-Claudia Sahm, New Century Advisors Chief Economist & Former Federal Reserve Economist
-Sarah Hunt, Alpine Saxon Woods Chief Market Strategist
-Andrew Hollenhorst, Citi Chief US Economist
-Stephen Stanley, Santander Chief Economist
Former Fed Economist Claudia Sahm of New Century Advisors says 'calm is important' amid rising global concerns over a potential US recession and what to expect with the 'Sahm rule' now in effect. Sarah Hunt of Alpine Saxon Woods discusses where traders are flocking as markets sell off, and her thoughts on the Fed's rate-cutting path. Citi's Andrew Hollenhorst and Santander's Stephen Stanley debate how urgently the Fed needs to move rates lower.
Bloomberg Audio Studios, Podcasts, radio News.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. Sarah Hunt of Alpied Saxon words, writing this, the totality of the data seems to have shifted, and that was a certainty last week, sticking the soft landing now is being called into questions. Sarah joins us now from Well, Sarah, good morning to you.
Good morning.
What changed to eight thirty Eastern time on Friday mornch I.
Think it started to change on Thursday and Friday, just confirm the fact that the data was in fact getting weaker. Those im numbers were weak on the manufacturing side, and then you had a payrolls report that was much weaker than people expected and There's been a lot of controversy on the Perils Report of how much of how easy is it to interpret the data, and whether or not the birth death model makes a lot of difference. And when the numbers were high, nobody worried, and now that the numbers are coming down, people are really starting to worry and you start to hear that conversation again, like how strong was it really all year? And how strong is employment? And I think that that's part of the problem that you're having, and it just reinforced the fact that you had weak ism numbers.
Let's shop up the equity market seven percent move lower almost on small camps. Last week, financials got battered on Friday, text get in hambered. This morning, banks it down again. Is there any think about these moves that you want to pick up the pieces anywhere anywhere at all?
I think the place that most people are going to want to pick up the pieces is going to be technology. Because I think you had a guest on earlier this morning that made the point that the small cap trade in the bank trade didn't make a lot of sense if you thought the economy was going to get weaker. So I would say that that also is true, and that was one of those what else can we buy trades as opposed to we really need to be in these sectors right now. I think that some of what's happening in tech is just you haven't really had a correction in a long time. You had this market running right up from January to July, and then we did a complete U turn. So I think that that's where people are going to want to be. To day Ive's point, I don't think it's the end of the world, but it certainly is a very fast correction and a very strong correction when people were not necessarily expecting this much drama. But you have so much that's happening on an unwind of the carry trade. To your point on the end, there's so many different mechanical pieces underneath that it's hard to parse them all out because they're not obvious. It's not one thing like earnings were terrible. They weren't, they were okay. It's just a lot of different pieces.
But I wonder, even if tech.
Is the trade, is some of that huge enthusiasm we had over AI. It's not just done in a market where you need to worry about whether the FED is going to cut or not. Can you really be so hopeful on giving those companies more time to let their AI plays play out.
Well, if you think.
About some of the parallels that the people had made to like the two thousands, right, you had a lot of companies in the two thousands that were selling to customers that didn't have any money, so they were financing their own customers. It was a whole different situation than what's.
Happening right now.
I think that AI is like dark fiberback then. People are putting in capacity because they're not sure exactly how they're going to use it, but they're pretty sure they're going to find a use for it. Is that as fast as people expect it to be?
Probably not.
Is it what people expect it to be.
It never is.
It always changes, So I don't think that that goes away. And the companies that are bankrolling spending on this have a ton of money. It's not like they're in trouble in any way, shape or form. But the timing was always going to be, you know, wall streets.
So quick immediate.
I need to know immediately what's going to happen, And that's not the way it's playing out.
And I think that that's.
Part of what you're seeing here as well.
But even so, when you do see these stocks swing to the upside, the moves are huge. I mean, you get again one hundred billion plus dollar moves on the upside or on the downside for just a single name like Nvidia. Does that make it harder just to stomach to hold on to the ride.
