Global Data Watch Weekender: Strait no chaser

Welcome to the JP Morgan Weekender. I'm Bruce Kasman and with me is as most weeks Joseph Lupton. Hey Joe. Hey Bruce, how you doing? We're both back in town here. I haven't been anywhere, so I'm still here. Um I don't know. There's a lot here to get our hands around. I guess the obvious point to make is that we don't really have any clarity on where the military political path is going, but we do have clarity that we're keeping

um supplies of energy uh and a bunch of other commodities off the market by the Strait of Hormuz not allowing flow. And that having an impact on prices. Um I would make the point that I think if we look particularly at the energy price space. Uh we're not seeing the kind of price increases yet that have been um you know kind of marking these supply shock episodes in the past, uh not twenty twenty two, not uh the Middle East wars that we've had around supply shocks, but the size of the um

uh loss of energy that's n not flowing through the uh uh strait, can't be made up by pipelines, won't be made up by drawing down reserves. So there's a fairly worrisome uh dynamic of what kind of price pressure might continue in the market if we don't have a a relatively quick resolution here. So you that's the starting point on the

you know, my thinking on this war right now. And then we get into the macro picture, which, you know, to me combines three points which I'll just lay out and then stop. One is I think growth is still pretty solid here and is not going to get uh hit immediately. Second is we're gonna have a pretty strid significant March-April um CPI hit. And third, I think in this environment central bankers are just gonna sit here and wait for a little while at least.

Um and um, you know, we got a lot of DM central banks this week. Uh basically everybody we're forecasting in the DM to be on hold. The only central banks we have moving anywhere in the near term is the ones that have pretty extreme stance positions. The Brazilians, we still have cuts uh next week and we still have Bank of Japan on tap for hiking in in April.

So I'll stop there. There's a lot of other ways we can kind of get into this and there are things which we can decide to focus on. But I will pass on to you, Joe. Uh yeah, I mean Look, I think the the starting conditions for the year, as you said, looked pretty good. Um and that incoming data I think support that. I think in the US we're tracking Kind of close to three and a quarter percent growth.

Um I think uh you had a noisy fourth quarter print that was on the soft side. I I wouldn't get too hung up on that and the final sales were tracking reasonably well.

there. Um, I think again this is all back at the ranch, but it's important to not forget what the foundations for the the expansion were. Um that the the the profit picture looked quite strong through the fourth quarter and and one of the things that we Updated this week on that front is um a sense of just how broad based that is, uh, and coming not just from

margin expansion, but revenues also increasing. This was over all over the course of of last year. And and the reason that's important is'cause we've talked about um kind of a a couple of crucial things that need to happen for the expansion to continue here, which is kind of business spending broadening out beyond just tech, right? So we wanted non tech capex to pick up and then most importantly we wanted employment to pick up.

and that broad base profit growth I think um is a is a uh you know is a support for that broadening to take place. So that's all constructive combined with the the PMIs, which were really gangbusters. I think with we'd be continuing to

kind of live in the afterglow of those reports and kind of pushing those as we're watching the the the the data come out. Um You know, but as y as you said before the call or this started, you know, we're gonna be living with this and talking about this for the next uh likely several several uh weeks and probably maybe even months.

Um I I keep coming back to the the point that I don't see how Well, uh i there's a lot of talk about like at what point does the the the the US um kind of see that there's too much damage being done and and and you know. find some way of calling victory here. Um and you see some of the the geopolitical experts out there saying that, oh, in X number of days

you know, the Trump administration's gonna kinda declare a victory and pull back and then things will start to start to get get better. I i again this it's it's hard to have these conversations'cause we're not geopolitical experts, so I I recognize that. But

Uh, to me this is a very different situation. This does feel like more like the late nineteen seventies. And you said you last week I think you were laughing about bringing up the seventies, but what makes this different than other types of oil related events in the last kind of several years and more like that late seventies, seventy nine event is that

This is gonna be driven by what Iran does here. They're gonna have kind of the say in what happens to the Strait of Hormuz. Now I get there's gonna be some type of negotiation, but Boy, I don't know. There's a lot hanging uh less on, you know, what the the US does here and a lot more on on what Iran does here. And then the the other point that

I at least in my mind, and again, not being an expert in this, is that it kind of feels like it's an all or nothing, right? Either you're gonna get you know, things coming back to normal through the Strait of Hormuz, or it's gonna be little to nothing coming through the Strait of Hormuz, in which case it's a very kind of bifurcated um kind of event that's gonna happen here, which is things are gonna get, you know, better. There'll be some modest headwind.

uh in the very near term, but things are gonna get better. It's not gonna derail the expansion. Or this is gonna get really, really, really Um, and I I think our stance at this point has really and uh you know, l listeners will will know we're not making broad base changes to our forecast, not because we have a lot of conviction, but because we're just holding that baseline.

