Let's start off with President Biden's comments about the risk of a slight
recession, as my colleague just said, a slight recession is still a recession.
What does that do to the mind set in particular when it comes to the consumer
and the household? Yeah, it's interesting to hear President
Biden say that. I mean, that is certainly in line with
our base case. So we are expecting a mild recession.
If you call them a slight recession or not a mild recession in 2023, I think
people are aware that that is definitely a risk, even even ahead of his comments.
Our base case is it would be mild. You know, you would have a couple of
quarters of negative growth, but it would also mean a rise in the
unemployment rate. We're expecting that to rise above 5
percent by the end of next year. You take a look at the labor market.
I mean, that is kind of thing that we keep falling back on as being resilient.
These numbers, even if we see that softening, is still historically pretty
high. Right.
Where do you see the weaknesses that we might not be seeing?
Yeah, I mean, labor market data is generally some of the last to show the
weakness. You first see activity slowing and then
you see your negative monthly jobs. Friends like we had a week ago, of
course, not negative yet, but we would expect that you see that in 2023.
We'll be watching for signs feeling the initial jobless claims, for instance,
that maybe those are starting to rise. I mean, unfortunately, this is just the
consequence of very aggressive Fed policy.
I wouldn't necessarily call it a mistake because it could just be intentional.
You know, that is what the Fed needs to do is loosen the labor market in order
to control inflation. The policy arrow risk is really tough
with my draw. I thought this chart, which I think is
really interesting. Swaps markets are pricing a piece for
Fed rates at about March next year and then it starts coming down.
So does that suggest that a policy mistake, my full support or oppose?
I think I mean, at least our expectation.
You know, we're forecasting similar for the Fed.
So we're expecting real policy rate that gets for 50 to 475 by Q1 of next year.
Our expectation is it's not necessarily a policy mistake.
It's just that maybe by then rates are restrictive enough that we see activity
slowing. You see the it was starting to see the
signs that inflation might return closer to target.
But unlike what the market is expecting, we would think that rates need to stay
restrictive for all of next year just to be sure that you are headed on the right
track for inflation coming lower. We wouldn't think of those cuts since
the market is pricing would happen until 2024.
When you take a look at the way that price pressures are playing out, I mean,
even here in Australia where we are, you see quite clearly that household
sentiment, the consumer is deteriorating, whereas corporates are
holding up actually quite well. How do you, I guess, make that
inflation, I guess, impact a little bit more equivalent, because it is also an
equality issue when it comes to how it's impacting people in the US?
Yeah, I'd say in the US. I mean, we do still see it really as a
Brazilian consumer for four right now. And a lot of that has to do with the
fact that the labor market has been so strong and still is very strong.
So you do have a low unemployment rate. You do have nominal labor incomes that
are actually still on aggregate terms outpacing the pace of inflation.
You eventually would see that sentiment even worsening.
As you start to see layoffs, you start to see a weaker labor market.
But for right now, I'd say that's still a factor that's keeping inflation pretty
strong. We are expecting that you start to see
some slowing in goods prices and people are not spending as much on goods.
But I say the risks are that even for those types of prices, they could stay
stronger for longer. The other two risk, as of obviously a
topic, has been just market dysfunction globally, particularly when you take a
look at what's happening with the U.K. but the Treasury market dysfunction,
liquidity concerns, as well as the strength of the dollar being just so
stubbornly high. These ivories when it comes to, you
know, what you talk about with clients, for example.
Yeah, I would say it's certainly a question that we get asked.
It's something that the Fed is watching. But I don't really see any imbalances
just yet that would cause, say, pivot from the Fed.
So this is the question we've gotten asked the last couple of weeks,
especially as you know, is this the Fed is is that what we should be expecting?
The Fed will, of course, pay attention to global financial stability concerns.
The strong dollars is part of that. But it's ultimately going to be still
just domestic conditions. And what the Fed is seeing on inflation
and the underlying drivers of inflation, which is the tight labor market, which
will eventually will foreign policy is a wage price borrow a risk that they
should be watching for? Yes.
I mean, we've we've definitely seen signs of this wage price dynamic.
You know, maybe you don't call it a spiral, but that's certainly what we've
seen as the driver of underlying inflation for some time.
I think that still is the driver. I think the Fed knows that at this
point, you know, you hear Cherif all talking a lot about that ratio of job
openings to the number of unemployed people in the economy.
That's been around to for about six months or so.
It's fallen a little bit at one point seven or so now, but that's just a sign
of a really tight labor market. And that's what's driven a wage growth
that's around 5 or 6 percent. And that's ultimately what's driving
inflation that is too high. So at what point does that strong
currency become an issue? Because we know it's going to be an
issue going into earnings for the effects exposure for a lot of companies.
Yeah, I'd say for individual corporations, we definitely could be a
factor for the macro economy. I mean, a strong dollar on the margin
would actually benefit said, you know, that is less inflationary pressure and
some deflationary pressure. But unfortunately for the US that pass
through a really strong dollar to inflation is just really small.
So I don't think it's enough to cause much comfort that you're bringing
inflation down because of the strong dollar.