um but also would be I think threatening in a way that probably would be a

a reasonable spark for central banks uh to to hike. Uh so we'll we could talk about the central banks and the inflation stuff, and I think we should, but let's first say some things about How we're processing the the growth news from the perspective of what the data flow is telling us, what the perspective of how we assess risks here. Um why don't you why don't you jump in, Joe? Yeah, I mean I think, you know, risk assessment is the is the

story of what you and I have been debating all day today and thinking about the cover. Um I I think the little the the bit of a a whiplash feeling has been amplified by the fact that in the past two, three weeks we started to maybe talk a l talk up more the the cyclical lift story.

Um not ignoring the headwinds, but really we've just been battling these two forces working on the global economy, the the cyclical story coming into the year, which was our our baseline, uh which also had its own tail risk.

Um but um uh then coming against the the the oil price shock and I think You know, when we started to look at the the last month's PMIs, the GDP numbers that were coming out, the tech story that just continued to to boom, and l let's not forget the stock market, which has um after

contracting in the first quarter is actually now up eleven percent in the in the second quarter. Um, you know, all of those things kind of led you to think, well, maybe maybe if we can get through this downside tail in the straight opens.

Um, you've got a pretty powerful cyclical story here. Uh and so we started talking about that. Uh, but I think this week's data is On one level, it's just getting us back to what our baseline is, as you noted up front, that we we already have a downshift in our forecast.

Um maybe it takes out a little bit of that cyclical upside we were flirting with. Um but I do think, you know, it's also a reminder of the downside tail, right? That uh you know, when you look at the the pieces of the flash PMIs that came out for the developed market. Um you can say the composite is

in line with the downshift in growth we're looking for. Uh although I will say for Europe, it y I think you noted in your comments that we marked down Europe this week, so it wasn't quite in line with that. Um so we but in general this downshift is is is tracking the story. But this is a but.

the the the sectoral kind of gap there is is interesting in the sense that the manufacturing story is is quite strong and the services have really pulled off strongly. And you might say, well, okay, those are sectoral issues, but There's an element of the manufacturing lift that we don't uh have a a good answer to about how much of this is about front loading and fears around uh some potential disruptions. Uh w as you dig into the manufacturing part of this of the PMI.

These things are showing um, you know, kind of like COVID type levels of backlogs and delivery time. Um, you know, these are are something looks a little weird in that, like there's this kind of rush to to get product. Yeah And, you know, while manufacturing is look is is going to kind of benefit from that in the near term, is that a signal of some some other weakness?

To come. I think there are reasons to fade that story, but nonetheless, that's there. And then services is there, which is a it fell pretty hard. Is that telling us something? And and is the weakness in Europe, as as you noted, the weakness in the China data, uh, and then some of the the weaker uh stories in the in the Flash PMIs

Is it telling us that the downshift we're looking for, maybe something else uh is building there? So it's the, it's the double bang of taking out a little bit of upside. Now, maybe you would say you didn't have that, but No, I don't think it's I don't think it's about the taking in the upside. I think it is exactly what you're saying, is it's about

It's about momentum and the degree to which the momentum feels like it's more worrisome. And I think you're a hundred percent right that In normal times we would say manufacturing is at the front end of the cycle. So the fact that manufacturing's showing more resilience here, the fact that manufacturing's done well over the last three or four months would be a

Perhaps a more important cyclical indicator, but for reasons you you mentioned also because the tech strength may be hiding other things that could be somewhat softer in the front end of the data. Um But also I think the idea that services might be at the front end of where behavior is being uh affected in terms of consumers, in terms of businesses. Um, and maybe in this context we need to pay more attention to services as a cyclical uh

signal here. So I mean that's to me the the issue. And then there's also the issue of whether, you know, in a world and we've we've gone back and forth on this and I don't want to get into this in a in a gory details in a world in which the US consumer has shown m more resilience um but has had a uh benefit from tax cuts that may not be lasting very much longer. Um, you know, does the uh weakening um

elsewhere tell us that that's going to be a problem as we go forward in the next few months. I mean that's the the issue. I don't have a particular bias here other than I'm just not feeling very cocky and confident. Uh I would say the other thing and you kinda touched on it. Um

You know, you can argue and legitimately so that financial conditions have tightened in the last couple of weeks because interest rates have moved up a fair amount. But when I look at the uh the dynamics of what financial markets are doing where bond yields are going up and and they're they're pointing to higher real yields across the curve with equity values as you noted going up, no real signs of stress in credit, that's usually a positive cyclical sin s indicator.

