Navigating the Markets: Understanding Jobs, Inflation, and Interest Rates | Jan. 13, 2025

Opening: 00:00:31

Welcome to Optimal Insights, your weekly source for real time rate data and expert capital markets commentary brought to you by Optimal Blue. Let's dive in and help you maximize.

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Your profitability this week.

Jim Glennon: 00:00:46

Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue. I'm your host, Jim Glennon, Vice president of hedging and Trading Services at Optimal Blue.

Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary, and these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Welcome Alex and Ben. How's your week been so far? It's been going well.

Alex: 00:01:13

Good afternoon, Jim. How you doing?

Jim Glennon: 00:01:15

Good afternoon. We are, we are podcasting on Friday. This week we've got some Optimal Blue company business going on next week, having a bit of a company kickoff.

So we thought we'd, we'd get everybody together on Friday to record this, but it'll be coming out Monday. Have a great show today. We're going to give a little update on Friday's job report which came out this morning.

And also we thought it was good timing wise to deliver some pretty in depth education on how to consume some of these numbers that we talk about, right? We talk about jobs numbers, we talk about inflation, we talk about GDP numbers.

And you know, how can we, whether it's numbers or even just news or Fed meetings, how can we help originators, help all of you out there to think about these things in ways that are constructive and that can even help you understand how they affect things like interest rates and thus mortgage rates in our industry. So we'll get into that here in a second as well as an update on the jobs report that came out this morning.

Otherwise, in, in the news, if you're in Colorado, the stock show starts this weekend. So we'll see some of you all there.

That's kind of a cool tradition we have here in Colorado, which is essentially a literally a stock show where, you know, folks who sell cattle and other types of stock come down and from the, the neighboring states and sell, sell and show their animals and they have auctions and they also have a rodeo. It's like the kind of the super bowl of rodeo here in Denver. So looking forward to that.

In much sadder news, I think we've all been following the fires in the Los Angeles area. As of today, January 10th, tens of thousands of acres have burned around LA and more fires just keep cropping up, right?

These fires have created other fires and the winds have not been Friendly. So that's been a little bit difficult to watch. More than 10 people have died so far. Just a really terrible tragedy unfolding.

So we're all thinking about our friends and family and clients in that area. There's some big lenders down there too.

And you know, the fires are getting close to where some of the big lenders and investors are down there like in the, kind of in the Thousand Oaks area and all that. So anyway, our thoughts and prayers are going out to all the folks affected by those fires in LA.

Switching gears a little bit data wise, the conventional 30 year. As you know after the, the number this morning we saw yields jump once again.

We're hoping maybe they, they drop down a little bit by the end of the day. Sometimes on these unemployment days they do that.

You get a strong reaction in them right after the number and then things kind of settle back into a, into a normal range or almost come back to flat. But as of right now we're seeing that, that 10 year around 4 and 3 quarters.

Conventional 30 year obmmis are approaching 7% which is not, not exactly what we wanted to see. But despite that volume has rebounded quite a bit since the holidays. But you sort of expect that.

But we didn't necessarily see that in the past couple of years. We actually have seen volume come back to close to pre holiday levels here just in the past few days. So I think that's pretty good news.

The optimal Blue Summit is coming up February 3rd through the 5th. If you've not registered for that, please do. I think at this point everyone's aware of it.

If you haven't booked a hotel, definitely reach out to us or do that. We've got a hotel block that's, that's going to be tapped out here pretty quickly and I believe it closes on the 15th of January.

So please, please register. If you haven't make your plane reservations in hotel. If you haven't hope to see you all there.

We're going to try something a little bit different today. We're going to talk through some of the economic releases that have come out recently, including the unemployment report that came out this morning.

But along the way we're also going to educate.

So we're going to kind of walk through economic indicators and educate and also as we're educating talk through some of the indicators that are going to be coming up soon and that have come up in recent time. So let's kick it off with today's unemployment report. Another absolute blowout.

Although it was focused primarily in kind of the sectors you would expect if you live in America. Right. Health care, hospitality, construction, and the rest is kind of made up by government jobs. Right.

Is Most of the 256ish thousand jobs that were added to the economy, but yet what else should we be looking for and thinking about as these different types of unemployment releases come out?