It's one of the reasons why you're not supposed to look at your wordfolo every day, right, But we do anyway because that's what that's what we do for a living. And I think the problem is just you had to love large numbers. With a lot of these tech companies. The earnings moved so fast fro Nvidia in particular because people were scooping up those ships and they were being able to charge higher prices for them. So then the question becomes, Okay, when things settle down, what kind of pricing can they get an amdal All of a sudden, theres now becoming a player, which people thought that they would be, but that didn't seem to be. And then all of a sudden their earnings were good and they were like, yes, look out for us. So there's a lot of moving parts, and yes, those things swing around a lot.
Let's just sit on the FED just for a moment. You'll catch up with ed Ouh Senning a little bit later this hour. He draws the distinction between a FED cutting to become less restrictive and a FED cutting to become accommodative. And I'm trying to work out where we're going to be in September. Are we cutting to normalize or are we cutting to address a growth shock, because that's very different things. And I just wonder how different your captain adication decisions would be based on what kind of decision we actually get in September.
Well, that's part of the U turn, right, And that's If the FED had cut last week, which I would argue that they should have at least twenty five basis points, then I think the amplitude of this would have been lower. You still would have had a direction downtrend, but I don't know if the amplitude would have been so high. And I think part of the problem is that's what they were moving towards, which is cutting to normalize, and now the growth scares is making that shift to maybe they're cutting because they have to and that's where the fifty basis points I think is a push because I don't think that they want to look that worried about it in September.
But I think that if.
There really is a growth scare, I mean, we've been trying to position for slower growth anyway, so it's not like that's going to change our allocation too much. But in the end, this quick turn from markets and perception and investors from it's all fine, and we still have growth to oh my god, the world is coming to an end is really made all of the markets come down, and I mean everything is coming down right now. So I think that that's I don't think people are expecting the amplitude.
Of that change.
Okay, So I put it another way, at least right cuts worth buying, go right cuts, and I should sell.
Oh that's a tough one too, because I mean, I think that the question about I was thinking about this in the green room, the question about rate cuts and what happens with rates When people are piling into treasuries as a safety trade, it stops becoming about rates and it starts becoming about safety. So it almost doesn't matter in the near term because people are piling into treasuries because that's someplace to put money, and I don't know when that flips back to know, we really care about what the Fed's doing, and that's why I'm buying bonds too. I need to buy bonds because they're safe.
You mentioned what would happen if we got a fifty basis point cut, Sarah. If the FED does do what this market is saying, an inter meeting FED cut, what would the reaction be?
I think, unfortunately, because they missed the opportunity last week, the reaction to an inter meeting cut would be what are they seeing that we don't see? And I think that's what they don't want to do, right, That's what markets don't want to have, is that kind of you know, two weeks ago everything was fine, or a week ago everything was fine, and now you feel like you have to come and intervene when twenty five basis points to be fair is not a huge cut. It's just that people were worried that if they went twenty five, they would expect that they keep going. And I don't that kind of concern. I don't really understand. I think the FED has more power than that, but they seem to get trapped into perception, and I think that that's.
Part the issue.
I just want to make sure I walk away with the right impression of where you were at currently. Do you think the pendulum swung too far in the other direction?
Now?
Absolutely?
But I don't know. But it doesn't so in stocks are in bonds, both both.
Right now because the bond is a panic where am I going to put my money? And the stocks are, Oh my goodness, the world is coming to an end. But the question is, you know, did the whole Olympic stick?
The landing thing?
When does that knife stick? And does it keep falling? And I don't know because things always move too far, and there have been a lot of really levered trades that are underneath all of this that, yeah, everything else that are unwinding that we can't see, and that's where it's hard to figure out where does that stop. I think that this is an overreaction, but I don't know when that overreaction stops, because I don't think that the underneath is as bad as it has been in the last couple of times the market's really had problem.
