Global Data Watch Weekender: The shadow knows

Welcome to the JP Morgan Weekender. I'm Bruce Kasman and with me is Joseph Lupton. Hey Joe, what's with the scarf there? You cold? Well, do you want me to tell you the real reason is because you complained your office was too hot and so they lowered it, which made everyone else's office too cold.

I didn't I didn't actually expect that answer. Okay. Walked right into it. Yeah, I like wearing sweaters in the winter. It makes me feel good. So it's nice to have a little bit cooler temperature. So I think the scarf looks good, Joe. I think you should keep wearing it.

I'm feeling okay. I'm gonna start with that, which is to say I think the the basic building blocks of the story that, you know, we're gonna get a recoupling here. of hiring non tech uh business spending, you know, that's gonna have a fairly substantial effect on how we kinda see combined with a big acceleration of GDP growth, I think is is working out. I mean I think the Uh the storyline gets support.

from the um resilience of consumer spending. And I recognize China consumers are pretty weak, but when you kind of weigh that against what has been a pretty impressive run here for the US consumer Um, with to this week's uh October November uh reports pushing our

tracking for the fourth quarter up above three percent on consumption. Uh the Euro area team is feeling like we're tracking about one and a half, which in that uh space is almost uh you know, uh people get ready to pop the champagne courts if you can get consumption to grow one and a half percent or more.

Uh and you know, so you've got that story playing out and uh I think you've got the sentiment side, which we've been emphasizing, uh also moving. You had a modest move up in the future output PMIs and it's now standing Uh, in the D this is in the DM flash of course, the highest level we've been this year. Um, we got the um manufacturing stuff, which I know you're gonna want to talk about some more, feeling like it's uh rebounding in the PMIs as well. Um and um

You know, I think the dynamic on the US side from sentiment's actually even more impressive. What we're kind of getting in the January readings from the Fed surveys on expectations has actually moved up quite quite significantly at this stage. So I think the stage is set here. What we need now is to start to see

that translate into the labor market and that hasn't happened yet. I don't uh I don't wanna ignore that. Uh I think it hasn't happened in the US employment data. It hasn't happened in the PMIs where Uh the January readings were uh continuing to signal weakness there. And I think there's two challenges which you could have to our view. One is that we're just wrong in looking at this cyclically, that, you know, while the sentiment picture might be normalizing here.

uh while we might get some benefits from that in some aspects of growth, that the weakness in job growth is more structural. It's more tied to AI, labor supply constraints, things like that that are just shifting the production functions in a more capital intensive way and therefore you won't see sensitivity there.

Um you know, that's you know, that's something which could get us to be just wrong about this and has some important implications. Um the second story here is that we just uh you know, gonna see the cyclicality of this thing being disrupted again uh as it was uh in the early part of last year by US policies and certainly after writing and I think very eloquently as I wrote last Friday on the cover about how US policies

are different this year than last year, uh, in a way that's supportive more than uh um, you know, uh

kind of against the flow of sentiment recovering, we had the the weekend deliver some, you know, some concerns. And I think it in in some broad s sense It's a reflection of the fact that even if we have domestic policy trying to support growth going into midterms, even if Trump is constrained in his ability uh to do disruptive things like control the Fed.

Um he's pretty free in his um operations on m foreign policy and there's some risks in the face of what we saw this weekend, um, that that stuff could spill over. So Uh you know, feeling pretty good, not not losing sight of the concerns, but I do think the the theme that we're gonna see the labor market rebound, and then we'd start to debate the issues around inflation, labor market tightness and interest rates. But I think

From my point of view, if we're anywhere close to being right on our forecast, we're pretty much done with the Fed as we look at the twenty twenty six uh forecast. Uh that's a step or two ahead in terms of getting the story right, but um I'm feeling okay. I don't know how you feeling other than the fact that you've got to put a scarf on that you'd probably don't want to. Yeah, I mean I think that's um definitely a that's a good characterization of of where we stand. Uh I I would