Ben: 00:05:44

Yeah, Jim, So jobs, and you know, you can think of it as the labor market in general as well, are obviously a massive part of the economy, as well as kind of how interest rates get set. The Fed is obviously very interested in jobs. You could consider it one of the parts of the Fed's dual mandate.

The other we'll get to in a little bit here.

But you can think of the jobs part of the mandate is max employment, so as many people employed as possible, along with the second part of that mandate being inflation being moderate. Right. That's a key part of that.

We don't just want max employment because that could potentially lead to runaway inflation, but the jobs part being a massive part of that. Today's release, nonfarm payrolls, a huge part of the jobs data that gets released on a regular basis.

Nonfarm payrolls being both private and public jobs that get added throughout the course of a month. The exact measurement period is not like this morning. We're looking at December's non farm payroll report.

I believe that that period's actually like from late November into mid December. So it's not like a perfect month worth of data. They got to compile the data, et cetera. But within this report there's a lot of information.

Everyone focuses on the jobs added number, which Jim referenced at 256,000. So quite strong. But also we get the unemployment rate, which, you know, this time was down at 4.1%, dropping just a little bit.

And then also wage growth data can be important in that as well, especially when the market seems a bit more focused on inflation. And if we have a strong jobs market that is impacting inflation. So that's definitely the biggest one. We got that report this morning.

Definitely a lot higher than expectations. Probably the preeminent report that gets focused on each month.

You can make the argument that certain inflation reports at times could be just as important. Like over the last couple of years where inflation's been running hot.

But then you look at, say: 2010

Jim Glennon: 00:07:58

Yeah, yeah.

Ben: 00:07:59

Like if inflation's 2% or under which a lot of that time frame it was running below target and it's not nearly as much of an important release.

But we, we've kind of returned back to where inflation is important because it's definitely affecting the Fed's policy rate as well as their, their balance sheet plans as well.

Jim Glennon: 00:08:20

Right.

Jim Glennon: 00:08:21

And just the interaction between the two. Right.

Like you said earlier, if we have super strong employment that can lead to wage growth that's too hot, which then makes it easy for prices to go up. And then we get back into the cycle of inflation and with the dual mandate, the Fed has to keep their eye on both of those things. Right.

Bad employment means potentially poor economy and obviously trouble for the American worker. And then inflation's the same issue, trouble for households and issues with a currency not being worth what it once was.

Ben: 00:08:50

Right. Non farm payroll is definitely the preeminent channel jobs data. We get a few other less important ones.

You know, ADP payrolls, we get those the same week. So we got that on, on Wednesday of this week. It's, there's really been not a strong correlation between ADP and non farm.

The market still pays attention to it, but it's generally comes out with a pretty big asterisk. So definitely important to keep it in mind, but definitely not at the level of a non farm payrolls. The other important metric we get is Jolts.

So the Job Openings and Labor Turnover Survey. The only problem with jolts is it's great data and it's probably more in depth than non farm payrolls is it's lagged.

So this week I believe it was, I want to say Tuesday it came out and it came out pretty strong at 8.1 million, so showing more job openings and overall kind of a strong labor market, just like non farm.

But it was data from November and so the market's not as likely to react because it's already kind of, it's not as much as a leading indicator as non farm payrolls, I should say.

So that's part of the reason I think non farm has a big place in, in watching markets and moving markets is because it's kind of the first big economic reading we get in a month usually.

Jim Glennon: 00:10:11

And it's the, it's the, it's the official U.S. bureau of Labor Statistics number. Right. So the, the ADP number comes out and that's done by adp, the payroll company.

And they're trying sort of, they're trying to sort of estimate because they see so many payroll checks and ads and drops of, of employees. They're trying to estimate what that the direction maybe of that number.

And then Jolts, as you said, is a little even more lagging, but it looks at actual openings. So that scans databases for folks that are looking to hire. Right?

Ben: 00:10:40

Right. Yeah. And even within Jolts there's further, there's data on separations and quit rates and even some, some wage data, I believe.

So a little bit different kind of metrics, but certainly still very important.