and we're kind of thinking more in terms of scenario analysis here. Um and uh, you know, I I think uh, you know, this is the the kind of position we're in and we're probably gonna be in this position for the next uh couple of weeks here, I wouldn't think major wholesale changes to forecasts are gonna come, even though we've got uh

a pretty serious risk that this could be uh expansion ending if this thing uh continues. Maybe the question I'll I'll just stop here and and ask you, Bruce. It was a long time. Go on. Well I mean Uh unless you disagree with the uh you know the that that kind of framework. Like if this Let me put it this way. How many days or weeks do we need to go before

you think we would say, Okay, we need to make wholesale changes, either significant cuts and then maybe how long would we go back? Well, I think it depends on what you're talking about here, Joe. I mean, if you're T L E P we need to sit here and make a judgment about what type of political and m and and outcome on the ground. should push oil prices to two hundred dollars a barrel, I'm not going there in that conversation. I mean obviously

There's there's a concern about that and there's a there should be concerned. I don't understand why. I have no reason to make wholesale changes in any forecast. I totally agree. That's why I say you're saying how many days I need to be here to make changes in my forecast. What is it that's going to be the catalyst for that? I can't be the idealist will be if oil prices go up to two hundred dollars a barrel, right?

Right. I'm just I'm asking not gonna sit here and forecast what's the probability that oil prices are gonna go up to two hundred dollars a barrel. That's not I think where we should be in this conversation. No, I'm saying if we're sitting here a week from now and nothing's flowing through the Strait of Hormuz But tell me what the price of oil is. That's what I'm asking you. I don't I mean you we right now we have a model that says if we have four

four million barrels not flowing through the Strait of Hormuz, oil prices should be at one hundred and twenty five ba dollars a barrel. Natasha's four telling us seven million barrel, seven million barrels have been reduced from there and we're we're at we're at a hundred dollars a barrel. So I'm not gonna be um I'm not gonna I don't think it's worthwhile for us to get into the business of trying to forecast

uh what oil supply is gonna do and and where prices are. We can obviously deal with scenarios on that, but I think yeah, you can tell me what what I do to my forecast if for the next three months. oil was at a hundred and fifty or two hundred dollars a barrel, but um I'm not gonna be sitting here trying to do the So what are you asking?

If if oil goes up to a hundred and twenty five and is gonna be there for three months, is that gonna be a level where we're gonna start talking about global recession if it's one hundred fifty? I think one fifty is about where we get to that mode. Yeah, I think one fifty. Yeah. Well, I I'm surprised you didn't make the point and press the point. How long does it stay at one fifty? No, well you I mean I think embedded in your question is you're staying at that level for a few months.

Yeah, so three months three months, four months of one fifty, I think we at the level that starts to be threatening. I think somewhere in the low one hundreds. It's not, but what I I I think is more useful for us to talk about here is putting the risk that that's a scenario and not trying to by any means ignore it.

I I'm not quite with you that there's only all or nothing. Either that we're gonna be at eighty dollars or a hundred and f fifty dollars. I think there's a lot of ground in the middle where political and military developments developments on the ground.

leave us in a situation with elevated risks, but not necessarily Uh continue. I think actually right now we're probably in the opposite circumstance. Which is unless I'm reading the market wrong, if you look at what has actually been um uh held back from the market right now, it would warrant I think a higher uh price, but the markets are pricing in, I think, to an important degree. Um you know, political and e and and and military action that's gonna relieve the pressures relatively soon.

Now you're kinda starting to have the conversation. But the risk premium I think the risk premi well, I'm not sure I wanna have this conversation'cause I I don't feel like I wanna be talking politics and and military here. I what I think is useful for us to talk about is if we're in a world of ninety dollar average oil prices for the next six months, or if we're in a w world where it's one hundred and twenty five dollars or in a world of a hundred and fifty, what what's gonna happen?

Terima kasih. Yeah, so let's talk about that. What happens if we're in a world of ninety dollar oil prices for the next three to six months, which can happen that was kind of the piece we put out two weeks ago, right? Uh and I think I my sense is we'd shave off about um, you know, a half a percentage point to global GDP growth for um uh the next

Couple quarters. Um it's coming in a backdrop where growth is probably tracking uh two to three tenths at least higher than our forecast. So that's not much of a change. For the year? What what do you think? No, for the first half. For the first half. You're we're talking that half percent number you that half percent number you just quoted was an annualized rate for the first half. No no no we don't know anything.

Okay, you can decide it's a second or third quarter, you just decide it's a it's a first or second. I don't think uh I know anything. But whatever you what you're do what you're defining is a two quarter uh two quarter drag of half a percent annual. Yeah. And I'm saying I'm defining without without it trying to be cute about the timing is saying that we're right now we're tracking on the momentum side at least a couple of tens.

