Global Data Watch Weekender: The more things change…

Welcome to the JP Morgan Weekender. I'm Bruce Kasman, and with me this weekender is Joe Lupton. Hey, Joe, how you doing? Hey, Bruce. I want to start by, you know, emphasizing that...

An important driver of what our macro forecast is about for this year is about the idea that we've put in place with resilient growth, with solid profit gains, with a... you know, an environment where consumers have held up here, a dynamic where we're expecting global business sentiment to recover and with that recovery.

generate stronger job growth, generate stronger non-tech spending, and effectively create a rebalancing of global growth as we go through the first half of the year. We can and we have been and we will continue to debate how well that's going, I think. From my point of view, what we have is a relatively encouraging set of signals coming as we're seeing the consumer continue to be resilient. This week's retail sales report, part of that.

seeing some signs of business sentiment picking up from low levels. So these are encouraging things, but we haven't yet seen the big prize, which is job growth pick up. Certainly not what we've got from the latest U.S. employment report, but where I want to. Focus the conversation this week is a little bit in a different area, which is the source of the sentiment shock last year was U.S. policy and disruptive policies around trade, around immigration, around Doge.

that had impacts on both U.S. and business confidence globally. The question I think I want to pose here is, does the things that we're seeing coming out of the administration here, there's a set of...

Google geopolitical things, but let me focus for the moment on domestic policies, whether all of these announcements that are coming across on credit card interest rate ceilings on what the... housing restrictions and supports there, and also things like what we're seeing in the conflict between the Fed and the administration ramping up, whether those pose the risk of creating a...

a new disruptive event i don't want to argue that there isn't risk there and i think the risk around the fed and some other things are worth highlighting but i do want to make two points here which i think do really differentiate what's happening this year compared to last year and does reduce the likelihood it will disrupt this confidence lift we're looking at. I think the first one is that last year's policies on immigration, on trade, on Doge.

was a signal that the administration coming in was willing to damage near-term growth at the expense of trying to achieve both political as well as medium-term. economic objectives. And I think the differentiation here today is that the initiatives that Trump is proposing here, they may not be achieving his goals, but his goals here are really to get supports for growth.

coming into the midterm election. So the alignment of intentions here, I think, is more consistent with sentiment continuing to follow the trajectory we think it is. despite these efforts. The second thing I would just emphasize is that the reason we're hearing such a wide range of proposals coming from the president, I think partly relates to the fact that he's constrained. What he really wants to do is generate.

monetary and fiscal stimulus. And the Fed is not looking like it's going to deliver on his desires. And Congress isn't going to give him the votes to get any material fiscal support. So he's coming out with a lot of stuff. But I think... it's unlikely that much, if any of these things, will actually be made policy. So you're creating a lot of noise, but not...

things that are likely to be signals and certainly not things that are likely to be disruptive. I want to leave on the table here for a second as I stop the issue of the Fed and risk of... Fed independence being damaged, which I think would be a disruptive event. I think we could also talk about the foreign policy side. But before I do that, since you and I haven't really talked through much of this, I'm just going to stop here and say, Joe, how do you want to give me grief on this?

I guess I want to maybe give you grief just in terms of the way you're framing some of the policies and the policy shift. I don't think Trump came in last year and thought, hey, I'm going to do. uh you know upend the global trading order i'm going to push through the most draconian immigration policies his words not mine that the country's ever seen and i'm going to you know fire a bunch of government officials

I don't think he said, I'm going to do those things even though it's going to hurt the economy. Right. I think he did those things precisely because he thought these were going to be good for the economy. The same way I think he thinks the things that he's doing now are going to be good. I disagree with that. I think there was a recognition that there would be some potential short-term pain, but it was based on the idea.

Trump didn't say that it was going to hurt the economy. What they say and what they think are not necessarily the same things, but I think anybody setting policy who... puts tariffs up, who puts immigration constraints up, who cuts back on government spending in a material way, has to realize that those are things that can hurt growth. There are other things they're doing that may be offsetting it.