So if you're, if you're really trying to pour through, you know, how is the job market or how was it a little while ago, Jolts can be helpful for that.

But yeah, if you're looking to trade based on like real time occurrences in the labor market, non pharma is probably going to be the better, bigger report for you.

Jim Glennon: 00:11:11

Sure.

And related note, did I see that part time jobs, part time hiring was a big piece of the report that came out this morning and so someone called it the mall Santa effect. Right. Just the fact that it's not just the mall Santa, but just in general there's a lot of part time hiring that goes on around the holidays.

A lot of it's retail or restaurants or maybe it literally is elves and Santa at the local mall.

Ben: 00:11:34

Yeah. So I believe part time jobs were, were a large part of that. Mall Santa is a real job, Jim, and temporary.

I don't want to offend all the mall Santas out there. Yes, probably a temporary gig. There's, there's a few folks out there probably trying to make it permanent unfortunately.

But yeah, yeah, so definitely you can dig into a lot of, you know, not just the sector, but also part time jobs, full time jobs. You'd rather have part time jobs than no jobs at all.

So if folks who, you know, maybe were previously unemployed are taking part time jobs, that could still be a sign of a stronger labor market. But yeah, they're within every report there's so much to, to parse through.

And again, you got to remember it's just kind of one moment in time and they also do seasonally adjust it and those adjustments are obviously a point of contention amongst market watchers. And, and so a lot of times it ends up being.

Is what we saw in one month kind of the real trend or is it just kind of a blip in the radar due to whatever reason? And so you kind of got to look at like a, a running average perhaps of, of what jobs reports are saying.

Jim Glennon: 00:12:45

Sure.

Alex: 00:12:46

And while you're talking about part time jobs, Ben, I think something else to point out about the, the Non farm payrolls is there is a line item for individuals engaged in part time work who are looking for full time work and that percentage has, has been on the rise in, in recent quarters.

Ben: 00:13:01

Yeah, yeah. Classic underemployment where you're not technically unemployed, you're just working part time.

Obviously different unemployment metrics too that dig into. Okay, you know, not just measuring.

Are you technically unemployed, are you looking for more work that you're unable to find so you can get as deep into the labor market as you want?

And so generally I think markets are looking at the bigger high level trends and, and you know, probably not trying to read too much into the weeds unless it seems to be a recurring issue with each, each month's release.

Jim Glennon: 00:13:33

Yeah, good call. You hear a lot of folks talk about underemployment. That's a good, a good primer on that.

Ben: 00:13:37

Yeah. And just lastly, I'll kind of touch on why this matters.

I mean bond markets are always looking to price in, you know, economic growth, inflation, those are big parts of long term bond yields, even kind of medium term bond yields.

And then on the short end of the curve you obviously have the Fed setting policy and the Fed is obviously reacting to the labor market as well as inflation, as Alex will touch on in a second. And so anything that's affecting bond yields in that fashion is going to affect mortgage rates. You could think of mortgage rates as a bond yield.

And so like on this morning's news of a much better than expected jobs report, bonds sold off. And when we say bonds sold off, what we're meaning is the price of bonds went down and essentially yields have gone up.

Or you could think of it as investors are demanding higher rates or higher yields to compensate for owning bonds. And that's why rates go higher when bond prices go down. So that's kind of the overall dynamic there. But there's a lot of things to dig into there.

Jim Glennon: 00:14:42

Yeah, that's the crux of it. Right. Is if the Fed starts to see cracks in the jobs market, they could start dropping rates faster.

Whereas right now the expectations are for a lot slower than we thought 612 months ago going into this year. I was reading an article the other day that I thought was interesting just to cap off this little piece here.

We're talking about how all of these things we're talking about affect rates. We're going to see the 10 year treasury bounce around being kind of the blue chip for where interest rates are. Right. We're about 475 today.

We were four and a half a few weeks ago, and so on, lower from there going back into 4Q24. But as far as mortgage rates, typically mortgage rates follow the ten year.

But we've been talking on our desk and amongst our team and I was finally reading some articles that are putting it out there more in the public that we actually could see mortgage rates rise slower than the 10 year going into this year, or just generally the spread between the rate on a 10 year treasury and the rate on a 30 year mortgage get tighter for a few reasons. But honestly, when I think about it, the main reason is because rates are expected to remain higher for longer.

