Torsten Slok

Absolutely.

and what was also very interesting in the ECFC Go Bloomberg survey was that the probability of recession actually went up from 25% to 30%.

So we're almost looking at more bifurcated distribution where either you worry a lot about inflation being higher and potentially above three now for a very extended period, meaning at least the next several quarters,

Or alternatively, people are beginning to worry about that maybe there is a harder landing that is also potentially an outcome.

So that distribution tells you exactly what the problem is for the Fed.

Namely, they worry on the one hand about inflation being high, but they also worry about if the labor market begins to deteriorate, including, of course, also if AI puts upward pressure on unemployment.

And all those factors are, of course, the challenges for the Fed, namely how much should they put a weight on inflation relative to how much weight should they put on the risk that the labor market might begin to deteriorate over the next several months.

Absolutely.

I think it was low hire, low fire because of the trade war for most of last year.

And now I think it's low hire, low fire because of the energy shock.

So that's why companies are responding in probably the most rational way by saying, we don't really know exactly how long time the shock will last.

We don't know what all the prices will go to.

So for that reason, it makes sense that the labor market continues to show this fairly cautious overall properties, especially as you mentioned, Scarlett, that jobless claims continue to be relatively low.

Well, the key issue, of course, is next Friday, and particularly for fixed income more broadly, that is the most important number across the board, both for rates and for credit, namely, is the economy still producing jobs?

Or, as we saw last month, are we still losing jobs the way that we did with the 92,000 decline that we saw in the previous month?

And the key issue, therefore, becomes the labor market data is just taking a very, very prominent, more important role than usual, because inflation is telling us to hike.

But now we suddenly have that the other side of the dual mandate, namely the labor market, might begin to show some more cooling, especially now that immigration restrictions and the labor supply is also weighing down on the overall outlook for nonfarm payroll.

So that's why next week is becoming very critical for thinking about what is the Fed going to do, because so far it's been easy for them in the SEP this week to just say, oh, we revised up inflation, and they also revised up GDP.

But if the labor market begins to show softness, then that would, of course, become more challenging for them.

But I think the logic really here for investors is quite simple.