But I think in the context of what happened as we moved through February, March, April last year was a willingness to, if not, kind of recognize that to at least. not put any real weight on that as they were trying to do ideological things, as they were trying to do things which they thought over a more medium term perspective would have done.

positive things for the other the other aspect of this and the more here do we agree that what trump is trying to do now is provide support for the near-term growth outlook regardless of how we want to interpret 25 can we at least agree that what he's trying to do now is deliver actions that are going to be supportive for growth in 2026.

Well, that's that's the clear intention of what I think he honestly thought that his policies all leave aside. It doesn't matter. We can go back and say we think that he thought something in 25. But in reality, most observers. And businesses themselves recognize that those things were going to have short term tradeoffs. And that's what scared them and got them in trouble. But do we recognize today that the intent of the administration, what they're going to be trying to do here?

are things that are going to have a more close alignment with supporting businesses in the near term. And therefore, the thrust of what's happening here is less likely to disrupt business confidence. Do you have a problem with that?

I don't think caps on credit cards are going to be good for businesses. Particularly, I don't think they're going to be good for banks. Right. So, no, when you say, are these going to be business friendly policies? I don't think they are. But I just keep wanting to make the most important point here is, and this is something you hear all the time, that, oh, as we move away from 25 and all the disruptive policies, now things are going to be better.

As if their trade war suddenly has disappeared. As if there is no ongoing immigration drags that are still there. As if the disruptions in the government aren't still building. Let me ask you this question. The point I would make...

is that the trade war drag, even in our own numbers, is peaking right now from the inflation standpoint. If it happens, maybe it's not going to. I don't know. Is it happening? The last three-month run rate on U.S. score CPI is 1.4. i i agree although core pce is running higher but look i i get that and there's a noise in the data

That's fine. But what we're looking for, and I think most people are still thinking this is going to be big. And when you talk to corporates, you know this. You see them saying, we are going to start passing this stuff through. So, yeah. I do still think that's – Other than an inflation increase, where is the trade war impacting on growth in 26 in a negative way? I think the inflation is enough.

And then I would add, and it may not be, do I think it's enough? How much do you think it's going to add to U.S. inflation? How much do you think the trade war is going to add to U.S. inflation in 2026? I don't know. What have we said? It's not, it's not. It's not a huge amount. It's definitely going to temper. I mean, what do we have? We have inflation running about 4% in the first half of this year, right?

Not in the first half. We had 4% in the three months through February, which included a December forecast that was considerably undershot in the number. Yeah, yeah, yeah. So look. So there's that. Right. So it's wrong to say that that was last year's story. But I just want to say, if you think that you're going to add four tenths, three tenths to U.S. inflation this year because of tariffs, I mean, that's not.

that big a deal in the macro space i mean i'm trying to understand what you think are the drag because what i'm saying to you is that what i'm saying to you and you can disagree with me is there was a tangible and relatively large drag on global growth in 25 because of sentiment drags. And I think that's starting to reverse and that's going in the other direction. What?

Do you see that drag? Seems like GDP was doing pretty darn well through that. Well, every every component of business spending out of tech was was was weak. Inventory behavior was weak. Non-tech CapEx was weak. Hiring was near a stall. Businesses were very weak and they were weak across the world outside of tech.

I think that had to do with the sentiment shock. And that is a step that's moving, I think, in a more positive direction now. It could get disrupted. But I think it's – excuse me? See the hiring picking up? It hasn't yet. We don't see it through December for sure. Again, I was just getting warmed up on that's the trade story. I think the immigration trade, what you're saying, the trade story is not much. That's what I'm trying to get at. You don't have much of a drag.

