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This is the Financial Exchange with Mike Armstrong and Paul Lane. Good morning, Happy Friday, Welcome back to the Financial Exchange. If you weren’t happy about markets yesterday, you’re getting a bit of a turnaround today with all three major indssees in the green so far. Will be filling you in later during the show on where markets land for the day, but breaking a bit of a trend for the last few We had a new inflation read out this morning at eight thirty am, and that’s where we’re going to start the program today.
It’s Mike, Paul and Tucker with you. And market Watch wrote this morning the Fed doesn’t think inflation will run a muck again. The PCE price gauge will help clue us in. So Paul, did the PCE price gauge clue us in on whether or not inflation is going to run a muck? We still have no clue, Mike, still have no idea in what direction it’s going to go.
In terms of the numbers that we saw today, everything came in right in line with expectations. We saw the month over month number rise zero point two percent. That was, like I said, in line with expectations. And the annual figure for core PC sits at two point nine percent, again right on in line with what economists had estimated.
The problem with the PCE is that a lot of it is telegraphed in the earlier CPI report that gets reported earlier in the month. I believe it was the eleventh this month, So there’s often not a lot of surprises. A lot of it is very easy to sort of interpret what the number is going to come in at. So oftentimes we sit here at the end of the month and we prep for the core PCE and then there’s very little of insightful commentary to be made other than it is.
What it is. Yeah, no, no offense to mister Bartash and market Watch, but this PCE price index did not clue us in to the direction of inflation, nor does it really ever clue us into the actual direction of inflation, or it hasn’t for the last several years anyway. But we do talk about it because the Fed cares a bit more about this inflation reading than they do the CPI. They use it as their main gage for the direction of prices and just how far away from their target we actually are.
And so that’s I think the context that we can look at this taking a look at all the four inflation readings that we get between CPI and PCEE, we are now showing a reading of two point seven percent a year over year at the low three point one percent if you strip out food and energy on CPI at the high. And what I think is safe to say here is compared to the first quarter of this year, prices are running up faster during the second quarter than they were in the first. And really where we saw this start to take off is more at the end of the second quarter June July August is when we saw prices on a month over month basis getting to levels that I think normally the FED would be concerned about. The three month average for most of these price in disease.
In fact, if you look at core CPIP, core PC, the three month average for all three right there at three point two percent, and so I think that is the piece that has some folks hung up about cutting in this environment. But in any case, I think very clearly the FED is on this path of lowering interest rates into this environment. I think they are today justified in doing so. But I think right now I’m trying to contextualize this right now, more than I think anytime in the last few years, the FED is justifiably confused about what to do next.
I think they were confused about what to do next back in twenty twenty two, but they shouldn’t have been. It’s kind of my conclusion, like it was a pretty obvious prescription. I know that sounds obvious in hindsight, but we were saying at the time too that look, you just had Russia invade Ukraine, you had a massive amount of spending shutdowns, We’re going to have inflation. You need to be raising interest rates.
Today the waters are very muddy. It is really unclear what comes next. There are definitively concerns about the pace of hiring in the private sector, even the public sector. The pace of hiring obviously is pretty low, given the administration’s goals to reduce headcount.
And at the same time, there is still a tremendous amount of spending going on. GDP is getting revised upwards, there’s a lot of infatuation with the stock market, with artificial intelligence, and all of those things are the possibility of being inflationary and running away to the upside here. And so I was listening to an interview with Stephen Myron with I believe Bloomberg. Just yesterday he whipped out the word transitory once again, you know, throwing it around on top of us.
I thought that they had, yeah, put that word away and decided not to use it anymore. But this is probably too nice of a place for it, maybe just. Six the garbage can. Yeah, but that word was pulled back out by the newest voting member of the Federal Reserve to describe what they are seeing in terms of price increases right now.
And it’s kind of the trillion dollar question with all of this is can they get away with modestly lowering interest rates or you know, in Myron’s opinion, dramatically lowering interest rates. I don’t think he’s going to get it, but that’s his goal and not spark off a period of uncomfortable inflation. And to me, you know, these numbers are trending towards three percent. If you get much higher than that, then you start having people get frustrated.
I think people are already frustrated, but you know, you start getting to three and a half four percent range, that is when the Fed is going to have to take a very serious look at their policy. Strategy. It’s been really challenging over the course of the last six months or so to really gauge what direction the economy is going. Just when you think you have a beat on sort of where the economic data is trending, it’s sort of reverse.
