How Core PCE, Iran Developments Will Shift Fed's Interest Rate Narrative

SPEAKER_1 (0:00)

Let's bring Marlee back into the conversation, turn our attention to the current macro environment and its impact on the Fed with our next guest, Brian Jacobsen, Chief Economic Strategist over at Annex Wealth Management. Brian, good afternoon, happy Friday to you.

This wasn't really a big week as far as top tier economic data, but we got some interesting information. That S&P Global Flash PMI moved the needle quite significantly when you look at the tenure. There seemed to be some good news in there, but some bad news as well. This Consumer Sentiment Survey out from Umich this morning was kind of like the good, the bad, the ugly as well, which both impacted, as I said, the bond market. We saw a little bit of, you could say, wobbliness off the back of that in stocks as well this morning. I'm just wondering how you're thinking about sort of this divergence between what we're seeing in the strength and the resilience of the economic data and consumer sentiment and inflation expectations right now.

Brian Jacobsen (0:57)

Yeah, there's really that growing gap between what consumers are saying that they feel and what they're actually doing. Now, in fairness, that S&P global PMI, I haven't seen that type of market reaction to that preliminary reading in a very long time, because it is one of those things that, you know, next week, it's going to be the first of the month. And so as a result, we're going to start getting, obviously, the jobs number, the ISM manufacturing in the following week, the ISM services. The market oftentimes will move on those ISM numbers, but I'm actually kind of glad that the market is responding to the S&P preliminary numbers, because those have been a pretty good barometer of what to expect from growth going forward. And it really is pointing towards strong growth, but unfortunately, continued price pressure. Now, in that type of environment, you know, if you think about lower income households, and let's then also think about from a market's perspective, small cap stocks, they tend to be more interest rate sensitive and energy sensitive than higher income households or large cap stocks. And so I think that can go a long way of explaining some of the moves that we have seen in this market, is that when it looks like we might get some sort of, you know, technical agreement between the US and Iran, if we can see some of that oil price pressure come down, that is hopefully going to take some of the pain away from lower income households, and then also from smaller cap stocks. Possibly, it also means that the Fed can stay on hold in October, instead of feeling the need to hike.

SPEAKER_3 (2:29)

And we've been talking a lot about the K-shaped economy today, just in the wake of Costco's results and the consumer sentiment numbers that we got. Brian, and I'm wondering how you're looking at the K-shaped economy here. You said something very interesting in the notes that you sent over, referencing the OECD nudging its global growth forecast higher, but you said what is true for countries is also true for households. So can you break that down for us? What are you seeing here? I mean, are higher asset prices creating its own bifurcated economy for those who own stocks and those who are dealing with higher energy prices and borrowing costs?

Brian Jacobsen (3:07)

It really does seem like that. So if we kind of start from the microeconomics at the household level, it does look like the higher income individuals, especially those who have enjoyed some of the stock price appreciation, they're feeling a lot better. They're also spending a lot more and also on a lot of discretionary items. It's the lower income individuals who haven't been able to participate. They're feeling more of the squeeze because their consumer basket is much more heavily weighted towards energy and it's also oftentimes debt financed. So they are both pressured by oil prices feeding into gasoline prices and also moves in the federal funds rate. So we're seeing that bifurcation or that K-shape there. But then we can take it up to a level of aggregation at the country level. What the Organization of Economic Cooperation and Development, what their forecast really did highlight, was that there's a K-shaped economy for the global economy. You have countries that are tied towards the infrastructure build out, the AI trade technology that are doing quite well, but then you have others that aren't. They are sometimes just kind of dribbling along, if not outright contracting. So it's the K-shaped, not just when it comes to consumers, but when it comes to the market, and then also to countries as a whole.