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Instant Reaction: Will the Fed Cut Quicker After This Selloff? · Bloomberg Intelligence

• 0:02
  Speaker 1: More Wall Street banks are calling for more aggressive cuts
• 0:05
  Speaker 1: from the Federal Reserve following last week's jobs report. One
• 0:09
  Speaker 1: of the first out of the gate with a call
• 0:11
  Speaker 1: for two half point reductions at the next two meetings
• 0:14
  Speaker 1: was City Group, joining us now. One of the economists
• 0:17
  Speaker 1: behind that call Veronica Clark, us economist at City Veronica,
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  Speaker 1: Good morning, Thanks so much for being with us. So
• 0:24
  Speaker 1: you've had a weekend to think about the impact of
• 0:27
  Speaker 1: the jobs report and some of the other data that
• 0:29
  Speaker 1: we've seen. Are you sticking to that call?
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  Speaker 2: Yeah, yeah, good morning, Thanks for having me. Yeah. I mean,
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  Speaker 2: I think this equity self that we're seeing overnight only
• 0:39
  Speaker 2: maybe furthers that call the sense that maybe the Fed
• 0:42
  Speaker 2: is a bit behind the curve here. I think if
• 0:45
  Speaker 2: the Fed had had this number on Wednesday when they
• 0:48
  Speaker 2: were meeting, we might have seen a cut last week already.
• 0:51
  Speaker 2: I think, especially the Doves, are just going to be
• 0:53
  Speaker 2: increasingly focused on the employment side of that mandate. And
• 0:57
  Speaker 2: it's not necessarily the one hundred and fourteen thousand jobs added,
• 1:01
  Speaker 2: you know, as a bad number. Four point three percent
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  Speaker 2: unemployment rate is still generally low, but the trend will
• 1:08
  Speaker 2: just be very concerning to Fed officials, and they're far
• 1:11
  Speaker 2: from neutral, so yeah, you might as well start with
• 1:13
  Speaker 2: some bigger rate cuts right off the bat.
• 1:15
  Speaker 1: And to your point, we've heard from the market, to
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  Speaker 1: some extent pricing in sixty percent odds that the FED
• 1:21
  Speaker 1: cuts rates this week, and some of your colleagues at
• 1:25
  Speaker 1: JP Morgan Chase are calling for an emergency rate cut
• 1:29
  Speaker 1: as well. Do you think that the Fed should cut
• 1:33
  Speaker 1: rates before the September meeting?
• 1:36
  Speaker 2: Yeah, I mean, that's that's definitely not our base case,
• 1:38
  Speaker 2: but yeah, I would never say never in a situation
• 1:41
  Speaker 2: like this. In terms of the economic data that would
• 1:44
  Speaker 2: get them there, it does seem a bit unlikely. It
• 1:46
  Speaker 2: really is going to be employment data that is the
• 1:49
  Speaker 2: most important. We won't have another jobs report until early September,
• 1:54
  Speaker 2: so that in that sense, there's not necessarily the economic
• 1:57
  Speaker 2: data that would get them there, but something like equity
• 2:00
  Speaker 2: you know, the decline in equity markets that we've seen
• 2:02
  Speaker 2: that that is a big tightening of financial conditions that
• 2:05
  Speaker 2: could get them a bit worried that things will be
• 2:07
  Speaker 2: slowing even faster.
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  Speaker 1: Do you think that there's a risk of recession if
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  Speaker 1: the Fed doesn't cut rates to the levels that you're
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  Speaker 1: looking for?
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  Speaker 2: Yeah, to be honest, we actually even have a recession
• 2:19
  Speaker 2: in our base case already. You know, these things are
• 2:22
  Speaker 2: you know, they start very gradually and then at some
• 2:24
  Speaker 2: point you can reach this non linearity and and things
• 2:27
  Speaker 2: weaken much faster. It does kind of feel like we're
• 2:31
  Speaker 2: on the tipping point of that right now, and it
• 2:33
  Speaker 2: might be a bit too late to prevent that slowing altogether.
• 2:38
  Speaker 2: So that's actually in our in our base case already.
• 2:40
  Speaker 1: Is it just about the jobs market? This weaker than
• 2:43
  Speaker 1: expected jobs report from last Friday or what else has
• 2:46
  Speaker 1: you thinking that the Fed needs to make up for
• 2:48
  Speaker 1: lost ground?