Yeah. So I I'm a little bit confused on how to read where we are. I'm not feeling uh particularly confident or cocky here on how to read the assessment of risk. uh at this point in time. And you know, I do think there's some things in the momentum side that get me a little nervous, but not enough to to really be pushing pretty hard in the in the downside risk side of things. There's obviously the the underlying question which we keep

having to realize is the strait is still closed and there's that that risk. We're we're kind of keeping out of this conversation the risk that, you know, crude oil would be a hundred and seventy five dollars a barrel in in three or four weeks, which we can't ignore entirely. Yeah, and at the at the risk of adding one more obvious thing, although we ha maybe we haven't mentioned it, is that you know, s central to the the story here is this um

ongoing resilience of the consumer, but underlies that is a is a a faith that the labor market pickup is gonna be sustained. And if, as you said, what you're seeing is a service sector pulling back, if that's indicative of a behavioral shift. Um, then I think the that handoff from kind of large wealth effect driven spending over the past year. to more sustainable labor income driven spending starts to uh get short circuited a bit. I I say that actually I I was a little shocked

uh looking at our our our forecast, which of course is not necessarily right, or as you always like to say, one thing we know is that our forecasts will be wrong. Um but I I had been kind of telling a story that, hey, looking back, the saving rate in the US has been falling close to a percentage point a year.

two years, give or take. And you know, that was consistent with the wealth effect story, so I didn't have a problem with that too much. Um and and it you like to kind of tell that as a behavioral story of willing to smooth Well last year. Last year, not two years. Last year. But okay. We were sitting upwards of like five o almost at six percent at one point in the in two thousand twenty, uh two thousand twenty four.

Um, so yeah, it it's I I don't want to quibble about it. It's it's it's right, Bruce. I mean, as I said, give or take a few tenths, maybe seven tenths, eight tenths. It's been pretty steady drifts down in the unemployment rate. Um I I had great.

Saving rate. I had a view of our forecast was that this year you were going to get a more sustainable at least leveling out at one point at the start of the year, we were telling that the saving rate is actually gonna start to to uh you get a little bit of a saving rate rebuild. uh aided by fiscal income and aided by a a labor market that's that's doing better. I look at our forecast now, saving rate goes down even more this year than it did last year. That's what I was telling you last week.

Listen. Yeah. Saving radius. Well, but that's forecast, Bruce. Like I I mean I I that's a remarkable. We get down to one of the lowest levels in in quite some time. Now I I'm not gonna get hung up on okay, we can revise income and whatnot. The point is the delta, right? And the the the delta here is big and I've just

All of this is not to get and argue our forecast. All of this is to kind of get back to the general important point of behavior, right? And consumer behavior. And can we go a third year? of consumers behavior willing to lower their saving rate to sustain a pace of consumer spending growth that is larger than the pace of their income growth. Right. That that's that's mechanical what's going on it, but there's a behavioral element there. And is that s something that we feel comfortable with?

Is too there's we we keep bouncing back and forth on this. I'm a little bit surprised the way you're coming at it because the way you had been coming at it in previous iterations of this debate is you're saying, Well the saving rate is down because wealth effects are up, which is not saying you've been you've been arguing there's not been a behavioral story here, there's actually just been a a normal relationship with the other.

I mean that's behavioral and I agree the saving rate is consistent with this kind of wealth effect over the past couple of years. Can it be consistent? this year.

I think my my point is that there's two there's two things there. There is that saving rate beh story, but there has been, I think, particularly over the last, you know, year or so I think a move down in the saving rate which did reflect a behavioural willingness to smooth the the hit to income, which has come both from the labor market and and some other things.

And the more I the more I buy that, the more you have to say, well, how much further that can go. The more you align the saving rate to a to a basically a wealth effect and say that that that's all

normal behavior, the more you say there is no stretching of the consumer. So therefore if you do get an income squeeze now because of higher energy prices, then maybe behavior can can actually, you know, stretch itself here. So You keep wanting to call the wealth effect n as not behavior, but that's fine if you want Well if it was income if you think

That income was up three percent and and and spending is up three percent. That that's not behavior, right? That's just a normal relationship. There's nothing unusual about behavior. I think it's all behaviour. But um Well the question is is whether something is in a standard model that has uh income and whatever you want to put in on wealth and financial conditions, is the consumer doing something that's different than that.