Higher for the first two quarters of the year annualized. So if I smooth this out why you say we're not tracking anything for the third c for the second quarter. I'm just saying the momentum in the start of the year is giving me a perception of some upside rather than downside. Okay, okay, forget it. Forget it. Okay, forget the forget I even said that, all right?

Yeah. For the for the four quarters of the year, if we smooth this out, the growth hit from staying at ninety is about three tenths. Okay? The inflation hit is about four or five tenths. You can decide you want to focus on the quarterly profile, which I'm not trying to ignore, but that's roughly the parameters we're talking about. Um I you know, as you say, I don't think it changes things very much. I do think probably the bias.

I'm a little surprised you say three tenths for ninety, because if we said fair value, Natasha says is sixty, that's about a fifty percent increase, which is about seven about seven, eight tenths. Well you're you're you're you're basically incor incorporating a fall in oil price. that hadn't happened because oil prices weren't at sixty. They've been sitting above sixty. Fair enough. It's a risk premium, but it's been in our it's been in our numbers for the it was.

But it's been in the in the market for the last six months. Right. We haven't been reacting to the move from sixty to seventy. I mean if you if you think that in our macro forecast there is some boost that's built into the forecast for twenty six because of the move down from seventy to sixty, I don't I don't think that's right the case. Anyway, it doesn't matter. The the numbers are are okay, you wanna say it's a half a percent, say it's a half a percent. Whatever it is, it's a modest

hit around a whole bunch of other things that are kinda happening. And I would argue that the momentum and the bias as we were starting the year was a little bit upward. I don't think that changes the nature of the beast here much and I would still think that in that scenario, global growth is roughly at trend after a baseline forecast that would have had it above trend. Inflation which is already elevated globally.

um in our forecast for twenty twenty six, although there's important rotations across countries, now becomes more elevated by about a half a percentage point. Uh yes, it's primarily uh headline inflation and not core. And yes, there's important country variations on that. So that's the macro backdrop to me that shifts.

if we're talking about this this environment. The risk of course and the downside risk which I think is most significant is even without the more um you know acute scenarios of of oil supply disruption and prices going way above this, is that we do damage to sentiment, we do damage to financial conditions. And as a result of it. What I was saying about momentum is really missing the point that there's more magnifying effects here.

that work through the system and we end up with a much weaker growth outlook. That is, I think, a legitimate risk here. Uh the other side of this story though, I think, is if we're not getting that, and you just put those numbers in, that we're going to start to see some spillovers.

of what is happening in the energy market, recognizing that the Strait of Hormuz also matters for agricultural market prices, it also matters for metals prices, and you're seeing these things uh move up now is that we start to see a movement back towards a more generalized global set of pressures and global goods prices, which we've been arguing was basically falling out of the picture after having been quite strong from twenty twenty one uh through twenty twenty four.

Uh I wouldn't worry about the the growth impact of that more. I mean when we talk about oil. I we we never really say in our kind of model is that a proxy for broader kind of spillovers, but to the extent that you are seeing. you know, the the the kind of as I was I think I was saying last week on the call, fifty percent of the world's kind of seaborne sulfur flows, which is affecting your fertilizer prices, which is affecting your semiconductor.

Which needs sulfuric acid. I mean if these things also start to get impacted, there's a the growth hit, which is, you know, three quarters of a percentage point, starts to go up to something that could be more like one and a quarter percent. We're starting from a point of view of growth above trend. We're starting from a point of view of inflation above trend. And we're starting from a point of view of policy rates with a few notable exceptions, close to neutral.

So the bias here is to push inflation that's already elevated higher, growth that's elevated back towards trend, and then you have to deal with how central banks are going to react to it. Which is I think the bias has gotta be for uh less easing where the where there was and a bit more pressure uh towards tightening where there wasn't.

Yeah. Um I mean you can then say that things are gonna happen that are gonna be more acute and I'm very much with you. This is a very difficult environment to to ignore. risks of magnifications in both directions. But starting from a point of view and say, hey, we got a cushion because we have a strong global economy, but we don't have a cushion on the inflation side because inflation is still elevated, um, I think is the right starting point here when we're thinking about modest

shocks that push in both directions. I mean, I guess I would have said, I mean, and we've been debating a lot about this. The US is where you're really kind of talk the US. I mean it's uh I think the Euro area is the one that you and I have been debating a bit more all day where it's just surprisingly the market has moved

The most well th th this is another issue. The issue is the market I think has rightfully made a qualitative move in a somewhat hawkish direction, but it's moved a lot in the way that it's priced in hikes in a uh actually more than half of the countries. we forecast now I think there's hikes priced in sometime this year. So the issue is I think qualitatively With the backdrop I just described, it's right to have the tilt being in a hawkish direction. I just I think all of those moves are uh I

Frankly, I d I don't understand them. I I just think either You don't understand the qualitative or the quantitative. Well, I in some sense the qua even the qualitative, but I I don't know. I But you don't agree with what I said a minute ago that we're Starting with growth above trend, we're starting with inflation above trend. If you push growth down modestly and you push inflation up modestly. Well, we're forecasting that, but we're not there yet.

