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The Fed chair takes questions on the job market and the economy while speaking at a Harvard event. How AI is impacting the workforce, plus the ripple effect of the Iran war on inflation. Then with the President threatening new strikes against Iran, Doubleline’s Jeff Sherman breaks down the impact for stocks and bonds. And aluminum the latest commodity to surge. More on what the potential supply chain disruption could look like.
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Fedger Powell at Harvard today taking some questions there from the economic
students with some first-year students. I'm joking back and forth a lot of
questions around how the Fed works, what the decision making is like. I will say
that we are seeing a bit of a treasury rally to the highs of the day where yields
are lower. Not sure that Fedger Powell tipped his hand really in terms of
monetary policy but maybe he was more he was less hawkish than the market was
positioned. We're going to continue to monitor these remarks for you bringing
any headlines as they relate to the market. We're also streaming it right
now on CNBC.com. Let's bring in CNBC, senior economics reporter
Steve Leastman. Steve, he did talk a little bit about the rise in oil
prices and the war in Iran and said that the Fed
Fed doesn't have any meaningful tools when it comes to supply shocks. The Fed
usually looks through these kind of supply shocks but
again didn't didn't necessarily say so we're not going to
we're not going to do anything as a result. What was your take?
Well, I think you're underscoring the importance of what Powell said which is
the market had gotten itself a bit too attissue, a bit of a froth about the idea
of the Fed potentially raising rates. I thought Powell very specifically
decided to use this opportunity to bring the conversation back to the
center Sarah and the idea when he first started out said we have tensions on
both sides of our mandate on the job side and on the inflation side
and then he went on to say well our inclination in this case is to just look
through it and he made a very important point about
the differential between he talked about energy shocks they
work through the system quickly but policy takes a long time.
Again suggested the Fed was not going to do anything
knee jerk here in response to a high oil prices. Now some of us like you and I
who watch the Fed every day probably didn't expect that but certainly
the market was out there guarding against it. So what I see when and I'll just
double check while I'm talking to you Sarah when I look at the probabilities
a bit of a shift it's still in the center
70% 80% chance the Fed doesn't do anything
but the tail's a little bit more towards well maybe a cut and away from the
hike where the market had gotten itself into a froth than last week about.
Yeah he emphasized the both sides thing agreed and and did say you know as
you know we talked to Stephen Myron I don't know if you saw Fed governor
right before this and Myron said I'm looking forward to hearing
Powell talk about what the Fed usually does with it with a supply shock like oil
and you know right on cue right here Powell did talk about that and said we
we do usually look through that which is I think more in the Myron view
what they should be doing. It's an important point so do you think about it
what's going on we've had ghouls be in some other folks say you know what we
can't take a hike off the table but what we're looking for is where's the center of the board here
okay and I think what Powell brought it back to is and then layering in Myron on top of that
it's keep the rates the same with maybe a cut if we get an opportunity to do that
but the hike looks a little bit more remote listening to Powell this morning and certainly Myron's
on board with that and we'll have to hear what others have to say but right now I think that this
idea of 80% probability the Fed does nothing probably the more likely and right solution here
okay Steve thank you very much we'll come back to you if he says anything else
let's turn out to the broader market following those comments by Fed Chair
Jay Powell joining us now with some reaction is double line deputy chief investment officer
Jeff Sherman and we are saying the bond market rally especially the two year so the market just got
got a little too worked up about a hike coming Jeff yeah well I think the thing that we have to
remember too is that the Fed always looks at core inflation right and so that strips out commodity
prices even though they affect every consumer and every input in our economy and so I think what
what's happened with this oil inflationary shock is that people have been expecting the central
banks to respond in some manner we've seen this as a recent as a week ago you know the BOE was
pricing in or the the English market UK market was question in for hikes of the year you've seen
the ECB price in hikes as well remember that oil price shocks are actually a version of hawkish
policy itself right if the price of oil goes up right that is inflationary but that causes a
strain on the overall economy and so I think the right response here is for no reaction based on
the energy prices and ultimately go back to what what's the market's been focused on
is actually where we are in the cycle of the labor market you know we did speak this morning
just in the last hours and a half with Stephen Myron the Fed governor who's dissented at every
meeting he wants lower interest rates listen to where he says policy should be headed
at the moment I think that we could be at about a point easier but gradually done over the course
of a year so you'd like to see now 25 basis point cuts that's what I voted for the last two
meetings 25 basis point cuts I mean that's clearly not where the the center of the Fed is but his
point is that the Fed is holding back job growth at a time where we are seeing the job market show
some signs of weakness payrolls has gone negative and that if the Fed were easier you'd see better
results on jobs yeah I'm not convinced I mean Myron's been very aggressive in his cuts and he
seems to be some one of the lone wolves out there but that being said let me pause at the
question to you Sarah if if we ease 25 basis points does that get corporate America excited