I would emphasize the fact that the the labor market isn't playing a role. That's not just kind of one of the many other positive ingredients you mentioned. That is the the linchpin to make this all hold together. Um and if you don't get employment improving than I think the rest of this. I I don't care what we're seeing. I you can't see this continue. And and and and I think the way you can see the moderation of that uh push and pull is

in the US and through the saving rate, right? I mean, you have a a a consumer That is just knocking it out of the park the last two quarters and I I was kinda laughing if if m listeners remember our uh our orange bet. I think I gave you a banana on the the consumer way back in the summer. I mean I should give you a crate of oranges because the the consumer is three percent in the what's three percent in the

Second three and a half. Or you're three percent last quarter and three and a half and the quarter before that, right? Um Real real income. Contracted modestly over that period. No, no, not over that period. It contracted for a bit into the summer and then it's rebounded, but it's been growing less than quarter on quarter is real DPI is zero for three and it

about flat or it's about down a little bit. No, that's that's fair. I I tending to focus on the labor income which has been Well I just wanna talk real DPI because I'm talking real PC and I wanna the ultimately I want to talk about the saving rate. And the saving rate has just collapsed here and it's it's actually down three percentage points over the last two years. I mean

Pretty eye-popping. Now we can have all the debates that'll bore listeners to tears about potential revisions, and the saving rates tend to get revised, but Of course, if we want to open that door, then you could get ri revised by having less PCE. So who knows? Let let's just work with the data we have. And I think it's just hard to square, you know, the the strength of the consumer with this massive pullback in the saving rate. We can talk wealth effects and those are important.

Um, that then opens up the the K-shaped recovery. But I I don't I don't want to go down that road. I just wanted to say.

that you can't have this continue. You need to see labor income pick back up. Now You're gonna say that, well, we actually have one more quarter where we You're gonna do this, you're gonna take both sides of the conversation. Yeah, because we're gonna get this because we're gonna get the the tax refunds. So that's gonna give us a dollop of income without potential

uh labor markets recovery. So maybe that buys us another quarter, I I I suppose. But um this is it's you don't see this very often to see a consumer as strong as it is in a world where real DPI is contracted. for now and that i'm not talking like one month two months three months i'm talking six months where where we've seen this. And um I I'm not saying it doesn't happen, but it it

Doesn't happen often. It looks a lot like if I recall the the big saving rate drops we saw in ninety-two, ninety-three, or the wealth effect periods of ninety-eight, ninety-nine, and two thousand five, two thousand six. I mean those were all, you know, wealth effects. And maybe these are just back in spades. And you know, um, you know, maybe this can continue a little bit longer, although I will say both of those lasted two years.

Actually all three of those lasted two two years and twenty-four and twenty-five were the big decline. So we've kind of run our two year mark here on on this big wealth effect. So all of that to say y where do I feel? I I I am amazed and you uh You don't sound very positive. Not that that's Well I I know, Bruce, and I'm I'm You're turning you're turning what I think is a is a is a very important positive signal.

into a negative signal, which I think is the wrong thing to do. No, I agree. I think the resilience of the consumer and the fact that the savings rate is moving down. is a very significant positive here. It is in terms of the the macro outlook. And you're turning that into a negative. Wrong thing to do. I'm I'm just saying I don't know how much longer this can last without a labor market. And as you said up front,

The labor market has not shown up yet. And that, as I said, that's not just one of many missing ingredients. That is the missing ingredient. And so until you see that happen, it's hard to get too excited about the other piece. But the resilience is remarkable. Uh and so yeah, it's pretty good. And and and you're right to point out some of the sentiment measures are looking better. And the news on the manufacturing side, which we'll we'll turn to in a minute is.

is I would say back on track after it looked like we were on our heels a bit there. Yeah, I mean I d I don't have any problem with saying that the um grows without job growth is eventually gonna run into some trouble. But I don't think what we're seeing in the dynamic here is getting me to feel worried about that because I see uh A, the beginning of a pickup in labor income that's coming even without the job growth.

B, I see the uh the business sentiment responding to it in a way that I think will have beneficial effects on the labor market. see I see financial conditions still broadly supportive here, even though I do think there's some risks of what might happen if we're right in terms of the overall shifting in terms of people's perceptions of interest rate are risk.