I'm just trying to work out where we actually really are at the moment, and we'd ask this question a few times over the last few weeks coming into that unemployment report, if we triggered the psalm rule, and clearly a psalm's going to have our own thoughts on our own rule live late to this morning, So you should look out for that, I said, if we triggered it with this market behavior as if we're in a recession already, even if the Fed policy makes that everyone else said, would not with the market begin to behave like we're in a recession or ready, and this tease up. I think the data a little bit later. Let's say we get M services and it comes in strong. Is that data that this market's going to ignore because it's so firmly fixated on the view that that's where we are now a recession and it embraces weakness, that ignores strength. I'm just trying to work out how we respond to incoming information, how sensitive we are to strong data, how sensitive we are to weak data.
Well, I think this goes back to Danny's point how much of this is underlying mechanical trading problems and how much of this is a reaction to the data. It started as a reaction to data, and then it became its own problem. And that's again the problem of highly levered trades is that when they go against you, the forced unwind is not necessarily things that people want to do, but it's things that people have to do. So the data can help slow that down, possibly, but it's not as much reactive to data as it is reactive to margin calls and to other issues that are underneath that on the financial side. So I think that the data would help, but bad data could make it worse. Good data might make it a little bit better, but I don't know how much that's going to stop this. This has to stop on its own because there's some calming down of forced selling, and I feel like that's what we are right that right now, forced.
Buying at the Japanese yen as well, in particular. So Hun, thank you, Vampire Saxon Woods, let's park all the price action and just sit on this. I know many of you have heard this phrase in the last few weeks. In fact, for the last few months, we've been talking about the so called Psalm rule, the rise of the unemployment rate in July triggering the Psalm rule, a recession indicator for so many which has a perfect track record over the past half century. Claudia sam herself of New Century advisors, saying this, I don't look at this and big pictures say we are in recession. But I look at this and I say we're not headed in a good direction. Claudia joins us. Now for more, Claudia famous, if you weren't already, I think you know that. Anyway, it's great to catch up with you. I just want to take a beat and just sit on this from moment. Claudya, let's go from the very beginning. Tell us what the psund rule is, what you wanted it to be used for, and whether you think it's applicable in Alpa market like this one.
So the origin of the recession indicator was in a proposal I had to improve fiscal policy, put it on autopilot automatic stabilizers in a recession. It's a rule in the sense of not the economy must do something. It was a rule in the sense of policymakers do something. It may end up playing out that way. So, but what the idea of it was was to look at the historical record in the United States and find the pattern, find the unemployment rate, increase. It's very important to look at changes at which in the past the US has been in a recession months into a recession. This is not a forecast, right, and so it's just trying to capture and yet it is absolutely true it doesn't have to be that way this time. And frankly, if we look at all of what we know about the US economy right now, it is very unlikely that we are in a recession. And yet a really important question is where are we headed. And those changes in the unemployment rate that the sambrule picks up on, they do not look encouraging, right, They're headed in the wrong direction, and that momentum is what can get us in trouble.
So, Claudia, for just all of those people out there who are talking about your name, who are talking about the same rule, using as an excuse to sell, using as an excuse to say that the FED should be moving.
Sooner, Just what do you say to those people?
Calm is important in a moment like this, regardless of what indicator data points you're looking at. You know, the fear does no good. And this, again, this was trying to give a simple summary of one piece of the US economy, the labor market is very important. There's a lot of complications right now. Again it's this balance between calm but take it seriously. Right, Like, there is slowing in the US economy, and we have seen that the point is to keep that slowing from really pulling us in reverse. We're not there yet. Usually dissemble by the time it triggers, we're past that point. Right, So there is this opportunity of as I said, the Federal Reserve has a lot of place to ease there is. We do come into this in a position of strength, broadly speaking, in the economy. So that's really important for weathering a storm like this that has many different contributors to it.
Today, I didn't mean to use your pun as a segue, but I want to in terms of storm and weathering it because on Friday there was just this huge debate when the numbers dropped of people saying, look, don't believe the numbers you're going to see because they will revert quickly. Because a lot of it has to do with weather, A lot of it has to do with Hurricane Beryl. But by the way, the BLS comes out and says there's no discernible impact which side of this do fall on, Claudia, Whether the numbers we saw on Friday are something that can somewhat re verse because it's a weather impact.
