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CPI Keeps Pressure on the Fed as Diesel Hits $6 · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Chuck Zotta and Mike Armstrong.
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  Speaker 2: Chuck, Mike, and Tucker with you here on a CPI
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  Speaker 2: Friday at 8.30 a.m.
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  Speaker 3: This morning.
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  Speaker 2: We received consumer price index data from the fine folks
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  Speaker 2: at the Bureau of Labor Statistics. The headline number came
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  Speaker 2: in as expected, 0.4%. The core number came in on
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  Speaker 2: a slightly hotter than estimated number of 0.3%, mostly due
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  Speaker 2: to rounding. It wasn't, you know, a straight up 0.3%.
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  Speaker 2: But what we've seen this morning as a result, initially
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  Speaker 2: bond yields moving higher across the entire yield curve. Now
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  Speaker 2: what we've got is the front end yields a touch higher.
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  Speaker 2: The 10-year is actually down by one basis point after
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  Speaker 2: a big run up yesterday of 12 basis points. And
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  Speaker 2: the 30-year is down about three. So, Mike, walk me
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  Speaker 2: through what we've got with this CPI report. What did
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  Speaker 2: you take away from it?
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  Speaker 4: Yeah. That it was about in line with expectations, but
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  Speaker 4: nothing in it giving any sort of cover for Fed
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  Speaker 4: to say, oh, watch out, look at this, inflation is
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  Speaker 4: not as bad as we thought. So I don't think
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  Speaker 4: it provides any cover. In terms of markets, I sense
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  Speaker 4: that we are just getting a buy the dip across
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  Speaker 4: markets pretty much everywhere here this morning. We've got equities
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  Speaker 4: up a percentage point. We had bonds, like you said,
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  Speaker 4: initially reacting before now falling. And so I think across markets,
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  Speaker 4: I'm not sure I would read much into how they're
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  Speaker 4: reacting to the CPI report because nothing in it was
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  Speaker 4: hugely surprising. But, you know, if you are already of
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  Speaker 4: the opinion that the Fed needs to hike, this report
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  Speaker 4: gives you no cover to stay where you are. I
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  Speaker 4: don't think I think they still may choose to stay
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  Speaker 4: where they are. and surprise markets in that way. But
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  Speaker 4: I don't really think that this report, again, given what
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  Speaker 4: you're going to get in September with where oil prices
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  Speaker 4: and now diesel prices are, I don't see how you
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  Speaker 4: look at this as anything other than a stay-the-course combat
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  Speaker 4: inflation report.
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  Speaker 2: Yeah, you take a look at where we stand now
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  Speaker 2: on the inflation metrics that we have. CPI is at 3.4%
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  Speaker 2: for the last year. Core is at 2.4. PCE, which
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  Speaker 2: we have not gotten the data yet for August, but
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  Speaker 2: heading into the August reporting, PCE is at 3.7 on headline, 3.34
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  Speaker 2: on core, and producer price index 5.4% on headline, 4.6
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  Speaker 2: on core. So overall, it's safe to say, even if
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  Speaker 2: you throw out PPI just because it's a separate index
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  Speaker 2: that measures completely separate things, CPI and PCE, if you
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  Speaker 2: just average them, which, again, I'm not saying that you
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  Speaker 2: should or shouldn't, but neither one's right. There's no one
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  Speaker 2: where it's like, oh, this is inflation. But if you
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  Speaker 2: average them, you're at 2.9% on core inflation, and you're
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  Speaker 2: at 3.55% on headline inflation. It suggests that you don't
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  Speaker 2: have a particularly tight economy, in particular with the fact
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  Speaker 2: that you've got some additional inflation since this report that's
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  Speaker 2: going to need to get passed through because of what's
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  Speaker 2: been happening in diesel prices and things along those lines.
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  Speaker 2: So I think that when I look at it, again,
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  Speaker 2: is there any evidence in the labor market that things
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  Speaker 2: are too tight? No.
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  Speaker 4: No, I mean, we did see a slight uptick in
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  Speaker 4: wage growth, as you were talking about this morning, Chuck,
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  Speaker 4: before we went on air. So there's something there. But no,
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  Speaker 4: I don't see much that is a risk of the
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  Speaker 4: labor market driving inflation right now.
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  Speaker 3: No, I meant the other way.
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  Speaker 2: Are there any signs that the labor market is like, Oh,
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  Speaker 2: on the verge of falling apart?
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  Speaker 4: That policy's too tight on the labor market. Oh, I see. No,
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  Speaker 4: I don't see much of anything there.
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  Speaker 3: There's nothing.
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  Speaker 2: Jobless claims remain very muted. You don't have any signs
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  Speaker 2: of widespread job loss or anything like that. It's very
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  Speaker 2: much a stable but slow labor market.
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  Speaker 3: At the moment.
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  Speaker 2: So I look at that. I look at, you know, the,
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  Speaker 2: the huge CapEx spending that is, is going on as
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  Speaker 2: it relates to AI. And it's tough to look at
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  Speaker 2: this economy and say that a rate hike or even two, three,
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  Speaker 2: or four is going to significantly hurt it. If I'm
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  Speaker 2: being honest, I like what, what I'm telling you is
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  Speaker 2: I think the economy is strong enough to be able
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  Speaker 2: to withstand the multiple rate hikes and still keep on chugging.
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  Speaker 1: Yeah.
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  Speaker 4: I mean, you ask yourself, right, are the economic drivers
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  Speaker 4: right now, the drivers of economic activity, are they going
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  Speaker 4: to be meaningfully hurt by a percentage point of rate hikes?
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  Speaker 4: And I have a tough time getting there. I don't
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  Speaker 4: think AI companies are going to slow their spend. I
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  Speaker 4: don't think that the housing market will get substantially worse
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  Speaker 4: if the Fed hikes rates by a percentage point, because
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  Speaker 4: I don't think that's likely to affect 30-year mortgages very much.
