Morgan Stanley's Sibal: US Inflation Cooling

Let me just start off with what your view is on on what the Fed are going to do. When did they start cutting? Yeah, we have a call that the Fed is going to start cutting in September. Our Fed call is basically our inflation call and we think that inflation will be there in September and enable them to start their cutting path. Why is the inflation, why is it your inflation call and not your labor market call? Right now, we think that the labor market is tight, it's resilient, and the focus is on figuring out if inflation can come down. Even though the labor market is tight, we have a forecast that the labor market will start to see kind of a softness and the unemployment rate will rise. But the the primary focus for us right now is inflation. Yeah. And what do you think when you see the pricing of the markets and the fact that a big substantial portion of bond traders are out there betting on a very swift cutting cycle once the Fed actually starts? Are you of the view that we're going to end up in a Table Mountain or a Matterhorn situation where it's quite, it's quite steeply? Yeah, I know this is a big challenge. I mean the markets have been changing their view on on the Fed pace for quite some time. If you go back to the beginning of the year versus today, we've seen a lot of volatility there. We have a pretty steady path on our our forecast. We think that the Fed will do 25 basis point cuts and consecutive meetings through to the middle of next year. But the the markets have this tendency to, once they start cutting, expect kind of a consistent path. And I think that will continue to move around as data moves around. What about the global inflation cycle? You say that by September, inflation will be the justification for the Fed to start the cutting cycle. How does it sit with other central banks around the world? We see actually pretty similar path between the ECB, the Bank of England and the Federal Reserve. We have them all starting their cuts and the timing of the cuts at very slightly different intervals. But overall what we see is that inflation in the most developed economies should be around 2 1/2 to 3% by the end of this year and then easing down into target by the middle of next year. So that's pretty consistent across the major developed economies. Yeah, so we had some commentary from EC BS all Iran overnight and he was saying obviously he is one of the more dovish members of the ECB, but he's saying seize bets for two more cuts in 2024 as reasonable policy shouldn't overburden the economy, etcetera. Do you see another two more cuts then out of the ECB? That is actually our call. We have two more cuts coming out of the ECB this year and then four more next year. So for us, that's the reaffirmation of our view on inflation and the ECB. So just to pick up on these comments, he's saying he does not see disorderly market moves in France. Let me just ask you how you're viewing the recent volatility in French bond markets as we head into the first round of these elections. Yeah, Look, Morgan Stanley has done a lot of work on analyzing the French election, but I think it caught many people by surprise. For us, what I'm focused on is some work that we've done on debt markets and looking at the path of sovereign debt for the French economy. The next budget cycle will be very important for that. And so seeing what the new government puts together in terms of the budget will be critical for that. But it's really hard to predict that right now. Yeah, it's interesting because we are in an environment now where I think the focus has actually started to shift towards how much debt many sovereign countries are sitting on get distressed. African nations, a lot of stories coming out of the region there that restructuring. But then also you hear the likes of France being downgraded by S&P. You hear a lot of scrutiny of US public finances. Obviously US is the world's reserves currency. So it's a bit of a different situation. But when you look at the state of countries, public finances, how worried are you about the trajectory in this higher interest rate? We, we, we're concerned, but we're not quite at the threshold where we're panicking yet, so to speak. What is that threshold? So mathematically, if you look at the sovereign debt across most developed economies, what you see is that the cost of the debt starts to approach market right rates in about 20/29/2020 thirty. And so when you get towards the end of the decade, you'll start to have an increased burden of interest costs. And so mathematically if fiscal burdens start to consolidate going into that, then you're in a little bit more of a stable environment. But if the fiscal deficit starts to widen going into the rising debt cost, then you have a problem. And so that's why I say the next budget cycle is critically important because that's will determine kind of the path of the fiscal outlook over the next three years. Yeah, and I'm just going to simplify that to some of the viewers. Essentially, what you're saying is the outstanding stock of debt is very high, but it's being serviced right now at low interest rates historically. But as they continue as if rates continue to stay where they are and they refinance, they're going to end up with much higher. Yeah, that becomes a problem in 2029, getting from the legacy of lower rates still.