about hiring probably not now you could say that if we got that path of potentially one percent
lower rates it would bring some of the stresses out parts of the market and you know some of this
would be the floating rate low market right which we know has had some challenges with private
credit with bank loans and etc so maybe there is some some true to that statement when it comes to
some addresses but I'm not convinced this change is the overall outlook for overall hiring
based on you know 25 to 50 or even a hundred basis points lower at the current cycle well I think
it does if it if it's able to move the market I mean if the tenure if it if the Fed went into
cutting mode still and you saw you know long term interest rates come down that would that
would certainly make things easier for housing for for corporates for all sorts all sorts of parts
of the economy that need lower rates you are correct but thus far since the Fed's been cutting you
know if you look at the last three rate cuts bond yields have not come down on the middle to the
back another curve and so from that perspective I'm I'm empathetic what you're saying here but
actually the bond market has to react that is correct why do you think that is why do you think
that yield tab risen even as the Fed has cut well I think that ultimately it's it's it's digesting
many things out there one is you know the overall fiscal overhang of not just the US but the overall
developed market and when you look at kind of back in yields let's call it like 30 year bonds we've
seen this dynamic of a rising yield or at least being near all of the cycle highs across the
developed world you have the UK near all time highs the US market where we're really close to that
as well you got to you're up and even Japan now as well so there seems to be a market rejection
for kind of the back end of the curve and to me that's really signaling that potentially there's
a longer term inflation problem not the 9% we experienced three years ago but maybe we're not
that 2% inflation rate plus the overall is a fiscal policy in the entire developed world so
I don't think it's as simple as cutting the front end of the yield curve brings the whole yield
curve down in fact it may just indeed steepen it it may not make back in yields rise but it also
may not make them come down and getting the desired effects that the treasury secretary of the
administration essentially wants country yeah Morgan Stanley has a tidbit today Jeffrey
recent data quote confirm a regime shift foreign ownership of treasuries has fallen to the 1997
lows making speculation about outright sales seem plausible you think that explains some of the
weak auctions lately it could be and essentially you've got to think about it as that the world is
voting not just on the outright payment of US treasuries or the fiscal stability there but it's
also potentially talking about our policies right here we are again mirrored in another conflict
that's once again wheat we help begin and so I think potentially there's some of that rejection
of our policy and if you really want to wake up the administration one one way you can do that
is through financial markets and so that can be through you know abstaining from purchases it could
be from outright sales you could sell you know corporate bonds you could actually sell stocks I
mean there's a lot of ownership of our assets so you never want to mess with what ultimately
can be the economic impact of your ultimate policy as well so sometimes I get lost in markets
through the day-to-day but potentially there's something about the rest of the world voting
against that so what are you guys doing at double line how are you positioning right now
yeah I mean we've been talking about potentially adding to a little bit of duration and buying
some of the kind of rate ingress not on the back of the curve but kind of that five to ten year
part of the curve because as I mentioned on the onset you know we're talking about a slowdown
because of this conflict and what it's done with oil prices and I'm very concerned about what
we've seen in the oil market thus far because it's not just the spike we've seen in potential
reaction back downward the conflict stops but it's the amount of disruption that has happened
a destroying supply chain so it's not just the straight itself but also the production facilities
and so if that continues to be an ongoing problem and there's more destruction which we've seen
now the aluminum plants get hit over the weekend you're seeing more of the LNG plants get hit as well
ultimately that leads to just not opening the spigots back up and being able to deliver
that supply so if you want the oil markets to calm down we need demand destruction at this point
and if they see in the commodity prices the cure for high prices is high prices
okay Jeff thank you for joining us with some first reaction there to Powell what we're seeing
in the bond market Jeff Sherman thank you speaking of high prices the WTI is higher today
Brent about flat as the Iran war goes into its fifth week president writes on truth social
this morning that if a deal is not reached and the straight of our moves is not immediately open
the U.S. will destroy Iran's electric generating plants oil wells carg islands some desalination
plants joining us this morning is Barclays energy analyst on our sing Amar it's great to have
you back thanks for the help today I am curious to get your take this morning on this sort of
narrowing spread between West Texas and Brent it's more like 10 bucks today I'm not 15 or 20
thanks Karl for having me so we break down the Brent WTI spread in two components the
onshore component is the cost of getting oil from pushing Oklahoma to Houston on the coast
and then the offshore leg is basically getting it from Houston to to UK where it
computes with Brent and what we've seen is because shipping costs have gone up we've seen the
offshore leg widen but more recently what we've also seen is market part spends probably betting
that there's going to be some export restrictions in the U.S. which has led to the widening of
the onshore spread as well do you expect that premium to last it depends on how things play out
I mean at this point shipping rates are very high obviously but we've not seen any formal
announcements from the administration about a potential restricting of exports out of the U.S.