Which is a weird thing to think about, a weird concept. But it's because over the last couple of years that spread between the 10 year treasury and the 30 year mortgage has expanded.

And a big reason for that is because rates were expected to go down, therefore more mortgages were expected to pay off.

So who wants to buy a mortgage bond at 7% if it's going to pay off in six months when I can buy a treasury for 4 or 5% or some other alternative instrument.

But now that as we've said on this podcast and other areas that rates are expected to stay in the sixes for the next couple of years, that demand for mortgage bonds has gone up, they're becoming more attractive, they're becoming a better investment and they're paying better than, than a 10 year treasury. Right. Treasuries are again, 4, 7, 5. You can still get a yield on a 30 year mortgage a couple points above that, but that spread is shrinking.

Meaning if we do see rates go up from here, we see rates even stay flat from here we could see mortgage rates dip.

Ben: 00:16:56

Right. And yeah, I think, I always think about it, as does an investor in mortgage bonds.

They don't want to pay one or two for something where they're going to get their money returned to them in a few months at par. Right. You just lost two points.

If you're confident that you're not going to get that situation where rates go down and you're going to get refi'd out and just get your principal back essentially and lose on that premium you paid, you're much more likely to pay a higher price. Right.

If you're confident that, okay, prices are not going to, rates aren't going to drop sharply on me, you're much more likely to have confidence in paying a little premium for certain bonds. But yeah, it definitely is a dynamic that's been in flux here recently and probably will Continue to be.

But yeah, there's definitely just looking at where spreads versus Treasuries are now versus where they were maybe in the pandemic. And we might not get back there, but we hopefully we'll at least narrow that, that gap a bit.

Jim Glennon: 00:17:56

Yeah.

If we keep seeing unemployment reports come in like they did this morning, and if tariffs become a real thing, that maybe put pressure on inflation and we see the new administration or any, you know, the government spends money, that's just what they do. Right. So we could see inflation just continue to be an issue. We could see rates here for a long time.

But that could paradoxically put downward pressure on mortgage rates and mortgage spreads. All right, so I guess speaking of inflation, should we transition to that?

How do we look at inflation data, especially now with the dynamic between inflation and unemployment and just generally why do I care? And what are the key metrics that I want to be watching out for with all the different inflation releases that are out there?

Alex: 00:18:40

Definitely, I think, I think a great way to think about inflation is, you know, you know, congrats, you got a job, you got a paycheck. Now, now you get to spend that paycheck.

s been the issue defining the: 2020

If the: 2010

The way we, as consumers, most of us listening to this podcast, most of us probably aren't producers, but we're consumers. The number that we kind of gauge this with is cpi, that's the Consumer Price Index.

And that is essentially taking a price of a basket of goods, which is defined by the Bureau of Labor Statistics. But it's all the things that you would think of as needing. Housing, insurance, auto, a little bit for you, some food and gasoline in there.

And it's, and it's all weighted by what the average American uses. And then they just look at what the cost of that basket changes up and down in recent years, up each, each period.

Then they derive a percentage from, from that. Right now, the CPI is floating around 3%. The most recent metric showed it at 2.7% all in. And then there's, there's what they call the core cpi.

So that, that's that basket of goods that I talked about but without food and energy input into that basket.

And the reason they do this core basket, aside from from the main basket, is that food and energy tend to be the most volatile categories in that basket. What's actually really interesting is, is like I said, the, the core value is higher than the, the all in.

So you're actually seeing the rest of the basket inflate faster than food and energy prices. I think that has something to do with potentially the election a little bit.

If you look at the most recent November CPI data you saw fuel costs went down into the election.

You know, you can call it an election tactic, but they'll often tap strategic reserves to bring gas prices down because a lot of voters are very sensitive to the price of gas. I mean we all are, or rather before COVID we all had to drive to work every day.

And so a lot of voters are extremely sensitive to the price of gasoline. On the flip side of cpi, they have this other metric called the ppi. And this is really kind of the cost of doing business.