Fair enough. I'm building building this on our forecast for the year, but okay. I'm just saying what we're tracking is something not is about trend or a little less. No, no, actually they're the our team's forecast for the first quarter is is well up is is well above one percent. It's like one percent. And then our team's forecast for inflation is also that we're back to target, not above target. In the Euro area it it's a forecast that we're gonna get back to target, yes. Right.

So I mean it's kind of if I use our forecast, it's kind of modestly above trend for a re for a region that we're talking now about the world or euro area specific Euro area. Okay. So let's make sure we're making that distinction. Yeah, we're talking

about the euro. I think the US is in a very different and now we wanna hone in on the E C B specifically we can. And I think your I think your point is right. I think there's no reason The E C B should be tightening here in a world in which inflation momentum is moving downward. And growth momentum, while it's solid, it's not that exciting here. And you got two sided risks. I'm totally agreeing with you there. However, on the on the ba balance of risk here, I have to say that the E C B is a

A a crazy asymmetric central bank that focuses more on inflation risk. Well, I think they've tightened they've tightened they've tightened in two thousand and eleven and two thousand and eight case of energy price pressures. in which um their economies were about to fall into recession. Right. And you basically it's an assumption that they've learned nothing from that and the post dragon. to pressures in twenty twenty two till after things got got hot and now they're somewhere in the middle.

Right. They got burnt in twenty two. They got burnt in twenty two by being too slow. They got burnt in tw uh two thousand eleven, two thousand eight and eight. And now, you know, they're somewhere in the middle. So I think people like to look at twenty-two as if that's an example where that's what they're looking at and they feel burned by that and they have this.

big, you know, commodity price shock that led them to have to hike. And I think that's just kind of missing what was going on there, that there were a lot of other inflationary pressures. Everyone was hiking through that period. Um I I just feel like if we're talking about a world where oil's gonna be But if you remember Joe, if you remember Joe, if you remember Joe going back to that environment.

And I remember very well, especially talking to a bunch of European central bankers at the time. They were saying what distinguished the Euro area in twenty one into twenty two is that European uh labor markets were soft and wage inflation wasn't picking up. So what was happening globally wasn't going to happen there. And with a lag it did happen there.

uh on the wage side in this. I and I'm not gonna f I'm not arguing the point that I don't think the E C B is gonna hike here. What I do wanna argue to you is I don't think it's wrong to tilt the market pricing here and and and emphasize that if You know, you you wanna you wanna focus on downside risk to growth. And I'm with you there. There's a lot of things that could go badly wrong here. And if it does and we're in recession,

you know, everybody's going to be easing. But if you t stay in a world of, you know, oil prices not going crazy on us, but staying elevated, there's a reasonable chance that you do see some pricing pass through to core, particularly in the good space. Um, and I think the E C B is gonna be pretty darn sensitive to that. So I can't by any means ignore the scenario here that, you know, UA inflation runs two and a half.

uh with core goods pressure starting to build. Uh the economy holds up okay and these guys probably don't do the right thing, but they do hike on us. It's not my baseline scenario, but I I I wouldn't fight somebody who kind of think about that as a a way we might might see this thing play out.

Yeah, I just think the I think it's harder to get that story in the US. Long run inflation fears from this are are misplaced. When I see five year, five year inflation in in Europe go up twenty five basis points. I'm just I I just don't think that's I don't think that's right. Um you know, and I g if you're telling me that that's, you know, unanchoring inflation expectations, then I can see why the ECB should be hiking. I just don't think it's right.

But um I think with when you get a series of commodity price shocks, o oil isn't gonna keep going up fifty percent. I mean, I don't know, unless I'm reading the screen wrong, it's more like ten ten fifteen basis points, but um that it's moved up. And it's still it's still well within the range it's still well within the range of the last twenty. I don't think

I don't think anybody is arguing that the Euro area inflation expectations curve is becoming unanchored. Um I think it's just a it's just a sense look, if you go back to twenty twenty two, twenty three, right? Central banks, um will look at that period and say, Hey, we got through that. Inflation was a transitory, transitory meaning an eighteen month event. It was a transitory story and uh things came down.

