On today's episode of the Macrocast, Ylan, John, and Brendan are joined by Loren Smith, President of Skyline Policy Risk Group. The group delves into the addition of 353,000 jobs to the economy in January, which surpassed the expected 180,000 projected by market forecasters. They analyze the implications of this growth streak across various sectors and its potential impact on the Federal Reserve's approach to rate cuts. The discussion also explores recent nuances of the labor market, including wage increases and workweek fluctuations, while examining how these trends might influence policies and sector-specific outcomes, particularly in areas like mining and oil.
Shifting focus, Ylan, Brendan, John, and Loren also take a detailed look at global market risks and economic challenges, examining the delicate balance between corporate performances and the looming shadow of geopolitical strife, with a specific focus on the Middle East and its effects on commodity markets. Listen in for a comprehensive understanding of how these factors may impact U.S. consumer prices and influence the upcoming U.S. elections!
On today's episode of the Macrocast, Ylan, John, and Brendan are joined by Loren Smith, President of Skyline Policy Risk Group. The group delves into the addition of 353,000 jobs to the economy in January, which surpassed the expected 180,000 projected by market forecasters. They analyze the implications of this growth streak across various sectors and its potential impact on the Federal Reserve's approach to rate cuts. The discussion also explores recent nuances of the labor market, including wage increases and workweek fluctuations, while examining how these trends might influence policies and sector-specific outcomes, particularly in areas like mining and oil.
Shifting focus, Ylan, Brendan, John, and Loren also take a detailed look at global market risks and economic challenges, examining the delicate balance between corporate performances and the looming shadow of geopolitical strife, with a specific focus on the Middle East and its effects on commodity markets. Listen in for a comprehensive understanding of how these factors may impact U.S. consumer prices and influence the upcoming U.S. elections!
Hello everyone and welcome to this jam-packed episode of the macrocast. I'm your host, elon Mui, and managing director at Penta. My co-hosts are John Fagan and Brendan Walsh of Markets Policy Partners, and our very special guest today is Lauren Smith, president of Skyline Policy Risk Group. So glad that you can join us, lauren.
Speaker 2:Great to be here.
Speaker 1:Fantastic. Well, I think that you must have some sort of magic in you because you brought the big jobs number today. I have to say it was definitely stunning, blockbuster, ginormous I mean you could just like pick your adjective but the Labor Department reported that the economy added 353,000 jobs in January. That is way above expectations of around 180,000 or so. Meanwhile, the unemployment rate stayed pat at 3.7% and it looked like the hiring was just really very broad-based. Guys, I mean, I'm sort of at a loss for words because it was just so stunning and I think that folks weren't necessarily anticipating not even no landing. This is almost like re-acceleration.
Speaker 3:And there was 126,000 revisions to the previous one.
Speaker 1:Yes, yes. So it was not just January that looked great, but also November and December were better than we thought.
Speaker 2:That revision is particularly notable because one of the sub-themes over the past year has been positive job growth. But the past unknowns were actually a little bit worse than we said before, and so that would always take the edge off the reports most months, but not this month.
Speaker 1:Yeah, when I was reading the jobs report it was kind of funny because I was reading the 353,000 in January and then the BLS release said similar to the 333,000 gain in December and I thought three to 33,000 in December, that's, I don't remember that number and then I realized it had been revised upward quite significantly. John. Are markets going to like this? What does this mean for the expectations for rate cuts, which already have been sort of walked back quite significantly?
Speaker 4:Yeah, yeah Well, they got walked back a little further in the middle of the week when the Fed had their decision and Fed Chair Powell was a little less dovish than perhaps markets had expected, really pushing back on that March date for rate hikes. Obviously he couches everything in caveats and that sort of stuff, but it was about as clear as Chair Powell can say that March isn't the likely beginning of the rate cut cycle, which is futures had moved from a very high implied likelihood of starting then to about 50-50. And after the Fed it was kind of 30% and now it's down to 20. You're still it's dying hard, right, the idea that rate cuts are coming, they're on the way, but yeah, it's essentially a. We've seen this.
Speaker 4:The dynamic that we've seen obviously in stocks is to some extent risk. Asset prices have been buoyed up by this idea that the Fed is going to be easing and so when you get these data points or pushback from the Fed, we've seen sort of moments of wobble and indigestion, particularly on the day, and then markets go back and sort of focus on the fundamentals. Right, I mean, this is not the fact that they aren't likely to cut in March, is not because inflation is reemerging, it's because growth looks pretty solid still and they are looking, as we'll talk, more about the potential for growth to be perhaps even re-accelerating or staying at a very steady and solid clip going into what could be another you know another global supply chain snarl, and we've seen that feed through into goods price inflation in the past. So it's, I bet, fed share Powell and the FOMC, upon seeing this number, felt pretty good about their cautious, their cautious wait and see posture on Wednesday.
