ASH BENNINGTON: Welcome to the Real Vision Daily Briefing. I'm Ash Bennington, joined by Jack Farley. And today, a new day, a new era, the newest member of the Real Vision editorial team, Samuel Burke. Samuel, welcome.
SAMUEL BURKE: Thanks so much for having me. I'm excited to be here, and I wouldn't want to start this without a hat tip to Ed Harrison, because I know he has such a big fan base here. The fact that I'm here has nothing to do with the fact that he's moved on to bigger and better things, but I know that he's beloved by the audience and beloved by people like me so it's an honor to be here, and certainly not to fill his shoes, but try to stand next to his shoes.
ASH BENNINGTON: Welcome, jack.
JACK FARLEY: Thanks so much, Ash. It's great to be here on Samuel's first day on the Daily Briefing.
ASH BENNINGTON: Indeed. We've been talking a little bit offline about all the things that are happening in markets. The big story of the day, obviously, continues to be the hawkish Fed. What are your thoughts on this, guys? Samuel, let's start with you.
SAMUEL BURKE: Well, I think the Fed got it right. It was interesting to see in FT headlines saying that the Fed had nailed it. If you look at the reaction, yes, there was reaction in the markets but it wasn't a huge reaction. What really fascinates me is the fact that what's shifting this, I really believe, is work from home and the fact that employees are suddenly in the power position, maybe some offices are opening back up, and people don't want to return to the office.
They're looking for a company where the offices have closed, and they're looking for employees that are willing to work from home. That puts all of the power in the employees' hands for the first time in a very long time and I really believe that's fundamentally what's driving these shifts here. A lot of people in the US talk about the fact that the extended unemployment benefits are driving this. Well, I think that must be true, that must be a factor but I'm here in the UK, and we don't have those extended benefits.
Ironically, a more socialist country here, you would think they might be even deeper, but they're not and we're still seeing inflation here. So, I think at the end of the day, I don't believe that this is transitory and I think the Fed is catching up to that idea. That's why we saw the dot plot move the way it moved.
ASH BENNINGTON: Jack, thoughts on that, on the Fed and inflation?
JACK FARLEY: I think, Ash, that today was a big, big stumbling block in the inflation trade. Now, the inflation trade is the opposite of worries about inflation, but you saw gold sell off. You saw oil, copper, lumber, soybeans, pretty much everything that has been at the vanguard of the move up in prices, you saw a huge speculative plummet in those assets. Meanwhile, Ash, you saw the NASDAQ holding firm and stocks like Peloton, stocks like Tesla, DocuSign, NVIDIA, those tech giants, which people think of being most vulnerable to rising rates, they actually surged to some as much as 6% today. I think that really has to do with the flattening that's happening on both ends of the yield curve. Of course, all this action breathed new life into the dollar.
ASH BENNINGTON: Yeah, and just a little bit of context for people who haven't been following this story as closely as both of you have, yesterday, the Fed was unexpectedly hawkish, meaning it signals that rates would be rising faster and sooner than market participants had believed, Treasury prices declined, yields rose, particularly at the five- to seven-year maturity range. The 10 Year rose I think about 10 basis points yesterday, and breakevens on inflation declined.
Now, we look at this, Jack, and exactly to your point. It's an incredibly interesting one. As we look at what's happened in US equity markets today, the first full session since the Fed statement and comments, we now actually see what seems counterintuitive to see that growth stocks have rallied on this while rates are rising.
JACK FARLEY: Yeah, absolutely. I think we can actually put a few charts up. If you look at today, which is June 17th, the NASDAQ staged an epic recovery after it falls yesterday alongside with other indices. That is what you see in the index level. Then if you look within the select sectors, you see that sectors that are very exposed to duration, like energy, like financials, so XLE, E stands for energy, F stands for financials, those really faltered today, whereas the XLK, the tech sector, you can see in the green on this chart was rising again. Yeah, it is very surprising.
ASH BENNINGTON: Yeah, and a very good overview on that, Jack, for what's happening in terms of sector rotation. The next thing that we have to talk about here was jobless claims. Obviously, there was an unexpected change in this, an increase of 37,000 from the previous week's highs. Tell us what you guys think about that?
SAMUEL BURKE: Well, it was really driven by two states, Pennsylvania and California. When you look long term, though, does anybody really not think that there's going to be a shift toward more employment, that people will not be moving away from these benefits? These benefits are going to be cut off and it just brings me right back to the fact that you see here in places like the UK, we don't have these extended benefits and we still have some of these similar issues. I really don't see how this is going to be a long term issue.
We've seen in previous months that people's expectations haven't been correct and this was just another one of those months. The big picture is vaccination is going what very well, particularly in places like California, it's going to trend one way. At the end of the day, the employees' going to have the power and so maybe for a month like this, they have this option, but it's not going to be here in the medium to long term.
