Welcome back to Market Movers, the opening bell, while rising worries over a protracted conflict with Iran, as well as swelling fiscal deficits and renewed Fed rate hike fears are rattling global bond markets. But as Treasury yields rise and do remain overall elevated around the globe, higher borrowing costs are spilling over into mortgages, auto loans, as well as corporate debt threatening to squeeze consumers. Now inflation is denting the rate cut narrative and nominal GDP running at nearly 6%. Do rates have much higher decline? Well, joining us live on this Thursday morning following Fed Governor Chris Waller's comments to break down what we're seeing is Sonu Varghese, VP and Global Macro Strategist at Carson Group. Sonu, good morning. Thank you so much for joining us.
No, thank you for having me. It's nice to be here in the studio face to face.
Yeah, absolutely, Sonu. And we know that Governor Waller spoke this morning. And as a result of those comments, right now, if we're looking at Fed fund futures, the likelihood the Fed stays on pause in September is higher than a rate hike expectations. But we have to take all of this into perspective, especially on the heels of Kevin Warsh's Jackson Hole speech. So what do we really need to focus on, given that yields are also higher?
I think the big picture after Walsh's speech, which is sort of hawkish, and he said, look, we are at full employment and inflation's a problem. And you would think, OK, that means a rate hike is coming. But even after the speech, the probability of a rate hike just about got as high as 65 percent. That's closer to 50 percent of coin toss odds rather than 100 percent. And then this morning you have Governor Bowler, as you said, come in and say, you know what, I was encouraged by the last two inflation prints, which is sort of okay. You can define his definition of okay, maybe different from mine or other people. But he said, you know, if the next print comes harder, then I'd be in favor of a rate hike. So now it's conditional on yet one more print. And that's why the odds of a rate hike, as you said, is at 50%. It's even lower than that, you know, maybe 45 to 50%, which means the base case is no hike. They're keeping rates unchanged. Like I said, going back to the big picture, they're willing to run things hot for a little bit longer.
Yeah, and there are also question marks about what actually defines hot when it comes to that inflation, whether we're talking about the month over month or year over year figure. And when we do step back, we have to keep in mind that geopolitics do play a key part in the inflation picture. So what are the key takeaways here? I think if you pull back, look at where the unemployment rate is, that's 4.1%. Usually when people think about inflation, their first thought goes to stagflation. But stagflation is a scenario where you have elevated inflation and rising unemployment. We've got the opposite now. Never mind payroll numbers, because I think payroll numbers are skewed because of low supply, right? The number of jobs the economy needs to create per month to keep up with population growth that's fallen maybe from 120,000 a month to about 20,000, 25,000 a month. So there's a lot of noise around that, right? Whereas, you know, you think about nominal GDP growth, that's running at, you know, five and a half, 6%. That's close to where we were in the 90s. I think all else equal, that is running pretty hard. The last quarter, in fact, was 8%. nominal GDP growth. That's higher than anything we saw in the late 90s, and yet interest rates are low. I think that's how I think about, you know, they're willing policymakers, and I would say both at the Fed and Treasury, with fiscal deficits, so that includes the White House and Congress, they're willing to let things run hot. You know, fiscal deficits are clocking at about 6% of GDP, and yeah, interest rates are low.
Yes, so there are so many moving parts. You mentioned unemployment and we are less than 24 hours away from the jobs report. And normally we would be waiting with bated breath to the nonfarm payrolls and unemployment figure. But as you mentioned, there's so much that goes into that jobs data and we've been looking at ADP. and jolts as well. But when we take a step back, of course, the geopolitics do play into everything. But another area we're paying attention to is diesel prices in addition to rising WTI and Brent. So how do you see that affecting the global economy? And with everything that's happening with rate differentials and global central banks, how does all of that shake out?
So diesel prices are interesting because I think right now nationwide average diesel prices are just about 10 cents away from an all-time high. And we are talking about now it's higher than what we saw in April. It's very close to the 2022 peak. Now diesel is important and it tells you two things. One is that even if they solve the Middle East crisis, however you define that, and oil starts flowing, And the U.S. government is saying, you know, maybe 9 to 10 million barrels are going across the strait. Others are saying not so much. But there's a products problem. Diesel's a product, right? And now diesel is what we use to transport food across the country, transport goods. All of that is just putting upward inflationary pressure as well. So from our perspective, it's the same story at the end of the day. We're in a period of inflationary growth. That's not bad for stocks, by the way. That's good for sales growth. That's good for margin expansion. One person's margin expansion is another person's inflation after all.
Yeah, and of course, while I have you here, I do want to get your perspective on the AI story as well as politics. So the G20 wrapped up in Asheville, North Carolina, and it was surprising to see some of the tech executives there, including Jensen Huang, as we heard from the Treasury Secretary, as well as the Commerce Secretary. So we all know that the narrative out there is intertwined. So where do you stand when it comes to the AI trade as we wrap up earnings season? I mean, look, I think the AI story, more than the trade right now, is a macro story. And it was sort of underlined by Jensen Hong and NVIDIA's earnings when they said, you know what, we think our next fiscal year revenues will grow at 70%. And that's actually constrained by supply. It would have been higher if they could get more chips and things like that. And the market is expecting 40, 44%. That tells you the CapEx boom is continuing. Number one company spending on chips is other chip companies' profits and sorts of margins and things like that. So, yeah, the boom continues. Now, with respect to the trade itself, I think investors are in a place where the show me more, show me the money. You guys are spending all this money, where's the ROI? And we're seeing a little bit of, I don't want to say it's complete rotation, but other areas of the market, for example, healthcare has got some solid momentum recently. Banks have gotten some solid momentum. Banks doing well tells you that, again, nominal growth is okay. Loans are going up, credit is tight, right? And with the AI story, they need more credit for this. It's no longer funded out of hyperscale of balance sheets. It's no longer funded out of cash flows. They need more and more credit. But for now, that boom is continuing.
And finally, Sonu, I have time for one more question, so I do want to get your perspective on what we're seeing in the bond market. Many times we like to say this time is different, but given that the 10-year broke above 4.8 yesterday, and it's not just the U.S., it's Germany, it's the U.K., it's Japan. If you were on summer vacation and you just came back, how would you explain what's happening in the bond market?
I would take a glass half full view. The bond market may be finally normalizing. We have come out of a period where growth was weak, which was the 2010s, and now growth is stronger. Inflation is also stronger. That's part of it. It's a bigger part of that mix. But growth is stronger. We're going back to what we saw in the 90s. And that means you need higher yields.
Well, we will continue to monitor those levels and we will have to leave it there, but I'm sure you and I will be talking very soon. So thank you so much for joining me. Thank you. Thank you.