Is absolutely the case that any indicator, and the so rule fits into this, should not be designed to overreact to one months of data. Right, So this looks it smooths across months. The pattern it's responding to is a gradual increase, gradual steady increase in unemployment over the past year. Right, So there's that in terms of weather effects. I the beer of Labor Statistics has the ability and the experience to look very carefully at the geographic data to get a sense of where its effects are. I think they take those statements very seriously, and I agree with them for a lot of reason, including their statement that the unemployment raid specifically the ambos On was not affected the labor force status was not affected being home because being unable to work because of the weather doesn't flip you out of being employed to unemployed. So it gets really technical in that, but absolutely that one month that was a big surprise was a negative one a prior of just some of them. Reverse is probably the right one, but it is the context of the year as a whole, and even moderate slowing. And this increase in the unemployment rate has been in the past consistent with early in recession. So we might not be there, but we're getting uncomfortably close to that situation.
Cloda, you've worked at the Federal Reserve. You know better than most how that institution operates, how slowly it can move sometimes. How do you think it's going to respond to this data, not just on Friday, but the data from Thursday as well as we go into Jackson Hoe on a day like.
Today, when, as you said, the panic word is loubing large for many people. The fact that the Federal Reserve is slow moving and deliberate, it's a good thing. The last thing we need is them joining into that kind of that energy, that emotional energy, and yet they're watching it very carefully. The market functioning, liquid these are all you know. The reason that we have the Fed is to make sure the markets keep functioning. Monetary policy then came later, right, So there is this aspect of them being diligent in terms of them looking at Friday's report and changing dramatically their views on a September rate change. I think that that would be unlike them, and I think it would be premature. Right they're pointed in the right direction. They have some time to get there, but yes, they are slow moving, particularly when it comes to the economic data.
How do you imagine they'll frame that first interest rate cut? Do you think that's going to be framed as a mid cycle adjustment, the process towards sort of normalization, or the first step towards taking a more accommodative stance. Given what's developing, how do you think they're going to frame it? Just give them what we know so far.
In the September feels like a lifetime away right now. Yeah, I think they if they can. The FED likes to move in on the path it's set out. The path it has set out is to begin normalizing interest rates. Because inflation is normalized and we are in you know, kind of everything is planned in that right direction. I think they're going to want to keep to that narrative and to that path if they can. You know, the last few days have called into question whether that is appropriate. It will be appropriate at that point. And I will say one thing for the Fed, you know it is it is very deliberate. It can be very slow moving. But when the facts change and it gets its mind around it, it will move and it will do what it has to do. And we are in a position right now where they have the ability to do quite a bit, and that is notable.
And John made the point that both City and JP Morgan have changed their call now to see two consecutive fifty basis points cuts from the Fed. Claude, what difference does it actually make moving twenty five or fifty in September.
It it will all it all fits within the context of that moment. Right for someone changing to fifty point cuts, particularly consecutive ones, that's that's a pretty dire outlook for the economy when we get to that point. Or you know in the intervening that that's not where my baseline is. I don't think that's where the fence is. I mean, looking at the data and where we're at. And yet you know, clearly if we were seeing large moves like that out of the gate, there's there's a real problem. But you know, but we saw some big moves out of the gate and fighting inflation in twenty twenty two in the other direction, and you know, you you the FED will take its policy to where it needs to be to the conditions in the economy.
Chlodia, we appreciate your time. Just fantastic to space you passed some Clodia Son of New Century advises.
Shoting us now.
It's Andrew home Hosts of City and Steven Stanley of Santanta. A gens is try to catch up with you bugs the when it comes to you first entry. Because you wrap with the big cop on Friday, fifty basis points in September, Goldman's to stick him with twenty five. They think maybe you should wait for payrolls to come out for August. In September, why they run, Why is it now the right time to make the call? Why are you so convinced by Friday?
STATESA.
Yeah, when we came out with the fifty basis point call for September, we also think they'll go fifty basis points again in November. That was just after the jobs report. And I think that the key thing of the jobs report is not that the unemployment rate rose to four point three percent. It's not one month of data. It's that we now have four consecutive months of the unemployment rate rising and accelerating. So if the Fed is trying to get a soft landing. You have a lot of momentum upwards in the unemployment rate that you need to stop. If you're trying to stop that kind of slowing momentum, that means rate should be down, maybe at neutral, maybe below neutral.