Let’s give some examples here. Yeah, I think this is a good example of it, really, where all of the statements in the week prior was jobs data had been revised down significantly. Nine hundred and eleven thousand jobs had been taken away from March of twenty four through March of twenty twenty five. You had the jobless claims number that came out I believe that was the first week of September that was in the elevator to high two hundred, Yeah, two fifty maybe range or maybe two mid two thirties.
And then you had a number this week that was much lesser than anticipated on those continuing unemployment claims jobless claims that were being filed. So and then you also had a GDP number that came in revised to three point eight percent in gas. Which, by the way, that GDPER revision was primarily due to all of us. Spending more money exactly.
It wasn’t some nuanced like imports versus exports. I think it was really easy to explain. Turned out when we actually measured it. All the consumers in the US spent more money in Q two than we previously thought.
Right, So you have a consumer spending continually with a lot of resiliency. That’s been the story for the last two or three years. But the week before I would have told you, oh, there are there is some data point to the labor market weakening. Not to say that these, you know, job as claims are the end all be all.
They’re noisy. But again this week you had indications that the consumer’s still spending, the jobless claims aren’t as bad as anticipated, at least for this week. So you sort of pause for a moment. That, paired with the Q two GDP numbers, say perhaps some of these trends aren’t really materializing.
And I continue to sit here and debate whether or not we’ve seen the full impact from tariffs. I had read earlier that Ken Griffin from a Citadel had been on saying that we’re only fifty percent of the way there in terms of the impact of tariffs on the economy. I don’t think anyone really knows how far along the line we are. I would have told you in April that by this date we would have known the answer to that question, but we still don’t have a clear, conclusive read on that yet.
On the inflationary side of it, that is the reality here. I don’t think that’s bad news necessarily. There’s oftentimes that kind of fog of the moment where it’s really tough to tell exactly what the biggest looming issue could be. But right now it just happens to be a tie between the two things that the FED is really in charge of at the moment, and so I do think they’re gonna move cautiously.
I don’t think that the President is going to get the cuts that he wants. I don’t think Stephen Myron, the President’s appointee to the FED, is going to get the cuts that he wants. I think if there is a I always like to look at this from a perspective of what could really surprise everybody, and the answer would be no more rate cuts, or dramatically fewer than are being priced in, because right now you go take a look at markets, they are very clearly pricing in definitively two more cuts this year and probably more starting next year. And so if you want one thing that could surprise investors, it’s that it’s that data comes out that reverses the Fed’s mind on where rates need to be, and they don’t need to hike rates, they just pause.
It’s got to be inflation. That’s the only way you’d have that is run away inflation. And run away again. We’re not talking about eight percent here, right, We’re not talking about twenty twenty two.
It doesn’t need to get that bad for the FED to have to pause what they’re doing here. Let’s take a quick break when we come back. New tariff announcements this morning overnight. When did these actually come out? Tuger, It was after I was asleep.
I don’t know when precisely it was, but new tariff announcements. We got to cover that next here on the Financial Exchange. The Financial Exchange streams live on YouTube. Subscribe to our page and stay up to date on breaking business news all morning.
Long Face is the Financial Exchange Radio Network. The latest news on inflation, the FED, the economy, and how the markets are reacting every morning right here on the Financial Exchange Radio network. So, as I mentioned this morning, we learned of new tariffs being imposed on the pharmaceutical industry. I want to start there.
There’s also something about trucks, but starting on the pharmaceutical industry because I think this has been in focus for a lot of families over the course of the last several years, realizing that oh yeah, like a lot of my arts are being made in China or other parts of the world. And so I know for certainty that this story is going to get misinterpreted, and so I want to cover it specifically what it’s going to do here. So starting October first, the United States will be imposing a one hundred tariff on some pharmaceuticals. But we’re talking about branded or patented pharmaceutical product unless a company is building their pharmaceutical manufacturing plant in the United States.
So that was the post from President Trump on Truth Social and so obviously your mind goes to, Okay, what precisely does that mean. The answer is that there are very few drugs that are patented or. Or or what’s what’s the other word it was. Brand that are manufactured outside the United States.
Nine out of ten of these drugs are done in the United States, and then also nine out of ten ten prescriptions in the US are actually filled with generics, not branded drugs. Those generics are the ones that are heavily manufactured outside of the United States and are not affected by this. Overall. From what I was seeing the other day, only about five percent of the branded drugs that the United States imports come from China or come from Asia.
Rather the rest of them primarily coming from Europe, and many of those European companies are already in the process of developing US manufacturing or have already done so, and so market reaction has been very muted on this. Not many companies are getting hit with this. I think the logical question is do they go after generics eventually? Right? Is this a first step? And I think that’s a fair question to ask. But I think the very first thing people are going to react to is what’s happening with the drugs that I take? And the answer is probably nothing, because you’re probably on a generic.
