Let's get some reaction to this report.

Leslie Falconio of UBS Global Wealth

Management and Brian Jacobson of Annex

Wealth Management are with us. Brian, I

want to start with you here um and this

unexpected drop that we see in this

number. Were you surprised by that and

what are the implications?

>> I was surprised that it had a negative

number at the beginning, but then when I

look at the government

shredding or shedding 53,000 jobs,

right? You look at the private sector

gaining 30,000. It's not a great number,

but it's probably good enough in terms

of that private sector strength,

especially that we have had a little bit

of a heads-up from the ADP weekly

numbers. If we look at the trajectory

for that, really started turning

positive back in November and then it

was accelerating, but it's been on a

decelerating path. So, still positive,

just not as positive as what it was. So,

I think that when we strip out the

government part of it, the notable part,

manufacturing was still positive 5,000,

but I also like looking a little further

down in that table where it talks about

what's happening from the the

establishment survey. There's the

diffusion indices. Now, all those show

is that within private service sectors

and then also manufacturing, like the

percent that are expanding and

contracting. Manufacturing is basically

treading water at about 50, but it's a

lot better than what it was, you know,

just a few months ago. So, I think there

is still that manufacturing strength,

that nascent recovery going on. The

problem is the service sector. Shed

signs of slowing there. Leisure and

hospitality down 40,000. So much for

that World Cup effect.

>> Yeah.

>> Leslie, you told us you were focused

coming into this on wage inflation. We

just saw those numbers, average hourly

earnings year-on-year coming in below

estimates at 3.2%

last month revised down to 3.4%.

Give me your read on that. How does that

impact how you're looking at this and

how you're taking these numbers and the

loss at the top line that we just saw.

>> No, I I'm not as much as concerned as a

loss in the top line. I think we we

discussed that already, but to the point

of the wage inflation

I think it really solidifies our view

that the Fed is going to stay on hold

this year, but with that said, I want to

make the note that the market was

pricing in the December hike before and

after this number. So, the market's a

little bit more convinced that the Fed

is going to hike this year. Um I mean,

partly because as we talked about

earlier, it's going to look through some

of this and wait for next week's CPI,

but this actually gives some comfort in

the sense that the focus that we've seen

on the mandate of price stability and

still a you know, a solid labor market.

Um there is not a point of concern that

we're going to have this huge rise in

wage inflation, and it gives also a

little bit of of, you know, vigor to the

fact that they might not completely

overlook some of these supply issues

that we're seeing in terms of the

inflation, but also

a better understanding maybe what might

be discussed at the end of the month and

more than likely in our opinion, you

know, a hold, you know, possibly in

December a hike, not our view, but this

really solidifies our view that the Fed

stays, you know, on course in 2026.

>> Brian, uh it's kind of hilarious to me.

Here's Kevin Warsh saying, "We want to

take ourselves out of the equation." And

we want you guys to pay attention to

data.

Here we are, and immediately we start

discussing what the Fed's going to do as

a result of the data. Because that's

what we do. That's what the market does.

That's the market's reaction function,

just like we were trying to figure out

the Fed's reaction function. So, I I'm

really curious for both of your take.

Brian, we'll go with you first. When

Kevin Warsh says, "Oh, it's just us in

the media or it's people who aren't

actually making financial decisions.

It's not the trigger pullers who are

upset about getting less clarity from

the Fed." Um you guys are trigger

pullers.

What do you What do you think about

getting And I'm not talking about the

dots.

Yeah. Good riddance to the dots. They

can go away. I'm not even really talking

about forward guidance. I'm talking

about explaining the reaction function

of the Fed and the current framework of

the Fed. Do you think that what he's

doing is working?

>> Uh no, I don't. I think that really what

he needs to do is clarify what are the

data points that he likes to look at in

terms of not just how to respond to the

data. He's We are not asking him to

predict the data, right? That would be

the forward guidance part. It's the

reaction part and

reaction function part is about how does

he react to the data that comes in and

how does that shape his view of where

inflation is heading forward? And I

thought that actually his messaging

during the last press conference was a

muddled mess, right? Trying to invoke

the Lucas critique, Goodhart's law. It

was very disjointed from what would

actually be relevant because, you know,

the the idea of like Goodhart's law is

that if you have a certain measure,

let's say inflation, that they're trying

to target, the argument is that in a lot

of cases that can then get manipulated.

It's like, well, the Fed doesn't

calculate inflation. Are they going to

change the way they do it? So, to me, it

just didn't make much sense. So,

hopefully he will explain that in a

little bit more detail when he's given

the opportunity and space to maybe put

it down in writing and think through it.

But in terms of the Fed is a thermometer

or the

he can't make the Fed a thermometer.

They are a thermostat, right? In terms

of what they do with policy affects the

markets, and that's why we have to be

concerned about how will the Fed look at

this and what will they do?

>> You know, Leslie, I also found ironic

that the Financial Times put out a story

citing people close to Kevin Warsh

saying that he if if the inflation data

shows heat, that he is likely to raise

in September. Okay, so he's not going to

tell us directly, but he's still going

to leak to the FT. I I don't know what

this is all about.