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  Speaker 4: So I kind of come to the same conclusion that
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  Speaker 4: the risk to me is much more on the side
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  Speaker 4: of inflation than the Fed causing a recession.
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  Speaker 2: And let's be honest, this is what the bond market
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  Speaker 2: is telling us as well. If you look at the
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  Speaker 2: 10-year treasury, just as an example, because again, the 30-year
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  Speaker 2: is not.
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  Speaker 3: Really traded and used by most investors.
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  Speaker 2: The 10-year is is really like that benchmark for, hey,
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  Speaker 2: how do we expect the economy to be over the
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  Speaker 2: next business cycle, basically? And here's what we have. We
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  Speaker 2: can decompose it. Because the U.S. government issues regular 10-year treasuries,
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  Speaker 2: as well as what are called TIPS, Treasuries Indexed for Inflation,
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  Speaker 2: we can decompose the move up in yields into, hey,
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  Speaker 2: is this the market pricing in additional real growth? Or
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  Speaker 2: is this the market pricing in additional inflation? Here's what
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  Speaker 2: we see. Since the start of the year, just as
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  Speaker 2: an example. Actually, let's do, this is going to be
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  Speaker 2: even better. Let's do since the start of the Iran conflict.
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  Speaker 4: On February 28th, 27th, sorry.
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  Speaker 2: February 27th, 2026. The 10-year real treasury rate, meaning, hey,
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  Speaker 2: here's the percentage that the U.S. 10-year treasury is pricing
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  Speaker 2: in for real growth in the next 10 years, was
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  Speaker 2: at 1.74%. The 10-year break-even inflation rate, meaning the rate
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  Speaker 2: that inflation would have to be over that period in
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  Speaker 2: order for TIPS investors to be rewarded for buying TIPS
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  Speaker 2: versus the regular U.S.
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  Speaker 3: 10-year treasury, was 2.25%. So investors.
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  Speaker 2: Six months ago, six and a half months ago, we're
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  Speaker 2: expecting 1.74% real growth for the next decade and 2.25% inflation. Today,
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  Speaker 2: or rather the last day that I have updated data for,
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  Speaker 2: which is yesterday, what we see, 10-year Treasury real interest rate, 2.46. Mike,
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  Speaker 2: is 2.46 higher or is it lower than 1.74? I
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  Speaker 2: was told there wouldn't be math.
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  Speaker 3: It's higher. It's higher. I'm sorry, than 1.76. It's higher.
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  Speaker 4: No, 1.74.
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  Speaker 3: Sorry about that. It's higher. Exactly.
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  Speaker 2: So real growth projections for the next 10 years have
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  Speaker 2: moved up by 0.7% in the course of the last
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  Speaker 2: six months. Break-even inflation has gone from 2.28.
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  Speaker 3: Up to 2.40. Mike, is 2.40 higher or lower than 2.28?
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  Speaker 4: 2.40 is lower than 2.88. No, it's not.
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  Speaker 3: It's 2.28.
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  Speaker 4: Sorry, I wasn't... You throw down a lot of numbers, Chuck. Michael,
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  Speaker 4: come on.
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  Speaker 3: It's Friday. It's basic math.
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  Speaker 2: Break-even inflation has moved up, but not by nearly as
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  Speaker 2: much as what we've seen on the real growth side.
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  Speaker 2: The 10-year Treasury is telling you a story of real
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  Speaker 2: economic growth, not of inflation. Inflation expectations have moved up
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  Speaker 2: a little bit. We see that. I'm not saying that
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  Speaker 2: they haven't at all. But what we're seeing is, okay,
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  Speaker 2: if this is the level of capex that we're going
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  Speaker 2: to see, The 10-year Treasury is pricing this in right now.
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  Speaker 3: Does that mean that it's right?
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  Speaker 4: No.
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  Speaker 2: This could end up being wrong. Maybe inflation's higher and
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  Speaker 2: real growth is lower. We don't know. But this is
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  Speaker 2: important to understand in terms of, hey, why are we
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  Speaker 2: seeing bond yields moving the way they are? It's not
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  Speaker 2: just purely an inflation story. Some of it is, but
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  Speaker 2: it's also, hey, the growth that's being projected in is
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  Speaker 2: stronger because ultimately, if the Fed's not going to try
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  Speaker 2: to stamp out inflation, then both of these things end
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  Speaker 2: up moving up.
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  Speaker 3: And that's what you see there. So let's take a
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  Speaker 3: quick break here.
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  Speaker 2: When we return, we're talking about kind of what we're seeing,
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  Speaker 2: you know, recently in inflation. Let's talk about the last,
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  Speaker 2: you know, five, six, seven years of inflation and what
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  Speaker 2: it's done to the prices that Americans see every day.
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  Speaker 1: The latest news on inflation, the Fed, the economy, and
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  Speaker 2: Mike, we got a piece in the New York Times.
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  Speaker 3: What years of inflation have done to American prices? They've
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  Speaker 3: gone up.
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  Speaker 4: Yeah, how useful. I was interested in how they decided on,
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  Speaker 4: what is their starting point, 2012 here? And I don't
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  Speaker 4: I know that people very much think about inflation in
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  Speaker 4: terms of the longer term, but does the average American
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  Speaker 4: really think about the price of bread today compared to 2012?
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  Speaker 4: Or is it more like, oh yeah, three years ago
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  Speaker 4: this was a fair bit cheaper? We can go through these.
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  Speaker 4: I'm happy to. Beef and veal is 100% more expensive
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  Speaker 4: than 14 years ago. But I just don't know that
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  Speaker 4: that's a useful benchmark.