Speaker 1:Yeah, just looking through some of the categories that added jobs, professional and business services up 74,000. Healthcare up 70. Retail up 45. And I even looked at one of your favorite indicators, brendan temporary health services to see what's happening there and it looks like you know about 4,000 jobs added there. Not certainly some of the bigger numbers we saw in other places, but you know, so positive.
Speaker 3:Yeah, and government was only 36. Some of the criticism the last few months was that government was kind of outsized and you know that's not sustainable. But this one was the private sector that drove it.
Speaker 1:Yeah, it's hard to see anything to complain about in this report. Average hourly earnings were up as well.
Speaker 1:The work week edge down, which I think maybe is actually kind of a good thing for working a little bit less, but earnings are up and companies are hiring, so maybe there's giving workers a little bit of breathing room here. Lauren, one thing that I did notice is that there was some a little bit of weakness in this sort of mining, oil and gas sector. You know, logging, I think, might have been down, which I'm wondering if that's related at all to some of the volatility and turmoil that we've seen internationally and with supply chains.
Speaker 2:Well, it's true we did have the Biden administration announced that LNG export pause. That may have just put a very slight down draft there, but you know I'd be careful reading too much noise into it. But I guess logging is interesting too, because the European Union enacted a new deforestation regulation which is of great interest to wood and paper producers. There are some signs that the Biden administration may be looking at something in that direction possibly, which would be very significant and potentially a big challenge to those industries. So I'd keep a close eye on that.
Speaker 1:Absolutely, John. I'm wondering, you know, with the strong job growth that we've seen, if we do get into a period of an acceleration in growth, does the Fed need to hike if inflation is still low? In other words, we have, you know, have some little wrench to fix the uncertainty that the federal government is going to use to change the rich. You know, could we get into a period where the economy is spinning too fast, even if inflation remains low, and the Fed then feels like it needs to sort of reign in what could be a frothy environment?
Speaker 4:Yeah, I think that would come into play if we saw, you know, a number of months in a row with this kind of increase in average hourly earnings pretty notable 0.6% at the month on month there and that took the year-on-year pace to 4.5% and, you know well above consensus, above the previous 4.4%. This is the kind of place where you know you begin to see that flicker of inflationary risk that could be coming in. But you know there's nothing necessarily that the Fed would seek to do in terms of suppression of growth writ large if inflation is behaving and trending in the right direction. But you know, as we mentioned before, the Fed is looking, you know, not in the rearview mirror, it's got to look into the future. And certainly we live, you know, in a world where potentially these sources of inflation are, you know much more geo-strategic, supply-driven things that are can be unforeseen, and you know we also have, we have relatively elevated energy prices, not shooting the moon, but you know a pretty stable to high kind of range that they're in.
Speaker 4:Obviously, you know we've seen the pendulum swing back toward labor and the strikes and the workers getting more leverage in bargaining and so forth, and so we think that this is, you know that's just a higher equilibrium inflation dynamic that's taking hold and you know that goes without saying the most key dynamic of that, which is the rollback of globalization writ large, and the rift with China, which doesn't seem to be getting any better.
Speaker 4:The reshoring and French shoring is expensive and are relatively more expensive. So we think that you know the Fed is going to be probably cutting later this year, but not with the aggression and not with the conviction that markets had priced in. Is that a problem for risk asset prices? You know we think it can create a little bit of a downdraft here and the dynamics of earnings have been a little bit muddy, despite, you know, some of the good numbers that we saw last night, particularly out of Amazon and Metta, I guess Facebook, metta, and you know so it's not. It hasn't been fatal to the rally to have a big sell-off today in treasuries, but it just creates, you know it creates some cross currents and you know, with stocks at all time highs you can argue that markets have been really priced for. You know the softest of soft landing, like pillow soft landing, you know immaculate.
Speaker 4:Down pillow down, pillow, kind of landing with a doily on top right. So but you know that that doesn't mean that a number like this is going to knock stocks out a bit.
