Inflation data shows 'meaningful step down' in line with Fed expectations: Strategist

[Music] treasury yields under a little bit of pressure this morning after the federal reserve's preferred inflation gauge coming in line with expectations bond yields has been on the rise this week as investors were considering the feds higher for longer stance but we are seeing a dip following that pce print joining us in studio to discuss we have K her JP Morgan's us CIO for fixed income currencies and commodities Kate thank you so much for being with us this morning I just want to start on your reaction to some of the data that we're getting out today it seems like we've been joking that the meat is the new beat when it comes to data do you think that that is going to be continuing here what does that look like in your outlook I have to confess I'm not sure what that means the the oh the meat the meat m e a t so you threw me I'm sorry I'm okay no news good news I'm workshopping I'll take your feedback after the hit sry Okay so the bond Market's really focused on three things right now Bond Market's focused on inflation which we got a read on this morning on employment which we're going to get a read on next week and then the fed's meeting on June 11th and 12th so let's start with inflation and you're right it was basically a meet and a meat is a good thing and you mentioned that bond yields are under pressure that's a good thing that means prices are rising in the bond market so yes a number that's in line with expectations is actually been well received by the bond market and broader Financial market so please I was going to say what do you think just of the pricing action that we've seen right now in bonds and yields when you take a look at the 10 year you're right around 449 are we going to stay in that range right around four or five here until we get a bit more clarity yeah I think that's right and there are really two things we're looking for in terms of economic data and then the third thing we're looking for is the Fed so let's talk about all three of those things the first is inflation as I said we got a good read on inflation this morning in terms of personal consumption expenditures the reason that's so important for the markets is because it's the fed's preferred measure of inflation what we've seen is a step down in inflation so on a year-over-year basis inflation is now running at 2.75% the fed's target is 2.6% so there's been a lot of talk about inflation reaccelerating but that's basically kind of rounding error if you look underneath in some of the details if you look on a three-month annualized basis we've gone from a 4.4% number in March down to 3.46 in April that's a pretty meaningful step down if you look a month over month in April that was running 0.334 March we're running 0.249 so I think it's and then on an average monthly basis in the first quarter things were at about. 36% for April 0.25 so a reasonable step down moving in line of what the FED fed thinks if we do see the numbers hitting that two handle 2.6 is that enough for the FED to cut I know they' said very clearly that they want to get to 2% and that then everything's going to be great whatever but are they going to need to see a meaningful crack in something like the labor market to actually cut so you got to remember the fed's focused on two things they've got a dual mandate and that mandate is stability of prices and full employment so we've just talked about inflation coming down and remember the cure for high inflation for high prices is high prices you see that in some of the economic data you saw this morning so prices for goods were up a tenth of a percent but what you saw was real spending on Goods decline 38% so inflation is moving in the right direction it's what the FED wants the other piece of it and and then if you look in even more detail the real progress in inflation was in in Services X housing so what is that that's health care that's Recreation that's Transportation so airline prices we'd seen a lot of progress on that in April that was um uh 0.26 it had been running as high as 044 in the in the months of the first quarter so that's real progress why does the Fed look at that that's correlated with wages and that's exactly the next Point we've had a very strong labor market we've actually had 29 consecutive months with unemployment under 4% that's the longest string we've seen of strong employment um since the 1960s you have to go back to so we get a read on non-farm P payrolls um excuse me we get a read on non-farm payrolls next month consensus estimates are about 185,000 jobs um you know the cycle low for the unemployment rate was actually 3.4% we're all the way back up to 3.9% so I mean our expectation is that the cumulative and lagged effects of fed policy are starting to take a bite we're going to start to see a little bit of softness in in the labor market and and that that's going to lead the FED to answer your question in a long-winded way I'm sorry but to answer your question the fed's going to move toward cutting rates yes okay what do you think that softness when you talk about a little bit more softness within the labor Market to what extent I guess what are you expecting to see with that weakness so that's a great question and that's what the fed's anticipating that's why they're watching this decline or this disinflation so closely and they're watching the labor market so closely because what they don't want to see is a hard Landing so the fed's actually engineered something that's extremely difficult to accomplish a soft Landing in the economy we last had one like one of these like this in 95 96 and what you saw then the Fed was worried about inflation the Fed was worried about the unemployment Market Market being strong and nevertheless they cut in July of 1995 so we think the fed the FED knows that history they don't want they want to repeat a soft Landing they don't want a hard Landing that's why we think the FED eases really quickly here I'm curious about where you see value in the curve if we are starting to see some disinflationary Trends does the lawn end of the curve start to look a little bit more attractive or is it still front end all day I think it's the front end and it's the belly of the curve we think you get some you know if you look at where the yield curve is yield curves disin it that's typically been a sign of of a recession and we haven't had a recession yet the fed's trying to prevent a recession the way they do that they cut rates you get the long end to come down you get the yield curve to disin thank you so much K this was really fun I appreciate you joining us and we'll talk about my catch phras phrases in the break here really appreciate it thank you so much that was K her she is JP Morgan's us CIO for fixed income currencies and commodities

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Length: 6min 26sec (386 seconds)

Published: Sat Jun 01 2024