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  Speaker 2: Here's how I think they got there just based on
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  Speaker 2: the charts they put in the piece and why they
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  Speaker 2: did it this way, they basically wanted to say, look,
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  Speaker 2: the last seven years have had high inflation, whereas let's
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  Speaker 2: compare it to a period of low inflation before it.
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  Speaker 3: I think that's how they got there.
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  Speaker 4: Yeah.
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  Speaker 2: Because here's the premise. Here's the data that supports that assertion,
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  Speaker 2: in my opinion. They show nine different goods in a
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  Speaker 2: first series of charts. And here's what they have.
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  Speaker 3: Beef and veal.
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  Speaker 2: Prices from 2012 through early 2019 rose 17%. Cumulatively now,
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  Speaker 2: they've risen 96%, as opposed to it would have been
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  Speaker 2: 37% if we had continued on the same trajectory.
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  Speaker 4: Yeah.
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  Speaker 2: Bread, during that seven-year period from 2012 through 2019, was
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  Speaker 2: up 7%. If it had continued on the trajectory that
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  Speaker 2: it was on, and again, they're extrapolating based on the trend,
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  Speaker 2: it would have been up 11%. Instead, it was up 46%.
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  Speaker 2: Alcoholic beverages went up 10% in that first period, now
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  Speaker 2: up 31% for the whole versus it would have just
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  Speaker 2: been 20% otherwise. Used vehicles had fallen by 6% in
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  Speaker 2: pricing for the first seven years. They're now up 20%
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  Speaker 2: for the whole period instead of being down 16% if
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  Speaker 2: you extrapolate that out. So they're basically saying, look, here
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  Speaker 2: was the seven years prior to inflation starting to pick up,
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  Speaker 2: and then the last seven years we've seen hotter inflation,
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  Speaker 2: and here's what we've seen instead.
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  Speaker 4: Right.
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  Speaker 2: The issue with this is, should one assume that the
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  Speaker 2: inflation that we saw during the 2012 through 2019 period
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  Speaker 2: is the norm, or did that happen to be a
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  Speaker 2: period of unusually low inflation? And the reason that I
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  Speaker 2: bring this up, okay, is that if you look at
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  Speaker 2: the CPI data that we have going back as far
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  Speaker 2: as I can see it, which the data that I
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  Speaker 2: have goes back to... Give me just one second so
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  Speaker 2: I can pull it effectively.
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  Speaker 3: It goes back to 1948. Okay, so I've got 1948 there.
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  Speaker 2: If we look at the average of inflation during that time,
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  Speaker 2: 1948 through now, it averages 3.52% annually.
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  Speaker 3: Now, that includes the high 1970s and 80s. It includes
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  Speaker 3: the low 1960s, the low 2010s, yada, yada.
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  Speaker 2: But if I go 1-1 of 2012... through 1231 of 2018,
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  Speaker 2: what I see is that CPI averaged 1.61%, which is really,
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  Speaker 2: really low.
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  Speaker 4: It is. It's abnormally low.
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  Speaker 2: I'd have to go through and look at rolling seven-year periods,
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  Speaker 2: but I would guess, just based on eyeballing the thing,
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  Speaker 2: it is one of the lowest periods of inflation that
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  Speaker 2: we've ever had.
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  Speaker 3: The only other ones that I can find that.
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  Speaker 2: Are probably comparable are early 1960s, and I think that's
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  Speaker 2: probably it.
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  Speaker 4: So here's what we tend to do in our minds
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  Speaker 4: is we tend to sometimes just remember the good times
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  Speaker 4: of the past and not the not so good times.
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  Speaker 4: So the reason we had such low inflation, in my opinion,
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  Speaker 4: would be that the economy sucked during the early 2010s. Yes.
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  Speaker 4: To put it plainly, if you want to compare prices
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  Speaker 4: to January of 2012, let's talk about other parts of
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  Speaker 4: the economy in January of 2012. The unemployment rate was 8.3%.
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  Speaker 3: Is that bad? Pretty bad.
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  Speaker 4: It's more than double what it is today. More than
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  Speaker 4: double the unemployment rate than where we are right now. Now,
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  Speaker 4: the unemployment rate getting cut in half is not the
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  Speaker 4: cause of the inflation that we saw in the 2020s.
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  Speaker 4: That's not the insinuation that I'm making here. It was
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  Speaker 4: a contributing factor, but it was not the approximate cause
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  Speaker 4: of it. The approximate cause of it was that we
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  Speaker 4: shut down our economy, flooded it with cash, did bring
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  Speaker 4: down the unemployment rate, which drove wages higher. And then
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  Speaker 4: also implemented tariff regimes over the course of the last
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  Speaker 4: year and a half that have also contributed to higher prices.
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  Speaker 4: So all of those things combined are contributing factors here.
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  Speaker 4: But I'm not sure that I'd be willing to sit
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  Speaker 4: here in 2026 and say, yeah, I yearn for the
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  Speaker 4: days of cheaper bread because 2012 was such a great economy. No,
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  Speaker 4: not really.
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  Speaker 2: And so this is the thing is, yes, like I'm
• 16:27
  Speaker 2: not saying that the inflation that we've had is good.
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  Speaker 2: It's really bad. It's been awful for most people in
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  Speaker 2: the United States. And basically, like, if your name isn't
• 16:36
  Speaker 2: Jeff Bezos, even Bezos is probably like the cost of
• 16:39
  Speaker 2: my yacht has gone up.
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  Speaker 3: You know, high class problems, but still problems.
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  Speaker 4: I'll also say just one other, you know, if we're
• 16:47
  Speaker 4: taking metrics from 2012, the Dow Jones Industrial Average. While
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  Speaker 4: unemployment is now half of what it was, the Dow
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  Speaker 4: was about one-fifth of where it is now in terms
• 16:59
  Speaker 4: of the Dow Jones Industrial Average. So, yeah, I can't
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  Speaker 4: say that our inflation problems over the last 14 years
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  Speaker 4: have been all bad for Americans.