Speaker 1:Yeah, brendan Powell said that he needs greater confidence that inflation is moving sustainably lower. I think those are the key words here greater confidence and sustainably lower, in order to cut rates. Are you confident that inflation is moving steadily lower?
Speaker 3:I think it is especially because, like we talked about in the past how the housing component is works with a lag. So we knew we have that kind of deflationary forces coming, you know, in the next six months or so. But so much of the normalization of from a we went to very high rates to now kind of back to normal rates is goods prices went up so much because of the supply chain issues, and now that's normalized they've come down, so there'll be less of a drag. But now I want to, you know, bring in Lauren, because you know the Red Sea and shipping problems are, you know, weighing on that outlook? How do you see things? Well, first of all, where are we and how do you see them playing out?
Speaker 2:Yeah, I think that we've taken on a significant premium with global freight shipments and it's interesting. It's almost a mirror image of what's happening domestically here in the US, where the news is good and seems to be getting better. You know, like soft landing who said anything about landing at all? But overseas things are not as rosy. We're seeing a lot of rising tensions. I still think that you know we avoid sort of the worst case scenarios, but certainly having a major trade artery like the Suez negatively impacted like this, with prices doubling or even tripling in some cases and driving a lot of the shippers to like, instead of having that risk premium, taking on the time premium of sailing around the Cape of Good Hope, around South Africa, that's a significant drag on pricing for container shipping all across that part of the world and it looks like again, even if we're going to avoid the worst case scenario, it may get a little bit worse before it gets better.
Speaker 2:We are in a new era of war over the past few years, with widespread use of drone technology for, you know, military and paramilitary type operations, and this has really significant strategic implications for US force projection.
Speaker 2:When it comes to naval operations, you can't just necessarily sail anywhere you want and own the territory, because drones do complicate that a little bit.
Speaker 2:It doesn't, you know, it doesn't completely change everything, but it's a very significant fundamental driver, and so that affects, you know, sort of dominance of the Red Sea.
Speaker 2:And then so you've had the US striking Uthi positions in Yemen to try to push back on the attacks on the Red Sea, and now you've had US casualties in Jordan and a possible US response to Iran. So, again, I don't think we're going to see a widespread war here, but we certainly are seeing at least a few dominoes falling, and so I think that we are looking for the certainly the cost premiums and the risk premiums to be in effect through most of this year, certainly for at least the next three to six months, and then we may have some more information about how the situation is evolving, if the war on Gaza is winding down or reaching some sort of plateau level, which we're not at yet, and so that, just that, that alone is a big challenge. Of course, you know we could talk about the situation in Ukraine, the situation in the Far East or the multiple situations in the Far East, but let me just pause right there. You guys have comments or questions?
Speaker 4:Yeah, I mean it just seems like you validated that worst case scenario, which is the Houthis. Their ability to threaten shipping in the Red Sea is so easy to sustain with the current cheap drone technology and the missiles that they have on hand and they're so difficult to degrade, given the sort of rag tag, hide in a cave kind of dynamic of the Houthi militia. So when it really does seem to be something that can only be brought under control with a larger regional solution, rather than the US military coming in and being able to effectively defang the Houthi threat, is that correct?
Speaker 2:No, I think that's right. This is not a simple matter of you launch a few cruise missiles where you have an operation here or there and then all of a sudden everything is. You sort of get past that issue. I mean, this may be something that takes some months to resolve or even burns a low intensity conflict for much longer potentially.
Speaker 4:In your mind? Do you think that I mean, we've seen the most intense part of the Russian sort of energy aggression and threats against wheat exports and so forth. That was relatively early in the conflict and that's kind of died down. But do you think that there really is some lingering risk there, if there's a wider expansion of hostilities in the Middle East, that Putin sees his chance of tightening the screws further? Going back to these kind of tactics that we saw early on in the war, which pushed natural gas prices in Europe up to eye watering levels and created other supply chain problems throughout commodities, Well, I think for the last, you know, maybe six months even there just hasn't been a lot of movement on the front in eastern Ukraine.
Speaker 2:And, you know, from strictly from commodities markets perspective, maybe having things just sort of freeze in place where they are now is allowing commerce to move in, particularly wheat, and is alleviating the pressure on the global food market. But I was really concerned about the second half of 2022 in particular, that you might see widespread famine and, you know, misery, you know even compounding what's going on in Ukraine, which is, of course, terrible. But at least having a relatively stable front with no major offensive, countrywide offensive in Ukraine, has probably allowed the situation to settle a little bit over the last few months. And so the question would be how long does this phase of the war last?