Um, and D, as you mentioned, the idea that there's some more supports coming here for the consumer in the near term, which I don't think is small, at least for the next uh a few months. So You know, I don't I don't feel like we should be doing anything but other than saying this is moving in the right direction and therefore feeling, you know, cautiously optimistic. Are there Risks? Yeah, I think if we can't get the labor market going and we're sitting here in six months

without any job growth, something might go wrong. But I feel like we've put in place enough here and what's coming in the early part of the year is gonna keep us going. And and let me just say this. W this is this is where the banana and orange story is important, is that We have to recognize the consumer is choppy and we just had a six month run of um faster than three percent real consumption growth. I don't think the underlying trend in the consumer is above three percent.

Um, I would look for some moderation even in a world in which the tax cuts are coming and and some other supports might actually be building. But I think the consumer behaviorally is doing the right thing. I I think there's a mistake in the way people describe the economy as a a K shaped animal. Um and I think the uh and I think the what do you what are you saying?

Well I I I I would say my entire career doing this, which is going on uh you know, a little more than a couple of decades now, I would tend to say that these distributional issues aren't that important. But this feels like a very unique expansion where you you are getting supercharged gains and equities in a labor market that just completely sucked. You don't see it.

I I don't I don't know and uh and it's not because of layoffs, it's because the hiring rates are low, which means your new college grads. This is a very different and so uh economy and and so you have people that really aren't have income or they're just in the beginning part of their earnings profile that are really struggling here. And you have a lot of kind of baby boomer types that are sitting on their portfolios feeling great.

And I think that is such a Are you accusing me of being a baby boomer who's feeling great and just missing the pain of everybody else? I wish you were a part of the silent generation, Bruce. Um but what you're what's going on here look To argue there's diversity in in in in uh the distribution of outcomes here.

I'm totally uh on board with. To argue that there is a wealth effect that is helping to support consumption, I'm right on board here. But the K-shaped description of the economy is a description that kind of bifurcates the economy into two groups.

And I actually think there's at least three groups here that matter. And that's what I think is missing and it's missing in the way we're understanding what's actually happening in the consumer. So you have a low end consumer which is probably being hurt Disproportionately, both by how elevated inflation is in the US and also being uh hurt by the weaker labor market outcomes. I think that's no doubt.

But if we take the low end consumer, if we take that as the lowest twenty percent of the income distribution, they account for less than ten percent of consumption. So I will more than that, Bruce. What? I I'm saying it's not the bottom twenty percent. I think is that median household out there is feeling pressure. That that middle sixty percent, the three quintiles before you get to the upper

in income. That's a part of the income distribution which accounts for more than fifty percent of consumption. And that part of the income distribution is benefiting from wealth effects, is benefiting from access to credit. What's benefit is is getting hurt by labor markets. and is spending and reducing its saving rate. And that's where the cushion is coming. It's not a it's not an economy that's bifurcated. It's an economy that has

I think more uh three pieces to it. There's the upper incomes, there's the middle incomes. And the lower income. And what's saving this economy right now is the middle income distribution, which is the part that you're correct to point out can't keep going in terms of doing this if there's not jobs. But is doing it right now and is the reason why consumption is as strong as it is.

Yeah. I I I I mean, I i it's just a matter of degree along all those things. I mean we can break this up. Obviously there isn't just two groups, um, but I I think in a way that I haven't before, I think these distributional issues are mad. And I think I do think they are, but I think the characterization of it as K shaped inherently suggests that there's two groups. And I think that's wrong.

I I I don't know what you want to call it, a fan. I'm not sure. But who cares? The point the point is is that these distributional issues matter in a way that they haven't in the past. And that we're getting certain parts of the economy that are firing on all cylinders. and supporting spending and there are important parts of the economy and distribution that are not seeing these benefits.

And to the extent this is different than what we've seen in other expansions, it makes me a bit more nervous about how long you can. I would I would postulate that almost any environment in which you're seeing a significant move in the saving rate over a short period of time, or almost any environment in which you're seeing a consumer smooth shock. Requires more than just the upper end or the lower end. It requires a fairly broad range of consumers.

to be doing the job of carrying the uh the economy. And if it in the the you know, to the extent that we both agree that there's a there is a dispersion here and I'm not arguing that and I totally agree wealth effects and access to credit and all of the things that drive savings matters here. I agree.

