Wysiati
The latest U.S. inflation reading showed core inflation unexpectedly picking up in August. Oscar Muñoz, Chief U.S. Macro Strategist with TD Securities, says while the results are unlikely to deter the Fed from cutting rates by 25-basis points at its next meeting, it makes the chances of a larger cut far less likely.
Transcript
Greg Bonnell – US inflation continues to cool, hitting the lowest annual levels since 2021. But what do the details beneath that headline number tell us about the size of potential rate cuts from the US Federal Reserve? Joining us now to discuss, Oscar Munoz, Chief US Macro Strategist with TD Securities. Great to have you with us here on the program, Oscar.
Oscar Munoz – Thank you for the invitation, Greg.
Greg Bonnell – All right. So let’s start with that inflation report this morning. Obviously, headline tells us one story, core tells us another. What’s your read on it?
Oscar Munoz – Yeah, what the market, the Fed, cares about, really, is the core, and not really the year-on-year change, at least not right now, but actually the month-on-month increase. And that actually came in a bit stronger than expected, right? So the number wasn’t really what the Fed would like to see.
But in the grand scheme of things, I don’t think it’s going to be a deal-breaker. I do think that stickiness in shelter prices, particularly OER, is a bit concerning. But we’re going to have to wait and see what September and October data bring.
Overall, we’re still of the view that inflation is likely to continue to normalize in the near horizon. So even despite the strength that we saw today, we don’t think that 0.3% month-on-month increase will translate into the core PCE, which is what the Fed actually targets. We’re forecasting a smaller 0.2% month-on-month increase for that core PCE. So it’s still in the vicinity of what the Fed would like to see.
Greg Bonnell – All right. So as the Fed does head into that meeting next week, and the market expecting some sort of rate move from them, what do you think they’re going to make of inflation? What are they going to do with all this?
Oscar Munoz – Yeah. I think in today’s data it probably sets up the discussion between 25 bps and 50 bps. I think they’re probably going to start with a 25 bp rate cut. I know the market was debating if that was going to be the case or not, but I do think that we’re focusing too much in September.
I think what’s going to be very important as well is the Fed guidance next week. We’re going to get a dot plot. They’re going to tell us pretty much what they’re going to do between now and the end of the year, and also expectations for 2025.
And even if they don’t really implement or start the easing cycle for that 25 rate cut, I think the 50 bp option will remain on the table. The Fed will stay data-dependent. And I think labor market conditions continue to garner the most attention. And we’re just a bad jobs report away from the Fed deciding to actually go with that, that 50 bp cut– maybe not in September, but it could happen in November or December.
Greg Bonnell – There’s some thinking out there, Oscar, that if next week they decided to go for 50 basis points, a half of a full percent, as the opening act, that it could actually get the markets quite nervous in terms of that. What are you seeing that we’re not seeing? Are people overplaying that fear?
Oscar Munoz – I think so, Greg. I think that we are of the view, or the market in general is of the view, that the only way the Fed can ease rapidly is because the economy is getting into a recession or that conditions are deteriorating very rapidly. I don’t think that’s the case.
I think you have to look at it from where we are in terms of monetary policy versus where you need to be. And I think the Fed can manage the message that they could start on the faster side front-loading rate cuts with 50 bip cuts perhaps just once this year, and then guide that those decisions can become more gradual, depending on the labor market.
I don’t think the market is going to take it that bad. I think we saw first evidence of that on Friday when you had Governor Waller seemingly in the headlines supporting a 50 bp rate cut. You saw the market actually rallying on that news. So I think we’re overplaying that story.
Greg Bonnell – I want to talk– you mentioned labor a few times there. I want to get your take on what we’ve seen out of the US labor market. Clearly, it’s starting to slow down. You’re still adding jobs, though. What about some of the market reaction you’ve seen to that? Is that a bit overdone?
Oscar Munoz – A little bit. I think the market has to look ahead. And it’s probably overextended the recent softness that we’re seeing in the data. I think that they have to assign some odds of the economy entering into a recession. I think that’s fair. But I do think at least our view is that the economy is going to enter a soft landing.
And in that view, I think the Fed is probably not going to overdo policy cuts in the near-term, because I think, overall, the Fed in general thinks that the economy is probably going just to normalize here and probably achieve a soft landing between now and 2025.
Greg Bonnell – OK, so let’s talk about, we’ve got a full dance card this fall, right? We see inflation coming back towards target, a little stickiness on core. We’re watching the labor market. We’re also watching a presidential election that’s just around the corner. We had the debate last night between Harris and Trump. Big takeaways for you.
Oscar Munoz – Yeah, I think it is clear that Kamala Harris did better in the debate. Betting markets also support that view. I think she did a better job in terms of connecting with undecided voters.
We’ll see at the end how that translates into actual polling. I think the first polls will be published this weekend, so that will confirm if she actually managed to gain a meaningful advantage. But I still think that the story doesn’t change much.
It will still be a close race that will be decided in a handful of states. And it’s still a race that will be too close to call. We’re going to have to wait until November for the most part.
Greg Bonnell – Yeah. Let’s dig into that– the importance of these swing states right now. I think of the people who live in those states that aren’t among– I think it’s seven, right? Basically saying, your vote doesn’t count. We know which way you’re going to go. It’s those seven that we need to watch.
Oscar Munoz – That’s right. I think Wisconsin, Michigan, Ohio, Nevada– those are the key states. And Pennsylvania, I think, is going to be very important as well. I think that that’s where the money is going to be spent. That’s where the candidates are going to continue touring and visiting.
And it is a bit funny that they only focus on those states because you pretty much know how the voting is going to go in the rest of the country. But that’s how it works in terms of the electoral vote in the US.
Greg Bonnell – Now, perhaps informed a little bit by the debate last night, or maybe part of the story as we didn’t get a lot of information about policy from either candidate, what it could mean if either/or takes the White House for the economy and for the markets– what should we be thinking in terms of investors about that?
Oscar Munoz – Yeah, for now, I think there was no focus on policy, really. The differences are big, though. We do think that Trump brings more uncertainty to markets, particularly for 2025, given his policies ideas in terms of trade and immigration, I think that could have a meaningful impact for 2025 if he goes through with those initiatives, particularly on inflation and growth. It could be a stagflationary scenario for next year.
If he goes through with the tariffs policies in particular, that could increase inflation meaningfully in the short-term and also provide a negative hit to growth, similarly with immigration policy. So there is a lot of uncertainty of around what Trump might do, whereas we think Harris is mostly a status quo.
Our view has been that for now, the market is probably paying more attention to Fed policy in the near-term. But as we get more clarity in terms of what the Fed might do between now and the end of the year and into 2025, the market will start focusing more on the actual election results. So, as we get closer to November, we start getting more sense of the polling and expectations, I think the market is going to start to price in the most likely scenario.
Greg Bonnell – With the markets paying attention to Fed policy, how much are the presidential candidates paying attention to Fed policy? I believe your shop has talked about Fed independence recently in some of your notes.
Oscar Munoz – Yes. I think for now, no matter what the Fed does, really, in terms of easing next week, if they do 50 in September or if they decide to do 50 in November, I think it’s going to be read as political, no matter what. The Dems or the GOP is going to hit back on Powell. So somebody is not going to be happy, that’s for sure.
If they do 25 and then they start doing 50 after the election, the Dems are going to say that Powell has been political. If they start with 50, you’re probably going to start seeing some tweets from Trump on that front. So no matter what the Fed does, it’s probably going to be not taken well by a part of DC, for sure.
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