I just want to talk about the market
reaction here first for a moment, because it does seem like we're coming
off the boil a little bit, that this was a a quick strike by Iran.
And Iranian state media seemed to be downplaying as if this is indeed the
retaliatory strike that Israel had been promised.
Could the worst be over? Well, it's a very dangerous game that is
being played where each sport is trying to have the final word.
So that can be a mistake. It can go too far from one side or the
other. But indeed, the responses so far have
have either been telegraphed or relatively moderate.
So, yes, there is a path for de-escalation here, and we could have
seen the worst. But of course, the tension remains high
and the possibility of a mistake is obviously there.
So we need to watch the reactions going forward.
But there is indeed a path for de-escalation.
And of course, some of you know, you're the chief economist at Lamar earlier.
So I do want to put you on the spot. But if we take this into the realm of
monetary policy, which I guess, you know, we can if we draw the string a
little bit, pull on the string a little bit hard,
does it make it more difficult for the Fed to do its job if currencies are
extraordinarily volatile, which, you know, events like this make them.
Not necessarily. So.
I think what's difficult for the Fed currently is actually the part of CPI
that is being driven by demand rather than the supply issues or the energy
issues which are perhaps easier to deal with.
The problem with the US is the sticky part that comes from from services.
Services is demand and and that demand needs to come from somewhere.
And that's a robust economy, consumers consuming because they have jobs,
because they have rising incomes. So it's it's it's it's from a different
side I would say that makes the situation complicated for the Fed.
And if it's demand, if the economy is too strong, well, you know, obviously
what's happening on the energy front and what's happening on the supply front is
perhaps not going to help. But I would say the biggest challenge
here for the Fed is to is to manage the demand of the US economy.
And that comes from, again, the other side.
It comes from domestic America and not from the Middle East.
If we were to see oil above $90 a barrel for a protracted period, if if this were
to escalate and, you know, so far there are no signs that it will or that the
Strait of Hormuz or anything like that will be impacted.
But if it were, would that be an inflationary problem for the Fed?
So it's the start, I would say, where we're on the upper hand of a normal
range. Currently, 90 is acceptable.
Not particularly disruptive, not not massively inflationary.
Maybe it adds a couple of tenths of basis points, but but that's totally
manageable. I would say it's not necessarily the
above 90 level that we would be worried with.
It's more above 100. And then if you get to above 110, then
then yes, but you're right, you start being at the beginning of another energy
shock. So so of course, we need to be able to
prevent that. There seem to be enough supply, at least
from the back side, to prevent an escalation of the oil price above 100 or
above 110, just north of 90. I think it's still manageable, but I
just think this is a very key channel of transmission from geopolitics to the
real economy and market is absolutely what happens to energy markets.
Well, now it's contained, so let's hope it stays that way.
But obviously, this is something that we're monitoring very strictly.
Exactly. And, you know, before this came onto our
radar, so to speak, we were obviously very focused on what happened yesterday,
Fed speak wires, which turned out to be very hawkish.
John Williams with comments and so on. Yet you still see three rate cuts this
year, even though we actually now have Williams allowing for the fact that
there could potentially be a rate hike next.
How do you see three rate cuts fitting in to the rest of this year?
So Fed speak is important. But what happens to inflation is even
more important. So if if you know, our base case remains
that inflation is going to continue to converge to a landing zone, let's say
between two and 3% this year. Let me mention that, by the way, this
year inflation is already between two and 3%.
Yes. EPA and particularly services in the CPI
report is still at elevated level. That has a lot to do with construction
element around housing and around insurance costs.
But I don't think Fed speak is more important than what we than what might
happen to inflation. Again, if inflation surprises on the
easing side in the coming 3 to 4 months, the Fed speak is going to change
materially again three months ago. The market and the Fed was probably
acknowledging several cuts and then we had three months of tough inflation
reports. That can change pretty quick as well.
