PCE, Yields, and the Tech Trade

SPEAKER_1 (0:02)

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Tom Keene (0:27)

Mike Reid is going to say I shouldn't do the Senior US Economist RBC, but I got a good ADP number of 14 minutes ago, and so I look at the yield and we are 5.57 and a 30 year bond. Are you guys micro looking at yields coming off 18 lines of economic data here today?

Mike Reid (0:47)

You said it, there's a lot to digest.

You're going to have the employment data. We got the sneak peek this morning. We get the inflation data. We get the revisions to GDP. And we do get some of those other measures, I think, that are important signs for AI investment. We do think that continues when you look at things like durable goods order. So a lot to unpack. But at the end of the day, if everything is looking positive, I think you can expect that rates continue to move higher.

Paul Sweeney (1:16)

I mean, let's just set oil aside because it whips around every day based upon social media posts here. Underlying inflation, how do you view that? Because it's there, it's sticky, and I think it's definitely got the tension of the Federal Reserve. How do you think about underlying inflation?

Mike Reid (1:32)

Yeah, we are concerned about it right now. The way we're thinking about it is putting it into three buckets. You have your services, which we're splitting out. You have the housing component, which we think the disinflation there is largely done for this year. Maybe you get a little help next year, but for the most part, it's just going to move sideways. That's a big chunk of the bucket. Then you have core services, ex-housing. With the labor market doing as well as it has been, there's really little disinflation.

The wage component, what's contributing in terms of compensation there, unlikely to provide any help. When you look at what's left to provide that help in core goods, I'm concerned because when you think about the energy story, it's freight prices that are starting to look like they're moving higher.

When you look back at 2020, they're comparable in terms of a year-over-year change. That's going to start to bleed through into the core goods space. All of this says inflation is moving in the wrong direction. Yeah.

Paul Sweeney (2:36)

We'll see core PCE today on an annualized basis, 3.3%.

That's not what the Fed is looking for here. On the other side of the equation, the labor market, I mean, it seems pretty darn solid, right? Is there any cracks underneath the surface that we should be paying attention to?

Mike Reid (2:54)

No, and we've been looking. We put a piece out last week and it's something I look at. Some of these measures that most people don't pay attention to, things like part-time work for economic reasons, aggregate hours, and when you look at those, it's really hard to find any weakness. The aggregate hours really continues to grow. That just shows a continued demand for labor.

And when you look at things like part-time for economic reasons, again, suggesting hours aren't being cut. In fact, they're being expanded. And I think despite some of the headlines about recent grad struggling, at the end of the day, at a 4-1, it's hard to argue there's weakness in the labor market right now.

Tom Keene (3:37)

Mike Reid, with this, as we go into the economics, so let's have that for you in a moment. The privilege he has of working with Francis Donald.

Paul Sweeney (3:45)

Pretty solid there too.

Tom Keene (3:45)

Five days a week. Mike's got to have patience.

Summarize, is it Nathan Jansen who does your Canadian-U.S. border? Yes. Are these reports, particularly PCE, affected by tariffs?

Mike Reid (3:58)

Yeah, they are. And so one of the things we're thinking about is, certainly on the Canadian side, how that's going to impact the Canadian economy. How it's going to be more impactful there. Right now, based on the current environment, we do think it could reduce employment there up to about 90,000 jobs.

Tom Keene (4:17)

What about here? Is it part of our inflation calculation?

Mike Reid (4:21)

As far as the direct tariffs on Canada, not so much. We think it's more about kind of a negotiating strategy between the two sides. But more broadly, we still have tariffs that are in place.

One thing we're concerned about is the rundown of the pre-tariff inventories that we saw last year. We still think you have about a quarter or two of inventory drawdown.