But I think the conversation on the K shape thing where it goes off is it's suggesting that there's a very narrow wedge which is carrying the consumer and the c economy right now. And I think that's incorrect. Okay. And i in in a sense it's it's both a message of strength along a broader range of uh of of people. And it's also uh I think you're right that it is a it is a threat because I think people who are making these decisions to smooth

uh the the softening in income here uh can't do this indefinitely. But I do think they are also the people who are more benefiting from the tax cuts that are coming in and and obviously if we're right, we'll benefit from the labor market improvement as well. benefit from a lever consolidate. They'll consolidate rather than rather than continue to run spending at at at such a rapid pace of growth.

Yeah, I mean we we've talked about this before. I don't think the the tax cuts are geared towards middle lower income households. So I I think you're not gonna get as much bang for your buck from that. You're not gonna I wouldn't be applying the the kind of usual what point eight MPC on this. I would be hitting it with a lower number. Let's hit it with a point five, okay? Yeah. We're getting what I would estimate is something like for the first half of twenty twenty six.

an income boost for households, which is probably on an annualized basis, a percent and a half to income. Mm-hmm. So Okay, gimme give me something close to three quarters percent faster consumption. I actually think the way to look at it is that if the labor market begins to deliver income growth The multiplier on this will be small, that the multiplier is not a constant here, that the degree that other things improve. And households see their labor income pick up, they will use more of that.

The multiplier will in realized terms end up being quite small. If the labor market doesn't pick up, then the multiplier is going to be quite a bit higher. That's the way I would postulate it. It's not a it's not a constant. It's gonna be conditional because I think households use these uh transitory boost to income to help them when they need to. No, because the people that aren't getting the jobs aren't the ones getting the tax cut.

So you're saying people who are getting benefits from l no tips and overtimes are people who are not working? Are people that have to itemize their their income? They're they're where are they in the income district? They're not in the top one percent. They're not no time. If if your idea in the top twenty percent middle class is the the ninety to ninety-nine, then I think you need to reassess.

No, you think the people are getting tips in common overtime, but are people in the top ten percent are concentrated in the top ten percent? Do I think the people who are getting the salt benefits in the in the northeast, which will be concentrated higher income individual, are only in the top ten or twenty percent?

I would say the bulk of it is by far is in the t if you're saying twelve. I think home ownership is pretty well distributed here and it's gonna it's gonna be of significance across the the top fifty percent of the income distribution. Right. For again, for people who are itemizing their taxes, you're gonna this is gonna show up.

I mean, I I don't wanna fight the idea that there's gonna be a fiscal impulse here. I've been kind of all on board with that. I just think the MPC is gonna be lower than usual, given that the tax cut is geared towards higher. I think the MPC as as it is right now, I think it's conditional. I think households overall have a healthy enough position that when they're feeling hit by transitory shocks have a much

bigger opportunity to smooth it and that's what we're seeing. And when things get back to something that they feel is more normal or they're getting temporary boosts coming from things like tax cuts, they'll they'll save it, they'll rebuild. And that's that's where we are. I think we have a

uh the concerns you have of the labor market not picking up as quickly. But if we do get better news, I think they will save most of it and the NPC will turn out to be quite, quite low on it. Otherwise we're gonna have very strong growth in the first half of the year. The only way you can kind of keep the economy growing in the low to mid twos, if our broad thematic points are right, is by having the households rebuild savings in the first half of the year.

Right. So you're gonna end up with a negative multiplier from this if if the macro picture turns out to be good. Yeah it yeah, I mean it could. I I don't have a strong view on that. I mean if you're if the labor market's doing better then I'm then everything's done. The key missing ingredient of all this is done and we're off to the We still haven't seen that yet. Yeah, but you're still grumpy. I'm I'm cautious.