Speaker 2:You know you could see a major Russian offensive. You know, maybe Ukraine, they launched some sort of major offensive to try to push Russia out of those provinces, those captured provinces. Maybe there is a peace agreement that basically says, you know, whatever everybody has right now, they get to keep, and so you know, at some point one of those scenarios is going to occur. It's not just going to be this sort of, you know, an active front like this for the next year or two. I presume this phase of the war will evolve into something else, and what that something else is will tell us if things are going to get worse before they get better. But for right now at least, for the last few months I think, we've avoided sort of major threats to Ukraine being able to shift wheat out, and that's, I think, been very important for countries like Egypt and Eastern Africa and other places that are very dependent on those grain shiftments.
Speaker 4:Yeah, how concerned are you about the situation around Taiwan? Obviously we saw the election go in a way that wasn't how Beijing would have wanted it. You know there aren't, you know, declarations of independence and you know declarations of war. It's, you know it's still relatively steady and seems like a very, you know, small, but you know non-zero tail risk that something happens there. Is there a concern in your mind that part of China is tightening the screws strategy on Taiwan will involve some kind of disruption of trade from that very strategic island?
Speaker 2:Yeah, I think well, a couple of threads. I'd watch carefully the progress of CHIPS Act type projects in the US, particularly the ones of Taiwan semiconductors involved in in Arizona and the work that Intel is doing there in Indiana. How is the US doing in terms of trying to to onshore its own high performance chip production? That timeline may be relevant. The way that folks think about innovation of Taiwan directly is tied to the way that the tides work in that part of the world, and so April and October are sort of your hot spots for being concerned about a possible innovation, because that's when it would make sense. From China. There's been a lot of talk about this fall being a possible time. 2027 is a number that's been out there for a while. China might feel like the duck's. Turn a row over the course within the next three years, I would say in 2022 and early 2023.
Speaker 2:As recently as maybe a year ago or a little bit less, I thought that, as terrible as the situation in Ukraine is, it looked like maybe a positive indicator for avoiding a Beijing-led invasion of Taiwan. Because if you're the Chinese government and you're looking at the situation in Ukraine as sort of a testbed for, hey, how does invading and conquering another country work in the 21st century, in 2022, it looked like Russia had really committed a disastrous strategic error in terms of executing this invasion. That was not planned, that the military wasn't ready, they didn't have great equipment and they were taking very, very heavy losses and maybe not gaining anything, and so, from the Chinese perspective, it's wow, this could be really like. We're prepared to pay a high price, but this is maybe you get nothing and you pour out a lot of blood and treasure for what? And I thought that that was, in a sense, it was good news, in the sense that the PRC might say oh well, here's the thing we already kind of own Taiwan, so maybe we don't need to conquer them militarily, because that looks like it could be really, really hard.
Speaker 2:However, over the last eight or nine months, it looks like, while Russia has paid an extraordinarily high price in terms of casualties in particular, it does seem like they're not about to be dislodged from Eastern Ukraine, and that's a couple of the critical strategic objectives that I think they had, which is establishing a land bridge to Crimea and blocking a southern pipeline, potentially going through Ukraine and bypassing Russia.
Speaker 2:And so, as terrible as it is, it seems that, again, if Russia is not going to be dislodged from Eastern Ukraine, if you're China, the calculation may have moved back towards okay. Well, okay it'll be. We would lose a lot of people, but we could actually carry this off, and that, I think, is probably increased the odds slightly from my point of view. So I would say I don't believe an invasion is imminent, but I think that now, with Russia potentially being able to hold on to, if not permanently then for the foreseeable future, those provinces that were formerly Eastern Ukraine, I think does make me think that China could probably think, maybe thinking that they could pull this off, and also, at the same time, the US political situation, like how committed is the US, even if strategically it makes a certain amount of sense, how committed is the US to it? And I think that that's a challenge too.
Speaker 1:Lauren, that's actually the question that I had was do you think that the US response to a Chinese invasion of Taiwan would be more forceful and unified than what we're seeing around the Russia-Ukraine situation?
Speaker 2:Yeah, so I, and global response quite frankly to what, and global response to yeah, no, I think that that's that's that's a great that.
Speaker 2:That is that. That is the next, that's the next question. I think the, I think the response to China will be a lot more unifying in the US. I there's, there's a lot more, it's much more of a unifying factor.
