Bond market is 'crying out' for 50bps rate cut: Strategist

The Producer Price Index (PPI) came in slightly higher than anticipated in August, increasing 0.2% month-over-month and 1.7% year-over-year. This follows August's Consumer Price Index (CPI) data that came in line with economist expectations.

To discuss how these figures might influence the Federal Reserve's decision at its upcoming Federal Open Market Committee (FOMC) meeting next week, Morning Brief welcomes The Bahnsen Group senior managing director and partner Brian Szytel and Inflation Insights President Omair Sharif. Current inflation and labor data suggest a 25-basis-point cut is likely.

Sharif observes that the PPI data reveals "benign pipeline pressures" in the economy. He notes that the combination of PPI and CPI data "makes up what we would get in the Fed's preferred core PCE [Personal Consumption Expenditures]." Given this dynamic, Sharif believes a 50-basis-point cut could still materialize at the Fed's next meeting.

Szytel, while hoping for 50 basis points, doesn't believe the Fed will "actually get there." However, he explains that such a cut would benefit the bond market (^TYX, ^TNX, ^FVX), which is "crying out" for one. With the Fed funds rate at 5.25%, Szytel argues that "starting at a 25-basis-point cut really doesn't do a whole lot."

In terms of a soft landing, "we're pretty far from the Fed's own estimates of neutral. So 50 to me would be a good step to start to get towards that," Sharif tells Yahoo Finance. "If policy works in long and variable lags, let's get moving here to make sure that we are able to achieve a soft landing and not kind of fumble at the one-yard line here."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Angel Smith

Transcripción del vídeo

The PP I data showing a slight uptick in inflation on a monthly basis.

However, the FED does look on track to cut by 25 basis points at next week's meeting here to break all of this down.

What the data is telling us about the fed's next move.

We want to bring in Brian Seitel.

He is the bouncing group's senior managing director and partner and we also have Omar Sharif.

He's the founder and president of Inflation Insights.

May let let me start with you ju just in terms of your reaction to the to the inflation number that we got out this morning.

Not necessarily a huge surprise, given the uptick that we saw a slight uptick in the month of a month on CP I.

But what does that then tell us about PC?

And ultimately, where the fed is in its fight to tame inflation?

Yeah, good morning.

Uh So a couple of things about this number, as you said, relatively benign for the most part, um you know, final demand PP I was uh about 2.1% last month, dropped to 1.7% this month.

So really what we're seeing is benign pipeline pressures.

Um And you mentioned the CP I yesterday was a little bit, you know, firmer than we like to see.

It was about 0.3.

But the good news is when you take that CP I data yesterday and what we saw in the PP I today uh that combines to really make up what get the fed's preferred core P CE and right now that looks like it's tracking at about a 0.1 maybe a very low 0.2 depending on a little bit more information we need tomorrow, but much more benign than what we got out of the CP.

I, so quite frankly, I, you know, wouldn't be at all surprised.

Um, once people kind of crunch these numbers, um, you know, if you get a little bit of a, a move back, talking about 50 basis points given how benign this core PC is looking for the month of August.

Right?

Is that the case?

Should we be talking about 50 basis points?

Well, there's a 17% chance now that, that they'll go 50 basis points, but I don't, I don't think they will, but what I would want them to do is 50.

I just don't think that they'll, they'll actually get there.

I think 25 is what we'll end up getting unless something changes and we're, what, 67 days away now from that decision.

So I think we'll get 25 out of this why do you want 50?

Um, I think if you look at the bond market where a two year yields are compared to fed funds at 175 wide, I think the bond market is kind of crying out for a 50 cuts and I think that might be wishful thinking.

Um, I think that when you're starting at a fed funds of five and a quarter, starting at a 25 basis point cut really doesn't do a whole lot other than telegraph that you're gonna move in that direction.

And so 50 would be a little bit more meaningful on what they're trying to accomplish.

But again, I, that's what I would want and I think they'll start with 25 er, when it comes to, I guess just your assessment of the economy so far.

So here we are, it looks like overall, yes, the labor market is slowing.

We certainly have seen a bit more emphasis on the labor market rather than inflation here over the last several weeks.

Are, are you confident that we will see that soft landing has the recent data reaffirm that narrative to you?

Uh No, to put it in technical terms, I would say the recent data has kind of freaked me out a little bit.

Um, you know, quite, uh I mean, the, the, the labor market numbers last month I thought were, were pretty disturbing.

Um So, you know, I would, Brian on the fact that there's always a concept of what we think they should do and what they will end up doing.

But I agree that they ought to go 50 because the three month average of payrolls has dropped to 100 and 16,000 from about 100 and 60,000.

That's a really sharp slowdown.

And I think one of the problems is, you know, we talked quite bit about the narrowing and job growth.

So we're seeing it really in government jobs, we're seeing it in health care mostly and a lot of the other sectors not really adding a whole lot.

Well, the problem is the three month average in terms of job gains in health care slowed by almost 30 k, you know, through, through the month of August, we've seen all the downward revisions to last year, over 800,000, some of that will continue and will continue to affect the data from April 2024 forward.

So I think, you know, even though we haven't seen claims really pick up net hiring has slowed down quite appreciably, people may not be laying off a lot, but they're not really hiring either.

And I think the other thing is we're, we're pretty far from the fed's own estimates of neutral.

So, you know, 50 to me would be a good step to, to start to get towards that if policy works with long and variable lags, you know, let's get moving here to make sure that we, uh, we are able to, to achieve the soft landing and not, um, you know, not kind of, uh, fumble at the one yard line here.