Would you argue that the last two years would you argue that in the last two years the consumer has done something different than your model, which has wealth income and interest rates in it, would have would have suggested? Uh the saving rate came down more than I would have thought last And I agree. I think that consumers had to had to stretch and obviously there's issues around the uh the different income classes within the consumer is to talk about.

But um I I agree. And I think that's a positive message. generally speaking, going forward, because it shows a willingness to do that. And I think there is a willingness to do that. Now the question is how Right. But I would have thought Bruce is is your answer to this I I'm I'm pretty sure it is. You tell me if I'm wrong. Rather than getting hung up on kind of

This kind of lens through which I'm talking about things, you would say, Yeah, I think the labor market is gonna be stronger, right? You're talking about a hundred thousand, hundred and twenty-five thousand a month on payrolls in the second half. That'll give me the income. Yeah. I'm what I'm Yeah. Look at our forecast, our GDP forecast has a consumer that is reducing its saving rate over a percentage point this year.

Jazz slow down a second. The movement up in jobs that's in my mindset is worth about uh three quarters of a percent on on income on an annualized basis. The wage numbers are running a little lower this year than last year. So you're taking something off. So that's probably on net on labor income is worth probably about a half a percent maybe. The disposable income squeeze that's coming from higher energy prices this quarter and possibly into next quarter is like, you know, the you know, the the

PCE deflated is running five and a half six. That's a three that's a three percentage point uh uh hit on an annualized basis, two two and a half percent. So that's not gonna the labor income is not labor income is gonna do Cypress. What labor income is gonna do is it's gonna make households feel somewhat better to continue uh eating into their savings and getting through this transitory drag if they perceive it as transitory.

So the the labor income stuff is not gonna be that big a boost to to income to offset the energy uh story. Obviously you can get the tax cut to Right. I wasn't saying I was saying what But it's it's worth a half a percent annualized on on disposable income perhaps this year, which is Households start to see jobs picking up at a hundred and twenty-five thousand pace, and you get labor income responsibility. They will feel better about that. But that's behavior.

They felt sentiment number was just hit an all time. I I a hundred percent agree with that. But what I'm saying is that's that's different than saying you're gonna get a much stronger pace of of income growth as a result of that. It's it's a behavioral story. You hope that it's gonna cushion um uh the the drag from the point of view of consumers being more willing to to lower their saving rate.

Uh the saving rate comes down. And, you know, there's a question of how how well we're tracking this. We don't have consumer spending in our forecast slowing below a one and a half percent pace. I think that's pretty optimistic here for the next few months given um the drag that we're getting from higher inflation. Yeah. I mean so for for listeners.

I mean that's the bottom line where I was getting to, which is what you just said there, which is like we've got a one and a half percent consumer. And and I was trying to rationalize, well, what's going on here in this world where you've got real income getting squeezed? And obviously. It's we've got this big drop in the saving rate again. And I thought wow.

That's a that's a story, right? I'm like, are ri consumers really gonna do this again? Uh and maybe they will, but I'm just I'm a little it's like how many times can they keep dipping into the well here? Um Two. Well it'd have to be this will be the third time. No, but I don't think again, I think there's a difference between the normal pattern of responding to wealth, financial conditions and income, and then the behavioral shift you have to make to kind of go off that relationship.

And I think last year you did and this year, I don't think going back in the previous couple of years you really had that. Um so anyway, whatever. I don't wanna dwell on this because we already had we had a much better argument fight about this last week. We're not in fighting mode today, so uh at least that um I guess um

Where I wanna go a little bit more into is in inflation. Um I mean partly because we just published a piece on this and I wanna come back to the point I made up front and kind of get your take, which is You know, there's a lot of uh uncertainty about the growth outlook. And I do think if we would have a more damaging

hit from energy prices, whether it be because a oil goes to one hundred and seventy five or because behaviors as we're kind of talking about now is much weaker. You know, if you push the US unemployment rate up, I don't really am am so sussed as to why it happens. If the unemployment rate's going to five percent or if we're going, you know, to have GDP growth well below one and a half percent. Um

You know, that's gonna be ultimately I think disinflationary. It's gonna hit pricing power, it's gonna hit labor market tightness, it's gonna have an effect. It may not be immediate, of course, because it could be a channel that works through higher energy and and some prices we're seeing. But if we're in a world just let's humoring me and saying we're in a world in which US and global growth is close to trend. That's the that's the extent of the damage that gets done by the energy shock.