Well, where's neutral from here?
Most people would say at least two hundred basis points below where we are, So fifty basis points in September is really just getting started. That's why we have fifty again in November. I base case they don't do this emergency cut.
But it's possible, possible. What would make it happen?
I think further sell off in risk assets and seeing that broadened. Right, it can't just be about the tech sector. It has to be broad It has to be in credit markets and credit spreads, widening liquidity issues.
Those are the kind of things that could get the Fed to move early.
Stephen, you're skeptical of that that they could go fifty, that they more likely to go twenty five?
Why? Yeah?
I think well, first of all, I mean the key thing for the FED right now is inflation, and I don't think that we've gotten over the hump on inflation yet. We had four bad numbers. We've had two good numbers. I mean, I did my forecast last month for CPI and I got point three for the core CPI.
I don't think the Fed's going to.
Be cutting dramatically in that sort of an environment. I also don't think the economies that week.
I mean, I mean, Andrew's.
Right about the unemployment rate, but if you look at the totality of the labor market data, it's certainly not signaling that the unemployment rate is giving us an accurate signal what's going on in the labor market.
But again, as Andrew says, if it's not the level, it's the trend. Is the trend not concerning, it's not enough for the FED to step in.
Again.
I mean, look, household survey is a very noisy set of data.
It's a very small sample.
If we were seeing dramatic pick up in jobless claims, if the Jolts data were supportive, if you know, all the other survey data that we were seeing was supportive of a dramatic cut in or a dramatic weakening in the labor market, I'd be more convinced. But as it is, I see that as more there's a lot of noise in that number.
Of my view, I want to pick up on your point on inflation. I think it's really important and it's hardly been talked about for the last few days. We've got the next print on August fourteenth. Peter chev Academy published this over the weekend and he said, if the FED does anything that looks or smells like there eager to embrace the FED put, we would likely see inflation. Starting with risk assets. They're caught between a rock and a hard place in terms of being able to be aggressive. Why do you disagree with that, Andrew? Why do you think they're not as constrained as perhaps Stephen and the likes of Peter Cheer are suggestic.
There are medium term concerns about inflation. I'm not discounting that at all. But in terms of the near term, you have financial conditions that are tightening right now, are tightening rapidly, and as we say here, and if the FED doesn't push against that tightening and financial conditions, you will actually end up slowing the US economy by more.
So.
What they're dealing with right now is risk management, where yes, there are some concerns about inflation, but cutting rates.
Now, if they.
Cut fifty basis points in September, that's already priced into the market. That's not going to cause equity prices to rally. They need to over deliver on what's priced at this point to get equity prices just to stop selling off.
This is where I'm a little bit confused. It was only a few months ago we had people asking whether we need to hike again. How much of a clear sort of sight have you got on how tight we actually are right now? How do we know that we're as restrictive as you are making out we are.
I think the clearest evidence is from the labor market. That's been our guiding light throughout this cycle and continues to be. If you look at the Jolts report, for instance, the hiring rate has just consistently been falling, falling below prep endemic rates, falling out. If you look at the leisure and hospitality sector and the JOLT survey, the hiring rate is the lowest we've ever seen outside of two thousand and eight. It's lower than it was in twenty twenty. So it is harder to get a job at a restaurant right now than it's been in very deep recessions.
That's telling us that we have some real softness there.
Check out this movement a bond mark. You've been talking about it for a while. Two year versus ten year. The two year is down twenty three basis points. The ten year is down just twelve. And look at the difference between the two. There is a positive sloping difference now on that yield curve, Danny, I haven't been able to say that for quite a while. Now the difference between the two is now positive a single basis point.
And there have been so many people who have said that when this happens, this is the recession indicator, not the thing being negative, not a being inverted, that it's uninverting that finally causes the recession. Steve, do you want to take any indication from this at all?
I'd like to.
Let the dust settle a little bit. This seems like.