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  Speaker 2: Yeah, it really is about the labor market. That's where
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  Speaker 2: we're seeing, you know, most of the weakness. But of
• 2:54
  Speaker 2: course that's probably you know, the biggest underlying support to
• 2:58
  Speaker 2: the general economy as a whole. And if you see
• 3:01
  Speaker 2: the labor market turning, especially if we get to that
• 3:03
  Speaker 2: point where you are seeing the bigger layoffs, and that's
• 3:06
  Speaker 2: really the last step, that's where it's almost a bit
• 3:09
  Speaker 2: too late to prevent the weakening, you would expect to
• 3:12
  Speaker 2: see spending pulling back even more, and spending already has
• 3:16
  Speaker 2: slowed for a lot of this year. Manufacturing, you know,
• 3:19
  Speaker 2: data on manufacturing activity has been a bit weaker, at
• 3:21
  Speaker 2: least in the ism the survey indicators. It does seem
• 3:25
  Speaker 2: that broadly things are slowing down.
• 3:28
  Speaker 1: What if the FED sticks with the messaging that it's
• 3:31
  Speaker 1: been putting out there up to now before we got
• 3:34
  Speaker 1: this Job's report that twenty five basis point move in
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  Speaker 1: September is warranted, what would the impact on the economy be.
• 3:42
  Speaker 2: Yeah, I mean at this point where we're certainly pricing
• 3:44
  Speaker 2: you know that we're going to be getting those bigger
• 3:46
  Speaker 2: rate cuts, so you would have to price that out.
• 3:49
  Speaker 2: That move higher and yields is a tightening of financial conditions,
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  Speaker 2: which does seem probably like what the FED doesn't want
• 3:56
  Speaker 2: right now if you're tightening conditions into a weakening. You know,
• 4:01
  Speaker 2: I don't necessarily think they'll tell us right now that
• 4:04
  Speaker 2: you know, yes, it's going to be a bigger fifty
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  Speaker 2: basis point cut, but we'll see the data over the
• 4:09
  Speaker 2: coming weeks. You know, we have Jackson Hole towards the
• 4:11
  Speaker 2: end of this month. That might be the avenue to
• 4:14
  Speaker 2: signal that, yeah, we're we're going to start a bit
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  Speaker 2: bigger right off the bat.
• 4:17
  Speaker 1: When it comes to the weakness that we saw in
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  Speaker 1: the jobs report last Friday. Are there seasonal factors that
• 4:22
  Speaker 1: play there?
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  Speaker 2: Not particularly So. There was some speculation that maybe Hurricane
• 4:27
  Speaker 2: Barrel that hit during the reference period for this July number,
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  Speaker 2: maybe that would influence things, Maybe that was causing people
• 4:34
  Speaker 2: to miss work or temporary layoffs. But the BLIS actually
• 4:38
  Speaker 2: told us that for payrolls there wasn't a big hurricane impact.
• 4:42
  Speaker 2: A lot of the weakness we saw really was kind
• 4:45
  Speaker 2: of across the board. It was not in sectors that
• 4:47
  Speaker 2: you would expect to be impacted by by the hurricane.
• 4:51
  Speaker 2: And there are a lot of just you know, fundamental
• 4:53
  Speaker 2: ways that you know, employment should be slowing down in
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  Speaker 2: sectors like construction housing. You know, construction is pulled back,
• 5:00
  Speaker 2: Restaurant spending has been pulling back, you know, leisure, hospitality
• 5:03
  Speaker 2: employment might be slowing. Yeah, not nothing too idiosyncratic. I
• 5:07
  Speaker 2: think this is just genuinely a weakening trend.
• 5:10
  Speaker 1: Just thirty seconds left, your colleagues at Goldman Sachs raised
• 5:13
  Speaker 1: their recession risk for the US to twenty five percent.
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  Speaker 1: I know you said recessions in your base case, but
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  Speaker 1: would you put a number on it?
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  Speaker 2: Yeah, I mean there, I think there's honestly probably a
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  Speaker 2: pretty elevated chance that we're in, you know, the start
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  Speaker 2: of a recession right now. Part of the issue is
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  Speaker 2: that the official definition of the recession, however, you know
• 5:31
  Speaker 2: NBER defines it, We're not going to know that for
• 5:34
  Speaker 2: a year, year and a half later. You always define
• 5:37
  Speaker 2: the start in retrospect. But these types of you know, moves,
• 5:41
  Speaker 2: you know in the unemployment rate, you know, much more
• 5:43
  Speaker 2: quickly shooting up in the last couple of months. That
• 5:45
  Speaker 2: is what you see at the start of recessions. So
• 5:48
  Speaker 2: I would say there's a good chance we're already in
• 5:50
  Speaker 2: the early stages of it.
• 5:52
  Speaker 1: Okay, thank you for this, Veronica, really great having you
• 5:55
  Speaker 1: on these days after your call of Veronica Clark us
• 5:58
  Speaker 1: economist at City