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  Speaker 2: Well, yeah, I mean, look, in a vacuum, inflation is
• 17:16
  Speaker 2: not inherently bad for stocks. It's the response, the policy
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  Speaker 2: response to inflation is, okay, raise rates hurt the economy
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  Speaker 2: so that you kill inflation, but in doing so, you
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  Speaker 2: also tend to raise the unemployment rate. So, yeah, I
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  Speaker 2: think comparing inflation in the last seven years to what
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  Speaker 2: is an unsustainably low rate of inflation that we saw
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  Speaker 2: in the 2010s is not....
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  Speaker 3: It's not realistic.
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  Speaker 2: You're not going to see that again unless the economy
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  Speaker 2: sucks that much again.
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  Speaker 4: Yeah, I think it does one thing well, Chuck, which
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  Speaker 4: is assist in explaining why people are so unhappy about inflation.
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  Speaker 4: I think it does that, right? We had a really
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  Speaker 4: low period of inflation for an extended period of time
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  Speaker 4: that people got used to. It was one of the
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  Speaker 4: lowest seven-year time periods for inflation that we saw, like
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  Speaker 4: you said, since the 1960s. And.
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  Speaker 4: Now we're experiencing one that is a little bit hotter
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  Speaker 4: than average. And so that pace of change, I think,
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  Speaker 4: it's useful in contextualizing why we're all so unhappy about
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  Speaker 4: the state of the economy, but it's not useful for
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  Speaker 4: much of anything else. I guess the last piece on inflation,
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  Speaker 4: the last six months that we have measured now on CPI,
• 18:34
  Speaker 4: is a perfect measurement of what we've been seeing since
• 18:36
  Speaker 4: the outbreak of war in Iran. So if we're going
• 18:39
  Speaker 4: to take the very short-term look at inflation again here,
• 18:42
  Speaker 4: obviously we don't know how that all culminates, but March
• 18:45
  Speaker 4: through August inflation now, annualize that, you're at like 4.2%.
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  Speaker 4: And so I think that's what's leading a lot of
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  Speaker 4: folks to be uncomfortable with the state of things at
• 18:55
  Speaker 4: the moment, and a lot of that is energy prices.
• 18:57
  Speaker 4: But annualizing the last six months of inflation, which precisely
• 19:01
  Speaker 4: lines up with the start of the war in Iran...
• 19:03
  Speaker 4: And you're over 4% inflation, and that's not where any politician, voter,
• 19:09
  Speaker 4: or anybody else wants to be as we head into
• 19:12
  Speaker 4: the fall and winter season.
• 19:14
  Speaker 2: And in particular, I saw, let me pull the data
• 19:17
  Speaker 2: up on this. I pulled it today. Yeah, this is
• 19:21
  Speaker 2: from Ernie Tedeschi. I've got some inflation on what this
• 19:23
  Speaker 2: has done to real average hourly earnings.
• 19:27
  Speaker 3: Let's discuss that. We've also got Wall Street Watch when
• 19:29
  Speaker 3: we return.
• 19:39
  Speaker 1: Like us on Facebook and follow us on Twitter at TFEShow.
• 19:43
  Speaker 1: Breaking business news is always first, right here on the
• 19:46
  Speaker 1: Financial Exchange Radio Network. Time now for Wall Street Watch.
• 19:52
  Speaker 1: Tracking the stocks, the data, and the headlines driving markets
• 19:55
  Speaker 1: so far today, right here on the Financial Exchange Radio Network.
• 20:01
  Speaker 5: Well, the Consumer Price Index revealed consumer prices climbed 3.4%
• 20:05
  Speaker 5: on an annual basis last month, in line with expectations. However,
• 20:09
  Speaker 5: monthly core inflation came in higher than estimates, leading to
• 20:13
  Speaker 5: increased speculation the Fed may hike rates at its meeting
• 20:17
  Speaker 5: next week. Right now, the Dow is up over 0.8%
• 20:20
  Speaker 5: to 444 points higher. S & P 500 is up 0.9%,
• 20:22
  Speaker 5: 69 points higher. NASDAQ up over 1%. or 276 points up.
• 20:33
  Speaker 5: Russell 2000 is up two-thirds of a percent. Ten-year treasury
• 20:35
  Speaker 5: yield down one basis point at 4.932%, and crude oil
• 20:41
  Speaker 5: down about 3%, trading at $ 99 a barrel, while Brent
• 20:45
  Speaker 5: is at 105. Oracle reported stronger than expected quarterly profit
• 20:50
  Speaker 5: and revenue for the previous quarter, with the company's cloud
• 20:53
  Speaker 5: infrastructure business more than doubled. oracle is up half a
• 20:56
  Speaker 5: percent sticking with software adobe shares are down modestly after
• 21:00
  Speaker 5: the company's current quarter guidance came roughly in line with
• 21:03
  Speaker 5: estimates however adobe said its shift to a freemium business
• 21:06
  Speaker 5: model could slow near-term revenue revenue growth meanwhile shares in
• 21:13
  Speaker 5: furniture retailer rh are flat after the company's revenue and
• 21:16
  Speaker 5: profit beach street forecast while its full year revenue guidance
• 21:19
  Speaker 5: was also better than expected and kroger is up 4%
• 21:23
  Speaker 5: despite the grocery store chain posting mixed second quarter results,
• 21:27
  Speaker 5: beating on earnings but missing on revenue. I'm Tucker Silva.
• 21:32
  Speaker 5: That is Wall Street Watch.