It's the producer price Index. This is much more the prices that companies in the United States face and the price changes that they're seeing.

They split it between goods and services. What they do is they sample manufacturers, miners and service providers.

So that's everyone from, you know, those, those that cut your hair to those that are, that are pulling coal out of the ground somewhere in our country. When you combine those two, you kind of get a full picture of how fast the dollars are being inflated away in, in today's economy.

As Ben was talking about, we, we got our employment data this week. Usually the first week or two of the month you see your employment data. And then around mid month is when we get inflation data.

And, and that's coming right in this month. Next Tuesday, the 14th is going to be PPI followed by CPI on Wednesday. And then, and then I want to talk about a third metric called the pce.

That's the personal consumption expenditure. This is kind of the golden child that the Fed uses to gauge inflation. This one is very similar to cpi.

Again, they're looking at a basket of goods and seeing how the change in price of that basket of goods occurs over time. But while CPI only looks at kind of out of pocket expenses, PCE is far more broad.

It captures like substitution effects if you're maybe if one product is becoming more expensive and they see a lot of consumers switching to another product that fulfills that same need that they're capturing that, that change occurring as well.

Jim Glennon: 00:22:26

Okay, so PCE the Fed's preferred inflation measure. It's a little bit more dynamic, a little smarter, I guess, not as static.

Alex: 00:22:34

Yeah.

Jim Glennon: 00:22:34

And then you have PPI and CPI which are essentially PPI is like wholesale and then CPI is retail. If you were to look at it that way or look at it in terms of like mortgage capital markets. Right.

CPI is like the rate that the borrower pays or the price that the borrower pays. And the PPI might be the secondary market price. Right. The price you sell a loan to an investor, to a, to a wholesale lender or to a security.

There could be a margin, a profit margin between CPI and ppi. So that's how those two could interact Right. Over time with each other. Is it just the consumer that's paying more?

Like during the pandemic where maybe producer prices weren't moving so much, but it was easy to kind of hike prices on bar on borrowers or on consumers buying whatever or vice versa. You know, as the economy tightens a little bit, the producers have to lower their prices a little bit.

So even if producer prices are sticking or rising, they have to let the consumer price drop a little bit to create, to kind of stoke a little bit more demand.

Alex: 00:23:31

Yeah. There, there's an ever so slight correlation between the two where they see that PPI leads CPI ever so slightly.

And as a consumer in the economy, you can think before you go to Costco and get all your groceries or whatever you might get there, Costco has to pay for that item. And PPI is, is what, you know, Costco and the people bringing everything into the country are paying for things.

Jim Glennon: 00:23:51

Right. What are the expectations for next in the next report?

Alex: 00:23:56

It's still, still above that long term average that we're always referencing of 2%. 2% is kind of the historical medium that that's being targeted for the economy. I think we're looking at around 3% still.

Jim Glennon: 00:24:06

Gotcha. Right, Good.

Ben: 00:24:09

Alex, what have, what are egg prices doing? I know we were talking big fan of egg prices. I am. You know everyone talks about egg prices. I think it's overrated.

I think people should be much more concerned about like rent prices and owners equivalent rent because that's obviously a huge part of your budget. But I know we had especially leading into the election and it's kind of, it's not just about egg prices. Right.

It's just about a sentiment of unhappiness with, with inflation which I get everyone.

Alex: 00:24:37

Nobody likes it to these metrics credit, they do weight things by, by the percentage of what it Typically takes up out of a budget. So. So your rent is, isn't being discounted compared to eggs.

But on the topic of eggs I was actually digging into, and they make it really easy to drill down into what exactly was causing changes.

All you got to do is click on the bar and you can drill down and actually meat and poultry products were a standout on the last CPI report, believe it or not, which probably shocks no one if you have happened to shop for eggs in recent weeks.

Jim Glennon: 00:25:08

I know. How many eggs are we eating? Not enough to cover the rent. So yeah, I guess that's the point. Right.

You can look at it on its own, but its percentage is weighted very small in the overall number compared to your car payment and your gasoline and rent. All right, so we talked about inflation. Talked about. So in inflation the target's roughly 2%. That's half the dual mandate of the Fed.