I mean I look at this world and I see the the combination of the pressures that are already in the system from tech and and this pickup in goods demand that we've seen early this year. I see our forecast of energy prices staying. Um you know, high even if they um uh don't go any higher than where they are today. And then I put into that the the notion of some modest improvement in labor market conditions that if anything

at least stabilizes the U rate, if not pushes it down. And I like look at our you know, our forecasts which have really done almost nothing to change the core inflation forecast for the next year, I'll I'll I'll give us that we're on the high side of where consensus was. But I'm wondering if if it's there that our forecasts really haven't uh aligned to the shifts in uh where the macro picture is and um you know whether we're just a bit behind the curve on that. What do you think?

Yeah, I think ultimately um we should have more inflation, right? I I think the the I kind of give the simple framework I kind of talked to you about when you were working on this piece. I just said look this is I just think of supply and demand, right? So we're getting if we're getting two shocks, one is a kind of demand shock in this cyclical up. And you're getting a negative supply shock via, you know of the the energy complex. The net of those on growth is somewhat uncertain.

The net of those on inflation are compounding. Now you're gonna say y that, oh well the the adverse supply shock actually is gonna hurt growth a little bit, but that's gonna be a little bit further down. No, I'm s I'm saying let's assume for the moment that the mix of those isn't hurting growth badly. We then everything is kind of it's it's a little bit uncertain on growth, but probably still bit.

at least neutral on growth, but everything is super inflationary, both at the headline and at the core level. And what I mean by that is the demand shock is gonna be boosting your core. the the the the headline gets boosted by the supply shot. But then there is some pass through in a world where growth is resilient. I think the pass through of headline decor is actually going to be bigger. In fact that's an I just wanna I wanna qualify. Here we go.

I agree with everything you said, except I would take the word.

out of out of saying it super inflation. It's not we're not, I think, set up for twenty one, twenty two because I don't think the demand impulse here is anywhere near as strong. And I also don't think the supply The supply shock here is very narrow, it's just in an energy space and the whereas The supply shock we had at the uh earlier post COVID period was very I mean, So I think it's I think it's it's tilts you towards higher inflation, but I don't think

Take your Bruce, but I also want to remind people, and we've been screaming this for two years, and certainly the PC. That I put out last year about the kind of fool me five times shame on me that people just aren't appreciating that we are now in our sixth year of not just above target inflation, but well above target inflation.

So maybe the word super is too extreme, but if you're running three, three and a half percent core inflation or more for six straight years, I I don't know a central banker that wouldn't call that pretty extreme.

Right. And here we go. And and by the way, one thing that we have not talked about enough on the team yet, I've been meaning to raise this is The next year we could be sitting here, and we likely will be sitting here talking about another quote unquote transitory inflation spike in food prices. Which you can start to hear the ag people saying it's not showing up now, but the planting seasons being pulled back right now is gonna start to impact food prices next.

So now it's gonna be a Let me ask you a question because this is the look, I'm I I I I have a little bit of concern over your adjectives, but I'm I'm with you in terms of messaging. So let's say The Fed is sitting with three percent inflation with a forecast that inflation is gonna stay three percent. Uh for the next year. And let and you let's let's not question that forecast for the moment. How much higher do you think policy rates should be than where they are today?

With two with this which a with a growth forecast of stable unemployment and uh trend like growth. How much higher should you push uh policy rates up from their current level? Well. Right now it's complicated'cause you're all you're you're No, no, no, just say let's say we I don't want to get into the risk assessment around the straight and this and that. Anywhere six months from now. And you're and you're a judgment. Joe Lupton

Placement for Kevin Walsh is sitting here. Um, and your best forecast is that US inflation is gonna be three percent looking out twelve months. Your best forecast is that growth is gonna be trend, that the unemployment rate is gonna be stable. What do you think the adjustment that you need to make in policy is from current levels? I would do I would I would do one hike and guide people to say that our risk bias is for further Mike, after all that rhetoric you just threw.