Cautiously upbeat. Cautiously passive sort of fighting fighting the the more po I now I think there's a different part of the story which is

I think still important. Um, it's what I would call the six seven part of the story. Um which I think what we've seen in past cycles, particularly in eighty six into eighty seven and ninety six into ninety seven, and we are in twenty twenty six. is the idea that when you get into a middle of a expansion that's not about to end and the Fed goes from easing to stabilizing on policy rates, which is our call now, that interest rates tend to reprice in a way that oftentimes

financial markets struggle with. And I think that is a a perfectly reasonable you know, thing to expect is that we continue to reprice the Fed to a a more symmetric bias of risk about where policy rates are going over the next couple of years and we can certainly um connect that to to the politics around the Fed.

Um and I think markets will have a more difficult time if we're pricing in a you know, six months from now a a worldview where where the risks of the Fed easing and tightening are starting to get relatively closely balanced. Yeah. Yeah. I d I I mean, how much repricing took place in ninety seven? Um fair amount. Um that's what I'm saying. So the ten year bill that out if I took out a cut from the Fed, is that gonna lead to a crash in the equity market?

Fair enough. I mean the Fed didn't move much in ninety seven. It moved once. Yeah. It hiked. But the repricing of the tenure yield uh between I think early mid ninety-six to to to mid ninety seven was something like a hundred basis points. So I'd say that that's kinda like a you know, if we're starting to push up well above four fifty and starting to move towards five percent on tenure yields and we're doing a similar thing along the curve, that would be broadly consistent. I think

most people don't see that scenario as realistic that you can get as much upward pressure on interest rates. Um but, you know, we'll see. We'll see what what we what we get. Um But um I'm surprising that you've don't feel that way because you've been the one who's Talking about the Fed moving into a Fed that could be hiking is gonna start a lot earlier than people are. So I'm more talking to a rage trader.

Which it is is a big deal. I just want bad things to happen. Either the economy's gonna go down or the Fed's gonna have to tighten. Something bad your worldview has something bad's gonna have to happen here, right? I think I think you can't have your cake and eat it too, right? And there are consequences to strong growth. And I do I am not a believer in Goldilocks.

I'm not a believer in Goldilocks either. Right. That's why I don't think you and I are very different on this. And I think it is I think there's a more incremental dynamic around moving away from Fed easing and starting to talk about tightening. I don't think that's likely to happen in the middle part of this year. Um I mean I can see it late twenty six into twenty seven, but I have a hard time seeing it play out over six months. I mean if we're growing if

Consumer spending's growing another, what I mean, we're forecasting two and a half, so I could easily see three percent. Uh and you've got what core running close to f w what do we have, three and a half? Well, we have three for the year. No, no, I know, but what's the quarter what's the first half of the year? It's gonna be over three well over three, right?

Yeah, but you gotta balance that against the latest drop. I mean that we have the summit. I get that and they'll try to like be smoothing, but the year ago number the year ago number we have optics of a of a year ago economy that looks like it's growing three percent. and two quarters of core PCE running three and a half plus. Well just just that story in our forecast and you can obviously take a different view.

We have the year ago rate in course CPI and PCE running at around three in the middle of next year. Uh middle this year, excuse me. Uh we have the U rate. starting to drift lower, probably be about four three in the middle of the year or so. And let's just assume for a moment uh we get something like two and a half percent GDP growth. You think at that time with the new Fed share coming in in June or so, we're gonna be talking about tightening? Yeah.

I don't think the new Fed share is gonna have anything to do with this. Well, I think it's I think it's premature, but um I'm not gonna argue with you that we couldn't get there. I also don't think the unemployment rate's gonna be sitting at four three. Where do you think it's going to be? Well, you and I had this conversation, right? I think four two. Four two is what you told me before. So I mean, and and you kind of thought that was outlandish and now it's looking more likely, right?

Yeah, we'll see. It's possible. Okay, so you've already moved from outlandish laughing laughing me uh off the the podcast to now it's possible. That wasn't at the podcast. I wouldn't laugh you off the podcast I'm at better behavior. That was in an inter Where I laughed at you. Yeah, so I think we got that and you shouldn't shouldn't tell people that I laugh at you in internal I think we could be kind of flirting then I'll have to tell people what you do to me in internal meetings.