so if that remains the case you could argue that it's just limited to the offshore leg and the
onshore leg goes back to normal it was about one buck on average last year but if we see like
sort of the era going back to 2015 and before where exports were out of the U.S. were restricted
then the onshore leg could widen a lot more and I mean and the overall spread as well
so when when we read exactly what the president is threatening here I'm obliterating their
electric generating plants oil wells and carg island and possibly all desalination plants what
is priced in exactly in terms of that risk right now in the oil market so we've laid out
three scenarios and where market pricing stands right now is in the middle of the first two so
the first scenario is in the most optimistic one right now that we get a normalization of
the state of almost situation by early April and that would get you to a full year average
Brent of 85 as of Friday closed it the forwards implied 20 only six average Brent was at 91
the second scenario is the straight normalizes by end April and that is consistent with
Brent averaging a hundred bucks this year and the third scenario is the straight normalizing by
May end and that would be consistent with Brent averaging 110 so as I mentioned we're basically in
between the most optimistic and a little bit more what is some scenario right now what about the
carg island option where where the U.S. takes control of Iranian oil is that is that is that a risk
for higher oil or lower so it I mean the wheels have to see how that plays out rhetoric on that
specifically has been extremely elevated with Iran threatening attacks on regional oil infrastructure
in in response and so far we've seen like sort of very limited effect on least on the oil side
I mean Jeff mentioned earlier attacks on aluminum sites and LNG sites but on the oil
side has been limited to oil depots and refining complex what we've not seen upstream infrastructure
or even mid stream or shipping terminals attacked to that extent yet but if that were to happen
then that could compound the duration effect that I was talking about is it pertains to the
state of firm who is itself when when you think about LNG and the vulnerability of some of these
say southeast Asian countries do you think they're going to start to turn toward coal over the long
term or even some renewables as a replacement for the unreliability at least for now with this LNG
episode yes I mean this is exactly what happened in 2022 and we're just seeing an extension of
that I mean the 2022 crisis was you know finally something that markets were beginning to like sort
of start put behind with with the expansion and Qatar coming online later this year but now
obviously with the facility in Qatar hit even the existing capacity in the country is now on the
question even if the trade were to normalize because of that that damage the facility will not
be able to ramp up fully and and obviously expansion plans are also in question so so the LNG
market might have you know a lot more sustained damage coming out of this conflict and yes that
would mean the power sector in Asia will have to adjust to that reality yeah because that's a big
debate on oil prices too now is is just the how long this will last even if the war does end and
and find some sort of resolution how long does it take to get back online and what will that mean
for prices or do you think prices just react really quickly to to any kind of end I think there's
going to be frictions but markets are generally like sort of very good at pricing that like when we
laid out those scenarios we just discussed there's obviously an assumption there that things will not
come back online as quickly as the ships start moving right so they don't need to be necessarily
coincide with each other but those scenarios have some friction baked in and it would depend
from country to country like countries where the production shutdowns have been more widespread
like and the countries and that's in the countries that do not have much capacity to
reroute supplies like Iraq and Kuwait you will see a greater lag in terms of resuming production
but there are countries like Saudi Arabia and UA where they've been available to reroute supplies
and so production can ramp up relatively quickly right brings speaking to the Saudis I wonder Amar
have you been impressed at the ability of their east west pipeline to benefit global supply and
did the Houthis news on Friday put some of that at risk yes so it's been inspiring to see that
and it's obviously you know great comfort that they've been able to reroute some of the supplies
from the east to the west terminal and Houthis who have remained silent so far you know joining
Iran's like sort of response is a concern although so far infrastructure in the Red Sea area
our shipping through the Red Sea has not been attacked but that is something you know that markets
are very eagerly looking at Amar appreciated obviously extraordinarily complex to read
