WEBVTT 1 00:00:05.970 --> 00:00:07.500 - So Friday we get some jobs data 2 00:00:07.500 --> 00:00:08.970 that can make the market go crazy. 3 00:00:08.970 --> 00:00:11.010 What do you think it's gonna reveal about the Fed? 4 00:00:11.010 --> 00:00:12.065 Directionally? Okay. 5 00:00:12.065 --> 00:00:14.910 - You know that like Facebook relationship status button 6 00:00:14.910 --> 00:00:16.530 that says it's complicated. 7 00:00:16.530 --> 00:00:19.020 That's the way I think about the last couple of jobs reports 8 00:00:19.020 --> 00:00:21.690 because you saw these big headline gains, 9 00:00:21.690 --> 00:00:24.630 but they've been very concentrated in areas like government 10 00:00:24.630 --> 00:00:25.980 and healthcare jobs. 11 00:00:25.980 --> 00:00:28.620 And then the revisions have been significant. 12 00:00:28.620 --> 00:00:33.300 Last month we saw 111,000 revisions lower over the 13 00:00:33.300 --> 00:00:34.500 last two months. 14 00:00:34.500 --> 00:00:37.290 So the jobs reports have been a little bit murky 15 00:00:37.290 --> 00:00:38.370 or under the surface than 16 00:00:38.370 --> 00:00:40.080 what you would see on the headline. 17 00:00:40.080 --> 00:00:44.220 We've seen unemployment ticking up a bit. We're now at 4.1%. 18 00:00:44.220 --> 00:00:47.070 So I think any further cracks in the labor market's gonna 19 00:00:47.070 --> 00:00:49.740 support the narrative that the Fed can go ahead 20 00:00:49.740 --> 00:00:51.990 and start cutting at that September meeting. 21 00:00:51.990 --> 00:00:54.035 The challenge of course, is we have a couple more jobs 22 00:00:54.035 --> 00:00:57.540 reports, a couple more CPI reports and Jackson Hole 23 00:00:57.540 --> 00:00:59.130 before that September meeting. 24 00:00:59.130 --> 00:01:03.150 So we may hear from Powell that he's kind of wants 25 00:01:03.150 --> 00:01:05.070 to see more data. 26 00:01:05.070 --> 00:01:08.430 So I think of it as like, is he gonna commit to the cuts 27 00:01:08.430 --> 00:01:11.040 or is he gonna like play the field a little bit more? 28 00:01:11.040 --> 00:01:13.860 Meaning kind of wait and see what the data tells him. 29 00:01:13.860 --> 00:01:17.790 - He's got lots of information should he cut in September? 30 00:01:17.790 --> 00:01:19.050 - So here's the challenge. 31 00:01:19.050 --> 00:01:21.120 So what we've basically seen is this kind 32 00:01:21.120 --> 00:01:25.170 of mini economic cycle over the last 12 months or so. 33 00:01:25.170 --> 00:01:28.830 Back in the fall of last year, Powell used words, 34 00:01:28.830 --> 00:01:31.230 we call it forward guidance, to suggest 35 00:01:31.230 --> 00:01:32.525 that cuts were coming 36 00:01:32.525 --> 00:01:35.670 and all of a sudden the bond market priced in six rate cuts, 37 00:01:35.670 --> 00:01:38.070 which was completely over extrapolating. 38 00:01:38.070 --> 00:01:40.260 Yeah, it reminded us of the movie Fight Club. 39 00:01:40.260 --> 00:01:41.880 Do you remember that movie where the first rule 40 00:01:41.880 --> 00:01:43.325 of fight club is Don't talk 41 00:01:43.325 --> 00:01:44.325 - About fight - Club. 42 00:01:44.325 --> 00:01:45.158 Right? To the first rule 43 00:01:45.158 --> 00:01:48.570 of fed policy policy should be don't talk about cuts 44 00:01:48.570 --> 00:01:50.490 until you need to talk about cuts. 45 00:01:50.490 --> 00:01:54.060 Yeah. And so what we saw was this kind of risk on boom. 46 00:01:54.060 --> 00:01:57.150 The idea that fed cuts were coming, 47 00:01:57.150 --> 00:01:59.370 we were calling it a pivot party at the time, 48 00:01:59.370 --> 00:02:01.170 and we saw risk assets take off. 49 00:02:01.170 --> 00:02:05.280 This massive amount of easing was in the financial system 50 00:02:05.280 --> 00:02:09.450 and that caused inflation surprise surprise to pick back up. 51 00:02:09.450 --> 00:02:12.270 And so in the first quarter of this year, 52 00:02:12.270 --> 00:02:15.870 we saw economic data improving inflation was really perking 53 00:02:15.870 --> 00:02:16.980 back up a little bit. 54 00:02:16.980 --> 00:02:19.980 And that was really a consequence of that forward guidance 55 00:02:19.980 --> 00:02:22.380 of that loosening in financial conditions. 56 00:02:22.380 --> 00:02:24.690 Now we're seeing that reverse again. 57 00:02:24.690 --> 00:02:26.790 So we're seeing these kind of mini cycles 58 00:02:26.790 --> 00:02:29.790 where the data now are showing a deceleration. 59 00:02:29.790 --> 00:02:32.820 Once again, nothing sinister data slowing. 60 00:02:32.820 --> 00:02:34.830 Again, labor markets loosening 61 00:02:34.830 --> 00:02:37.050 and we're looking at business surveys, 62 00:02:37.050 --> 00:02:39.420 which are really timely reads of the health 63 00:02:39.420 --> 00:02:42.510 of the economy showing a contraction once again. 64 00:02:42.510 --> 00:02:44.130 So all of those things, again, 65 00:02:44.130 --> 00:02:47.340 are giving the fed the green light to go ahead and cut. 66 00:02:48.180 --> 00:02:50.040 From a market's perspective though, 67 00:02:50.040 --> 00:02:51.395 here's the way to think about it. 68 00:02:51.395 --> 00:02:54.780 In our view, those cuts are 69 00:02:54.780 --> 00:02:57.205 already in the price. 70 00:02:57.205 --> 00:03:00.640 So the soft landing is already priced into markets. 71 00:03:00.640 --> 00:03:04.150 We're sitting at elevated valuations, everything's awesome. 72 00:03:04.150 --> 00:03:06.970 High yield bond spreads are at 300 basis points, 73 00:03:06.970 --> 00:03:09.910 which basically is a fancy way of saying 74 00:03:09.910 --> 00:03:12.250 that the credit markets don't see any problems 75 00:03:12.250 --> 00:03:13.570 on the horizon. 76 00:03:13.570 --> 00:03:17.800 So you wanna think about lagging into high quality bonds at 77 00:03:17.800 --> 00:03:22.150 this point and not reaching too far for risk in portfolios. 78 00:03:22.150 --> 00:03:24.010 - All right. We need to make bonds sexy. 79 00:03:24.010 --> 00:03:26.230 - I know, right? Bonds are back, I 80 00:03:26.230 --> 00:03:27.230 - Hope. 81 00:03:27.230 --> 00:03:29.200 Yeah, it's a bond Summer, everybody. 82 00:03:29.200 --> 00:03:31.150 - Oh, I like - That. And thanks for watching. 83 00:03:31.150 --> 00:03:33.160 Check out more@qz.com.