Global Data Watch Weekender: Start me up

Welcome to the JP Morgan Weekender. I'm Bruce Kasman, and with me this week, just for a little bit before he goes flying off to uh Southern Climbs is Joe Lupton. Hey Joe, how you doing? I'm doing good, Bruce. I'm liking the the fit you got going on there. You got your your bathrobe on. Is this your big Lebowski uh Not a bathrobe, I'm wearing a cardigan. Oh cardigan. Oh, okay. All right. All right. Oh, I thought I see. I thought this was like the economist divides.

No. I'm I'm very well dressed. Um stylish. Stylish in fact. Just just saying you're dressed is enough.

All right. I will I will not respond to that. Um I'll I'll give you more crap on the economic stuff. So um I think, you know, it's another week of noise in economic news. Um certainly the the US GDP report had a lot of noise in it, I'd say. Um and um obviously we've also had some added things in the mix in terms of uh US um military buildup in the Mid East and the US the re very recently announced US Supreme Court decision uh uh knocking down AIPA TARF.

I mean so one thing to to kind of emphasize here, this is a lot of things that are kind of creating difficulties in getting signals here, but I I wanna continue to emphasize the point that I think signals are reasonably strong here. Um, I think we are moving past a period where while the global economy generated decent growth, it did so in a very imbalanced way, one which I think raised some

Important, uh difficult questions about what might happen next. I think we're getting a bit more clarity about what is going to happen next, which is I think we're going to have growth that's going to be solid. plus or minus what we did in twenty five, but um either way it's more balanced, um and particularly more balanced in terms of I think getting the labor market to look more in line with uh what GDP's doing. Um, I think the consequences of that are

not just about the US, but also about um developments in terms of generating more broad based uh demand growth in Europe, uh based um in Japan and EM outside of China. China's a bit more of a I think a complex story there. But I'm feeling, you know, pretty decent about the idea that we're on a a balanced growth path and uh that the signals are consistent with that and the data.

And then the the questions on inflation I think are are interesting and important here, but I w rather than go through a long kind of discussion on that, I think it's very hard for me to see in the macro environment that we've got forecasted.

a meaningful case to make that the Fed's going to deliver two or three easy, we have to be, I think, surprised, shocked by something. We're not expected here to deliver that. So I think the other um important piece of our story here is that this macro backdrop is one where people are going to be disappointed by uh the ability of someone like Walsh to deliver easing or the the the ability of the macro environment to support easing.

And you know, I think in my mind at least That's where the tension is in the twenty six outlook because I think the repricing of interest rates has historically been a source of tension and I think we're still in the very early stages, if at all, of of of moving down that path. So that's stepping back. Um I was uh you know uh s not getting my hands dirty in the data here. So uh d if you wanna do that, I'll let you do that, Joe, or or whatever else you wanna do in responding to what I just said.

Yeah, I mean look, if I were to just say what's the biggest um

tension and the biggest mispricing, frankly, I think it's that Fed call and of the markets. Uh and I think the data flow this week. really underscores that that that tension is uh, you know. Uh let's be clear be careful about what you're saying because I think what you were what you're saying, of course, is that There's firmness in the core measure on the PCE basket on inflation. There's mess message from the labor market that any pickup in

labor demand is not going to be met by a uh a equal or greater pickup in labor supply. So the labor market is going to Titan possibly, um, here, um, has still been a legacy of um year, year and a half of week labor demand. That is putting some downward pressure on wages in the US. Right. So there's there's some there's some cross currents here in terms of the

The inflation. I think those are the things that I was gonna kind of get into to say that those are the questions I'm not gonna let you talk today, John. Exactly. Um yeah, I mean I I think that continues to be the case right up through this week. data. Um, I think there's a so that I think that's point one. I would I think also underscoring that is the fact.

the Fed itself, you mentioned Walsh not being able to deliver um when he gets in there. Um, and I think that was really underscored in the in the minutes where you saw, you know, several participants talking about two sided risk to the rate outlook. Um and so this idea that of talking about, talking about, which

uh you were kind of beneedling me on. And I was saying you're going to start to see this come into the four sometime in the second quarter. Well, it's actually come into the four as of the January meeting. So uh and this is just the beginning of it. And we're seeing

You know, as you said, the labor market, not really labor supply, the immigration story is only going to get worse on that front. And if labor demand is picking up, if people want to be upbeat on growth, and I can see why you want to be upbeat on growth.

