Waller's inflation signal

0:00Today Wall Street awaits the August Labour Market report ahead of Labor Day weekend. Class Fed Governor Waller steers away from a rate rise and says give disinflation a chance. But US retail diesel prices hit the highest ever, adding to inflation worries this winter. This is Reuters Morningbit bringing you unfiltered market news and analysis straight from the Reuters newsroom. I'm Mike Doverland-Nunden. And I'm Peter Tevlen, it's Friday, September 4th. So Mike, two days of relief on Wall Street all seems to be based on one simple idea that maybe the Fed isn't going to hike. Since all stems from a key speech from Fed Governor Christopher Waller yesterday saying that he would support holding rates steady if inflation continues to fall back to targets. As we said, give disinflation a chance. I mean the odds of a hike in September are fallen to about a coin flip from the previous around 70%. And I'm scratching my head a bit with this, Mike. I mean, this is one Dover's speech, focusing attention again on the CPI report that we're already going to be paying attention to.

1:02Even just thinking about Kevin Worsh's credibility. He tilted hawkish to Jackson Hole in a few weeks. Is he going to have a Dover's rate decision? Well, yeah, Governor Waller came into our team, to speak to our team in the Washington Bureau yesterday. And he did have a significant impact. And the reason behind it is because Waller is seen as a swing voter in the FOMC. And I think people were watching his view very closely. Now we talked all during the week of Kevin Worsh, which seemed to lean even if ever so slightly to a possible hawkish stance from the chair. But Governor Waller has been one of the board members who's been leaning that direction for the past couple of months. He had a very famous speech or at least famous within the markets when he said that basically the Fed can't just keep looking and staring at inflation sternly and hope it'll come back to target. You know, basically saying that the Fed would have to act if it's not moving.

2:05Now, his tone yesterday was very different. He did seem to suggest that there was some disinflation. Give disinflation a chance. He was channeling John Lennon as he said himself. And he said that maybe we get with the CPI numbers are coming gradually back to at least in the direction, the right direction. We will get an update next week from the CPI numbers at least. It has to be said that that's not the Fed's targeted rate. The PCE, which is the measure of inflation that the Fed is focused on, that's its target. That won't be released before the September meeting. But like ever, we will get ingredients in the CPI and the producer price report that will inform us on that. The next meeting is just five days before the midterms. And even though the Fed will insist it has no part in the political process and shouldn't, it would be extremely unusual if the Fed were to raise interest rates just five days before a very important election.

3:12And then you have to spin into December before it gets a chance to move. Well, as you said, with the lead up to the midterms, one number that's really going to be hitting Americans wallets. And they're going to be watching for us. US diesel prices are hitting an all-time highs now. I mean, what does this mean from inflation numbers? Is that really feed through and hit hard? I think this is going to be a big issue. Certainly it's going to be a big headline grabber. But most particularly, it feeds very quickly into prices. Potentially. So what's going on here? We have talked a lot and obsessed a lot about what the crew price is doing from day to day. As it stands, it hasn't set new levels in the last couple of days. But the refined product. So this is an issue about refining capacity around the world, which is extremely tight, partly because, obviously, the Iran War. But also because of the other big war that's been raging for the past four years, that the refining capacity in Russia, for example, has limited the global capacity

4:22over the recent months as Ukraine has hit many Russian refineries. And this is filtered into even US prices. So this is one thing that markets have been watching the so-called crack spread. And we are now seeing diesel prices hit their all-time highs. 585 per gallon for retail diesel on average across the states. That's the most... It's up 55% since the Iran War started. And we're coming into the winter months. So certainly for those states and for those countries that are in the thick of that, then home heating prices, transportation prices, particularly for retail, for retailers who are shipping stuff around the country, all of that will be affected by this rising diesel price. And whatever Governor Waller wants to

5:24guess hope for in terms of underlying prices could well be challenged by that. Well, of course, it is the first Friday of the month, which means that it's jobs day. And that's looking at the expectations for the NFP print. 56,000 jobs gained expected. First is last month's surprise drop of 23,000 jobs. The unemployment rate expected to hold steady at 4.1%. So August does typically undershoot expectations due to a seasonal quirk, according to economists, as well there might be a bit of subdued gains because of work permit terminations towards Haitian immigrants. But I think the big question for today is, do we sweep NFP to the side and a post waller speech world is inflation just the main focus for rate expectations? Yeah, as you say, I mean, Governor Waller yesterday made it very clear that the labor market right now for the Fed has taken a bit of a backseat, mainly because the Fed sees the labor market as relatively stable. And I think we got a whole torrent of information on the jobs market, as we always do, in the lead up to the payrolls report this week, which all of which

6:24reinforced that point. So take a look at some of those numbers. The ADP private sector payrolls were slightly below forecast, but nothing dramatic. The weekly jobless claims numbers, which are a very important ingredient as well, came in pretty stable. And then the interesting detail from the Challenger Layoffs report for August, I mean, that was that showed a rise in layoffs between July and August. But it was the lowest August tally for four years in layoffs, partly because seasonal aspects in August often have a higher level of layoffs, but not, doesn't seem to have been that problematic this time around. Interestingly, under the bonnet of that report, we had a lot of, we get a lot of detail about what sectors. And we're watching, everyone's watching very closely as to what AI is doing to the labor market. And even though there was no really new development in

7:28the August numbers, it still is the single biggest reason cited for job layoffs this year. However, as you say, coming into the big national report today, if we get what the consensus numbers you point out, then that gives the Fed absolutely a green light to look solely at inflation. And for today's recommended read, check out Jimmy McKevers' column on Hoi Hedge Funds of Replayers China as the biggest concern for some watching the US Treasury market. The link is in the show notes. And for more about any of today's stories, head to roiders.com or the roiders app. Follow us on your favorite podcast player and if you're on the smart speaker, just ask for the latest market news from roiders. We'll be back on Monday.