June rate cut seems less likely after hot CPI print, says Goldman's Hatzius

Here with his first take on the data is the man behind that call, Yan Hotsy as Chief Economist and Head of Global Investment Research at Goldman Sachs. Good to see you. It’s nice to see you. You’re surprised today I was. We thought it was going to be a low .3 and it ended up being .4. There’s also some read through into the core PCE numbers, which ultimately are going to matter more. We’ll learn more about that tomorrow morning with the PPI numbers, but we’ve also lifted that to 29 basis points. And since it was already, I think, a little bit cuspy whether they would cut in June with this, it seems less likely. So it still happened, but it’s not my expectation. OK, so you were at three cuts, now you’re at two cuts. What makes you so sure two is right, that that’s the right number now? Well, we’re never sure. As I said, I think it’s possible that they cut in June and you could still get three cuts. I think that that certainly could happen. But likewise, it’s also possible that it moves back further. I mean, it’s always very dependent on how the data come in. I think it tells you a lot more about the Fed than it tells you necessarily about the underlying adjustment in the economy, the disinflation. I still think a lot of the trends are improving, and you can see that in the labor market as well. But for the timing of Fed cuts, these numbers do matter. What if the disinflation case is suddenly becoming harder to make and it’s going to be much stickier for much longer than any of us thought it would be? Are you entertaining that possibility? I think that’s less likely because I for that I’d look not just at the CPI or PCE numbers, but I also look at, for example, the adjustment in the labor market, the fact that job openings have been trending down, the fact that quits have been coming down, the fact that wage growth continues to come down. All of that to me says we are disinflating, but it is taking longer and I think the reason why it’s taking longer is that some of these lagging categories in service inflation in particular things like you know for example auto insurance and healthcare costs, they they’ve got a longer tail than we anticipated. So July seems to be now your base case, is that is that fair to say? That’s right. July is the first continental new forecast. So the PCE now becomes ever more important. What’s your read through from today? What we might get tomorrow, by the way, before you even answer that question, Does this make you now worried about what’s going to happen tomorrow? Or do you? Is it a foregone conclusion at this point? That it’s PPI is not going to be great either. It’s not a foregone conclusion. These things are not that closely related. Month on month. PPI will be another input into the PCE number. What they really care about is PCE, Sure. But most of the information for PCE comes in today’s number and then a smaller amount of information comes in tomorrow’s number. Oh, well, that means to PCE. I need to worry about then if that’s the Fed, the Fed’s most preferred measure. And I get more data from today’s CPI into the PCE, right. That’s I guess, the principal reason why June would be pushed off. Exactly. And that’s why we pushed it off because we now have a higher expectation for PCE and probably too high for them to cut into. What about this notion that some have raised, Jamie Dimon included, that the market just got well over its skis. My words, not not his on the idea that we’re going to pull this off, that we’re going to have a soft landing that were 70 to 80% voting from a market standpoint and that’s just way too optimistic. What do you think? I think I’m, I’m still very optimistic about a soft landing. I’m optimistic that the economy remains very resilient and that growth continues to be pretty good and maybe even more than than pretty good. We’re at, you know, close to 3% GDP growth for this year. And I also am optimistic that we are rebalancing the labor market and we will bring down inflation over time. For me, none of those things have changed. However, what has changed is the timing of the Fed adjusting, because that’s going to depend a lot more on the month, on month inflation news, which has clearly been disappointing.