Then boy, you what better watch out for the inflation side of this. And the core PCE inflation numbers, I think, are are sending the same signal on that. So This and then you look over at the rates market and you say three cuts this year, two to three cuts this year, like. Just because Warsh gets in there? Like to me, that's like a no-brainer trade. But that I don't I don't understand that part.

Another element away from that that I do think just big picture is there is a bit of a rotation taking place. So the US is doing well, but The PMIs were great in whole, but it was actually great outside the US. I mean, if you look at the PMIs, what's happening is the US is PMIs weren't great. They actually went down the flashback right, exactly. And if you look at what's been happening the last several months is

You know, the rest of the DMPMIs have been picking up into the new year and the US has been losing altitude from a very high level and they're now crossing. Right. So well, I think you have to be a little careful here. I think there was enough. colour in the US PMI's to suggest that whether Um late Jan and Earl Feb made of um had a role to play in that in that relatively weak US uh PMI reading in in today's uh Yeah, I mean it had already lost steam before the January.

Number on the composite head and And... And um, you know, I I agree that this was it was mostly driven by a big drop in the manufacturing PMI, I believe. So uh you could say there's a weather story, but but Bruce. I mean we don't think diffusion indexes are really gonna be driven by that too much, right? No, I think it can be. When you have a broad hit in a month on weather you can get hit. I mean I'd like to think it's gonna be

more limited and more transitory, but I think I think there's reasonable case to be made for that. I I would actually wanna argue Um, when you break out the US data, I think what is to me interesting is the sense that as we look at the second half of last year, building in the fourth quarter GDP number, how profoundly uh you know divided the economy was as you saw some continued very strong tech spending. Um Software. uh as well as uh equipment in the end end of last year.

Um you saw other CapEx actually f uh fall. Uh, you saw inventories continue to be drawn down. Um, and you saw the consumer hold up and all of those moving parts I think are in motion now. And in in some sense of rebalancing the consumer so yeah the biggest part of that I mean I I think the tech versus non-tech is important. I think we have been kind of

maybe hoping, praying that we were starting to see a little life in non tech as some broadening out in business spending. I think we wrote that a couple of times in the cover essay. I I I I think that view is on its heels a little bit after I don't think so at all, Joe. I don't think that's at all on its heels. I think when you look at the Doorbles report, you look at the I agree that the Happy report, I think you see the business sector side of that beginning to

to show a little bit more life. I don't think it's in the uh aggregate numbers in the fourth quarter and I do think the consumer side of it is slowing, but I'm I'm pretty comfortable that non tech business spending is is starting to show a little bit of signs of picking up. I don't feel it's on its heels. Um well I think yeah, okay. I don't wanna get into semantics. I I I feel like the the fourth quarter numbers

Kind of show that Yeah, but the fourth quarter was not when we're looking for the turn. We're looking for the turn into the new year, not in the fourth quarter. Yeah, I guess to the extent that the consumer is taking a little bit of a step back, that's gonna kind of pull some of your kind of Yeah, and I think the I think the point there is not that we have a clear directional move on non tech activity.

I'd like to see the balance of it be positive, but I think the rotation between the consumer cooling on goods spending and the business sector picking up in non-tech. uh spending, which is c important because it's it's as much behavioral as it is um substantive in its ad. So it's not just about that as a an impulse. It's about that as an impulse reflecting a business sector that's more willing to hire, more willing to to spend on things other than AI technology.