No, no, no, good forward guidance matters. I was saying I start with one hike and tell people that my risk bias is for more hikes and we could be going every meeting or every every quarter. But what you're saying if you if you sit forward, you do one hike and then three months later you have the same forecast, three percent inflation trend growth, you hike again? Yeah. And again?

So when when at that point where growth is at three percent and inflation is uh inflation is at three percent and growth is a trend, when do you stop? You're not you're really avoiding my question right now. Oh, I'm sorry. You you mean like w I I thought you wanted to know like am I gonna hike a hundred basis points at the next

What is the level adjustment that you're willing to do with a three percent inflation rate and a trend like growth and a Nehru and a Nehru like U rate? What's the level adjustment you're gonna do? Bruce, I mean if if you're saying I'm stuck at three percent, I'm gonna I'm gonna engineer a recession. Yeah, that's the problem I have, Joe. That's the issue. So I wanna get you on the record here. You're saying the Fed could sit here indefinitely with a three percent inflation.

Well Fed has sit here sad hair hair with a No, that's my that's my concern. You're saying they they will be willing to do that for another five years. I didn't say that at all. What you're saying. What I'm saying is that There's a trade off here if inflation is close to three percent, if growth is close to trends. If the economy in the labor market feels close to neutral, and if you're not being challenged on inflation credibility, having a modestly restrictive stance.

is something which I think is appropriate, which is the way the Fed describes it Well I think you're describing Whether whether that mode. Won't last. You could debate whether modestly restrictive is three seventy five or four fifty or whatever, but I think that's a good thing. Um that seems to me appropriate. Now you now you're arguing that you're not gonna maintain stable credibility and inflation ex but we have over the last five years. Yeah.

You you know, you said fool me five times, don't fool me again, but we have maintained stable inflation credibility. Fed inflation credibility on the long end of the curve is very well anchored. I mean uh What what what five year five year swaps are have stayed in a very narrow range all the way back to two thousand twenty. There's nothing going on there, Joe. I think they're tripping. arguing with you. I think I think I I would not if I if I was sitting here with three percent inflation

without a credibility challenge and without a pressure coming from tight labor markets, I would lean a little bit against it and see what happens. I wouldn't be saying I'm going to cause a recession. Sure, if you have a credibility challenge, if you're if you're losing the anchor on medium term inflation expectations or sure if the unemployment rate's going to three and a half percent, you gotta go and and fight.

Yeah, you and you're saying if you don't feel any pressure in kind of infl first of all, inflation expectations the the Michigan just hit another kind of all time high today, right? Not your go-to, but they do look at it, Bruce. I know you don't want to look at it at all, but they do look at it. Um so I I I think there are elements and you and Bruce. It's not like they're not talking about.

Right? I'm uh we're all talking about it. I'm not am I am I arguing against hiking? I'm not arguing against it. I'm I'm arguing against your judgment that you if your inflation is persistently at three percent, even if you don't have a credibility challenge there. gonna cause a recession because you had five years of three percent inflation. I don't buy I don't buy that. There's trade offs here. At what point at what point would you say our inflation target is no longer two percent?

That's not to say that my inflation my target is two percent. I just want to know, would you ever if let's say you went 10 years of three percent inflation, would you still say your target's two percent? Well so you can say the BOJ went twenty years saying their target's two percent and at zero. I mean it's a it's an interesting question as to what point does uh

sustained inflation overshoot become a structural part of the economy. If you've gotten there, you've you've you've made a mistake and you have to correct it. Then you have to start talking about unwinding it through lower growth. But there's There is an argument to be made. You know, you're you're trying to argue in some ways that the Fed has made a mistake here by letting inflation stay at three percent for five years, right? That's what I'm saying. The Fed's made a mistake.

Are you saying the Fed should have caused a recession in twenty three or twenty four or twenty five? No, I and actually I wouldn't say that they made a mistake. Right. And I wasn't saying that last year. They've they've they've they've kept rates uh they've kept inflation at Five years. I was at the forefront of team transitory through that whole period when people were saying we needed a recession.

Right. And I would say no, this will be transitory. It'll take longer. What I'm saying is to sit here after you've gotten down to three and that the last mile, and now we're going to go another three years of three, three and a half percent. Then I start to worry that something is gonna break. Right. And I think they need to be a bit more sensitive to to not keep saying, Oh, this year's gonna be transitory. This year's gonna be transitory.