For everything you say is not much. I mean, you're acting like these new policies that are like business friendly policies are a big deal. Like, do I think? No, I'm saying they're not a big deal. That's my whole point. I'm saying they're not a big deal, Joe. I'm saying they don't matter that much and don't pose much of a threat to being disruptive. I'm not arguing they're going to provide support. Right. I'm just saying that it's not going to be disruptive. Right.

Well, I think the policies that have been enacted from the administration are still disruptive. I think the immigration story is disruptive. And obviously, if you just pick up a headline and look at what's going on across cities in the U.S. on the immigration front.

This seems pretty darn disruptive. And as I've been highlighting, all these kind of 1.8 million under that were legal immigrants, these court cases have them rolling off legal status, not a year ago, but... A month ago, 500,000 coming up February of this year, another 100,000 coming up in April.

I mean, these are things that are still coming. And it's a mistake to think that this is a 2025 story that doesn't matter anymore. I think the Doge effects, a government that has lost all these workers and all the institutional knowledge. I think it's running pretty poorly here. I worry about U.S. data. You talk to people at the BEA, at the BLS, they have hundreds of positions that aren't filled.

morale of people I talk to working there is at the lowest they've ever seen. Do you really want me to translate morale at the BLS into a GDP forecast? I'm not sure where I go with that. No, no, I'm just saying that the doge effects in terms of what's happening on the efficiency of government. And I'm talking about like Social Security checks getting done right and on time. And you do see these stories of.

kind of disruptions in the administration of the various transfer payments. So, Bruce, I'm not trying to build an entire case on any one of these. I'm just saying this all started off with the idea that, hey, there were some disruptive policies last year, but now everything's better. And boy, he's going to buy 200 billion of MBS and isn't everything great now? And I think it's a mistake.

to think that we're out of the woods on this. I'm on board with our baseline view. I just think we're at a fragile moment still. It doesn't sound to me like you're on board with our baseline view. I mean, look, I, I, how could I not? Because I think, I think if you, if you're on board with a baseline view that we're going to get. What you're saying is the risks are skewed far more to the downside than the upside of the baseline view. Yes. Is that what you're trying to say? Yeah.

Frankly, you were there just a few weeks ago. It almost sounds like you think the risks are skewed to the upside. Well, I was not there a few weeks ago. I made a change. What I was saying... a few months ago, was that the US was a low floor, high ceiling economy, which means that it was at a cyclical juncture, which if things went bad, they could go very bad.

And if things went right, they could go more right than our forecast. And what I'm seeing is more news that's suggesting things are starting to go right, that there's a cyclicality to the story that's starting to gather some steam that I'm... Feeling is the more likely story. So if I'm thinking about where the risks are skewed, they're skewed, I think, to the upside here. And that's not a change that I made just a few weeks ago. It's a change.

they've been making over the last three, four months, and certainly has gathered steam over the last few weeks. Yeah. I mean, the 35% that we put in there for kind of... recession we grow you're more at what 20 now i'd say somewhere closer to 25 yeah um where are you I don't know. I'm kind of comfortable with the 30 to 35 range, which I used to be upwards of 45.

close to 50, right? When you and I were talking a couple months ago. But in some ways, once you're sitting around 30, 25, 30, it doesn't matter. You're basically saying it's not a very likely outcome. And therefore, it's not really what we should be talking about. We should be talking about the shades of what determines that 65 or 70 percent of the probability distribution. But you just said you're 30.

yeah right i know i said maybe i still am at 35 because it's just hard for me to wrap my head around what everything that i've just been saying that these drags i think still are I don't have a problem emphasizing that. And I do think there are things that could go wrong, including we could be hit by some shock that does. derail the lifting and sentiment here, which I think would be important. And that's in some ways where my perception of downside risk.

My perception of downside risks is now that we've got something in motion that's going to give us a decent outcome in the first half of this year, but there are things that could disrupt it. I'm not worried about the lagged effects of trade policy. I am worried about something being disruptive in the more kind of current setting on what policy is going to do with including in that.

