Are Interest Rates Going To Stay Higher For Longer Based On The CPI Data Released On Tuesday?
Benzinga's PreMarket Prep is the #1 go-to source for everything you need to know before the market opens! Join our expert hosts as they break down the latest market trends, analyze key indicators, and provide actionable insights to help you navigate the trading day ahead.
Today's Guest: Blu Putnam, Former Chief Economist at CME
https://www.linkedin.com/in/bluputnam/
Benzinga's PreMarket Prep is the #1 go-to source for everything you need to know before the market opens! Join our expert hosts as they break down the latest market trends, analyze key indicators, and provide actionable insights to help you navigate the trading day ahead.
Today's Guest: Blu Putnam, Former Chief Economist at CME
https://www.linkedin.com/in/bluputnam/
Category
đź—ž
NewsTranscript
00:00 Lou Hutton, the former economist at the CME, joining us here a day after CPI.
00:09 Happy Valentine's Day to you.
00:11 Wow.
00:12 What a reaction to the CPI numbers.
00:14 And after I saw it, after the market tanked like it did, and Dennis came back on, and
00:21 we're talking about, it was higher.
00:24 It was hotter than expected.
00:27 Talk to us about your expectations for the number and how the market reacted.
00:34 Well, I wasn't expecting it to tick up the 1/10th it did on the month over month.
00:39 So it was a little hotter for me too.
00:43 But when you look at it, I mean, these numbers, economists aren't that good at getting every
00:47 1/10th right.
00:48 And there's a decent amount of volatility in the monthly numbers.
00:52 So I don't see anything really different going on.
00:57 If you look at the year over year numbers, they actually improved a little bit.
01:01 It was the month over month that surprised people.
01:04 People are looking at the month over month now more than the year over year because Jay
01:09 Powell told them to.
01:11 He said, I got to get more confidence.
01:14 And so you get more confidence each month.
01:16 But if you look at the year over year in the CPI, not even the PCE, but the CPI, and you
01:23 take out shelter, you've been under 2% for like six, seven months.
01:30 And you're still there.
01:31 Didn't change yesterday.
01:33 The problem yesterday was in shelter, not shelter, services, sorry.
01:38 And services are going to be higher than goods.
01:41 There is no goods inflation left.
01:43 So you're just averaging services with goods and you're getting your inflation rate down.
01:50 So I didn't see any major change.
01:54 Jay Powell already told us they're not cutting rates in March and an amazing number of people
01:58 didn't believe him, but he was pretty adamant.
02:00 So I think they believe him now.
02:02 That's what came through yesterday.
02:04 It could be July before they actually start cutting because they definitely want to see
02:09 a few more months.
02:10 Okay.
02:11 I just got your charts here.
02:13 Aaron, if you could share my chart here.
02:16 The annualized inflation based on the last six months, pretty accurate description here.
02:22 So it really, you know, the core, it was a little bit hot.
02:27 You mentioned the shelter there.
02:30 Let's move on here.
02:31 Wait a minute.
02:32 Stay on this one just one second.
02:33 Sure.
02:34 Go ahead.
02:35 This chart is becoming more important because of the idea that the Fed needs to gain confidence.
02:42 So we're just looking at the last six months of data, looking at the month over months
02:48 and annualizing that.
02:51 And so you can see the CPI core is just a touch higher than the CPI, but you take out
02:56 shelter and you're in great shape.
03:00 So that's what people are looking at to gain confidence.
03:02 By the way, the Fed does not target the CPI.
03:06 It targets the PCE core inflation rate, which is lower.
03:12 Okay.
03:13 It looks like, yeah, go ahead, Christian.
03:16 Yeah.
03:17 I mean, it's a great point.
03:18 I mean, the CPI is not the only measure, you know, certainly out there and, you know, blue
03:24 hits the nail on the head.
03:25 I mean, their favorite inflation gauge is the PCE deflator.
03:30 Now, of course, like the market for whatever reason has been more focused on that number,
03:35 but we'll see.
03:37 And, you know, we've got a number, you know, clearly the expectations for our March cut
03:41 really moved down into basically nothing, which is, I think is good that the market's
03:45 not implying that that's going to happen anymore.
03:49 But that said, I mean, we're going to get so much more data that comes out too.
03:52 We don't know if this report is a one-off and, you know, as Dennis said yesterday, it's
03:57 a tenth of a percentage point of expectations.
04:01 It's really, you know, in all things, it's not that big of a deal to see just one tenth
04:08 of a percentage point higher.
04:09 Oh, yeah.
04:11 If you get focused on a one tenth, you're not paying attention to the volatility of
04:16 the data.
04:17 You know, it's like asking a weatherman to get everything exactly right.
04:21 You know, they're not going to do that.
04:22 Neither the economists.
04:23 By the way, this chart is the PCE core, and this is the one the Fed watches, and it's
04:28 been below 2 percent on the six month basis for all of one month.
04:33 And that data comes out at the end of the month.
04:36 So, you know, it could easily tick up one tenth to and, you know, be back there.