YEP, that’s a good way to look at it. The spillover effects. You can see that over the course of the last couple of days. It’s interesting that this story dovetails with Eli Lilly announcing that they were going to build another manufacturing plant in Houston.
That’s for six point five billion for weight loss drugs, and just you have a collective of farmer companies out there who have pooled together three hundred and fifty billion dollars to invest in US manufacturing and research and development over the course of the next decare. So it’s not as if a lot of the big pharma players aren’t already at least committing from you know, verbal commitments to invest in manufacturing research. So I think you take the story as a whole, you have companies that have been committed to do this in the first place, and you have minimal impact on the drugs that are out there. It’s not as significant of a tariff story because it is not attached to generics at this point.
This is really look, this is kind of the story of a lot of the tariffs that have been put into place thus far, which is make a big splash, but intentionally don’t make it terribly impactful on American spending. Like that’s been. When I look through the actual policies that have put it into place, there’s a lot of give and take, but ultimately it’s been we announce something. We then announced the exceptions, and when you look at the broader policy, you can see why, oh yeah, okay, this is actually not going to drive prices all that much higher in the United States because of the exceptions on these key components or these key pieces to the overall policy.
And so that’s how I’m kind of looking at this one too, is Yeah, it’s making a splash. It’s maybe a shot across the bow of some pharmaceutical makers that hey, we might be able to do this on generics too, so watch out. But for the time being, no big impact other than probably a few very specific drugs that are going to be more difficult for insurance companies and all that. If it does get hit with this one hundred percent terrify.
Yeah, it feels like the whip on a racehorse being cracked down, you know, the whip gets cracked down of hey, we’re coming after pharmaceutical companies unless you invest in manufacturing the United States. And then often it seems like companies sort of react over the few weeks by putting together some sort of dealer initiative to it to do just that. Moving over, Sorry, actually we didn’t cover the big the big trucks, big trucks, so I don’t know how big they have to be, but that is the other piece that they’re going to be looking at commercial truck manufacturers where they are making those outside the United States, once again getting a look at tariffs here, so Germany’s Dommler North America unit assemble some freighter freight liner brands in Mexico, those would be looking at some tariff. And so honestly, the auto industry is such a mess with tariffs that I have no idea what happens next on this.
This has been the constant bane of for General Motors and many others, and I know that they are working as quickly as they can to push the administration to create exceptions for their vehicles and moving manufacturing and changing things at the same time. I would think that in the event the United States can get a attractive deal with Canada and Mexico, that this is the first thing that gets put away in terms of like negotiable tariffs. I would think that having vehicles made under the North American what is the new NAFTA. It’s not new, it’s like ten years old now, but the North American Trade Agreement that we have with these allies, I would think that anything that we’re going to announce here, whether it’s on heavy trucks or cars, is something that ultimately the administration is going to negotiate on because it is so impactful for Big American Manufacturing USMCA.
Yes, thank you, Tucker, USMCA. That seems very likely to me because as it stands now, many of these domestic auto manufacturers are at a legitimate disadvantage to Korean manufacturers, to European manufacturers right like, those countries have navigated and negotiated deals for their cars to come into the United States, even if they are not manufactured in the US, whereas American manufacturers of vehicles, if they’re doing it in Mexico, are getting hit with way bigger tariffs. And so I think there’s still a lot to be worked out on this. I am concerned about the auto market generally, and this is again a bit of a stumbling block for many of those companies, but I don’t think is a show stopper for any of them.
Also worth only the last thing on the tariff front. There also were some tariffs announce on kitchen cabinets, bathroom vanities, and other similar products. A fifty percent tariff and a thirty percent tariff will be imposed on upholstered furniture. So you have the likes of URH and others down slightly on that news today.
So taking in all this context, Paul, this is what I have to wonder about. Right. We just had that GDP revision yesterday that was primarily on the back of the US consumer, And at the same time, we’ve had all this bad data about the labor market and everything else pulling on people’s views of the economy is pretty abysmal. All of this stuff is remaining true.
And so if I’m looking at Q two data April through June data on consumer spending, is it just still a whole bunch of front running tariffs? You know, like you think about that. Logically, we didn’t see yet the big price arrangements. We still had very big uncertainty on where teriffs were going to be. I certainly heard from people who were saying, heck, I actually did it myself, right.
I’ve talked about it how I was buying a bunch of stone for a project that we were doing, and I rushed that shipment to get it to me well ahead of time.