Core PCE’s Critical Market Role This Week, U.S. Diesel Ban “Temporary Fix”

Morning Trade Live. It's time now for the big picture. Let's welcome in the team from Charles Schwab Center for Financial Research. Cooper Howard,tor of fixed income research and strategy, and Michelle Ghibli, director ofnternational equity research and strategy. Good morning to both of you. Cooper, let's just start with you. Given, of course, bonds are really stealing the show at the moment. You say it's notime to extend duration. I was just morning. Who doesn't believe that five and a quarter is the , particularly on the ten year. But I suppose if you can get 5% on the five year, you don't really have to go far out on the curve. Just talk us through the thesis here. Yeah. So don't get me wrong, we do think that there are opportunities in the fixed income market. And we think that where yields are today are fairly attractive. However, we wouldn't necessarily get ahead of the oller. So we think that extending duration at this point, it might a little bit too early because there is potential for momentum to be on higher interest rates going forward. So we do necessarily risk goingrd given higherti potential for inflation. We know that we're going to see PCE tomorrow. So I think that where the market comeslsog of the fed is clearly in a bias for hiking interest rates. So we think that also a potential risk. And then ultimately if we break down moves in the ten y Treasury, Sam we break them down into the fed funds rate the term premium and inflation expectations. If you look under the surface, a lot of the move higher in the ten year Treasury has been due to the fed repricing. So we think that that's a little bit of a concern or a little bit of a risk going forward. Potentially the market might shift there. So we just think yes there are attractive opportunities in the fixed income market. But weouldn't try to get in ahead of the curve right now. Okay. Understood. And Michelle casting the net overseas. Obviously we saw Australia move on rat last night firing the gun on its what, fourth hike this I know you say that energy has become the swing factor for inflation. Central s t walk us through the significf what we saw the RBA do last nig In light of that. Yeah. You know the reserve Bank of Australia had been on pause for a couple of months. Butngs have really changed dramatically since then. And they had to raise rates to the highest level in 15 years last night. a lot of it has to do with inflation being high. o diesel prices. They have the highest per capita diesel consumption in the dev world, and those higher diesel prices have the risk of spilling over into non-energy inflation. You know, if we look elsewhere in the developed world, so far, we're not seeing higher wages yet from higher energy prices. But inflation remains sticky. And the more that inflation remai elevated, the more likely that central banks have to rates eventually higher interest rates reduce the present value of stocks in a discounted cash flow model. So diesel prices are an important thing to continue to keep our eyes on. All right. And Cooper, how are you thinking about the data this week? I mean, obviously we're waiting for the PCE Fed's preferred gauge and also the jobs. Friday we just got a pretty downbeat consumernfideo people are feeling about the economy right now. I believe that was the lowest sin 2014. How are you tying all the data together andhich metric? I suppose when you look under the hood this week, are you going to be scrutinizing the most? You know, I think that if you look at the if you had to pin me down and make me choose one metric to closely watch this week, it's going to be PCE, I think that that's going to be the telling figure. And ultimately that's going to feed into what the fed does. And right now, if you look at the market, the market is expecting an overar over yearn on PCE. And then a month over month of about 0.3%. I t that's probabl too hot for the fed to like, and that's therefore why they've shifted into aittle bit of a hiking bias. So our expectation is there's probably one hike at least this year and then potentially another one either this year or early in the next year. And that r comes down how inflation performs. And it's not just the monthoverr over year change. I think that e a little bit comfortable and the fed would be a little bit more comforseeing 0.2 month over, 0.1 month over month, potentially even lower. I also think the other thing that thelosely watching is the breadth and chairsh has said thisore, but there's too many under too many figures und surface PCE that are moving in the wrong direction or are above the Fed's 2% target. So I think it's that's anothng that they're going to be closely watching. And ultimately, that's where it'll feed into what the fed does longer term. And obviously, one thing that does feed directly into headline PCE inflation, Michel, u mentioned, with Australia being a big consumer of that. I just wondering how you're thinking about this, because obviously you've got talk that has beening traction this week of potential export Te views here that that could provide hort term relief, not ge countries that buy that diesel rely on it. What do you make of this? I mean, what sort of ficate globally? Yeah. You know, I think if we look at oil exports from the Middle East, t reports that they've reached 80% or more of pre-war levels, but the supply of products haven't followed because of damage to refineries and offline capacity. Now, diese export ban could provide temporary relief, but it really just trade problem for another. As you mentioned, it could hurt cou outside theut within the US it would likely result in diesel storage filling up quickly. down since every barrel of oil produces gasoline, diesel and jet fuel. So if they stop production of one, they have to stop af them. And that could result in a almost simultaneous increase in gas prices. So this is really just a temporary fix. Now states may end up picking up the baton here, but they can allow cheaper Di diesel wit lower taxes per gallon that can help for road uses. But it doesn't really help the farmers who already have access to thattaxey need to see more refining capacity to come back onlin for more of a durable improvement of energy inflation. Okay. Certainly something to watch. Really appreciate both of y joining me today.ank