But they're not gonna look at that and say, Well, we didn't have to tighten. They'll say that our tightening and our anchoring of inflation. And I think that's the mistake. I that's exactly what they're doing. They're saying, Oh, we had to hike through that and so now we're gonna have to hike. Of course they did, but not because of the oil price shock. Okay. So I think because you have global inflation surge.

That was unrelated to the the But what you're what you're what you're ruling out is any sense of um a environment in which we have still solid growth here, ninety dollar oil prices, and we begin to see some upward pressure on core inflation. You don't think that's a scenario which has much credence, do you?

Not enough to yeah, not enough to get me to price fifty basis to swing fifty basis points on E I'm not I'm not arguing we're gonna get fifty basis points of E C B hiking in the next three to six months, but I can see a scenario where Largest pressure in there. It's also a downside tail. So I wouldn't have thought the pricing should change at all. In fact, I would have thought the downside tail is bigger. What am I more worried about?

What a surprise. What a surprise. You see the downside tail is bigger. What do you think is bigger, Bruce? Oh I think the downside tale is that the m i because the laughed at me for saying the downside tale. I think coming back to what we were saying before, there's a bigger risk of a more disruptive as you say, nineteen seventy style event. And if that happened, then the downside tail I think is is is gonna be, you know, far more prevalent. Should the market mean price that?

Um I mean we're like on the like I don't know you're talking to people like everyone you talk to is like pretty freaked out about how bad this Well, if it's so freaked out, why are energy markets sitting with it? Totally agree. I d I d I d I don't know.

I think it's almost it's almost like a mutually assured destruction with oil, right? Like it's like It's one of these things that's so bad, you're like, I don't know how it's gonna resolve, but you know, it's gonna be like the the the Trump, you know, kind of No, could you you you could you could tell me what the E C B should do.

Uh you can tell me where the risks you think are distributed. All I want to say to you. All I want to say to you is this conversation we just had about the ECB, you can't have about the Fed. You can or can't? Can't. That that's I just I want to say that I want to come back to this point about bias. I think the Fed inherently has a greater tolerance for modestly elevated inflation and a greater

reaction function in the face of downside risks. So you you as you're mentioning, there's downside risk here, right? So I think when we talk about the Fed, and this is independent of Walsh and anything like that, we talk about the Fed, it's harder to get the Fed

to look at this, see risks on inflation side that are going to dominate the concerns they have on the growth. Given everything we've said. Yes. I mean, as you know, like I feel this w everything I'm saying applies equally to all central banks. But I'm what I'm trying to tell you is there's reasons to think about the Fed and the E C B differently, even if the E C B's wrong.

But that's trying to say that they that they haven't learned the the the draggy lesson, that they're gonna revert back to hiking in two thousand what was it, uh spring and july of twenty eleven. They hiked twice into that. Uh and they hiked in July of two thousand eight. Yeah. Yeah. Um so they're gonna it was both both trichet, right? They're gonna completely forget that that was like a huge policy mistake. They say, hey, let's do that again.

Right, we're gonna be on the cusp of a recession, oil price. Well, in the end of the day, Joe, there are multiple episodes here and there are multiple mistakes that get made in different episodes in different directions. You won't know what which event you're in as you go through the next three to six months. All I'm trying to say is the bias here in a world in which you can't have foresight and see which of these events are going to play out.

Still does leave the E C B with a somewhat different and and somewhat more inflation sensitive reaction function. Let's let's let's broaden this a second. Where's the Bank of England here? I I well they was more like what I described on the E C B or more like what I described on the Fed? Well, I mean in some sense on the inflation side they're more like the the Fed, but it not in terms of reaction function. Um Uh although I don't know, kinda.

Uh I think they're I don't think they're inherently more like DCB, but I think the current juncture makes them more inflation sensitive because they've had a huge Right. B supply shock. They're seeing inflation dynamics which are still too sticky. Labor market dynamics. Um

And that's just gonna make them more sensitive to inflate. That's why they're not eating. I mean, this is a central bank which I think for all intents and purposes looking at the domestic economy should probably have policy rates fifty or seventy five basis points lower now. But it's an environment where they have concerns. Inflation is a lot.

I inflation is higher, but the trajectory of the labor market is pretty darn weak. Uh the trajectory of wages feels to me like it's down, although I know that's arguable. and which are quite useful are are kind of screaming up, right? And policy rates are higher. Remember, the Fed the Bank of England's at three seventy five, the E C B's at two.