Elder abuse. Elder abuse. Yeah, exactly. So there is a lack of respect for elders in this building. So

Uh but let's let's la let's not get thrown off course here. I think um the you know the broad story here uh is that I think things are on track and you know, do you have anything kinda in your mind other than this sense that it we can't sustain this that's kinda

you know, giving you a a different perspective? Or is there some other part of the world in terms of the business cycle dynamics that we you know, the China data is still pretty soft on the domestic side, even as they're getting the So the way I've characterized last year. year last year and then this year's outlook is that the the the top line GDP numbers look pretty similar between the two. They're almost carbon copies, but the sources

of lift has is not sustainable, right? So that you have to have a rotation, right? You can't get, you know, the huge productivity surge, the huge tech related lift, the huge decline in the saving rate, there's this kind of this kind of weakness in labor markets and yet still getting enough income to kind of help support things. All of those things were crucial for 2025 being as resilient as it was. And I don't think any of those

can be sustained at that level. Doesn't mean I don't think the tech can continue to be strong or that productivity can be strong. It's just gonna be coming off. You need to replace it with other things. And the the the as I said, the key ingredient is labor markets. Coming back up. I think the China to I'm not gonna argue the individual pieces.

on okay, we can't have another year where the saving rate goes down this amount and we can't have another year where job growth is as weak as that. But let me sort of argue that the right way to think about twenty twenty five is that in the face of some important drivers that were moving things in different directions. You had tech up, you had business sentiment down, um, you had some other things moving around. The message of twenty twenty five was that

behavior was very much supported by the health of balance sheets, um, you know, ab available credit, things of that sort. And that when I sit here and look at the turn into twenty six. Um, I don't feel like things are in any more strained position. So you had balance your main wealth effect wealth balance sheets on household side, on the business sector side are if anything, healthier, profits have grown.

No. You do see leverage going up, Bruce. I mean, I can talk to people here in the bank who are saying like le even on the corporate side that there's some real leverage increasing in the system. So I Bruce, your argument as much your argument as much. stronger you can say i would look at 2025 as the sources all those things you mentioned were people smoothing through what was a shock that is now gonna fade

And then that smooth By the way, is our debt service ratio of households up today compared to where it was a year ago? We just wrote a piece on that. It's flat. Okay. It has corporate profits grown solidly in twenty twenty five. Yes. Yeah. Okay. You have a mar margins or margins of people on the corporate side. Are they saying that leverage is higher or lower than it was a year ago? And I I can tell you what they're gonna tell you.

Right. It's it's gone up a lot and it's starting to get worrying. Are you seeing stresses in the credit space on the household side? Are you seeing delinquency rates go up? Yes, yes, and yes. So to sit here and say that, Oh, everything's just the same as it was a year ago, I think that's a good thing. I'm saying the macro indicators we look at are better. You might be right in saying there again, what are the macro influences I look at? Where profit margin?

Where is um household debt servicing ratios? Where's corporate debt servicing ratios? I haven't looked at that recently, but I don't think it's up in a significant way. You know, where is where is the You know, where is the stress that you want to show me on a macro basis? Now you can argue, and I would be sensitive to this, that there's stress building in certain pockets.

And that that stress building in pockets can cause problems, particularly if it combines with a repricing of interest rate risk. And I think that is the story that we should tell. But I think from a broader macro point of view. We still have the health of the underlying position of the of the business sector. The household sector has definitely lowered its savings rate, but it's done so against the backdrop of a very strong balance sheet. And I don't think we're unusually vulnerable here.

Um, from a from a point of view of uh the normal things that would tell me, Oh, we gotta be worried that this is about to to break or something like that. Yeah. So I do think you're seeing these pockets of stress. And I hear these stories and I wouldn't characterize as where we are now is the same as where we were last year. But My point of all this was just to say I I at least I think the the positive, if you want me to be positive.

I don't want you to be anything other than what you are, Joe. Right. I all of these positives that were supportive that I'm saying can't go on were a reaction to a shock that behaviorally households and businesses chose to smooth through. But it's not a zero sum game, Joe. Not a zero sum game. The fact that you got the consumer to be able to smooth through that generated earnings for companies. The fact that you got the consumer and the tech sector to do things in the face of this.