Speaker 2:In fact, it's one of these sort of elements that you look at the Trump administration and the Biden administration and Ways in which they were more similar than different and I would say I would say trade, manufacturing and China are sort of those three core areas where in some sense, you have to sort of squint a little bit to see differences between the two administrations.
Speaker 2:Obviously, in many, many ways on Regulatory policy and the border and different things and tax policy and climate policy, the, you know, the the Biden administration has turned the page Pretty substantially from the Trump years, but when it comes to China policy and trade policy, it's it's really more an extension and I think that that's that's important, because that, that that tells you where the, where the country is a little bit that America right now is pretty like hey, let's just more of domestic maniac fraction, let's do some some on sourcing. I think that that's very important for investors to sort of have a sense of what are the, what are the through lines to tell you where the country sort of like you know, more or less agrees or at least is an arguing right now.
Speaker 3:Yeah, you, you mentioned earlier but the the Biden administration to ban experts of liquid natural gas. What's going on there and what was the kind of the thought process behind it?
Speaker 2:Well, I think that the, the administration is Looking at, you know, at its fourth year, and what are the? What are the legacy items on different issues that it wants to, you know, make sure that it locks in. There's a lot of the regulatory work is being done to To hit completion over the next two or three months, before what's known as a congressional review act deadline, which is basically a deadline that that, if the In in, in practical terms, if the Republicans Hold the White House and both houses of Congress in January, they can, at a stroke of a pen, reverse certain key regulatory actions. And so Administrations in both parties, both during the Trump administration, during the Obama administration, back over the last 25 years since this law was enacted, have tried to get things done by April or May. It's dependent on the congressional calendar, so it's on a fixed date, but basically there's this deadline for regulators to to act now.
Speaker 2:The LNG Rule is not is not a is not a regulatory action exactly, but it is the mindset right now people that are involved in regulation to To try to tidy up, you know, hit their, hit their major, you know, hit their major project milestones Over the next two or three months, and so I think that that's that's sort of what they're thinking Is like. What are we? What is going to be our legacy on environmental protection and on climate over the next couple months? This is, this is something that we should really think about doing, especially if the if the war in Ukraine Is not going to be over real soon. But maybe there's a bit of a, maybe there's a there, maybe there's almost sort of a low ebb right now, or we can. We can act Because obviously there's been a big ramp up in production over the past couple years and you know, partly do support the EU's, you know, lost Access to Russian oil and gas.
Speaker 2:So there's, there's a little bit of that going on. There's certainly politics to play to. The Biden administration right now is concerned about engagement with younger, more progressive voters that are sort of like Biden. Maybe okay, but not, you know, the level of enthusiasm is not, is not, is not as high as they would like to say from the, from the White House standpoint, and so this is helpful there and I think, I think you know there may there may be, you know, a few other political elements of play. I mean, the administration is certainly right now and very much at odds with a lot of the, a lot of the big oil and gas producing states like Texas. There's that, there's that crazy standoff going right now On, right now over the border. So those are some of the factors.
Speaker 1:I think that's a lot of factors. That's a lot of factors. But, lauren, you you laid out very well all of the sort of risk factors that are occurring across the world At the same time that the US is experiencing what we talked about at the top of the show, just the blockbuster growth in in jobs, strong productivity, strong wage gains. To what degree do you see some of those geopolitical risk factors either suppressing the US economy or maybe sort of trickling into the environment here at home? How, how concerned should we be that there could be spillover effects?
Speaker 2:Well, I think that yet we see um further problems with global shipping routes, such as, if the situation in the Red Sea even just drags on like it is or worsens in any way, it could drag on prices in the US. That sort of like sprinkles out over consumer prices, consumer goods. That would, in effect, delay what seems to be a positive trend line on inflation, which is, say, inflation fading back towards that 2% target. The inflation right now is still elevated. It's on the right track. I mean it'll go over the past two years. You see it's definitely coming down, but it's not there yet. If the situation in the Red Sea keeps it elevated by even, say, two or three tenths of a percent, that's significant. That, frankly, could be determinative in the US later this year, because I think inflation is the thing on which the US elections may end up turning.
Speaker 1:Lauren, thank you so much for taking the time to share some of your insights with us today. We really appreciate it. That does it for us. Here at the Macrocast. I'm Elan Wojbeth-Penta. Thank you to my co-host, john M Branded, of Market Policy Partners. Again, lauren, thank you so much for joining us today. We hope you all enjoyed our show. Remember that you can always listen and subscribe to the Macrocast wherever you get your podcast. Have a great day.