There's a big difference there. Yeah. So anyway I think the I think even with that policy gap The Bank of England is more like the E C B per and and let's not forget the fact that the E S the Bank of England is a a small small open economy, more so than the the th the Euro area the or the US in that context. Yeah. So I think these differences matter. I agree with you the tail to the downside is

worrisome, significantly worrisome. Yeah. And you're not gonna get me to argue with you about that now. I mean I I do see that I guess I mean what I don't know, I'm torn in this conversation, Bruce, because I I I I see and it's it almost seems like a no-brainer natural to say like, oh well your your your your initial conditions matter for how you're gonna respond to this shock, but there's

There's a part of me that kind of feels like either oil prices are gonna go up a modest amount and they're gonna be somewhat irrelevant, they're gonna move the needle a little bit, but not do much. Or they're gonna move up a lot. Remember how I started all this by was saying, like, I have a hard time understanding how this either isn't a a kind of a a short-lived you know affair or a really, really bad out.

And I think I think I think really bad outcome, I think everyone's gonna be cutting. I think I think where I would take issue with what you said is not that there's a fat tail of a really bad outcome. But I think there's more nuance. It's not it's not the case. That oil becomes a dominant driver of the macro outlook if it stays eighty to a hundred dollars a barrel. But I also would argue in that scenario and there are different ways you can

spin what happens there. It's not an insignificant one. It's still two sided risk. Again, we talked about earlier, you could have ninety dollar oil and while the uh the effect on the uh US and the global economy from a um a a a price effect on purchasing power is not that big, it could basically disrupt the sentiment rise we've got going on and that could change the outlook more materially.

Uh there are things that can happen here even with oil not breaking into the um you know 1250 dollar range. Um but there's also things that can keep oil persistently high here, not going back to where it was. Um at the start of the year. And then have a an impact on the macro outlook. Again, not necessarily the dominant impact, but it it it can matter.

Um, and uh, you know, it's not completely insignificant. It's not the dominant part of the story, but it's not completely insignificant that from two thousand three through two thousand eight. crude oil prices were rising on average over twenty percent per year. And the Fed moved four hundred basis points in that period. It didn't cause a recession. There was no energy supply shock.

Um there are things what? Those were all demand shocks that were pushing oil. But energy is part of it, that's my point. And there's things here that it interacts. It he the point you're not taking here is that if you have a mild supply shock in oil against the backdrop of a global economy that has strong demand, which is our forecast. These things can interact and have an impact on macro outcomes. I'm not trying to argue it becomes the dominant force, but it matters.

It matters whether oil is at ninety or at sixty in an environment of, you know, uh an otherwise business cycle that's doing X or Y. And ma and matter you know, all of these things come into the picture and it could you know, you yourself, you've been sitting here for the last god knows how many years. You know, saying if or if energy if inflation continues to stay high here, it can build dynamics on itself. Um, that could be hard to control. You've been saying that consistently, right?

Well for the first time. I started saying that about about less than a year ago when when we've been saying that consistently and fair fair point. environment in which you can think about dynamics where oil isn't dominant but it becomes part of a a dynamic which does have some important macro impacts. That's all I'm saying. Yeah. I think that case is Is stronger in the US. I think that case is strong in the UK. Um, I don't think that's a case for.

When you say stronger, it's not that it's stronger anywhere, you're saying that Yeah, are you trying to say that it could sip the tide into tightening in the US and the UK easier than it can in the Euro area? No. What does it mean it's stronger? Well I meant inflation is high. I oh sorry. I I think the impact of the oil shock tilting you in a hawkish direction or making you more cautious, I think that dynamic

Is more relevant in these economies where inflation is really elevated and a problem, like the US, like the UK. I don't see the Euro area in this space. And so I'm shocked. that the biggest move in markets is in the one place where I felt like among the majors where this is actually not a problem. I'm not sh I'm not sure that the I mean I d I have to look and I we have the table here.

I apologize, uh,'cause I'm sure we should know this. I actually think the pri repricing of the Bank of England's been greater than the E C B because remember the Bank of England was You're right. I think I think it's been over fifty or at least fifty, and I think the but the Euro area's been thirty. plus. I mean I I just But the U U S has been forty by the end of the year. So they're all moving about the same.

I'm not sure that my point is I'm not sure that the size of the moves differ as much as it has. I wouldn't have moved the Euro. The starting positions were different, right? The B Bank of England and US and Fed were priced to ease and the b E C was priced for neutral. the magnitudes for the UK and sp the UK and the US, I think those magnitudes are are too Because I still come back to the point that either the We don't expect the Fed D's it's uh

If it comes closer to our view, Joe, remember that. Oh, I I know. That maybe that's why I'm conflicted because in some sense it's it's getting me closer to my more hawkish view uh for for for the Fed. But I don't like that it's using this reason to do it because I don't think it's a well founded reason. And I think you're more open minded to it than I am. Well I just think it it can become a factor in the macro outlook and I think if it's not shocking us in terms of

breaking uh oil far higher than what we've seen so far, then I think on balance it's a it's a modestly hawkish signal. Um on average and with differential responses in different places. Anyway, let's get let's get off of this. There's a there's a couple of other things worth talking about here. One one last way to view this. I just want to say one last

There's a reason central banks look at core inflation. They look at core inflation specifically because they don't want to look at the impact of commodity prices on headlines. If you're telling me that these are moves that are gonna like seriously move the core inflation numbers, then I would be more open minded to it. But I don't think we think that. Well here I here's what I'm saying to you very specifically.