Okay. I mean I think there's a there's a balancing act here and I'm not I I'm as cawkish as anybody in terms of arguing that the Fed will probably have its next move as I But I think some of the adjectives you use you have to be a little careful there. Yeah, and by the way, just to just to make sure not let you pin me into the the the corner on this stuff, I I do Self in the corner, Joe.

I I would be in the argue that you wouldn't need to engineer a recession, that you could do one hike, two hike, three hike, and then see the economy slow and start to see inflation pressures come off. So I think they could engineer this. And do it right. You know, I'm a kind of technocrat that way. Maybe that's naive. Um, but that's what I think they should do, and I think they can do it.

Okay, we'll see. I mean, this is gonna be an interesting place for a new Fed chair to come in, one who's got Well he's got a car punch now. Bit of a a legacy of Ha ha. Yeah. It is it is gonna be interesting to see that. Um before we leave and I think we should broaden this out, there is the the kind of the different reaction functions we're seeing uh around the world. And I think

Obviously we can go the other side and ask the question of why the E C B is hiking, but we do feel the E C B is gonna hike in June. I think that feels Pretty solid. And um You know, I think if you want to argue their case, they're arguing their cases to say, well, there's they're starting from a roughly neutral policy stance. um they can point to some

surveys as you do that say that there's a pressure point on inflation, um, that they want to come in here and provide a bit of a credibility boost. They're not talking about hiking in a way that um Generates a uh That that call and and what they're saying is is almost identical to what I was just saying, right? That they feel like they can engineer, take a little steam out, keep their foot on the brake a little bit more, and get that number back. But you don't want them.

Well, but that is and I I'm laughing because of exactly that point, but that's because it gets conflated with the tail. I mean, the idea that the ECB was going to hike because we might be going into a recession from a supply shock seemed ludicrous. Um In April, right? Business survey that's telling them that growth is close to zero right now and it's got a inflation rate which is closer to two than three at this point. So um why why you why do you take that risk? They're gonna hike. Yeah.

Well's another two points here. I don't think they're hiking. Yeah, but you can you can given the Joe Lupton mindset on how important it is to keep your inflation rate close to target, you can see why they would be hiking if inflation is sitting at two and a half and Um, you know, they've been above target for as many years as the Fed has been, right? Yeah, I mean right now the the the the E C B's in a kind of a quantum s a quantum state of superposition between this tail risk of the

of the uh straight knot opening and a world where things start to start to overheat, right? So right now they're not doing anything. They're waiting, hopefully You know, the the box opens, Schrdinger's cat's still alive and they can start hiking again in in uh And in some ways the Bank of England is in the worst sort of place to make a choice'cause they've got weaker labor markets. Their growth numbers are not that bad, but their labor market looks weaker than any of the other majors.

And their inflation performance looks worse. Um, so uh their trade offs just are kind of crappy here. Um So um I guess I guess um I wanna end on two notes. I'm gonna ask I'm gonna say something and then I'm gonna ask you a question. They're not gonna be Exactly connected. Um one is um That We've got a situation where we've started with the idea that inflation's going to be sticky and now we're worrying a bit more about upside risk.

And I just wanna say I just feel like it's really hard to think of a scenario where you could get anything like what everybody at central bank space had been thinking about at the start of the year, which is that you can get just enough growth slowing here to get inflation down without going weak.

Um, and then you can kinda restore back to some kind of a immaculate disinflation story. I think that's just not in the cards. I think we can get inflation down if we get weak growth. We can get um uh inflation up and in fact to some to some degree our sticky inflation story is being challenged to the upside here.

Well part of the problem here, Bruce, is that the the the markets are a hundred percent agree with you. It's our it's our forecast that our our central bank forecasts, right? I mean the markets are pricing hikes. No, the markets are pricing hikes. That's not what I was talking about. I was talking about macro trade offs. I mean, obviously the hikes are gonna come if we're

to the upside. I think, you know, we could also agree that if we got a recession or some real weakness, we're gonna get rate cuts from the from the Fed. But I'm just saying the trade offs here are just not in line with getting a a good outcome here. Uh I mean the markets, you know, one year, one year forward um inflation rate for the US is still something like two six, two seven.