So I don't know why you're fighting with me. I I agree. I am saying yes, that is this that is the way you tell the twenty twenty-five stories that the smoothing provided all these benefits, and as you look into this year, the shock. fade and you get labor markets start to recover and you're off to the races. Everything reconnects.

I do think balance sheets are not as squeaky clean as they were a year ago, both on the corporate and household side. And there is a sensitivity to repricing rates, although as I said earlier, I don't think 25 basis points is going to be enough to do it. But

Yeah, the I I can tell our baseline story, which is why it's it's my modal modal view as well. All of that was us kind of reopening where I thought we were transitioning away from. I was saying China is another one of these things that I feel like is. On an unsustainable path. Growth was very strong last year. Lo and behold, they hit their 5% target. I'm shocked, right? But they did it by generating a significant amount of exports in an economy that is incredibly weak.

Right. So they can we continue to live in a world where China is just a week and using these kind of beggar thy neighbor policies to kind of keep shuffling off their capacity to the rest of the world? I I don't know. I don't think so. You can see pressures building across a lot of different places, not just the US. And that that worries me. So it's one of these buckets of things that was useful last year and is not gonna be sustained this year. So that's how I think about China.

Okay. And how do you think about inflation? Well especially against the world where you're I I mean I'm gonna echo I'm gonna echo I think what you've been saying as well, which is that we kinda had uh we've for a long time we've had a global sticky inflation story that had Frankly, I I think I can pat ourselves on the back. We've been we've been right on that for a number of years. There you go, Bruce. Uh number of years running.

I think you were saying it a couple of weeks ago that as we look to twenty six it's getting a little bit more bifurcated. I think on the US side. you and I, and probably I'm even more hawkish than you, um, are still pushing a inflation bias. But everywhere else in the world, it's kind of hard to see may maybe

But I don't know. But um, you know, it's hard to really make a case for sticky inflation. It seems like and and really the euro area in particular was a place you and I had thought maybe we'd see more pressures, and that's coming down. And so yeah, you have a US story and then you have a rest of the world story. And so that's where I am on the inflation. outlook. Does that characterize your view well?

Um yeah, I'm just not as cocky and confident about the US either at this point'cause I do think yeah a year of weak labor demand um

you know, can have more uh downward pressure. I th I think my my b basic point, and it comes back to what we were saying, is that our framework I think has served us well. And our framework has been to look at a world where There is um a global set of forces that have been common in terms of driving goods pricing and you have to look at the domestic measures of labor market costs and slack.

carefully when looking at the um service price story. And in what what has been interesting I think in the last few years is that the service prices have been sticky in most places, even though the the Slack measures have been all over the map. Uh and I think that's to a some degree the fact that everybody had a common hit to wage costs.

um in the aftermath of the pandemic and the unwind of that has been commonly slow. So um right now I think the goods price story is bifurcating as you described, with the US seeing upward pressure, everybody seeing downward pressure. Um, I think it's in the service price space where it's not clear whether there's commonality or not in terms of how fast things are coming off. I think things feel like they're coming off.

reasonably fast in the Western European space and I actually include the UK here, even though there's more more debate about what labor costs are doing there. Um and I right now look at the US, it's complicated, I think. There's Uh, I think there's pressure downward that comes from a a year of relatively weak labor demand. The wage numbers have actually

started to firm a little bit recently. Um, and then obviously you have the quirkiness, which is true in a lot of countries, when you start to bring in and I'm not we're not going there, Joe, even though I know you're gonna want to, healthcare costs and

uh OER in terms of the some of the pieces there that are being driven by by things that are a little bit uh different than what I I just described. So my my baseline is is sticky US inflation close to two and three quarters roughly this year, with the rest of the world, uh at least some of the important pieces of the world, Western Europe specifically, going down more. Um, I don't think the Western Europeans ease off of that, even if the E C B gets inflation.

below two percent. And I st also don't believe the Fed tighten with inflation close to three percent anytime soon. I think there's a storyline that could get them there, but I don't think it's going to play out in in twenty twenty six. Yeah. Or talking about it though. That's where you and I differ a little bit. Anything well talking about it. I mean are there some members of the FMC? Who will talk about?