ASH BENNINGTON: I agree, and I'll take that cynicism one step further. Look, let's look at the big picture, zoom the camera out on the employment data. Came in at 412,000, up 37,000, that's 14% higher. This is a weekly number. Obviously, we know there is noise in the weekly number, but take a look at that chart and the overall shape of that chart. This is the initial claims chart, ICSA at the St. Louis Fed FRED database. What you see is this, it wiggles around and then it shoots up to 6 million at peak and then it plummets down to approximately where we are now.
It seems to me like this is something that is very much part of the secular trend, and then the noise. You have this dramatic spike, obviously related to COVID, you have this incredible crash in the number of people who are seeking to file these claims as the pandemic begins to subside in the wake of vaccination and the reopening. Pretty much very predictable. I don't think this is a story that really moves the needle unless we see this on a sustained basis, but weekly data, they're volatile. California, Pennsylvania, as you point out, Samuel, can account for those changes. Jack, what are your thoughts?
JACK FARLEY: I think you're exactly right. I think it speaks to the magnitude of the chaos and pandemonium in the labor market in March and April that these discrepancies we're seeing today to the tune of tens of thousands of jobs for real people amount to nothing more than a few pixels. If you look at that one year chart, you can barely see it. Samuel, I think you are exactly right that the power really is in the hands of the worker.
The old saying or the old thinking was the Phillips curve, which is that if unemployment is too high, it's very hard to have inflation and if unemployment gets too low, and some people say there's no such thing as too low unemployment, then inflation will run amok. But really, if something gets thrown in the gears, if there are workers who are making more money being on unemployment benefits than they are if they were going to back to work, so you actually can have inflation with the unemployment levels that we have today.
SAMUEL BURKE: There's one thing that I think has been missing in a lot of this conversation, even though I acknowledged vaccinations are going in the right direction, the United States is going to have a plateau possibly unlike any other developed country with vaccine. There is resistance to the vaccine, and I think what a lot of people haven't factored into whether it's job numbers or the knock-on effect that it has throughout the economy, you have epidemiologists across the spectrum saying that this is going to be problematic.
Whether it's liberals in California who don't want to get vaccinated, or certain religious communities in New York, these are the types of people who are going to suffer when these breakouts inevitably happen and the US might be the country with the most vaccine resistance and the most amount of vaccine. Rather ironic because you have countries that say they're really not going to get much vaccine until 2022. This is one part of the puzzle that we haven't factored in.
We don't see that vaccine resistance here in the United States. What effect will that have on the job market? What effect will that have on people claiming jobless benefits? I really think that everybody's glazed over and just said vaccines, one direction, which overall is right, but this is going to have some type of effect on the economy and I don't hear a lot of people except epidemiologist really talking about the medium to long term where we could see continued flareups for a generation according to epidemiologists.
ASH BENNINGTON: Yeah, it's a frightening prospect.
JACK FARLEY: Sorry, Ash, I just got something which is, Samuel, I think that's a really good point. If you think about how that impacts asset prices, with 60% herd immunity, people are going to be flying and I'm sure Delta and American Airlines, they're going to have the problems. They're going to have too much business. Not enough. But what about those industries that really rely on true herd immunity, whether it's concerts where you're constantly just running into people, and it's a mosh pit, or maybe cruise liners where if one person gets sick, that ship that is halfway to the UK is going to have to turn back? It's a really important question.
SAMUEL BURKE: And most epidemiologists in the United States don't think there will be herd immunity in the US, where places like Malta, where they've already hit the 80%, which is the standard mark for herd immunity for most epidemiologists. Exactly. What effect will that have on concerts and if people say, well, I can't go to work. Let's bring this full circle, somebody who's caring for somebody who can't shield, who can't get the vaccine, for whatever reason, those are types of effects on the economy I don't think that we've talked enough about.
It's really something that I think we'll keep a close eye here on the Daily Briefing and across Real Vision, because right now, we're in a state of euphoria and Europe is starting to go through it. You're seeing stock surge in Europe as we catch up, even though we're more vaccinated here in the UK than the US. But as you see, Europe as a whole started to catch up. There's really this euphoria, and I don't think people in the US have stopped to think about the glitches that we're going to see with the society that is somewhat vaccine resistant.
ASH BENNINGTON: Yeah, Samuel make some great points there. Jack, over to you. I'm curious, I know you've been following the global stock and bond markets. What are you seeing abroad?
JACK FARLEY: Well, let's see, I think I'm going to have to steer out of the stock world and into the bigger but a little more esoteric world of interest rate derivatives. Let's actually just put up a chart which I found from a Morgan Stanley research report. It is the timing of the first rate hike. In other words, when do you think the Federal Reserve will first hike rates? Now, in late March, early April, people were saying they wouldn't do it until December, as late as December 2022. Whereas now, that has increased to May of 2023.