• 21:35
  Speaker 2: Mike, we got a piece in the Bloomberg. It's titled
• 21:39
  Speaker 2: Economists See Fed Defying Expectations for Rate Hikes. Quite honestly,
• 21:44
  Speaker 2: I don't care what economists think the Fed is going
• 21:46
  Speaker 2: to do. No?
• 21:48
  Speaker 3: It's not a useful data point to me.
• 21:49
  Speaker 4: I think they're more or less likely than the markets
• 21:52
  Speaker 4: at guessing what the Fed's going to do. I'm not
• 21:54
  Speaker 4: really sure either.
• 21:56
  Speaker 2: How do I know if they're better or worse than
• 21:58
  Speaker 2: what the market's pricing in? I don't care what the
• 22:01
  Speaker 2: economists are saying that the Fed's going to do because
• 22:04
  Speaker 2: I don't know if they're good at this. I don't
• 22:07
  Speaker 2: know if they're more predictive than the market. What I
• 22:10
  Speaker 2: do know is what the market's pricing in. And as
• 22:12
  Speaker 2: of right now, it's an 85% chance of a rate
• 22:15
  Speaker 2: hike on Wednesday.
• 22:18
  Speaker 3: And then a.
• 22:18
  Speaker 2: Subsequent hike at the December meeting and a subsequent one
• 22:21
  Speaker 2: at the March one. So basically, it's an every other
• 22:25
  Speaker 2: meeting hike for the next six months.
• 22:29
  Speaker 4: And what we can say, again, we don't know about
• 22:32
  Speaker 4: economists or the specific economists track record for calling rate hikes, but.
• 22:39
  Speaker 4: I think I'd be comfortable saying that it is pretty
• 22:42
  Speaker 4: rare to be, what are we, five days out from
• 22:45
  Speaker 4: a Fed meeting with an 85% priced-in chance of a
• 22:48
  Speaker 4: rate hike and not seeing one at that meeting.
• 22:52
  Speaker 3: It would be unusual.
• 22:53
  Speaker 2: I don't have any data on the last time we
• 22:56
  Speaker 2: saw the Fed go against the wisdom out there.
• 23:00
  Speaker 4: But.
• 23:01
  Speaker 2: Yeah, generally when you get to an 80% plus probability,
• 23:05
  Speaker 2: the market tends to be right on these things. Again,
• 23:07
  Speaker 2: as you would expect, 80% of the time it's going
• 23:09
  Speaker 2: to be right then.
• 23:11
  Speaker 3: So I.
• 23:13
  Speaker 2: Think that when you look at the overall picture, so
• 23:17
  Speaker 2: let's say you've got three rate hikes that are being
• 23:19
  Speaker 2: priced in. And honestly, the third one is really wishy-washy.
• 23:23
  Speaker 2: The third one is basically like 60-40. It's not even
• 23:27
  Speaker 2: priced in. We're basically pricing in two and a half
• 23:30
  Speaker 2: rate hikes right now. Mike, what's the tenure doing today?
• 23:35
  Speaker 4: It's flat last time I looked.
• 23:37
  Speaker 3: You know what that's telling you?
• 23:39
  Speaker 2: It's telling you that the market doesn't think two and
• 23:41
  Speaker 2: a half rate hikes is going to materially change what
• 23:43
  Speaker 2: happens to the U.S.
• 23:44
  Speaker 3: Economy. And that's fine.
• 23:47
  Speaker 2: But this is why, like, when everyone gets all stressed about, like, oh,
• 23:51
  Speaker 2: what's the Fed going to do this month?
• 23:53
  Speaker 3: Like, are they going to hike? Are they going to cut?
• 23:55
  Speaker 2: And I'm always, I'm the turd in the punch bowl
• 23:58
  Speaker 2: at parties. You know, like, I'm the guy who's like, Well,
• 24:02
  Speaker 2: it doesn't matter what they do, and people are like, oh,
• 24:04
  Speaker 2: but they're going to hike the interest rate.
• 24:07
  Speaker 3: One rate hike or one rate cut does not matter
• 24:09
  Speaker 3: to the U.S. economy. It just doesn't.
• 24:14
  Speaker 2: It's not something that has a material impact in any way, shape,
• 24:18
  Speaker 2: or form. If you believe that there's an inflation problem
• 24:23
  Speaker 2: in the United States right now, then if you want
• 24:26
  Speaker 2: to be serious about the issue... Take Fed funds up
• 24:31
  Speaker 2: by 1% next week and call it a day.
• 24:36
  Speaker 4: That would do it. I mean, let's... They're not going
• 24:40
  Speaker 4: to do that, by the way. No, they're not going
• 24:41
  Speaker 4: to do that. So the market's pricing in a hike
• 24:43
  Speaker 4: at the next meeting, Chuck, in five days. Yes. I'm
• 24:46
  Speaker 4: a little bit more interested in what happens if they
• 24:48
  Speaker 4: choose not to. And I think there's some reasonable evidence
• 24:52
  Speaker 4: that they may choose not to do so in spite
• 24:54
  Speaker 4: of what markets are pricing in. at least under Powell,
• 24:57
  Speaker 4: this Federal Reserve, which is mainly comprised of the same
• 25:00
  Speaker 4: voting members as were the case under Powell, were pretty
• 25:04
  Speaker 4: reluctant to hike rates, even in the face of what
• 25:07
  Speaker 4: looked to be pretty bad inflation. They were dovish at
• 25:09
  Speaker 4: every chance that they got. And while Warsh has talked
• 25:13
  Speaker 4: a big game, he hasn't backed it up with any action.
• 25:16
  Speaker 4: I'm not sure his viewpoints on that are any different.
• 25:21
  Speaker 2: No, and this gets into the really interesting game theory
• 25:24
  Speaker 2: of this. When you talk about how it potentially plays out.
• 25:27
  Speaker 2: Because let's say that the Fed doesn't hike next week.