>> Yeah, I agree. And and then here's the

problem. I mean, he had that kind of

sort of um rhetoric earlier and he ended

up really not doing it. So, you know,

the the fixed income market is might

it's going to definitely react

differently this time. Listen, I don't

think the market needs to be be market

needs the amount of communication that

it had maybe previously. But, it does

deserve a bit more, you know,

explanation and even if it's just these

task forces. You know, the to not be

clear in communication, you know, you

don't have to spoon-feed the market, but

it just makes, you know, the market a

bit skeptical. And I think that that

what we're going to see, unfortunately,

is what's going to happen is is that

until we have more data, until the

market feels more comfortable, you know,

you might have a situation where, okay,

the Fed stays on hold and that long and

yields rise or just the opposite. Until

we get a little bit more of a comfort

level, until he till he um you know,

sharpens his communication skills. It's

not that it's not necessarily

credibility, it's clarity. And that's

what I think he needs to do.

>> Brian, looking at the last Fed meeting,

we saw those three dissents all calling

for a hike. We saw Lisa Cook come out

earlier this week sounding much more

hawkish than she usually does. And

again, as Julie brought up the FT story,

this seems like more of a split inside

the Fed than we might usually see. And

so, I'm curious how you're thinking

about what that division looks like and

where that might lead them.

>> Yeah, I think that there is more of a

division than what the 9-3 vote actually

suggested. Uh the three were presidents.

It's not that uncommon to see the

presidents being the more independent

thinkers. And uh so, really I think

question of when do one of the governors

start dissenting. Now, I would not be

surprised if we do get to the point by

the September meeting, assuming that we

don't see a lot of progress in

inflation. I mean, that's really the

linchpin here, right? If we see progress

in headline and core inflation towards

the 2% target, then I think we'll be

talking more about, well, maybe they

should consider staying on pause or

cutting. But, let's just assume for the

sake of argument that we don't see that

improvement. And we're not going to get

a lot more labor market data before

then. If all of a sudden, you see a

couple governors dissenting, will Kevin

Warsh, the chair, suddenly be in the

dissent? Right? We haven't seen that, I

think, in more than 75 years, where the

chair of the Fed is actually in the

minority. So, that would be quite

the headline, I think, as far as that if

you actually did have a decision to hike

rates, Kevin Warsh arguing that we

should be shrinking the balance sheet,

prioritizing that, instead of hiking

rates. You know, he just has a different

belief about how it is the monetary

policy should behave. Maybe the rates

are good where they are, if not, should

be lower. It's more It's the balance

sheet that's causing the inflationary

The more structural problems with

inflation.

>> Um Leslie, let's talk about the market's

reaction a little bit. You know, as we

look at yields that have been climbing,

and then we got to throw the yen into

all of this as well, and the

interventions that we've seen that sort

of have been effective. Um so, what kind

of action do you expect in the short

term, and then sort of medium term from

the Treasury market?

>> Yeah, look, I think the markets right

now you're going through a bit of a bull

steepener. That's actually, at least in

the five spot, that's our expectation. I

mean, we really had felt the curve had

overly flattened, and particularly since

the short end moved up some, you know,

higher, given the amount of hikes that

was priced in. You know, we do still

believe that interest rates are going to

be lower by the end of the year. Now,

unfortunately, it's just going to take,

you know, a bit of time that data needs

to, you know, obviously, you know, be in

sync with that. But, right now, I think

what you're going to see are people

probably selling this rally initially.

So, as yields go down, you probably

going to have people probably selling

more than actually buying it because of

this uncertainty surrounding like, you

know, either inflation next week, or the

Fed meeting in September. But, we do

believe overall that the curve will

actually bull steepen by the end of the

year.

Um, just think there it needs to be a

bit more clarity. We have to ensure that

the inflation expectations in that long

end remain anchored and today's number

will will help that. We think that is

the case. We do believe that we are past

peak inflation.

Um, but you know, we need to we need to

see that the data the next couple

months. But overall, by the end of the

year, yields down, curve steeper in our

opinion.

>> Leslie, this data is

I mean, a loss of 23,000 jobs kind of

shocking there, but otherwise, you know,

this is going to be decently okay for

the Fed.

But what the thing that I keep coming

back to is the loss of credibility. I

think we're seeing a little bit

throughout Wall Street looking at the

Fed, looking at the FT story we got as

Julie brought up. How are you thinking

about that Fed credibility and what

Kevin Warsh really does need to say? Is

this simply about explaining the

reaction function or is this more he

needs to say in the next call it three,

four months to get the market back

looking at the Fed as having this

credibly kind of under control?

>> I don't believe he should hike because

to try to try and to try and prove

credibility. That that is I don't think

we obviously should not do that. Plus,

we know the Fed is not going to do a

one-and-done, right? If they actually do

hike, it's probably going to be a

reversal of the 75 basis point cuts that

we saw last year. So, I don't there is

big necessarily it's credibility, but

but the communication definitely needs

to improve. Every new Fed chair goes

through these communication, you know,

curfuffles all the time. I think that he

needs to be a little bit more specific.

I think that he needs to

you know, answer questions a bit more

directly, not just put it over to the

task force and we wouldn't even know the

information until the end of December,

right? Because then you start then the

market starts to really become

skeptical, you know, it wonders whether

or not is they're going to do

cherry-pick inflation indicators that

make the number look better, but you

really don't solve the problem. But so,

I think it's really in the communication

and have some backing in terms of what

this this task force are actually going

to resolve and how he how he plans on

going about that. It's really just it's

not necessarily credibility and you

shouldn't just hike on credibility.