Some concern about Fed independence, some concern about geopolitics, where there's a couple of flashpoints worth noting. And then there's the other concern, certainly, which is, I think.

independent of the story, which is we just could be wrong about the narrative and sentiment may not lift job growth, in which case we've got some concern of whether the consumer can continue to smooth here for that much longer. The upside is this kind of fiscal pop you're going to get here. And that's what kind of keeps me honest from getting too downbeat.

That's on my mind. I actually, and it's funny, for as probably negative I am, particularly on the policy front relative to most people, I'm probably the least worried about Fed independence of anyone I talk to. Now, this is going to, to me, the Powell thing that we had this week was like, if anything.

I came out of this week feeling stronger about Fed independence than before this week because what you saw was a huge rallying around the Fed, right? I mean, the Powell response was incredibly powerful. You know, you had a Sunday night statement, which is something you rarely see except in times of extreme emergency. And then you had all these Republicans come out and very forcefully smack down any idea of this.

What you learned if you were worried that there wasn't going to be enough support in the face of a real onslaught of Fed independence is that there's a big defense here. So learning that and seeing that in action. I think makes me feel a little bit better. Now, the one caveat to all that, and actually it's not a caveat, the most important thing to watch, of course, is the Lisa Cook case, which we'll see when that gets decided. But absent that.

I've always felt the kind of, you know, the fears around Fed control and frankly, the pricing that's in the market that suddenly you get these cuts coming after the new Fed share. I think that's a mistake. I think you're going to, if you're kind of in our baselines right on growth and maybe you get your upside on growth.

I'm much more worried about the inflation story. And if we're sitting here and the U.S. is running two five through the first half or three percent through the first half and inflation is running kind of three, three and a half percent in the first half. I don't see how any way, shape or form the Fed's going to be cutting. And as I keep telling you, I think the Fed's going to start talking about hiking at that point. Well, this is a good segue into trying to make sense of the.

Inflation news, you now have December, in which case not all, but a good portion of the distortions from the shutdown were supposed to kind of be cleaned out. And if I take the October, November and December inflation numbers as a piece, to me, what's kind of like really hard to make sense of is core goods that have been running close to a one and a half percent pace.

uh in the first nine months of the year are flat uh and if you look at you know supercore which was running um you know over three percent three and three and a uh a half percent or so uh is running one eight yeah these are these are like Numbers, which really took a step down. I mean, look, let me say this. What does that question mean? Do I believe it? Do I have...

Confidence that that's the signal that we've had this major downshift in inflation? No. But do I understand what signal I should be taking from this? I'm not sure. I'm confused.

If we were sitting here and what we were getting was that, you know, your kind of core goods were still running hot. You were seeing some kind of health care pressures building. you were really undershooting on shelter. That was coming down a lot. And also, by the way, I'm going to broaden it out to headline, if you were also seeing energy prices coming down. And so your overall kind of inflation pressures.

were kind of still on the contained to softer side. I would understand that. And you and I have kind of recognized that there's a downside tail here. It's the pieces of this that I don't know how you go when we, you know, on the core good side, which have been really hot. There's a clear story of. tariffs getting passed through and suddenly that goes radio silent at a time when the BLS has just been dropped a bomb on it in terms of its ability to kind of do this effectively.

I don't know what to think. I'm very kind of skeptical. I also think, as you know, that the translation of what is in the data is pointing to a pretty strong PCE number. And moreover, it's probably worth noting that both the median and the trim mean were quite a bit stronger. They were closer to the three tenths that we were looking for.

you know, maybe there's, there's something there, but I find all this very, very noisy. And when it doesn't fit with anything that you think would going on, I kind of call it into question. I agree with all of that, but I still think when you look at the data at this point, you have to be recognizing it adds a material downside risk to our assessment of where inflation is going to be in the next three to six months.