and we benefit from your help thanks so much Amar sing over at Barclays thank you for that
when we come back this morning the leading driver behind the steep declines and shares of meta
Microsoft and alphabet to begin the year we'll take a look at that in a minute plus why new
attacks in the Middle East have aluminum stocks spiking aluminum now on pace for its biggest
monthly gain since April 2024 we'll be right back
aluminum the latest commodity to see a sharp move here as a result of the Iran war pipa stevens
tracking those moves for us this morning and pipa I've heard I've heard some of the beer companies
already start to mention this like a course but it's really moving yeah that's right Sarah so
aluminum prices are rising after Iran targeted the two largest single-site smelters in the Middle
East Amar its global aluminum saying that it's side an Abu Dhabi sustained quote significant
damage with aluminum Bahrain also hit no word yet on potential production losses but together the
facilities produce about 4 percent of global supply or roughly 10 percent of ex-China supply
according to JP Morgan and this comes after some smelters in the region had already announced
curtailments given the goal for lies on aluminum imports that passed through the strait of
hormones and more cuts could be coming as smelters work through their dwindling stockpiles in total
the region accounts are roughly 23 percent of ex-China global production and last year about
21 percent of US primary aluminum imports came from the region that's according to smp global
aluminum stocks including alcoa and century aluminum seeing a big gains today the JP Morgan
saying the metal could quickly run towards $4,000 per metric ton or even higher before a demand
driven unwind guys pipa aluminum is a really interesting collision of the Iran war and tariffs
kato did a piece last week where because of the tariffs on Canadian aluminum a lot of US buyers
sort of migrated to Middle East supply chains which of course have now come back to bite them
i think in the words of one piece it was the dumbest tariff ever created that's right and so the
the whole point of that is to try to boost production in the US and there is a new aluminum smelter
that was announced last year but the issue comes down to power and these are incredibly power
intensive factories even more so than a data center and so in places like the united states you
just cannot compete with tech companies that might be willing to pay far above wholesale prices for
power and actually we've seen that a smelter and mosey and beak that was a key supplier for europe
just earlier this month announced that they are shutting down because they couldn't secure a long
term power deal and so while those tariffs were meant in theory to try to increase US production
it's really difficult given that in the middle east for example the reason why so much production
migrated there was because of access to cheaper energy and so there is unlikely to be an aluminum
smelter boom in the US anytime soon but where does the US get most of our aluminum is it it's Canada
Mexico yeah yeah so Canada especially they also have access to that cheap hydro power so they
can have a lower at lower cost access to energy and then also from the Middle East but again like
the Middle East doesn't have the back side so they are having to import that from places like
Guinea and Australia and then it's cheaper to refine it into the end product the aluminum in
the Middle East so it's but it's hit on both sides both coming into the straight and then also
trying to exit the strength and so those supply chains have all developed based on where you can
get access to cheap energy and then you add on the tariffs in the US and then you know manufacturers
do typically have some supply and some you know some finished product in inventory but the longer
the stretch is on the more that's going to start to drive up prices.
Pippa thanks appreciate it very important story almost as important as energy itself
our Pippa Stevens when we come back YA social media post has shares of fanning and Freddie
jumping better than 30% plus the reasons the street might be punishing some of the biggest public
players in AI when we're back in a moment.
Welcome back let's get to some movers we're watching this hour. Fannie Mae and Freddie Mac are
surging after Bill Ackman wrote in a post on X that they are quote stupidly cheap. Michael
Burry also saying he quote cannot emphasize enough how rare this is in this market shares of
car rental company Avis plummeting after jumping jumping more than 48% last week. Following
investor bets that the car travel company could surge amid long airport lines and then there's
Cisco the biggest US food distributor to restaurants hospitals and schools it's under pressure on
news today that it is acquiring jet road restaurant depot for more than $29 billion pretty big deal
including debt stocked down 13% when we return why the market is punishing names like Meta
Microsoft and Alphabet to start this year Microsoft losing about a quarter of its value so far
stay with us.