Then you look at a chart that actually Samuel flagged in the Bank of America Global Fund Manager Survey, which came out recently, which is that inflation expectations have actually rolled over. I was curious, as I said, Samuel, that's a great chart but this is only the fund managers. I wonder what the broader market says, so we looked at inflation expectations based on TIPS or Treasury Inflation Protected Securities, we saw that that too has rolled over to just over 2.52% down to 2.26%. If you look at the 5 Year 5 Years, that also is going down.
The market is believing the Fed. I think that, Samuel, the FT opinion piece that you alluded to earlier, I think that represents the majoritarian opinion and the bond vigilantes or the people who are calling BS on the Fed, so to speak, they remain in the minority.
SAMUEL BURKE: Yeah, I'm just curious to know, though, those people who just yesterday were talking about it not being transitory inflation, the inflation in general, I'd be curious to know what their view is today in the wake of the Fed decision as it's all sunken over the past 24 hours. Nobody's denying that there are inflation issues, but the degree and how long lasting and the factors underpinning it are really what's changing the conversation.
ASH BENNINGTON: Yeah, that's exactly right. By the way, let me just say, I know this can get a little esoteric a little fast when we show these charts. The TIPS chart, the Treasury Inflation Protected Securities chart is a measure of breakeven rates, meaning calculating what the expected rate of inflation is going to be as we look forward, and exactly to Samuel's point, this really is the key question. It's been the quick question.
We know that there's inflation, the thing that we are debating, not just on the show, but more broadly, in the investing community is this nature of transitory-ness. The idea here is that when you have obviously a catastrophic event, like the COVID crisis, and then you're following it up with a reopening, you can have these frictional issues, mismatches in supply and demand that cause imbalances in the market that cause inflation to spike temporarily. It is very much something that Jay Powell is playing close to the vest about understanding the balance of continuing to stimulate the economy.
Obviously, monetary policy remains accommodative. This is, as we talked about hawkishness, it's also important to remark that this is about the relative levels of which accommodation are being withdrawn from the economy. We are not running a tight money policy by a widespread and so we're just becoming slightly less accommodative at the margin, and it's the rate at which we're withdrawing that accommodation that is what we're debating here today.
SAMUEL BURKE: And it's the talking about the talking about talking about increasing the interest rate. I'm curious, I would like to know your take, Ash, what are the factors that stand out to you in terms of this being transitory or not? What are the arguments that really take shape in your mind?
ASH BENNINGTON: Well, it's exactly the points that I just mentioned. Whether or not we see the sustained rises in prices, whether or not it begins to translate through the system or whether it's just about the short term supply and demand imbalances. For example, it's very difficult to-- here in New York City where I live, I'll give you an example. I went to a restaurant the other night, and they were closing at like nine o'clock and I said, guys, you were open till like midnight, what's going on?
They said, we can't find the people to staff the restaurant. People who were in the food services industry left New York City because the rents here are disgusting and the jobs were disappearing, so they left. Now, you've got this challenge of trying to find people. Now, how do you lure workers back? You pay them a higher wage.
Now, the question about whether this is transitory meaning when the frictions are removed from the market, when people come back into that industry, when people come back into the city, and industries all across the country in similar fashion, will those increases subside? That's very much an open question. The reality is as we explore it, the Fed which hires rows and rows of economists are not able to answer that question. It's challenging for us to do so, but it's important to understand the argument, to understand the conversation that's being had. This is very much a part of the conversation, and one of the things that we're fortunate enough to get to discuss here.
SAMUEL BURKE: But come on, with the lack of integration that we saw to the United States in the Trump years, which is going to continue into the Biden years in all likelihood, and the plummeting population, that we're going to have plummeting birth rates, I should say, rather, you really don't think that people are going to go and get those increase in wages, draw them back into New York City, and that they won't stay, Ash?
ASH BENNINGTON: Well, no, I do actually suspect that we may have some degree of inflation. I actually am more on the inflationiste to side, I think, if I had to choose. Yeah, look, obviously birth rates, demography is something that's relatively stable, it doesn't change in a 6- or 12-month period dramatically. The policies around immigration are obviously important in understanding the ability of new workers to come into the labor market. It is a very complex issue, and the Fed is still struggling with this, and I think markets are struggling to figure this out and to price it as well.
SAMUEL BURKE: Yeah, I don't disagree with you but I think that that gap between the 6 and 12 months, I think a lot of these issues have already caught up to us in a lot of ways, whether it's in the United States, whether it's immigrants coming or I should say, migrants who can no longer come to the UK because of Brexit, a lot of those issues are catching up to the not so macro situation of the pandemic and being able to find labor, I think they're going to hit heads much sooner than we think.
JACK FARLEY: Yeah. Jack, any thoughts? It's so hard to say, Ash, is this something transitory or not. When Texas was in subzero frost in early February, and oil spiked, was that inflationary? Sure, the price of oil spiked, and we did see commodity inflation, but that is something that is clearly transitory. On the other side of the shop, you've got a wage price spiral, which is your textbook definition of chronic inflation, where workers need more money so they demand higher wages, and to pay for that, companies raise prices. Therefore, workers need more money and things