• 25:32
  Speaker 2: The most likely reaction, in my opinion, from the Fed
• 25:35
  Speaker 2: not hiking, the long end blows out topside. Like five
• 25:39
  Speaker 2: and a quarter on the 10-year, I don't think is
• 25:41
  Speaker 2: crazy within.
• 25:43
  Speaker 3: Two to three weeks. But here's the interesting thing.
• 25:46
  Speaker 2: In the long end blowing out topside, what it does
• 25:50
  Speaker 2: is it makes it harder for companies and households to
• 25:53
  Speaker 2: borrow because interest rates go up even though the fed
• 25:56
  Speaker 2: did nothing.
• 25:58
  Speaker 3: Okay that's that's kind of interesting.
• 26:00
  Speaker 2: And and if there's one thing that warsh has said
• 26:03
  Speaker 2: he wants to let the market speak for itself and
• 26:05
  Speaker 2: does the market speaking for itself end up doing the
• 26:07
  Speaker 2: work for the fed then maybe but here's the counter
• 26:11
  Speaker 2: to it okay because again like there's multiple layers to
• 26:14
  Speaker 2: this if the fed is implicitly saying then hey we're
• 26:18
  Speaker 2: going to let inflation run hotter then you get more
• 26:22
  Speaker 2: embedded inflation expectations, which means both businesses and households become
• 26:26
  Speaker 2: more comfortable paying more for stuff and they demand higher
• 26:29
  Speaker 2: payment for their services, wages and things like that in
• 26:32
  Speaker 2: the case of households, which can create that inflationary, you know,
• 26:36
  Speaker 2: pressure that then continues and lingers. And so it doesn't
• 26:41
  Speaker 2: weaken the economy as much because you're allowing that flywheel
• 26:44
  Speaker 2: to get going. So again, you can like, kind of
• 26:48
  Speaker 2: get yourself twisted into a brain pretzel as you're trying
• 26:51
  Speaker 2: to sort through all of this, which is why ultimately
• 26:54
  Speaker 2: you come back to, hey, if you want to reign
• 26:57
  Speaker 2: in the long end and kill inflation, hike rates and
• 27:00
  Speaker 2: don't be scared of doing it. You're not going to
• 27:05
  Speaker 2: kill the U.S. economy in doing so with one rate
• 27:09
  Speaker 2: hike or two or three. In order to kill the U.S.
• 27:13
  Speaker 2: economy right now, you probably need... We've seen this, by
• 27:15
  Speaker 2: the way, how much less rate-sensitive the U.S. economy is
• 27:18
  Speaker 2: than in previous business cycles. If you wanted to kill
• 27:22
  Speaker 2: the U.S.
• 27:22
  Speaker 3: Economy, I bet you've got to hike rates like 2% now.
• 27:26
  Speaker 4: You bet. And that's not going to happen.
• 27:28
  Speaker 3: And it's not going to happen.
• 27:29
  Speaker 2: So I think I'm interested to see what we get
• 27:32
  Speaker 2: next week. I don't think it is consequential insofar as...
• 27:39
  Speaker 2: hey like what they do next week like matters to
• 27:41
  Speaker 2: the economy no like i don't think it does but
• 27:44
  Speaker 2: it's going to give us the first reliable signal in
• 27:48
  Speaker 2: the wars fed as to what they actually believe in
• 27:51
  Speaker 2: from a policy perspective because the first meeting in june
• 27:55
  Speaker 2: there was no chance of anything happening then we knew
• 27:57
  Speaker 2: this the second one in july was a toss-up and
• 28:00
  Speaker 2: they they punted and i again i I didn't defend
• 28:04
  Speaker 2: Warsh's press conference because I thought it was quite bad,
• 28:06
  Speaker 2: but it was a defensible position at least. I'm not
• 28:10
  Speaker 2: saying that I would have done it, but you could
• 28:12
  Speaker 2: defend the position of not doing anything. This is one where, hey,
• 28:16
  Speaker 2: the market is basically giving you the go-ahead, like, okay,
• 28:20
  Speaker 2: we can price this in. And if they do, okay,
• 28:23
  Speaker 2: they're at least somewhat serious about being willing to hike.
• 28:27
  Speaker 3: The more interesting thing to me is if they don't.
• 28:29
  Speaker 4: Yeah, if they don't, then... You're going to have an
• 28:35
  Speaker 4: incredibly difficult time convincing anyone that you are serious about
• 28:39
  Speaker 4: combating inflation. It doesn't matter what you say.
• 28:42
  Speaker 2: If they don't, day of the meeting, and again, I'm
• 28:48
  Speaker 2: not hoping that we see this, but it's like you
• 28:50
  Speaker 2: kind of want to see it just to see what
• 28:51
  Speaker 2: the reaction is. Day of, you'd be like, okay, 10
• 28:55
  Speaker 2: years goes up, you know, another 10, 15 bips. Dollar down.
• 29:00
  Speaker 2: Because they're not going to defend the currency there. And gold,
• 29:04
  Speaker 2: even with interest rates going up, gold goes, you know,
• 29:07
  Speaker 2: mooning again. Like, that's what you would expect to see
• 29:11
  Speaker 2: in theory. But again, you're probably not going to see
• 29:14
  Speaker 2: that because the market is pricing it that they're probably
• 29:17
  Speaker 2: going to hike.
• 29:20
  Speaker 4: So, I don't know.
• 29:21
  Speaker 2: It's really interesting, you know, to game this stuff out.
• 29:28
  Speaker 2: Let me ask you a question, Mike.
• 29:29
  Speaker 1: Hmm.
• 29:31
  Speaker 3: Is this the most important Fed meeting in years?
