Host: It's been a massive morning for global markets as fresh US consumer inflation figures come out right alongside earnings from Bank of America, Morgan Stanley and ASML and one of bank results are revealing a $32 billion profit and powered by record equities trading as well as AI financing. Interestingly, Jamie Dimon warning that. Rising interest rates could spoil the party while joining us live to break down today's inflation figures, earnings as well as positioning is Brian Jacobson, chief economist at Annex Wealth Management. Brian, great to have you on the show. Thank you so much for joining us. Well, we are still taking a close look at those CPI figures, but the key takeaway so far seems to be that inflation. is filtering into many parts of the economy and of course CPI did come in slightly higher than expected and right now we are looking at a 50/50 chance of an unchanged rate decision from the Fed this October. But give us your take on what this report means and what we could expect from the Fed as we head into year end.
Brian Jacobson: Yeah, thank you for having me. I think that you're absolutely right. It was a little hotter than expected. The headline number was pretty much in line, but it was really that core, and that's what a lot of us have been really waiting for is to see how long does it take for the energy shock to spread to other parts of the consumer basket. There are some parts where it showed up relatively quickly, like in airfare, some of the transportation numbers, because as you'd imagine, you know, when you're Flying in a plane, they're providing that transportation service. A lot of that depends upon, you know, the price of the fuel. It's the other areas, I think that have people sitting on edge. It maybe isn't quite as bad at first appearance. Some of the increase was driven by a bounce back up in shelter costs. That's kind of one of these numbers that is, uh, I don't want to call it fictitious, but it is massaged. It isn't really reflective of reality. And as a result, if we kind of look at the core number excluding shelter, it maybe isn't as bad and could keep the Fed on pause in October. But if we stay with inflation numbers, even core inflation about where we are, so if we don't see any improvement before the December meeting, then I think that is the meeting that's in play more so than the October 1.
Host: And Brian, of course we are awaiting Fed Chair Kevin Warsh's speech from the IMF gathering over in Bangkok which we will be getting in about 24 hours, but it's a big week for earnings, and today is just two of the official earnings season. We just heard from Bank of America as well as Morgan Stanley. And this does come on the heels of JPMorgan as well as Goldman yesterday. So what do you make of some of the profits as well as the volatility we're seeing across big banks, especially given M&A and lending in the latest quarter, and what we can expect as we look forward?
Brian Jacobson: Yeah, so this past quarter, because of heightened volatility in the markets, it actually, some people would have thought it should have been a good time for the traders, but not a very good time for the investment bankers who are bringing deals to the market. That's just the way that it usually works. The trading desk can do quite well with volatility, but people do pull back on IPOs. Maybe they postpone them when you have the volatility. Well, unfortunately we didn't see the big increase in the trading revenues from those trading desks. I think that was really disappointing to see. It doesn't help that with Bank of America. There is now the announcement of the fine, uh, I think that actually pushed their shares lower last night after the close, and now the earnings report just really didn't help matters much. As an economist, when I'm looking at the banks, I'm really more focused not on the trading and the IPO information, so much as the lending. What's the quality of the loans? Is there still demand? And there is indeed still demand for loans, and in fact, the quality seems fairly sturdy. So, I would say that from an economic signal perspective, I actually find some encouragement in the bank's earnings numbers, even if the stocks aren't reacting, but that's maybe more due to just the disappointment with the trading revenue and some postponements of issuances and IPOs.
Host: Yes, and Brian, as you mentioned, when it comes to these earnings reports, there are a lot of details for us to sift through, and I have to ask you about tech bell welders, especially with ASML reporting and chip names coming under heavy selling pressure this week. Now we have to keep In mind that earnings expectations are at lofty heights right now. So can the tech giants out there deliver enough bottom line growth to justify some of the valuations? And what are your expectations as we count down to earnings from some of the hyper scalers?
Brian Jacobson: Yeah, so that's an area here on our investment committee where there's a difference of opinion as far as individual names versus the industry as a whole. So, for individual names, probably, you know, great opportunities still as far as who's going to own the space, who's going to be the disruptors, how long can they maintain their competitive positions. But for the industry as a whole, I've actually rotated a little bit out of semiconductors into more broad-based. So I'm Still in the semiconductor exposure business, but wanting to be more in software, hardware, and other parts, a little bit more diversified, because when I look at some of the consensus expectations, say over the next 3 years, according to the Bloomberg data, is annualized earnings growth of around 170%. Maybe they'll meet that, but that is a very aggressive hurdle to try to clear. And then when you Slap on top of that, high valuations. So, when you put a price to earnings multiple on where earnings are expected to be 3 years out, that's also elevated. So, when we have high valuations combined with aggressive expectations, to me, that just means that some of the risks are maybe a little bit more to the downside. Doesn't mean not to be in there, it's just being a little bit more specific about which names to actually own.
Host: And Brian, finally, before I let you go, I do want to get your take on what we saw in terms of bonds, in particular, Treasury yields following the CPI data this morning. So given that we saw that move in the short end of the curve, what is this actually telling us?
Brian Jacobson: Yeah, I think that the short end movement there really indicates the market is on board with that October is a live meeting, maybe a coin flip, slightly better than a coin flip in order to actually have a hike. I personally am taking the, uh, underside of that, thinking that maybe the Fed's going to want to exercise a bit more patience. They just hiked once, uh, they are going to get a lot more data before the December meeting, so I think that it is a little premature, the market might be getting ahead of itself as far as the likelihood. Of a rate hike, but then seeing the longer end of the curve move as much as what it did as well, I think that's a little peculiar. Mostly because if the conviction is that the Fed is going to actually hike in October, that should actually put some downward pressure on inflation expectations. So, um, uh, I'm actually thinking this is just more changes in positioning. It was a bit of a sup it was a small surprise, but because of, you know, positioning going in, you can have these outsized moves.
Host: And Brian, finally, before I let you go, I do want to get your take on what all of this data actually means for the American consumer, especially as we continue to monitor energy prices, whether we're talking about gas, refined products, or diesel. But would you say that the resilient consumer may be potentially reaching a breaking point? And how do you think this will affect 4th quarter corporate margins?
Brian Jacobson: Yeah, I think that this is a make or break period of time for the consumer. They've been holding in there sometimes by expanding credit card usage, uh, but a lot of businesses, they have been trying to eat some of those costs or find efficiencies elsewhere. And is it a point when we get into the 4th quarter, who's actually going to be able to push forward some of these cost increases onto the consumer, who is really at that breaking point? Now, keep in mind though, with this data release, From CPI, we also get the Social Security cost of living adjustment numbers for next year. So, based on my math, I don't think it's officially been published, maybe it has been by now, is the, uh, you know, retirees should be looking at a 3.6% cost of living adjustment for 2027. So, for those who are retired, maybe they're going to find a little solace in that, but for working Americans, it's gonna be a little bit tougher go.
Host: Well, Brian, you mentioned that Kola figure and that is something that has not been getting the spotlight this morning given the fact that we're focused on CPI and earnings, but I appreciate your take on that and thank you so much for joining us and for all of your insights as always.
Brian Jacobson: Thank you.