Tightening if the wheel is not a little bit. Well he might not be. He might he might be there. That's actually an interesting point. I said the chair's not gonna matter, but obviously the chair has uh We'll have the press conference. Um it'd be interesting to know who's gonna be the let's say you get some. some kind of uh you know, Trump person in the seat. Um and we think that that person's gonna be in the dissenting position more often than not, who's gonna be the voice of the Fed then?

Well, I don't know, Joe. I mean to me Once we take Hassett out of the picture, and I'm not arguing I know whether Hasset is out of the picture, but certainly body language has moved Hassett uh to the back of the the list. I don't think we got a Trump guy in any of those other names that are being uh discussed. Not not Walsh, not um Rick. What? I think Walsh is. I think Hassett is.

I mean reader, I I don't I look I think there's a there's a an inherent dovishness in the way that um you know, Waller, uh Walsh has a view which I'm not sure how I'd describe it in terms of dovish, hawkish, but he wants the lower rate. May want trade off balance sheet for rates in some degree. Rick Reader's got views. His Rick Reader's got views which from what I can see are more, you know, on the dovish side right now.

Um but I don't think these guys are inherently dovish or hawkish, they're they're gonna respond to macro considerations along so along the lines of what you said. Earlier, if we're sitting with three percent inflation with the U rate that's moving down and GDP that's solid with the labor market rebounding, I don't think any of these guys are going to be pushing rate cuts.

Well Hassett? Yeah. I can see Hassett doing it because I think he will be more political. Why you you think kind of Warsh is some kind of academic tied to some monetary framework. I'm not sure if he would kind of be able to

lay out any framework. And and Hassett is a like he does have a framework. I'm not trying to defend, you know, his his his views here. I don't know where he'd stand, but I I'd kind of put them all very very in the similar But but my point wasn't that I was just trying to ask like kind of like what are the names of people that you would maybe start to listen to more carefully because there would be it's almost like there would be a shadow chair on the committee.

I think that's an interesting question which I don't feel comfortable answering because I think what you're getting at is what kind of coalitions get formed. in groupings on the committee, which I think would be a natural consequence of having a chair that no longer is the central voice. And how that it unfolds in terms of where do you see that? kind of intellectual

uh narrative pushing views kinda coalesce is not is not clear to me right now. Uh and I I personally would like to to kind of stay away from that part because I haven't really thought about it. But I think you're raising a very important point, which is If the chair is disconnected from the committee, some other voices are gonna emerge here, which are gonna be not individual voices, but they're gonna be groupings of coalitions, I think among different different uh sub

What what would be interesting to do is to take like our hawk dove scores by by speaker. and line those up with kind of macro activities and see who kind of is the most consistent with macro conditions and are you giving yourself an agenda here to do that? Well or or someone who's listening and then you could kind of do a weighting of that and kind of see where things gravitate towards more.

Yeah. But let's just end here and note in in passing as we do that next week probably not gonna break any any new ground. I don't think This is a committee which is uh as it's almost certainly staying on hold next a week is gonna provide much in the way of any any clearer sense of what would get them to uh to move uh as we move towards the next meeting. I think it's gonna be on hold, saying they're on hold for the until something kinda gives them a a reason to move, but not being very

Clear about timing or specific um you know indicators that will deliver that. Uh with that I'll we'll end. Well, I I haven't thought about B. O. J. signalling here, but we do have them moving towards a A rate hike in April. There'cause I yeah, I think b they're gonna be quiet the view simply because the the election Just around the corner. So they're gonna feel somewhat constrained from trying to signal anything. And markets may take that as a bit more of a dovish.

signal by because they're not kind of setting up April as much. Uh we don't think that is the the case and we're sticking with the April call, but you could see a bit more of a um uh you know dollar yen rod. Okay. With that, let's leave it there and uh thanks everybody for listening and hope to continue this what we want to call it a conversation or whatever next week on the weekend or take care.