Yeah. I think the it's it's early, but I feel like that story is got some at least hints of of coming coming into the picture. Yeah. What it does to global IP is another is a I I was actually gonna I mean if y to me, if you want to tell a more positive story for global manufacturing It's just that it really looks like we spent a year of inventory drawdown.

But that's it. That's part of it, Joe. I mean an inventory isn't it? No, no, I I think it's more than part of it, right? I I think I It's more than part of it. Are you saying it's it's m all all of it? Well I mean I'm not trying to be too cute in distinguishing between business spending on stock building and business spending on non-tech uh equipment and and and and structures. I mean, I think it's those are all basically the same thing in a behavioral sense.

Yeah. I mean you're putting more emphasis on on inventories and I'm I'm fine with that. I don't really care in the in the near term sense what's driving the impulse as long as it's consistent from a behavioral point of view. Yeah, I mean that's the way I would I would was gonna get to to say that if we're in a world where So you're actually agreeing with me that we're not on our heels on that call? Uh on production on the production side of it, you could get some inventory list.

The demand side of it, I don't know, right? In other words, inventories are demand, Joe. What's that? Inventory rebuilding. Final demand. Final final demand. I I think you could get your inventory rebuilt for reasons that are not necessarily um, you know, constructive beyond the first quarter if it's not coming with sustained final demand increases. And unfortunately, our visibility on non-tech capex is really only the US.

Which we've got a global cycle going on here. And I think it's just it's hard to to see much here. Um Ja. So let me let me flip flip the switch a little bit. Um uh'cause we you and I can obsess about the the details on manufacturing for today till tomorrow. Yeah. But I wanna I wanna kinda come to another point which I know we have a little bit uh uh tension in in thinking about, which is the idea that

Give us the US call that the Feds on hold here and whatever stuff you want to put in about Warsh and uh the politics around that. Um, you know, I think there are a decent number of places which can still deliver easing and more easing than the market has got priced in. The easy call here is the high yielding uh EM guys and we wrote a piece which was, you know, emphasizing how

effectively they've been slow in in normalizing rates, even though inflation has been coming down reasonably smartly uh this year. And I think there's a set of countries there where we are expecting more than what the market is. But I think there's a few other countries which are interesting. Um

couple of the low yielders in Asia is important. But in the DM I think the UK story is interesting where we have two easing and I think there's a reasonable case to be made that the UK story on uh labor markets, which is the one place we're not seeing the pickup in in labor demand start to take hold. uh could deliver both lower inflation and softer outcomes on growth relative to other countries that are consistent with the

Bank of England doing more, maybe even Sweden as well. There's there's definitely a couple of cases here, I think, in the DM, where I think the the argument for more easing is still reasonably strong. Yeah. I think that's a good thing. goods price pressures and then everybody was gonna get short circuited on that. You don't wanna you don't wanna repeat that in in public?

No, my my well, I mean, when you start talking about these kind of some of this labor market weakness story, I I I don't want to get that idiosyncratic on the on the on this broader point. I think it is the case that if we're seeing the manufacturing sector

kind of pick up here and some of it is this inventory lift. And if you're right that the non-tech is starting to pick up by you know whatever you're seeing on US durables and extrapolating that to the global picture. If all of that's taking place, Um and then you throw on top of it a Fed that, you know, reprices what, 60, 70 basis points. Um, I think that is going to take put pressure on other central banks to uh not ease. I was more focusing on some of our

calls on the EM, right? You know, the um you know nor not a nice piece uh going through all of the the logic of of why, you know, from the from the domestic

kind of macro side, you can make a case. There are a number of these economies that still have space to ease. And I I fully agree with that. But I'm just wondering if this global wave of both strong good sector activity and a fairly large repricing in the Fed if that happens, um, that could short circuit some of that type of um uh space that that we're we're seeing in in in parts of the ES.