In the immediate uh future, as we're sitting here Not sure of the growth versus the inflation impact, not sure about the more lasting impact of this event. All I think it does is it promotes caution and that's caution in both directions. It's caution uh from the Bank of England who's not going to be easing next week. It's caution um from the RBA, who our team at least doesn't think is going to be tightening uh next week.

uh it may spill out and it's gonna be it's an interesting question as to whether the BOJ call, which is not till April on our forecast, whether that gets taken. So I think this idea that central banks are pausing whichever direction they're gonna move in in this world of uncertainty is what matters for now.

Uh what matters going forward bec be becomes really tied to how the macro in outlock is actually influenced by this. And there's a scenario which which we don't want to r I don't really wanna talk about, but I I do worry about and you obviously are very worried about it as well, that the closure of the Strait of Hormuz is far more impactful.

and damaging than people appreciate. And we've got oil prices at hundred and fifty, two hundred dollars a barrel and other disruptions going on. And that's gonna dominate and obviously from a macro point of view, that's a a recession scenario that um That's going to cause easing. But in the case where you are watching oil stay elevated um but not spike dramatically higher. Then

what role it plays depends and you've been making this point. It depends on where we are in the cycle. And you're You're not in willing to kind of think as I am that there's a scenario here of relatively strong global growth with energy price pressures that actually does have an impact on core inflation, does have an impact on where we think we are on the cycle, and six or twelve months from now can deliver tightenings and maybe even tightenings from the Fed.

That's all I'm saying is once we once we take out that big tail, it does become contextual. And um the context here is not clear. We have a strong growth forecast. We've got differential movements in inflation going on right now. And my bias would be that if we're holding up on growth and we have ninety dollar oil then we're gonna see some spillovers onto inflation. That'd be my bias on Now you're a hundred percent right. On the M side. Yeah, on core inflation.

On the E C B side, it's your starting point is a path of inflation to two percent. And you say, Well, they shouldn't really be worried if core inflation gets kicked up a few tenths by that. But they got two percent policy rates there, their crazy bias towards inflation.

risk. If it was the Fed seeing that the Fed wouldn't do anything. But the E C B is the E C B. Well, there is there is that added kind of assumption is have they or have they not learned the the errors of their ways from the past couple decades. Well again, they may not view the errors of their ways the same way you or I do. I mean so let's be let's be kind of uh a little bit I we have to figure out what they will do, not what what we think they should do.

But let's let's shift gears here a little bit. There's a at least a couple of other things going on here. Um, you know, one thing is we got tariff policy. We have we've kind of left that What? What? What are those who cares? Do we care? I mean I I again I think the question is we got

We got a signal this week that there's actually going to be starting to deliver refunds uh by the time we get to the spring into summer. Does that matter? Um and Well wait wait wait just to I I don't want people to confuse what you just said not tax refunds. Refunds of AIPA tariffs. They are tariff refunds, no? Oh, are you talking about IPA refunds? Yeah, yeah, I'm talking about the AIPA. I'm talking about trade policy here, Joe.

You don't we you don't want to talk about trade policy? Oh no, no, no, we can't. I'm sorry. I thought you were just listing the kind of I wasn't trying to build bank that in as a macro impulse. I'm just saying there's a bunch of things going on on the trade policy front.

And how I mean I I don't think it's an immediate issue, as you say, these things are gonna take time. But as we start to see these investigations go, look I guess the way I would interpret where we've gone is that the administration's been pretty lacks in terms of using all the tools it has to to quickly try to bring AIPA uh back. It's not it's not going to the full fifteen percent.

Um and um Well, hold on a s I mean, who knows where this administration is, right? I mean No, I'm just saying where it is today. We haven't we said we were gonna get fifteen percent this week. Maybe, but we still haven't gotten it. But this is what I want to really get at is are we now starting to see as we get these investigations you know launched? as we have um, you know, Trump going to China and come back, are we about to see another turn here that in the next two or three months the trade

conflicts are gonna start to heat up again. Is this a is this a ma a factor in the macro story in your mind? Um I mean the first order thing is that I think you continue to see um I mean meanwhile back at the ranch, right? I think you continue to see in the US some of the inflation pressures building from this, right? Which is kind of late, was one of the bedrocks.

