As investors brace for a slew of economic data this week, Citi economist Veronica Clark joins Market Domination to share her economic outlook and offer fresh insights into the state of the economy.
Clark predicts the Federal Reserve could initiate interest rate cuts as early as September, followed by cuts at every following meeting. She explains that this “consecutive cut call” is predicated on signs of a softening labor market. However, she cautions that the “unemployment number ticking up will be increasingly concerning for Fed officials.”
“We’re kind of in this trade-off era: Are we going to have a soft landing? Are we going to weaken further?” Clark tells Yahoo Finance. “I think we have a much easier time now than maybe a couple months ago convincing people that things are slowing down. A couple months ago, the story was reacceleration and growth picking up again, maybe the Fed would have to hike again. That looks much less likely.”
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This post was written by Angel Smith
Video Transcript
All right, let’s broaden it out and talk about what’s going on in the macro level because it is a big week for investors.
We will be getting a fresh reading on inflation this Thursday that could help build the case of the fed should begin to cut interest rates in September for more on the week ahead.
And what it means for the economy.
We want to welcome in Veronica Clark economist at City Veronica.
It’s good to see you and what I find really interesting about the city call on what’s gonna happen with interest rates is it’s a good reminder.
It’s not just about when they start, it’s about what happens after that and how frequently, um, they, they keep cutting rates and you guys think we’re gonna have a streak here once they start going, talk us through that.
Yeah.
Yeah, exactly.
We, we have the fed cutting rates for the first time in September, which is, is not so much out of consensus anymore where we’re pricing about 20 basis points or so for, for September.
Um, but yeah, we, we’re more out of consensus is what happens after that.
We do think the Fed is cutting every meeting after that.
So that includes November, December and, and into the first half of next year.
Um And that consecutive cut call is increasingly premised on this idea that the labor market is softening.
Um, you know, we had very strong 200 K plus payrolls on, on Friday.
Um But that unemployment rate ticking up, I think will be increasingly concerning for, for fed officials.
We’re now at 4.1% on the unemployment rate that’s above the fed’s year end forecast.
Um, so I think that will really, you know, what gets us to those consecutive cuts and veronica when you’re talking to clients.
So they ask you what, what are the risks to this call?
What, what do you tell them?
Veronica?
Yeah, I mean, we, we are still, I think in a, you know, we’re, we’re kind of on this trade off or are we going to have a soft landing?
Are we going to weaken further?
Um, I think we have a, a much easier time now than maybe a couple months ago of convincing people that things are slowing down.
Um, a couple of months ago, you know, the story was Ael operation and, and growth picking up again, maybe the Fed would have to hike again.
Um, that looks much less likely.
Um, but I think for us, it really just comes down to the, the normal macro diams, you know, most recessions, most downturns do start very gradually they start very slowly.
And then at some point you encounter this non linearity, you get the, you know, bigger increase in layoffs.
We have seen this rise in initial jobless claims lately.
It kind of feels like we’re on the brink of that now.
Um Maybe the the biggest pushback is, yeah, the, the overall numbers still look pretty good.
It’s just the, you know, extrapolating that trend does not look so good Veronica, what are the other warning signs that you’re seeing in the data?
Yeah, I mean, I think it really does, you know, mostly come down to, to the labor market.
We’ve seen, you know, for a number of months now, you know, nine months or so, you know, hiring really pulling back hours worked that are coming down.
It looked to us like all of those early steps that employers would be trying to, you know, cut labor costs, they’re not laying anyone off yet, but that would really be the last step.
Um But as that, you know, dynamic has happened and it’s been getting harder and harder to find work if you do happen to get laid off.
We have, I’ve seen this pullback in spending, you know, we’ve had retail sales and moving sideways to slightly lower for, for a number of months now and that pullback in spending that’s less business revenue, maybe that’s what gets you to that final step of, of layoffs.
Um So it is really just this gradual deterioration that we see.
Veronica.
I’m curious too.
Our, our central bankers are on Capitol Hill this week, Jay Powell, uh with his semi annual testimony, I’m curious, Veronica.
Um, you’ll be listening.
What, what, what do you think Jay Powell has to say?
Yeah, I think the, the risk tomorrow we’ll hear from him first tomorrow and then on Wednesday are that he sounds relatively dav.
Um It’s interesting that we’re hearing from Powell first, you know, among Fed officials after that unemployment rate number on Friday.
Um, but he did sound like a, you know, a central banker who’s getting more.
We’re worried on the labor market, you know, employment side of the Fed’s mandate.
We’ve heard that from some of the other Fed doves also.
Um, I don’t think he’s gonna, you know, you know, really flag, you know, alarm bells just yet.
Um, but I think he’ll be increasingly worried with that unemployment rate rising at the same time.
It feels like inflation is going in the Fed’s direction, right.
Um Are you, are you pretty confident that we’re going to see a benign reading in CP I on Thursday?
Yeah.
Yeah, I mean, as confident as a forecaster can be, maybe there’s always things that can happen, you never know.
Um, but yeah, we’re expecting another pretty favorable reading for, for the Fed a 0.2% month on month for core CP I, that’s a very normal reading.
Um, even in the D details of that.
I think we might see, you know, finally, some slowing in shelter inflation that’s been a very sticky strong component of inflation that might look more normal on, on we on Thursday’s data.
Um So that would be, you know, the fed, getting more confidence that inflation is easing Veronica.
Great to have you on the show today.
Thanks so much for joining us.
Thank you.
