How Core PCE, Iran Developments Will Shift Fed's Interest Rate Narrative

0:00Let's bring Mali back into the conversation, turn our attention to the current macro environment, and its impact on the Fed with our next guest, Brian Jacobson, Chief Economic Strategist, over at Annex's Wealth Management, Brian, good afternoon, happy Friday to you. This wasn't really a big week as far as top-tier economic data, but we've got some interesting information. That S&P Global Flash PMI moved the needle quite significantly when you look at the 10-year. There seemed to be some good news in there, but some bad news as well, and this consumer sentiment survey out from you, Mish, this morning was kind of like the good, the bad, the ugly as well, which both impacted, as I said, the bond market. We saw a little bit of, you could say, wobbliness off the back of that in stocks as well this morning. I'm just wondering how you're thinking about sort of this divergence between what we're seeing in the strength and the resilience of the economic data and consumer sentiment and inflation expectations right now. Yeah, there's really that growing gap between what consumers are saying that they feel

1:02and what they're actually doing. Now, in fairness, that S&P Global PMI, I haven't seen that type of market reaction to that preliminary reading in a very long time, because it is one of those things that, you know, next week, it's going to be the first of the month, and so as a result, we're going to start getting obviously the jobs number, the ISM manufacturing and the following week, the ISM services. The market oftentimes will move on those ISM numbers, but I'm actually kind of glad that the market is responding to the S&P preliminary numbers, because those have been a pretty good barometer of what to expect from growth going forward. And it really is pointing towards strong growth, but unfortunately continued price pressure. Now, in that type of environment, you know, if you think about lower income households, and let's then also think about from a market's perspective, small cap stocks, they tend to be more interest rate sensitive and energy sensitive than higher income households or large cap stocks. And so I think that can go a long way of explaining

2:03some of the moves that we have seen in this market, is that when it looks like we might get some sort of, you know, technical agreement between the US and Iran, if we can see some of that oil pressure, the price pressure come down, that is hopefully going to take some of the pain away from lower income households, and then also from smaller cap stocks. Possibly, it also means that the Fed can stand hold the October instead of feeling the need to hike. And we've been talking a lot about the K-shaped economy today, just in the wake of Costco's results and the consumer sentiment numbers that we got, Brian. And I'm wondering how you're looking at the K-shaped economy here. You said something very interesting in the notes that you sent over referencing the OECD nudging its global growth forecast higher, but you said what is true for countries is also true for households. So can you break that down for us? What are you seeing here? I mean, our higher asset prices creating its own bifurcated economy for those who own stocks and those who are dealing with higher energy prices

3:05and borrowing costs? It really does seem like that. So if we kind of start from the microeconomics at the household level, it does look like the higher income individuals, especially those who have enjoyed some of the stock price appreciation, they're feeling a lot better. They're also spending a lot more and also on a lot of discretionary items. It's the lower income individuals who haven't been able to participate. They're feeling more of the squeeze because their consumer basket is much more heavily weighted towards energy and it's also oftentimes debt financed. So they are both pressured by oil prices feeding into gasoline prices and also moves in the federal funds rate. So we're seeing that bifurcation or that K-shape there, but then we can take it up to a level of aggregation at the country level. And with the organization of economic cooperation development, what their forecast really did highlight was that there's a K-shape economy for the global economy. You have countries that are tied towards the infrastructure build out, the AI trade technology

4:07that are doing quite well, but then you have others that aren't. They are sometimes just kind of dribbling along if not outright contracting. So it's the K-shape not just when it comes to consumers, but when it comes to the market and then also to countries as a whole. So given next week is pretty heavy as far as top tier economic data. As you mentioned, the ISM, which people pay a lot more attention to and then the PC and the jobstater as well. What are you going to be looking out for in those numbers as to how it may inform the Fed's next move? Yeah, in a weird way, I think it's going to be more the PCE, which we already kind of know what most of that might look like, thanks to already having the CPI, the consumer price index, and the producer price index. In a way, I think they almost have their blinders on, where they not to say they don't care about the jobs number, but they probably really don't, because they know that even if we get some sort of weird outlier number, they can dismiss it. It is the second day of the

5:11month. And sometimes when the jobs number comes out that soon, they don't have nearly as many of the survey responses in. And so those numbers can be subject to a lot more revision. So anytime the jobs day is like the third or the second, oftentimes those are subject to bigger revisions. And so whatever happens there, they might actually just dismiss it and actually just focus on the inflation number. So I think that this weekend, if we do see some sort of breakthrough, even if it's a seven day agreement to slowly open up the straight of her moves, that's probably what is going to affect the feds thinking as to whether or not they need to hike in October or not. And Brian, I mean, I'm just looking at the 10 year today, we touched another 52 week high earlier in the session. We've come off of those levels a bit here, but how much is the bond market doing some of the feds job for it right now? Yeah, it really is. Look at the pressure that it's putting on the housing market. It's reducing the affordability. So not only do you have high

6:12prices, you have high financing costs for it. It's also affecting the cost of buying an automobile. I think that it is really doing some of the feds work for it, but in a very unequal way, because higher interest rates, it is having a bigger effect on the lower income households who tend to finance more, use more debt as opposed to higher income households. So if a lot of the growth is coming from the high income households that aren't very interest rate sensitive, and a lot of the struggles are for lower income households where there are a lot more interest rate sensitive, what good does hiking rates do? So I think that the fed really, when in terms of the tools out there disposal, they don't have the right tools for the current job that they really need to do in terms of inflation. It's more about the supply side, meaning oil prices and then also tariff policy. Ryan, really appreciate you taking the time to be with us today ahead of your weekend. We appreciate your insight. Ryan Jacobson, Chief Economic Strategist at Annex Wealth Management.