• 29:38
  Speaker 4: No, I don't think so. I mean, I guess it
• 29:42
  Speaker 4: depends on how many years, but it's tough for me to,
• 29:45
  Speaker 4: I don't think it's more important than any of the
• 29:46
  Speaker 4: ones that happened in 2022.
• 29:51
  Speaker 2: I'm trying, I'm trying to just like think through it.
• 29:53
  Speaker 2: Cause again, like anyone who's listened to our show, like
• 29:55
  Speaker 2: we don't normally hype things up. Like half the time
• 29:57
  Speaker 2: we're like, guys, this Fed meeting is going to be
• 29:58
  Speaker 2: a snooze fest or like, don't tune in this week.
• 30:00
  Speaker 3: And, Tucker just shakes his head when I say that.
• 30:02
  Speaker 2: But this one has a certain level of importance just
• 30:06
  Speaker 2: because the market is saying something but not with enough
• 30:09
  Speaker 2: certainty to completely bake it in the cake. And so
• 30:12
  Speaker 2: I think there's a level of intrigue here that is
• 30:17
  Speaker 2: interesting to me. There's some meat on this bone in
• 30:21
  Speaker 2: terms of how markets can react based on what the
• 30:25
  Speaker 2: Fed does here. And so I think this is... This
• 30:27
  Speaker 2: is one, it doesn't rise to a 10 out of 10.
• 30:29
  Speaker 2: You know, it's not January of 2022 or March of 2022.
• 30:35
  Speaker 3: But this one's like, this is a solid eight and
• 30:38
  Speaker 3: a half.
• 30:38
  Speaker 4: Yeah, if you want to make the argument that it's
• 30:40
  Speaker 4: the most dramatic Fed meeting in years, then you might
• 30:45
  Speaker 4: be there. It might not be the most consequential we've
• 30:47
  Speaker 4: seen this decade, but it might be the most dramatic.
• 30:51
  Speaker 2: Yeah, all you're waiting for to make it the most
• 30:55
  Speaker 2: dramatic is The Fed statement with a corresponding one put
• 30:58
  Speaker 2: out by Powell and Waller on the same day.
• 31:03
  Speaker 3: If you got that, then you're like, oh. But they
• 31:06
  Speaker 3: would never do that.
• 31:08
  Speaker 2: I think basically all of them there have enough respect
• 31:11
  Speaker 2: for the institution that you would never get a competing
• 31:12
  Speaker 2: Fed statement. As much as I would dream just to
• 31:16
  Speaker 2: see what... You know how different institutions have a different
• 31:21
  Speaker 2: level of what is disrespectful? You know, like if you're
• 31:25
  Speaker 2: dealing with like a Japanese company, just as an example,
• 31:29
  Speaker 2: and there's like any conflict that's publicly mentioned in a
• 31:32
  Speaker 2: corporate statement, you're like, oh, like this is for real
• 31:36
  Speaker 2: because Japanese corporate culture is just so buttoned up and like.
• 31:39
  Speaker 3: Nothing ever slips out.
• 31:41
  Speaker 4: Yeah.
• 31:42
  Speaker 2: So like, you know, this it would be like just
• 31:44
  Speaker 2: the very idea that there could be a second statement
• 31:47
  Speaker 2: delivered would be, you know, the Supreme Court is an example.
• 31:52
  Speaker 2: You get dissents that happen with rulings.
• 31:54
  Speaker 3: It's expected. Some are more fiery than others, but you
• 31:57
  Speaker 3: get them.
• 31:58
  Speaker 2: You never get a written dissent from a Fed Open
• 32:01
  Speaker 2: Market Committee member. It would be like, holy cow, this
• 32:05
  Speaker 2: is wild. I don't think you're going to get that
• 32:08
  Speaker 2: next week, but that would be the most dramatic.
• 32:11
  Speaker 3: Fed meeting ever.
• 32:11
  Speaker 2: Let's take a quick break here. When we come back,
• 32:14
  Speaker 2: we're talking diesel next.
• 32:16
  Speaker 1: Remember, you can watch the show live every day on
• 32:19
  Speaker 1: our YouTube page. We've got market updates and breaking business
• 32:23
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• 32:26
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• 32:28
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• 32:34
  Speaker 1: Fed decisions to market moves, watch the Financial Exchange live
• 32:38
  Speaker 1: on X. This is the Financial Exchange.
• 32:48
  Speaker 2: Let's talk a little bit about the diesel. Not Vin,
• 32:53
  Speaker 2: but the one that goes in your car. Diesel prices
• 32:56
  Speaker 2: rising another 8 cents overnight to $ 6.
• 32:59
  Speaker 4: 05 a gallon.
• 33:00
  Speaker 2: First time we've ever seen $ 6 a gallon diesel nationwide,
• 33:03
  Speaker 2: according to the AAA National Average. Yesterday, I was talking
• 33:07
  Speaker 2: with Mark Fandetti all day, because it was one of
• 33:09
  Speaker 2: the most insane days I've seen in the.
• 33:13
  Speaker 3: Diesel futures market, where.
• 33:15
  Speaker 2: Over the course of the day, we saw a 45-cent
• 33:19
  Speaker 2: intraday reversal to the upside on October diesel. And basically
• 33:25
  Speaker 2: what this means, based on how things are being priced
• 33:28
  Speaker 2: in right now, wholesale prices are going to be rising
• 33:31
  Speaker 2: pretty shortly, probably in the range of 25 to 30 cents,
• 33:35
  Speaker 2: based on what isn't priced in yet. So 625 to
• 33:38
  Speaker 2: 630 diesel next week is coming. It's basically priced into
• 33:44
  Speaker 2: the system now. And if we see more days like yesterday,
• 33:48
  Speaker 2: there's a pretty good chance that we get 650 diesel
• 33:50
  Speaker 2: by the end of next week, which, look, I'm telling you,
• 33:55
  Speaker 2: there still is the potential for this to get worse.