It's not high. It's not you know it's not looking for persistent high inflation in the way that you know, uh, the Joe Lupton let's kill this economy would

Well again I I just feel like you've got this bimodal superposition. So like how do you price I mean if there's gotta be something in that pricing that has But it's hard to think it's hard to think that the market today, given where the Fed is priced, given where um yields are uh out the curve, given where the equity market is, that it's really pricing in much recession risk.

And big big fa you know, it's hard to think that there's much of anything priced in for that big tail of possibly things getting so weak that the Fed Know what like the options, Marcus? These guys can kind of tease out some of these modes. I'd be curious if there's a if there's a tail of cuts and a tail of more hype.

I mean the market has moved, right? The market is now pricing this kind of idea that I at the start of the year was viewed as crazy when I was saying that they could be hiking by the end. Let me let me uh I wanted to ask you one last question, which is You know, we've been looking at this from the perspective very much of the US, um and um You know, If we're going to be able to do that, we

Talking about tail risks and where you're saying that the US isn't gonna get hurt that badly, we can debate how much of a growth drag is there. Assuming the US isn't in that case of having weak growth, how much should we worry about other places in the world? Is there a scenario where their the divergence story starts to become a dominant part of the way this plays out, as opposed to, hey,

What's the risk that the world goes into recession? What's the risk that the world has high inflation? Is there a scenario that seems reasonable here where the US grows two percent and Europe is contracting? Yeah yeah, very much, right? I mean I I think this kinda comes back to that piece we've got to do. And China is having problems too, perhaps as well.

Yeah, I'm a little less worried about China. It was pretty uh it was ugly data, but I think we f forget two things. One, that was after like what was very surprisingly strong data, and then most importantly China data at the start of the year should is just like nearly impossible to read because of all the lunar new year notes. Okay, let's leave let's see.

Yeah, yeah. But uh you know, we we did this piece a few weeks ago do going through this exercise exactly, right? Saying, like, okay, where are the where are the impulses, where are the vulnerabilities? And

What really stands out is is is Europe. I think there's a reason you asked about Western Europe. You know, can we contemplate Europe contracting and the US growing? And yeah, we can because in a way the the We this is just a replay of Russia-Ukraine and I'm not saying it's the same because Russia-Ukraine was on steroids for for Europe in terms of the drag, but in a way it's kinda like another one of these terms of trade shocks, which hurts Europe and helps the US.

But I think if that's the case I think if that's the case, I I think this is a very different um shock in terms of its relative concentration in Europe. I don't think it's anywhere That's a good one. But if that so if it is the case that Europe is gonna turn out to be much weaker. uh than the US and Asia, let's just say. Then what that's saying is there's some combination of strength that's coming from the tech sector.

or from some of these financial channels which are just much more powerfully positive for the US or that as we come back to what we were debating before, that the behavioral channels in Europe are just much weaker and more vulnerable than than the US. It's it's about things other than the size of the the relative size of the energy market shock. It's more about That wealth of fact. Right. Like that piece goes through and you know all of the moving parts, one of which is the financial channel.

But you don't have a negative wealth effect in you. A weg a wealth of an a a wealth effect story might get you less uh strength out of the U European consumer than the US, but it doesn't get you weakness. It's not like it's going in the opposite. It's just less simp it's less positive. What that means, Bruce, is that it's it's got a bigger drag from the energy shock and you're getting less offset.

I don't think they have a bigger drag from the energy shock to speak of. Not materially. Not a direct. I think they do when you look at these things like jet fuel and diesel prices. I don't think it's that big a difference, honestly. connection to Middle Eastern Commodities. I mean, put it put it in a simple way, the CPI inflation rise in in the Euro area is not larger than in the US. Yeah. March and April data.

I think it I think it comes down to saying That there's either some positives that are much more important outside Europe, or there's some negatives behaviorally in Europe, which are much more Well there is and they I think that's I think that's these things might be true. No, the other element that's gonna go right in your wheelhouse that we consider in in detail in that piece, which I would encourage listeners to go look at again, is the sentiment channel.

Right. I mean, so there's no doubt that that would be your behavioral story. Sentiment has fallen a lot more in Europe than in the US. And Oh that's uh that's a p a real possibility. But let's let's leave it here. Um Yeah, it's a long weekend, so we'll get some chance to um to take our breaths and think about things. And uh

If it's gonna be a rainy weekend. Okay, whatever it is gonna be. It's gonna be a long weekender and I will end it there without a good outro. So uh take care everybody. Uh hope we can continue this conversation next week.