Picking up a little bit of steam here in the major averages as you can see opened higher
kind of lost a little and now we're back on the ascent for stocks overall S&P 500 the
Dow's up a nice 430 points one potential reason that we're climbing here is that we are
forcing bonds rally and yields a little bit lower which has broken the trend because we don't
usually see that when oil prices are firmer we usually see the inflation trade on but it's going
the other way and perhaps because we did hear from Fed share Powell in the last hour so speaking
the kids at Harvard and you know not breaking any crazy new ground but he said inflation expectations
are anchored that's perhaps good for the bond market that was working itself a little bit into
maybe hikes he did say that we usually look through these kind of supply shocks and we can't do
anything about the supply shocks at the Fed so definitely not as hawkish as maybe the market was
positioned for and that's helping lead bonds rally and and the sentiment and stocks higher as well
right didn't hurt that he said no systemic clues of stress coming out of private credit and with
that we're trying to hold 6400 this morning. Many times some of the biggest public players in AI
are seeing some historic declines to begin the year our McKenzie-Cigallo says more on that
today's tech check morning Mac hey good morning Carl so alphabet meta and Microsoft deep in the
red year today Microsoft down as much as 24% in 2026 despite clawing back some ground this morning
and it comes as investors absorb three new mammoth data center deals tied to yet another wave
of catbex heavy AI expansion which together show big tech taking on parts of the build out
that private companies namely open AI and Anthropic couldn't fund on their own so first you have
Microsoft taking over data center campus in Abilene Texas that had been reserved for Oracle and
open AI stargate project before financing talks fell apart it's one of the clearer signs yet of how
far Microsoft and open AI have drifted they now have rival data centers right next door to each
other. Next alphabet reportedly nearing a deal to provide construction loans for a multi billion
data center also in Texas that Anthropic can't fund on its own here Anthropic signed the lease
but needed Google's credit rating to get the financing done at a reasonable cost which is pretty much
the dynamic for every frontier AI company right now they need hyper-scaler balance sheets to build
its scale and then there's a meta the company cut a deal with energy Louisiana to fund seven new
natural gas plants for its Hyperion campus tripling its power footprint though meta is covering
the full cost that ratepayers don't absorb it and what connects all three sites is natural gas
each of these projects run on it and the war in Iran has driven prices sharply higher since the
conflict began that's where investors start thinking about margin compression adding to broader
concerns about the catbex ramp these three companies are well off their 52 week highs for
Microsoft down 34% from its peak guys yeah I mean Microsoft has that added sort of software
headwind that it's dealing with Mackenzie I guess you know there are a lot a lot of the analysts
love these stocks who follow these stocks and they say they're they're safe haven and you're not
going to see growth like this in the rest of the in the rest of the S&P 500 especially with
these supply chain inputs precisely and to that point about supply chain inputs there's a big
concern that this could show up as a headwind as soon as Q2 because not only are you looking at
greater energy costs you're also looking at the price of helium going up and that
ripples into chip prices so already as of the last you know quarterly prints we had a collective
catbex spend of $600 billion across big tech and the question is is if they maintain those same
build out ambitions will the costs go up just because it's going to it simply be more for the
inputs at this point meantime we began the morning with Jim and David talking about open AI
and Sora which felt that like they had to make some tough choices because compute is that there's
such a premium on it and I wonder if you think any of those dynamics from the private markets could
migrate into public well certainly we already saw open AI revise down its catbex spending ambitions
from 1.4 trillion down to 600 billion dollars Sora ate a lot of compute costs we saw them
shutter that despite having a Disney investment tied to it but I mean you're looking at big tech
they don't know any signs of slowing down in fact that Microsoft campus meta put in a competitive
bit against it and meta despite the legal overhang also doesn't have a cloud business to justify
this kind of build out they just had their worst weeks since October last week and so there are
standing questions about whether or not that catbex spend four Mark Zuckerberg will bear out because
at this point it's really going into feeding their models and their algorithms something a change
that might be forced if courts say that they need to change the addictive nature of their platforms
okay Mackenzie thank you watch out all of these risks Mackenzie sagalos meantime stocks as we
mentioned our holding study their higher again bonds are higher so a little bit of different
correlations and we've seen over the last few weeks because oil prices are higher as well
today we'll get a lot of economic data and the data has taken a backseat to some of these headlines
around the war so let's see if that changes with some of the more heavyweight reports like a retail
sales and jobs report coming Friday on a market closed day job openings tomorrow it will be
interesting to see if retail sales are responding to obviously developments that were pretty fresh
when that data started getting collection during the course of the month higher gas prices now let's get
to the judge
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