Remy: Today's capital markets segment is brought to you by Alpaca. While global markets are navigating a complex macro landscape as US stocks pulled back from all-time highs and the 10-year Treasury hovers near 24-year highs. Now while jobs numbers do show signs of slowing underlying industrial dynamics as well as a multi-billion dollar AI data center. as well as surging raw materials to remain in focus all pointing to a resilient yet inflationary a growth environment. So can corporate earnings outpace higher borrowing costs as the Federal Reserve evaluates its policy path. Well joining us this morning to break down the macro picture is so new bar chief macro strategist at Carson Group. Great to have you on the show. Thank you so much for joining us. So we are looking at US stock futures pulling back again this morning and given the fact that we're paying attention to what's happening in terms of geopolitics as it does affect the inflationary picture, how would you characterize the macro environment we're in and our markets actually facing a genuine regime shift when it comes to monetary policy?
Sonu Varghese: Uh, first of all, thank you for having me back, Remy. It's great to be here with you this morning. Uh, yes, I think you mentioned it at the, at the top of this. We are in a period of inflationary growth, and we have been, speaking of regime changes, we have been in something like this for several years now, where we've seen relatively strong growth, and by that I mean especially nominal GDP growth, if you want to think about it that way. Just in the 2nd quarter, nominal GDP growth was 8.5% annualized. Now, a big chunk of that is inflation, which gets to the other side of this, that we have, you know, elevated prices right now, and there's a reason why You know, interest rates are rising, right? So I think more than ever we're seeing a really close connection between what's happening in the bond market to what's happening in the stock market to what's happening in the economy. Remember one person's margin increase or one company's margin expansion, whether it's ship makers, classic example, or even energy companies for that matter, it's somebody else's inflation.
Remy: Yes, and so, of course on this Thursday morning we're paying attention to geopolitics and the situation in the Middle East, but as we look ahead to the upcoming week, we will be marking the beginning of earnings season, the official start to earnings season, as well as key US inflation figures. Especially that CPI number coming out. But when it comes to the labor market here in the US and the jobs data, when you look past the headline noise out there, how healthy is the labor market right now here in the US?
Sonu Varghese: I would say it's pretty healthy, pretty solid. Now the headline payroll data is volatile, and that's because, look, the payroll survey comes from an establishment survey. It's a survey of, you know, the BLS does a survey of 150,000 establishments representing over 600,000 locations around the country, but it is still a survey. So which means there's a confidence interval around it. And right now with immigration especially stalled, the economy doesn't need to create too many jobs to keep up with population growth. Maybe it needs to create only about 20,000 to 25,000 jobs a month. So then the 95% confidence interval around that is 120,000. Which means we could very well have months where you have negative payroll growth, like July, for example, it was revised down to -10000. August was 100,000 or so, right? Over the last three months, we're running about 50,000 jobs, 51,000 jobs on average created per month. That's probably more than enough to keep up with population growth, which means the unemployment rate stays low. The unemployment rate is around 4.2%. On a rounded basis, Ray rose from 4.1% to 4.2%, but it was actually 4.14% to 4.18%. Last thing. The prime age 25 to 54 year olds employment population ratio that's at 80.7%. That is higher than anything we saw during the 2000s expansion, anything we saw during the 2010s expansion, including 2017 to 2019, which we thought of as a pretty strong labor market. So I would say yes, the labor market is in pretty good shape right now.
Remy: And Sony, while I have you here, I do need to get your take on AI in particular because we're seeing that divergence between the S&P 500 and the equal weight, and I understand that your research highlights an inflationary growth environment that's powered by manufacturing momentum as well as what we're seeing when it comes to the data center build out. So how much is this CPE boom driving commodity costs as well as inflation dynamics?
Sonu Varghese: So much of it. I would say it's driving the inflation picture in large part. I mean, of course, you have the oil price situation because of the Middle East and, you know, you have tariffs as well in there, which are raising steel and aluminum prices. But the PMI reports that we got last week or kind of underline this. Activity is booming. Both the services and manufacturing PMIs are at 54, 55, well above 50, so that means activity is strong, but prices also rising. The manufacturing prices index rose from about 71, 72 to about 78. Right now, all of that is not just oil prices and diesel prices. You have Yeah, aluminum prices have been rising for 34 months. Copper prices have been rising for 15 months. Almost every commodity in their list has been in short supply, and that gets to data center construction, electrical components, electronic components, memory, all of that short supply, right, even printed circuit boards. So I think, yes, I think that data center construction, the AI Capex boom, is driving the economy. It's driving markets. I think it's driving the bond market to an extent as well.
Remy: And so finally before I let you go, we are counting down to earnings season and we'll continue to monitor those reports as well as guidance for these companies as they move forward and obviously we will continue to keep an eye on bond yields, but portfolio construction is shifting so as we look ahead to your end as well as 2027. How do you think investors out there should be allocating capital across asset classes.
Sonu Varghese: Remy, we came into this year saying you need to ride this wave, and we have a very big wave which has only seemingly gotten bigger every time we have earning season, speaking of earning season. Uh, the hyper scale of the mega cap tech companies have said they're going to spend even more than we expected, you know, a quarter ago on AI Capex, and one person's investment or one company's investment is the source of somebody else's profits. So you want to take part in that, right? So we want to be overweight equities at the same time we want to avoid a wipeout, which means. You don't want to be too exposed into one part of the market, especially tech right now. We think it should be diversified. Yes, maybe it doesn't pay off in the short run, but it makes for creating a more robust portfolio.
Remy: Well, Sona, a lot to keep our eyes on as we head into the rest of this month. So appreciate your time this morning and as always, thank you so much for all of your insights as well as your perspective.
Sonu Varghese: Thank you.