The other half is full employment. Right. There's not a number that they typically look for, but it's right around where we are today. So they're not.

Fed's not concerned about employment if it's between like three and a half and four and a half percent.

But let's talk a little bit about just what is the general, other than that, like what is Fed policy and how do, why do we care about it and how does it change and what's the current stance?

Ben: 00:25:50

Yeah, yeah.

So in the US the, the Federal Reserve is the arbiter of monetary policy and they are paying attention to largely those two things we, we just discussed, jobs and inflation. They set policy generally eight times a year. So there are eight Fed meetings a year, eight Federal Open Market Committee meetings.

They set the fed funds rate. And you can think of the Fed funds rate as just the overnight rate, generally kind of a rate where financial institutions lend to each other.

Very short end of the yield curve. So not necessarily impacting mortgages directly.

However, further out on the yield curve, where mortgages tend to, to live and behave more like you're often responding to similar things. Right. Long term economic growth, jobs, inflation.

So I think of it as the bond market on the longer end of the yield curve as well as the Fed on the short end, they're generally both responding to the same things.

And if there becomes a big divergence between where the Fed sees things versus the bond market, you kind of can get some weird situations where maybe you have an inverted yield curve, maybe you have a really steep yield curve, and that's kind of where those things play out. And eventually one of them is probably determined to be more. More. Right. And the other, other part of it reacts.

So Fed meetings are obviously a big part of something to keep an eye on. For any Federal Reserve discussion, we get Fed speakers relatively regularly. We have blackout periods kind of heading right into Fed meetings.

But anytime we're not in a blackout period, you're probably likely to see several Fed speakers on the docket. Any, any one of them can move markets. We do get Fed minutes. They came out earlier this week, I would say.

Any more, they're generally as expected, no major surprises. But if there were something in Fed minutes that was not appropriately talked about at the previous meeting, it could certainly move markets.

So something to keep an eye on.

And the other, the other part of this too is aside from just setting overnight rates, which the Fed currently has it, you know, four and a quarter to four and a half percent, a point lower than their peak rate.

They also discuss the balance sheet and whether, you know, they're buying or like buying securities to put on their balance sheet, whether those are mortgages or Treasuries or in the case right now where they're letting the balance sheet run down to a certain extent. And so that's the other decision making that we don't focus as much on, but is still pretty important that's happening in the background.

Jim Glennon: 00:28:22

Right. We've talked so much about that over the past couple of, I mean, four years. Right. So it's the beginning of the pandemic.

Obviously, Fed was binging on Treasuries and mbs, and that's how we got rates where they were. And then they tapered that off to, to essentially only replenishing bonds that had paid off.

And now they're at the point where they are allowing bonds to just pay off, which technically adds to the supply.

Right, because every loan that gets refied or a Treasury bond that pays off, or a mortgage bond that pays off, some other entity has to pick up that slack. Right. Whether it's a big bank or a mutual fund or whatever.

So right now the Fed is adding roughly, I think, 18 billion a month in supply to the MBS world.

For instance, there's always talk about will the Fed actually turn around and sell, like actively sell bonds that are on their roughly $7 trillion balance sheet, which seems super unlikely. That could potentially crater the market. It would definitely change the dynamics that are out there.

The market doesn't seem to be pricing that in at all, but it could happen.

Ben: 00:29:28

One dynamic that I think could particularly affect, you know, the mortgage industry and, and mortgage spreads which are already wide is the Fed does. And they've kind of already made this decision. Right.

Where any mortgage runoff that's happening right now beyond their caps is actually getting reinvested into Treasuries. So I think the Fed long term always wants to return to a Treasury balance sheet.

And so that's probably not great for mortgage spreads, but again, that's likely, you know, well priced in at this point. So not a surprise. But the Fed does seem to prefer Treasuries over mortgage backed securities.

But they will step in and buy MBS when they need to, you know, support the housing market and support the economy overall.

Jim Glennon: 00:30:08

Sure. So our last subject I think we wanted to cover today, foreign central bank policy. We're ending on a, on a zinger here. What do you think, Alex?

Alex: 00:30:20

Yeah, I threw this in here.