Yeah, I think if you had really strong global goods activity, which would have to have more than just an inventory story associated with it, you could start to see things turn. And I think there's a case and I think if you talk to our economists in in terms of their caution in terms of putting um you know, more easing in, even though they've got from a kind of a macro point of view, inflation declines that would warrant it. Um the momentum swing combined with the Fed um and ECB on hold.

You know, those are v be kind of being viewed as I think forces that will shift the the forward looking perspective in a way that will limit the uh the easing that you um Uh you get and it's I I am I am curious like how much weight to put on these Very strong PMI readings in the good sector, good sector PMI readings in Western Europe, Euro area, UK.

Uh is that gonna extrapolate to the kind of the the scanties as well? Are we gonna see that when that data comes out? Is this gonna be the sign of a of a big pickup in in manufacturing output? Um That that definitely I think will change the the tone of central. Especially given I think if you look at the You already released at least there's a pretty healthy concentration in Germany there, so there's

Which by the way is the only place where we really have a lot of uh fiscal Exactly. So I think that's be a little careful about that. I'd be careful about especially coming back to what we were saying before that well Is there a case to be made that inventories and business spending might start to come off the the floor? I think the concern is UK being the highest output or highest deposit PMI rating across the G four?

Um I will discount that as a GDP forecaster, but we'll we'll wait to see. Uh and it certainly speaks against what I was

pushing a bit earlier that the keyboard is what I think. Exactly. That's um I'm kind of starting to sort of think about it. I think that is the you know the reason why Alan Monks, our UK economist has them only easing twice, even though he has inflation getting back into the mid twos this year, I think has to do with the momentum that you're seeing on growth that he's got built in, the and the combination of that alongside What obviously still is a somewhat damaged

underlying structure in the UK and the way it plays into expectations. Um but also just the Fed and ECB not moving probably matters some somewhat for him as well in there. Yeah. So um let me make a turn here again. Um we should um

Say something about SCOTUS AIPA here. Um And I'll I'll let you double acronym. Double acronym SCODIS AIPA. Yeah, I can't. Sounds like some bad disease. Well, I'll a with a little bit of concern about where you might go in this conversation, I'm gonna let let let you go go off on what you think about the implications of the decision today.

Well, I I think um we've had a fairly long-standing view that uh While the AIPA tariffs were uh you know, certainly under threat from the the SCOTUS ruling that we got, the Supreme Court ruling that we just got, um, that this was just the most expedient way for Trump to kind of put his tariffs in place. Um that there are many other uh channels that he has to um to kind of engage in his war on trade.

Um and he's going to use those. I would expect, you know, sometime in the next week, if not announcements over the weekend, that he's going to um uh you know enact Uh, you know, these various other tariffs. I'm forgetting what the numbers are at this point. The section one twenty twos. One twenty twos, yeah. That's the fifteen percent across the board. Yeah. Um so I would think that's coming almost immediately. And uh and so in that regard, you know, I would I think not too much.

Changes in our view. Effective tariff rates stay the same. I do think there's probably as you dig into this a little bit more, I think you could say two things. One is, It's gonna matter for countries that have much higher rates that got these emergency whatever, these IEPA terra slapped on the thirty, forty percent um

You know, so those countries are probably going to be breathing a little bit more of a sigh of relief. I think it then means that some of these other countries that um uh had lower ones probably are gonna be a bit more worried if Trump cares about the revenue side of this and wants to just do across the board fifteen.