• 33:58
  Speaker 3: $ 7, $.
• 33:59
  Speaker 2: 8, $ 9 diesel is very much possible in the coming
• 34:03
  Speaker 2: weeks and months. And so I think this is something
• 34:06
  Speaker 2: that we need to be prepared to see. The only thing,
• 34:10
  Speaker 2: there are a few things that can at least staunch
• 34:14
  Speaker 2: the bleeding. There's one that can manage the situation short term.
• 34:18
  Speaker 2: If you want to, you know, staunch the bleeding. Hey,
• 34:21
  Speaker 2: if Russia's refineries are able to spool back up and
• 34:23
  Speaker 2: Ukraine stops attacking them. OK, that'll help the situation, not
• 34:27
  Speaker 2: in the short term, but at least like intermediate term. Well,
• 34:31
  Speaker 2: Russia was having, you know, more refineries attacked yesterday. So
• 34:34
  Speaker 2: that doesn't appear to be happening.
• 34:35
  Speaker 4: Yeah.
• 34:36
  Speaker 2: Number two, if the situation in the Middle East improves,
• 34:39
  Speaker 2: that can turn the tide. Based on what we saw yesterday,
• 34:43
  Speaker 2: where the Houthis apparently now have taken over the entire
• 34:46
  Speaker 2: west coast of Yemen and may have launched drones at
• 34:50
  Speaker 2: the Saudi east-west pipeline, which may or may not be
• 34:54
  Speaker 2: offline today now. We're not really sure because no one's
• 34:57
  Speaker 2: confirming or denying anything. But things don't seem to be
• 35:01
  Speaker 2: improving in the Middle East at the moment. The third
• 35:04
  Speaker 2: item that can help the diesel situation is China can
• 35:06
  Speaker 2: spool its refineries up. But remember, that doesn't fix it today.
• 35:09
  Speaker 2: You still got to get the crude to China. then
• 35:11
  Speaker 2: you've got to produce the diesel, then you've got to
• 35:13
  Speaker 2: export it. So it still is like a couple months
• 35:15
  Speaker 2: in the queue for that whole process to happen. And
• 35:19
  Speaker 2: so you're left with the only lever to pull in
• 35:21
  Speaker 2: the short term to help the diesel price side of
• 35:24
  Speaker 2: things is if there's some kind of export ban on
• 35:27
  Speaker 2: the refined product side in the United States. But that
• 35:31
  Speaker 2: creates all kinds of other issues then, depending on exactly
• 35:34
  Speaker 2: how you implement it and what products or crude are
• 35:39
  Speaker 2: potentially banned from exports so there are no good solutions
• 35:45
  Speaker 2: at this point and so it's increasingly looking likely that
• 35:50
  Speaker 2: we may be seeing seven dollar a gallon diesel in
• 35:54
  Speaker 2: you know by the end of the month i think
• 35:56
  Speaker 2: is a legitimate possibility now and look i i know
• 36:01
  Speaker 2: that a month ago when i was talking about the
• 36:02
  Speaker 2: possibility of six dollar diesel i think a lot of
• 36:04
  Speaker 2: people said okay chuck like you know go have a
• 36:06
  Speaker 2: vacation or something But here we are now, and this
• 36:10
  Speaker 2: is a real problem because it influences so many parts
• 36:13
  Speaker 2: of the U.S.
• 36:13
  Speaker 4: Economy. Yeah, I mean, one of those, just to make
• 36:16
  Speaker 4: this quite a local story here, it's estimated that over
• 36:20
  Speaker 4: half of Maine homes heat their homes with home heating oil,
• 36:24
  Speaker 4: about a third of New Hampshire homes and Vermont homes
• 36:27
  Speaker 4: and Connecticut homes. Massachusetts is less. It looks like maybe
• 36:31
  Speaker 4: a fifth there, but Rhode Island's a quarter. Alaska's a quarter.
• 36:37
  Speaker 4: this region in particular relies very heavily on that home
• 36:41
  Speaker 4: heating oil, which moves lock and step with diesel because
• 36:45
  Speaker 4: it's basically the same chemical compound. So that's where we are.
• 36:51
  Speaker 4: And we talk about how fuel prices can bleed into
• 36:57
  Speaker 4: overall inflation. And while it does make sense for Federal
• 37:03
  Speaker 4: Reserve officials and others to kind of look past oil
• 37:06
  Speaker 4: price shocks, I'm not sure you can do it in
• 37:09
  Speaker 4: the same way with diesel price shocks, because as we
• 37:12
  Speaker 4: were talking about yesterday, Walmart, Costco, they are all preparing for,
• 37:18
  Speaker 4: there's no doubt that they're all preparing for big fuel
• 37:22
  Speaker 4: surcharges to their bottom lines when it comes to shipping
• 37:26
  Speaker 4: all the stuff ahead of the Christmas shopping season. Although
• 37:30
  Speaker 4: my wife was at Costco yesterday and told me that
• 37:32
  Speaker 4: already they have Christmas stuff out. So Perhaps Costco dodged
• 37:37
  Speaker 4: a bullet there.
• 37:39
  Speaker 2: But Costco's got the end of an aisle right now,
• 37:42
  Speaker 2: not four different aisles of gifts and decorations. They've still
• 37:47
  Speaker 2: got the giant skeletons out and everything.
• 37:54
  Speaker 4: This is where we sit right now. Like you said,
• 37:58
  Speaker 4: it's hard to see the path for substantially lower diesel
• 38:00
  Speaker 4: prices at least.
• 38:02
  Speaker 2: Let's take a quick break here. We've still got Hour
• 38:04
  Speaker 2: 2 coming up in just a little bit. Make sure
• 38:08
  Speaker 2: you stick around.