Not a good day to be taking your fundamental signals. No, I think to Jonathan's point before or I mean, what we really need right now is we need more data and we do get the ISM nine manufacturing today, the consensus looks for it to bounce above fifty. Boy, that would I would imagine change the way people were thinking at least a little.
Do you think it would put this story to bed, because we said one of the problems with this week is that actually the Canada for the economic data is quite light. Funny, really got two points to play with. One is the ism at ten and the other is jobless claims on Thursday. Is one strong ism services print sufficient to put this to bed? Or do you think the mood this market said will just ignore strength and embrace weakness for the rest of this month.
It seems like an awfully strong panic mode this morning, So I don't know.
Maybe we'll see, Andrew, this is tough, and I think this is what everyone's got to sort of embrace and confront right now for the next couple of hours and through this week, how sensitive this market will be to incoming data, strong data and weak data alike.
It's a really difficult moment. It's a really difficult moment for the Fed. Danny said it earlier. You have the market that started responding to the economy. Now you're going to have the economy that's responding to the market as these financial conditions, and it actually raises further the probability that we're inter recession.
Right now or that will soon be in a recession.
Could we get an intermeding cut then if this thing kind of.
Snowballs, that's the question. I think you do need to see more here.
I don't think this is enough for an intermeting cut, but that has to be something we put some probability on.
At this point, it's even any probability of that for.
You, not unless the world absolutely falls apart.
You're not impressed by these colds. It's all you really think. This is just a panic that could be over pretty quickly. That's why it sounds like characterization.
Yeah, yeah, I mean, look, the FED is going to be easing soon in my mind, you know, more likely than not now September rather than November. But and I think once they start to go, they're probably going to be going in a series of moves. But I just don't see the need for a kind of a panicked rush.
Would they still call this amid cycle adjustment? Do you think?
Or they tell us they're on the path to normalizing, on the path to getting accommodative.
I think it well, I think it's a path to normalization, But whether that leads ultimately to a commodative or not.
I think remains to be seen.
Andrew, how do you think they'll frame things?
I think I agree with Stephen though, that they will see this as the need to normalize policy rates.
At least that will be the first move here.
Now it might move to a need to move to accommodative. We've heard from Caair Powell they think rates are restrictive here, and I guess that's my broader.
Point this morning.
Why would you be restrictive when the equity market is selling off and the unemployment rate is rising, you wouldn't be. So they'll be looking pretty quickly to move rates down towards at least three percent.
But if we want to live with.
The philosophy if the Fed should do the least damage in this scenario, is hiking aggressively or before September not doing damage in terms of them signaling we're worried about something that there is an emergency.
Yeah, I mean, I think that's exactly what they need to negotiate here. And I think you heard that tension from Chicago Fed President goals Be on Friday. Not wanting to sound like they're over responding, not wanting to spook the market.
Further.
But the reality is the sentiment is shifting, and it has shifted, and they'll have to respond to that.
But see, Stephen, that's why I wonder to your point, why there can't be something bigger, because it feeds back on itself and you get that negative wealth effect, you get conditions tightening, maybe more than they should, which gets a bigger reaction from the FED.
Yeah.
Well, I mean this has been one of the problems for the FED all through this cycle is that financial conditions have been easy, right. I mean, they raise rates, they talk about how policies a restrictive, but if you look at broader financial conditions indicies, they've all been very easy up until the last few days. And now we have to weigh you know, deterioration and risk assets versus the big rally that we're seeing in.
Interest rates.
So I think they're certainly cognizant of that. But I think the underpinnings for the economy are still pretty solid. And the one problem that this economy has conceivably is that FED policy is super tight, and that's something that's very easy to fix. So we'll just see whether that comes fast or slow.
Asais last weight Chaman pound a great with you. I just wonder how much has changed since Friday. Andrew, do you think if they have that information to hand on Wednesday, we would have seen a different decision.
Yeah.
I think we would have seen a card on Wednesday if they knew this was going to be the job to report.
Amazing, Andrew, Thank you, sir, Andrew Hanhorser City Stephen Stanley are santantaire to the two of you.
Thank you.
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