04:41 But what it's telling you is inflation really is pretty close to 2 percent on the core basis
04:47 that the Fed looks at.
04:49 They're not far away.
04:50 They just want more confidence.
04:53 But why do they why do they act like they're so far away?
04:56 And then in the same breath, you know, so ready to talk about cutting interest rates?
05:02 Well, if if a recession were to develop, then they would have to cut rapidly.
05:11 But if the recession does not develop and it looks like we're going to cruise into the
05:16 first and second quarters of this year doing just fine, labor markets are fine, then that
05:22 buys them the time.
05:24 And they really don't want to make a mistake.
05:27 They would rather be late because they don't feel any urgency here.
05:31 The economy's doing fine.
05:33 They don't need the urgency is not there.
05:35 So they they think they can take their time.
05:38 I really wouldn't argue with that.
05:39 I mean, if you know, I would probably have cut sooner because I'm already convinced,
05:44 but they're not.
05:45 So they can wait.
05:48 Just as they were slow to react on on raising rates and you're kind of foreseeing that that
05:54 same scenario here, you know, they were late on, excuse me, raising rates.
06:00 You think they'll be just equally as slow and bringing them back down?
06:05 As long as we don't have a recession, the answer to that is absolutely yes.
06:11 You know, the thing is that what we saw in the market yesterday just reminded us of how
06:16 important rates are to the market.
06:19 But the rates are not that important to the economy.
06:23 You know, the economy, the jobs market is dancing to a very different drummer than the
06:30 S&P or the Nasdaq, things like that.
06:32 So, you know, if they're slow, they slow on raising rates and slow on cutting rates.
06:38 Doesn't matter to the economy, but it does matter to the equity markets.
06:43 By the way, this last chart is kind of fun.
06:46 This one is takes you back to 1960, compares the federal funds rate, which is the lighter
06:53 blue line on top of PCE core inflation.
06:56 And it really tells you that the last decade is the outlier where, you know, they kept
07:04 rates just so low for so long.
07:06 And that's why, you know, we had such great bond and equity markets until they started
07:10 raising rates.
07:13 And I think what the markets, the equity markets have to really consider is do we need to get
07:19 out of worrying about whether rates go up or down a quarter of a point and really focus
07:23 increasingly about earnings, because the Fed's going to keep the Fed funds rate above the
07:29 rate of inflation, just, you know, not quite as much as it is right now.
07:34 So, you know, I think we're in a transition period for the stock market where, you know,
07:39 we're going to learn not to be quite as skittish, if you will, about one tenth of one percent
07:45 on the inflation like yesterday and really start, you know, like where are we going to
07:51 be on a couple of years out earnings?
07:54 Which are the industries that are going to make it?
07:56 Which industries are AI going to disrupt more than others, you know?
08:01 And so I think we're about to head into a much more earnings driven conversation, which
08:05 I will certainly welcome.
08:07 Lou, just a quick question for you.
08:09 I mean, do you considering that it was just a tenth of a percentage point higher than
08:14 expected, do you think it was just more about that the markets had been on such a nice run
08:18 and were basically priced to perfection going into that report?
08:23 I won't argue with that.
08:26 They were definitely on edge because, you know, there were plenty of people worried
08:31 that this rally couldn't continue.
08:33 And they got that one little trigger of information and wow, did they sell fast.
08:38 But, you know, we're grinding a little bit back today.
08:42 The other market that got hit, interestingly, is gold.
08:48 The higher for longer on rates is not good for gold.
08:52 And the stronger, the healthier economy is not good for gold.
08:56 So I think we're down below 2000 again on gold.
09:00 So that's another one that's impacted here.
09:04 Just before we let you go, Bluett, you know, we got to talk about, you know, the banking
09:09 system.
09:10 We got to talk about what went on with NYCB looking at this is or the street, at least
09:15 is reacting that it's just a one off.
09:19 You know, the higher the rates stay up here, the more these banks are going to be, you
09:23 know, upside down on their loans.
09:26 And, you know, we all know, you know, it's not the biggest part of the market here, but
09:32 they don't look at it, the financial sector, you're not looking like any individual names.
09:36 I mean, this is this is not good for them, right?
09:40 Well, the the regional banks that have a very, very large exposure to commercial real estate
09:47 in the largest cities, they're in big trouble.
09:51 But regional banks that are outside the big cities, they'll turn over their loan portfolios.
09:58 They're not going to have much increased credit risk.
10:01 They're going to be fine.
10:04 Not great, of course, their earnings are not going to be as good as you might want.
10:07 But, you know, we're not talking systematic risk here or anything like that.
10:12 So and I can't figure out who hadn't gotten the message that commercial real estate in
10:17 the big cities was in trouble.
10:18 I mean, I was having a conversation with my dog the other day and he couldn't figure out
10:23 why people didn't already know that.
10:26 I mean, that email's been out there.
10:28 Yeah, it certainly has.
10:30 So all right, we're going to we're going to let you go here.
10:33 We've been on the line with Blue Putnam.
10:35 He's the former chief economist at my old stopping grounds, the CME.