I'll start with you. And certainly those jobs numbers really got our attention on Friday. We're really dominant.
What did they tell the markets. Yeah. Look David it's hard to really say that we're in a recessionary environment with jobs
going increasing over five hundred thousand five hundred thousand this month.
Now keep in mind the U.S. economy has started here from a position of strength.
So while we could see weakening in the jobs figures in economic and earnings data in the months ahead we certainly are nowhere
near what we'd call an economic downturn or recessionary environment now. Now what were the market implications of this
move. Well you touched on some of them. But one thing we saw right off the bat the expectations of a 75 basis point Fed rate
hike really skyrocketed between yesterday and today. Yesterday's probability. Thirty five percent today. We have a sixty five
percent probability of a 75 basis point rate hike again by the Federal Reserve in September.
The second thing we saw was of course those yields. So Treasury yields both on the 10 year and the two year. Now keep in mind
the two year tends to be a proxy of what the Fed may do in the next couple of years or so. Both skyrocketed higher but we
continue to have what we call an inverted yield curve. So historically this inverted yield curve does provide a leading
indicator of recessionary environment but there is some lag to it six to 18 months. So net net we saw a market that absorbed
this higher jobs figure absorbed a potentially more aggressive fed.
But what we did see under the surface was that some of those growth parts the market longer duration tech speculative higher
valuation parts the market did underperform again today. And that might be a theme we see going forward as well. So John
others you follow central banks all around the world all the time including the Federal Reserve. Did the Friday numbers make
the Fed's already difficult job. Harder for them to make it easier. I think it made it easier. They are people. I don't
think myself that Powell tried to be that dovish last week. I think he meant to give the impression that he was still very
much committed to a more hawkish series of rate hikes. He was open to the idea of the claim that he was just not
credible for a while. The number of people who are convinced that the Fed will have to turn turn around swiftly because the
economy will be too weak. There has been strong that's been wanting we've had this really remarkable full back down in
yields. And with numbers like that it's very hard to criticize them for tightening rates. There's obviously the the employment
picture could scarcely be stronger. There is really no good practical reason why they shouldn't be very aggressive in
raising rates to cut inflation. So I think their job has been made simpler. I don't quite understand why the stock market is
still very calm about this and still plainly in the middle of quite a strong bear market rally. That does surprise me. I
thought to the numbers we got stay would have been an RTS to shape the stock market far more than it did. Yeah I want to come
back there. But first Mona let me ask you do you think it's possible for us to have this kind of job growth and still get
inflation under control or do we have to see a change in the employment situation.
Yeah you know clearly we have to differentiate between headline and core CPI here and inflation expectations. So of course the
headline number will be driven by what we see in energy and commodity markets. And we've been seeing a nice move lower
really since the beginning of July mid-June. We've seen oil but not only oil food grain industrial metals all roll over to some
extent probably driven by concerns about global demand rolling over as well. On the core side you know we're continuing to look
at what we call a shelter and rent inflation but also services inflation. Both of those are stickier than we'd probably like to
see. But the Fed has to continue to put pressure on the core part of the market. And keep in mind their preferred metric is
core P C E in order for them to meet this mandate. Now what what else we're watching and the other good part of this story is
that we are starting to see inflation expectations and break even inflation rates starting to come down from their highs as
well. So inflation hasn't yet been anchored permanently higher at least in the minds of consumers which is something the Fed
does watch. So in our in our view we do think inflation will start to moderate certainly on the headline side. And also on
the core side by year end. And we should start to see you know even things like shelter and rent be impacted lower by inflation
sensitive parts of the market interest rate sensitive parts of the market like housing for example. But even ultimately like
durable goods and services as well. Well that's the key question isn't it some of those more durable factors in inflation. John
what about that. We're seeing CPI numbers next week and you have things like owner
rent equivalents of things like that. Yeah I mean I wouldn't be surprised if we don't see some kind of
a decline simply because in the year on year rates compared to last month because gas prices really have come down very sharply
from an extreme level. So the chances that we see a decline in the headline rate are fairly high. That's politically quite
important. It doesn't really help the Fed that much at all. I think is completely right to distress the rental issue. The
problem with rents is that because of the way it's calculated we don't need to go into now. It tends to it tends to have a lag.
And the likelihood is pretty strong that we've got quite a few more
months of increases in rental inflation already baked in. And there is again this is this is one area where monetary policy
will work. You make it more expensive to borrow to buy a house and demand houses will go down. You will see I think the Fed
feeling obliged to Ed's key a key to control let inflation. The other important point to let's make those
people get excited about whether the peak is in. Understandably what really matters is how quickly it comes down is a very big
difference between core inflation being down to 3 percent by the end of this year would still be up 5. Even though Booth which
represents a decline it needs to come down pretty fast. And if it doesn't come down very fast because of this concern about
creating new baked in inflation expectations the Fed is going to have to be more aggressive than people are currently pricing.
Ramona what about that. How fast you expect it to come down if in fact it does come down and put one more thing in that there
may be momentum behind and that is salaries this Arizona 5.2 percent year over year. And the numbers we got this week at the
same time it's thought that they're kind of sticking. There are a lot of people out there just waiting for the next raise and
expect some pretty big. Yeah absolutely. Look
I think the at the inflation rate we'll start to see an end to John's point the year on year comparisons. And you know based on
those basic facts alone we should see headline numbers start to move towards six and a half percent. But when we reach that 2 3
percent probably not till at least mid and 2023 but that could be driven by exactly to what John was talking about as well.
That lag effect from you know a weakening housing market potentially a softening labour market and potentially you know
just weaker demand globally. That should all put downward pressure on inflation and that core part of the inflation which
does take some time and when we looked historically takes about two years from inflation for inflation when it's above 5 percent
to go from peak to trough. So if we did peak last month we may not reach trough until another 12 to 24 months from now. But if
the direction of travel is in the right way we could start to see the Fed at least take a pause at some point next year and
assess the situation assess the economy as well. John what about wages. Because we've got those very strong employment numbers
out. There was sort of a head fake I thought in some of the jolts numbers in the unemployment claims the. What is going on.
Are we seeing real softening in the labor market. It's a very difficult one isn't it. My best guess. Exactly like
everybody else was surprised by today's numbers. The JOLTS number I suspect has come down simply because companies are
beginning to fill those vacancies. I'm not sure that it's because they are already drawing in their horns and
taking out job ads down without ever having filled them which was a popular explanation earlier in the week.
But the bottom line plainly is that there's I suppose with the claims the notion there although it's not fully borne out by the
establishment survey either is that more people are looking but more people are trying now to get back into the labor force and
things are getting things back therefore showing up as more more people claiming unemployment insurance even even though the the
overall numbers show a strong market. The wage inflation you mentioned earlier on Andrew Bailey of the bank being that he got
into a lot of trouble for urging people not to ask for more for higher pay which he certainly would like it if people didn't get
better pay raises. But it's utterly reasonable in times of high inflation to want higher pay rises. It's a very difficult issue.