Um so we we need to kind of wait and see how the the dust settles on that. It's definitely a noise generator. Um what happens to the revenue? I honestly I think the the case only got well there was no there was no um element of the at least if I read that the Supreme Court guided on what happens with the

um payback of the those people. Yeah, the payback. Okay. That's what I think still has to get decided in the lower court court and it's probably gonna play out over time. I mean I I I wanna push a point that I think is embedded in the way uh we're building the m the m the modal view, which is that In contrast to twenty twenty five where Trump policy

um turned out to be disruptive in in a number of ways and and was a major negative for business sentiment as we move through the spring. That in fact what we're seeing in twenty twenty six is some combination of a

a shift in focus which is to try to boost growth ahead of midterms, but also a set of more constraints that are being placed on policy. And I look at the AIPA ruling um, alongside the difficulty of getting anything through Congress, I'm sure if Trump could, he would do another big, beautiful bill here to to provide more stimulus. So I think in that context there's both a a message of the limits of what the US can do here in terms of domestic policies, uh as well as I think a um

supportive element in terms of the fading of that concern that happened through the disruptive policies of the last year. So to me it's it's it's part and parcel of the forces that help begin normalizing.

sentiment here and and is connected to the whole story about labor market. I I I I definitely think there's an element to what you're saying is right. That you know, in the kind of chaos of last year, people are wondering What we used to think we had guardrails, and those were good guardrails set up all the way down to the foundations of the Constitution itself.

And those guardrails were being severely tested and in some cases broken uh in a number of ways that left you kind of like in this fog of not knowing kind of where. Where are the new guardrails? Where's the limits? And you can say across a number of kind of uh through various judicial actions, right up to the Supreme Court ruling, okay, we're now starting to put some guardrails in place.

I think there's some truth to that. I I I think you're being too too kind of deep and broad. I don't think it's about constitutional guardrails. No, no, I that was just like one example. It's about economic policy. Last year it was doge, immigration.

The trade war was it's it's full of things. What? What what in what universe do you think the immigration story is over? I'm not suggesting it's over. I'm suggesting that the kinds of shocks that hit businesses last year that hey this is an administration that's just let me say it again what universe do you think that that shock is not only not over, but it's actually isn't accelerated.

Oh, I don't think it's accelerating, but um I think it's this year relative to last year, you don't think the the immigration stories? Not in terms of the change in the in the inflows on our border? No, it's not accelerating. We've gone almost to zero over the course of the last twelve to fifteen months. We're gonna go are we gonna we're not gonna go n negative in the way that you might

you know, worry is gonna accelerate that. No, it's not accelerating. I I agree that the inflows have gone to zero. That and by the way, that happened I'm getting the map or the timing right. I think that happened before Trump even took office. Mm not quite So I actually don't think that's the story. I think when you talk immigration, we're really talking about the deportation efforts.

Which I would say is a massive chaos generating machine and getting worse when you look at the latest headline. So that's still out there. How big that is. Fine. I don't know. Like I've obviously been a a proponent of the idea that this is a big deal. Maybe from a macro perspective, it's less big than uh than I had thought. But I do think the dust has not settled on that. The jury's not back on that story. Uh I don't think that's contained in any way.

I think the other containment that doesn't seem to is still a cloud of uncertainty is around the geopolitics side of thing, which I'm sure we'll probably get to at some point to talk about. the potential we're not gonna go any much this is the end of this call so well I mean obviously we haven't talked about oil prices and and what's what you know we could be going to to to war or whatever. I mean these are similarly kind of

Testing the boundaries, right? I mean, the whole thesis you are pro you're setting out there is Trump was kind of unchained last year and suddenly Trump is chained this year and that there's kind of limits around what can do. Well, I mean oil affects domestic the No, I'm not saying there's not a risk. go around internationally. And I think domestically the immigration story uh is there. But I'm still I'm still mindful. I don't think he's totally unchained or chained on on tariff policy either.

Um so Again, I started this by saying I think there's a you're it's a it's a very good point that you're making and I think it it gets you moves the ball a little bit, but I just wouldn't take it as far as it seems like you're trying to uh trying to suggest. Okay, well with that, I think we will leave it there. You can go catch your flight, and I can go back to doing some hard work. Thanks everybody for listening in and hope to continue this conversation next week on the weekender. Take care.