I mean, as Ben just explained, you know, America has a central bank and most other countries, I believe every other country has some form of a central bank or if not, if not their economic union.

When I'm speaking about, when I'm speaking about Europe, and it's not so much about maybe knowing, you know, the day to day of what's going on at the bank of England or the European Central bank, but I kind of just want to talk about it just from like a case study format is this is something that's live and going on in the world today. And it's, it's more interesting than maybe like textbook examples of what could be going on.

So as I said, you know, other countries have their, their central bank policies and the two I wanted to kind of narrow in on were the European Central bank.

So that, that's the bank that governs the eu, all the member states of, of the EU and those that use the, the euro and then the bank of Japan, because both are in quite interesting scenarios right now. So, so the European Central bank coming out of COVID you know, faced very similar circumstances to the United States.

You know, pretty strong economy, maybe not as strong as the United States, but strong nonetheless. And then as inflation emerged, they really bought the transitory story, which I think a lot of people did.

I think a lot of people were like, you know, like, yeah, the economy's been strong, like it's going to be transitory. But the European Central bank didn't react as aggressively as the Federal Reserve did.

, you know, from the highs of: 2020

But their inflation rate has, has remained high as well. So they're really starting to see a bit of, bit of stagflation emerge.

And stagflation is the worst of both worlds where you have contracting economic activity, but in addition to that you still have rising price levels.

And so that's just something to definitely keep an eye on and recognize that there is weakness in Western Europe and in the European Union in general. What I like to keep in mind about the European Central bank is they're working with very strong economies.

Think, you know, Ireland, Germany, where the GDP per capita is tens of thousands of euros.

And then they also have very poor member states like Bulgaria, where I think the GDP per capita is something like €15,000 compared to the United States. The range between the richest and poorest state is only about 20,000.

So the European Central bank really has their work cut out for them in, in raising and lowering rates because they have to keep in mind such a wider swath of economic health. And so again, just, just a case study to keep in mind and always good to be informed about the world around you.

Then the second one I want to talk about, which is really a standalone case, is Japan. I think a lot of people are at least kind of tangentially aware of the Japanese economy is very unique.

It's where a lot of, a lot of debt resides and a lot of, a lot of debt buying. And you kind of might wonder like, why did the Japanese, why are they always buying foreign debt?

But you look at their overnight lending rate, their overnight lending rate is 0.25%. And that's a, that's a new occurrence.

Jim Glennon: 00:33:06

Actually.

Alex: 00:33:07

They, they were floating at zero. In fact, neg. They even toyed with negative for a little bit. And that's just. They've been trying to stimulate their economy for close to a decade now.

In fact, they see what we call deflation in economic terms. And that's the opposite of inflation, where your dollars are actually buying more of given good than they would have yesterday.

Which sounds good, you know, when you, when you hear that. But long term it's not good because as less dollars are circulating around the economy, less profits and then which leads to lower employment.

So it's a vicious cycle and it's not as good as it may sound initially on paper.

Jim Glennon: 00:33:41

No, it's the worst. Right? I mean, that's how our Great Depression started was deflation. Deflation can be catastrophic to an economy. All right. Good.

Yeah, that's super helpful.

Like, I think we always, almost always think of things in terms of the US policy, US Economic terms, and it's increasingly important every decade to be more aware of what's going on elsewhere in the world, because what happens here affects the rest of the world. And obviously what happens in the rest of the world affects us here.

So that's a really big picture thing to keep in mind is these other industrialized nations have the equivalent of the Fed, and they have policies that they make and they, you know, and things can become contagious over time. So it's important to know these things are. These things are all related. All right. Really good information, Alex. Ben, what a great session, man.

Other than the unforeseen circumstances that you might see, like, like geopolitical issues, war, pandemic, that sort of thing, the main four items to watch that influence the economy and rates and currency valuation we just talked about today. So labor, inflation, the US Federal Reserve, and foreign central banks.

If you're watching and even somewhat understand these dynamics, you're better off than most at knowing how to consume the data that really matters in terms of where the economy is going and for our industry, where rates are going. So let's close this thing out. Thank you, Ben. Thank you, Alex, for being here. Thank you, everybody, for listening.

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Ben: 00:35:38

SA.