more hawkish uh central bank call. Um the I think our sense that of the the the Supreme Court ruling was that it creates a lot of noise but ultimately is gonna keep um you know overall effective uh e effective uh tariff rates kind of uh a bit lower, but uh still quite elevated. Um I don't know. Is it a macro event? Um I mean right now I'm taking the middle ground and saying what we're going to see is a desire to

put in place architecture that gets us pretty close to where we were. In which case it would be I think um On the margin we'll start to see tariff rates come back up from where they ended up going after AIPA was ruled. Yeah, but but in the broad scheme of things. It's not gonna change things much. But I'm you know open mind to be uh surprised in either direction on that on that side. Well the reason I was hesitating, I was like, okay, so you do all of the the the direct

Math on that. And it it gets you to a point where maybe it's a little more well, maybe it's a little less, maybe it's the same. Um But then what I was hesitating is you you do wonder just about like the chaos and the uncertainty around this, right? Remember a a central part of our call has been That you get fading business caution and uncertainty that leads to a pickup in labor income that replaces last year's wealth effect driven.

kind of hopeful behavioral shift in the consumer and that you get some saving rate rebuild along with solid consumer spec continued growth. That includes job growth. The starting point of that was fading business caution and uncertainty. This year has been nothing but kind of the ongoing chaos generation. Right.

D I disagree with that, but I'm not gonna f fight you on it right now. Fair enough. I know what you're gonna say and I'll say it for you that there is a sense that you know Trump's policies are getting somewhat corralled and limited and and we're we're moving away from the The the broad base fears.

Well I I was gonna say that, Bruce, and Yeah and I think that is the that is one of the risks here, which is not only that oil goes to one hundred and seventy five dollars a barrel, but that even oil at ninety or a hundred.

does more damage in terms of uh business sentiment than we're building in right now. That's a risk. But let me let me turn to one last thing because we've we've gone while I don't want I want just a bit of a a word on Asia right now. I mean it seems to me Um Asia in many respects is quite vulnerable to supply disruptions coming out of the Strait of Hormuz.

Um, but on the other hand, there's two other things happening here. One is that Asia continues to be an engine for both tech and non tech manufacturing. And you look at the China data, you look at the uh momentum. into the start of the year, it looks pretty darn good. And in addition, we're getting what feels like more fiscal stimulus uh across the region. So how do I balance these things in terms of thinking about uh the Asian outlook as we look at the the next couple of quarters.

Well, I mean I I think the the the tech part of the story continues to boom and you can see some of those numbers. Um I do think we need to be very not only cautious about the the the the the kind of um Iran war and the impact on the broader tech sector, not only the impact of the Iran war on some of these inputs, as I mentioned, sulfuric acid being important for semiconductor production.

But important for something I keep harping on for the last few weeks is that the that you hit just supply bottlenecks in the tech sector along things like hard drives and and I just came from Korea I don't know last week or the week before and and it's just like the the the memory price is there. And the the bottleneck pressures seen in there are are certainly a a a hot topic. That could be a limiting factor in the strength of this story. But with that said.

I think we're still kind of like going gangbusters. Uh it does mean like when you read nominal increases in exports you wanna be careful of what's real and what's what's coming from pricing. I think that has been a story in Korea for a while. Um so you don't want to overinterpret some of the the supercharged nominal trade numbers. Um but uh nonetheless, I think that's part of the story. I think the non-tech

part of the uh of the picture. I think I was talking earlier about the three drivers of business spending we want to see. Tech is continues, but you see non tech capex and hiring. Non-tech capex Um we are kind of seeing some hints of I know the Derbils report came back a little bit in the US, but I think the broad picture with profits doing better that I mentioned, you can see some of the industrial.

Um, you know, CapEx uh if you look at industrial profits starting to pick up, that does line up pretty well with non-tech capex.

And um, you know, I think that's gonna be an important driver for for Asia as well. I remember, you know, our you know, uh our kind of Former um uh you know, Asian regional economists would always make a big deal that outside of tech, the non-tech part is is pretty important for And so seeing these industrial profits turn, um, you know, and hoping to see this lift in the non tech.

uh capex side of things. I think that's the the hints that you've been flagging and kind of hoping to see for a while, I think those continue. And then there's China as well, which is, you know, China uh looks like had some pretty good numbers this week and we're looking for pretty solid numbers next week on the IP and retail sales side. Um You know, if anything, we have a forecast of six point two percent GDP growth could be tracking sequentially, yeah.

Uh yeah, sequential. Uh we could be tracking a little bit uh above that uh depending on the data that we uh the we get from um uh from there next week. Okay. I think we'll uh leave it there. I'm tired. I don't know how you are. You still doing jet lag? Yeah. Uh thanks everybody. I I hope you're having as much Fun and struggle with this as we are. Um, and uh hope we can continue this conversation next week on the weekender. Take care.