You just have to kind of recognize that and take that in the context of what you were saying a minute ago is that the Fed is going to be under pressure from elevated inflation. It may get some better inflation news here. I don't think... The Fed can process this information in a way that gets it to seriously consider a rate cut anytime soon.

You're right that if our broad view is right and we're sitting here by the time we're sitting in March, the payroll numbers have started to recover. GDP is still strong. Then I think it's going to be hard for them to. ease at that point. I think more time on the inflation side could deliver, if you had good news, some rate cuts. But I think if we're right, the tightening in the labor market is still solid.

GDP and recovering job growth is going to undercut that motivation as well. What I'm having a hard time seeing right now is a 2026, at least not first six or nine months. dynamic in which you build the pressure to talk about tightening, which you were raising. And I say that even independent of the potential for a more dovish Fed chair to come in.

said earlier, just kind of circling back to that point. I don't, I'm not at all worried about a more dovish Fed chair coming in. And by the way, you're not worried about a more dovish Fed share coming in or you're not worried about the consequences of a more dovish Fed share coming in. Sorry, I'm not.

Well, I'm not worried about the consequences of it, and therefore I'm not worried about whether one comes in or not. I don't think a dovish Fed chair coming in is going to change the dynamic unless... The Lisa Cook case goes through and the Fed can or Trump can kind of change the entire composition of the board. I don't think a Myron C, whether it's Myron or someone else and a Hassett Warsh. i guess readers now in the in the mix whatever it is anyone doing trump's bidding as the chair

is going to be able to sway a committee. The institution is too strong. And if they're looking at the kind of the kind of layout that we just did. I think you'd more likely see the chair in the dissent in a series of votes through the second half of next year. So, yeah. Yeah, I think the other point to make is the Lisa Cook decision is quite important. It's probably not going to come until March, April, maybe even later. And then the process, even if Trump gets the...

decision go his way. And that's not something I certainly would expect, but who knows? I think the process of turning things over, of getting Trump friendly.

appointees through the Senate is a slow process and not necessarily one that works entirely in his favor. The other thing that I think we need to recognize is that After this kind of, I mean, this I mean, almost insulting slap in the face to Powell that had to get him get up there on Sunday night and give this remarkable, unprecedented defense.

raises the odds that he probably does that he stays in his seat yeah it does um but i think the other thing we should just keep in mind here is that well i agree with your point about monetary policy in 26, I think you put in a more dovish Fed chair, you start to have them begin to change staffing and the institution in an underlying sense.

Over time, over the course of two years, there'll be more turnover at the Fed. And I think the institution over a couple of years will be changed fairly significantly if Trump continues to. push the agenda. He is right now on the Fed, even without the independence being lost. You can change enough personnel over time. You can change staff over time that the institution does start to look.

materially different. That's not a story for 26. But by the time we get to 2028, that kind of gradual but consistent change can actually have some fairly big effects. No, Bruce, we do get the flash PMIs, by the way. Yeah, no, I think it's all along the lines of both watching the sentiment components of that survey.

but also watching whether the pieces of it are actually starting to feel like there is some turn beginning to take hold in non-tech activity and employment, which the surveys so far have been still pretty... pretty downbeat on so we'll see that um but let's leave it here i'm getting i'm getting tired it's late late by me so um kind of looking up as we are talking the ability of the of the fed to you said change staff i was curious what the role the chair has the chair can't fire at will

There is a hiring executive that can deal with these types of issues. But can the chair fire that person? No, that's a board vote that would require that. So I think without firing, you can you can create. change in terms of staffing at the fed over over a period of time miserable so people just leave yeah you have a lot of power running the institution um

I think that prays out a lot. And I think that's overstated. That's what I kind of bristle a little bit at. Okay. But let's leave this here anyway. Okay. Okay. So we will end at this point. Joe, don't say anything. Thanks again for the conversation, everybody. And we'll continue this next week at The Weekender. Take care.