Closing Bell 9/16/26

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1:00Scott Wapner: Welcome to Closing Bell. We'll take it a few seconds early as the Fed chair finishes. I'm Scott Wapner. We're live from Los Angeles today. The Fed raising interest rates by a quarter point. It is the first hike since January of 2023, with the chair saying just moments ago inflation is too high and has been for too long. He called the decision to hike, quote, serious and responsible. It was a unanimous vote. 12-0. We'll check the markets here. Again, we are just approaching 3 o 'clock in the east. We were green going in. The Dow Jones Industrial Average is now down by 1%. We are red now across the board.

1:36Scott Wapner: Of course, we need to take a check of what the bond market is doing. Yields, especially at the long end, there's the 10-year. It is back above now 5%. The 30-year at 534. The dollar got a nice bid today. Gold was higher as well. So that's the backdrop that we have here. We're going to have Jeffrey Gundlach with us. He's the CEO, CIO and founder of DoubleLine. He does join us now. Welcome back. It's good to have you as always. All right. Good to see you, Judge. I'm in New York and you're in California. We got it backwards this time. I know we certainly did, but at least we're talking. That's the most important thing for our viewers.

2:14Scott Wapner: What's your reaction? Well, I thought the press conference was kind of devoid of content. There were a lot of questions that were asked and not a lot of answers given. But once again, the chairman emphasized that everything's fine with employment. And he reiterated that the speed of the inflation, the inflation statistics are not coming down with sufficient speed. If I were on the committee, I actually would have dissented today. I noticed that in your halftime show that there were a lot of people playing word games with like, you know, the old one and done. And then Steve Leesman said one and mum.

2:56I actually would have dissented and voted to raise rates 50 basis points today. And I would have called that stun and done and give the market a little bit more of a truing up with the Fed funds rate. The two year Treasury going into the meeting was more than 100 basis points above the Fed funds rate. And the two-year Treasury rate has risen today in reaction to the one hike. I think that one of the real problems is that the true inflation, and I use import-export prices, is what I call true inflation because there's no seasonal adjustments. There's no adjustments for quality and other things that are artificially estimated.

3:41Import-export prices, they're just really prices. And if you average import-export prices, which just came out recently, the average is 7.8%, which is pretty high. And also, getting to something that's more standard, the PCE is at 3.3 on the core rate. And for the 14 years before COVID, 2.6 or 2.7 was the high on the core PCE. The 2.6 was the low on the core PCE. Ever since it bottomed out at 2.6, it's now trending higher at 3.3. And so I just also think that one of the things that he didn't mention correctly, the economy looks stronger if you look at GDP now over the past few weeks. But the real reason for that is inventories.

4:38And I heard a story yesterday that kind of set a light bulb off. and that is that Costco doubled their price for their Kirkland motor oil. And when they doubled the price, I think that they feared or perhaps anticipated that when the price doubled, you might get hoarding. You know, when prices go up, people think maybe they're going to go up again. When you double the price of the Kirkland oil, people might think, gee, I noticed the oil is above$100 a barrel. Maybe it'll double again. And they might want to go and grab a year's worth of motor oil. And so they're rationing it out. That's a phenomenon that I remember from the 80s and the late 70s, where people start to say, I think prices are going to go up.

5:22And so they want to buy now. And when you look at the GDP now, the inventory increase is really what has pushed GDP now up in recent weeks. And I wonder if stores broadly, retailers broadly aren't thinking, hey, you know, I think prices are going higher. I notice commodities. I mean, our commodity fund is up. Our ETF is up 48 percent year to date. And we all know that oil is up tremendously. And so many people are thinking, I think prices when you get this. What I'm saying, Judge, is when you get a psychology that inflation is now trending higher, which is clearly the case on the PCE and on import-export prices, I worry that the inflation problem is not being fully respected.

6:10And Kevin Warsh really focused in the press conference on the fact that inflation is not falling fast enough and is still too high. It's been too high for too long. And I would have just done the 50 and then see what the data does. And so I'm not surprised that the markets weakened over the course of the press conference because I thought the content was pretty thin.

6:36Scott Wapner: I mean, you I think it's fair to say if my memory serves me well, you've always been at least recently a go big or go home guy, at least when it comes to hiking rates. I remember the conversations we had when the Fed was about to embark on its prior hiking cycle under the prior Fed share. And I think you wanted the Fed at that time to raise by at least 100 basis points, if not more, and just get it over with. Do I remember that correctly? So this is consistent with how you've been thinking. That was in February of 2022. And at that time, the two-year Treasury yield was more than 200 basis points above the Fed funds rate.

7:20And so your memory is quite good on this. I actually recommended, my point was that they should have raised rates 200 basis points in February of 2022. And I think history will record that that was a wise recommendation on my part, because they did have to raise rates 200 basis points in just a few months. I think they raised rates 75 basis points and then a couple of 50s. And so they really needed to do that. So you're right. I do follow the two-year. I've said for years that the two-year leads the Fed, and I've been right once again. And I noticed that Steve Leisman, to his credit, has now been referencing the two-year Treasury quite frequently in the discussions as it gets close to Fed Day.

8:05And now that the two-year Treasury rate has risen again, so now it's only 90 basis points higher because the Fed raised interest rates. So now we're only, I guess, so what are we up now here? About 10 basis points. So there are only 15 basis points worse off. So I think that, you know, I do think that the Fed is moving kind of slowly. And Kevin Walsh, he's very opaque today. And as I said in the past, I don't like this task force thing. It's like a company that's having trouble that wants to hire consultants. And the consultants always want to figure out what the people at the company really want to hear.

8:46And then they tell them what they want to hear. So I think, as I said before, I think one of the problems with the Fed is it operates as a committee. Back in the Volcker days, I think it was pretty much just up to Volcker. He famously, when they didn't ratify his rate increase at one meeting, he walked out of the room saying he was resigning. They didn't want to go without Volcker, so they had to go with him. So I don't like the way committees work. I really think you need a primary decision maker. And now, I mean, I'm glad they had a unanimous decision. I think for anyone to dissent on the don't hike side was just non-defensible.

9:23So as I said, I would have gone 50 basis points. So now we're having subcommittees. We have five subcommittees. I think that's going to make the process slower and less crisp.

9:32Scott Wapner: It definitely felt like the chair had an agenda today to be briefer than we've become accustomed to with the prior chair. And even this one from the very beginning, I should note for our viewers that this news conference was 15, 20 minutes shorter than we've become accustomed to. I want to push back on one thing. I almost didn't make it into the chair on time because I usually come to the camera at about 12, 12, 10 Pacific time. So all of a sudden I was watching the TV. I was watching CNBC and I hear last question and I go, whoa, I better move. Yeah, that makes two of us. My dancing shoes were going to be tested for for a moment.

10:18Scott Wapner: So I'm glad you were in the chair. Let me push back on one thing that you said, if I could. We talked about how inflation is, you know, trending higher. You use that word. And then you also said, I think you're not sure it's being respected by the committee. Is that truly the case if you've got 16 of 18 members saying at least at least another hike this year? How do you reconcile those thoughts? Well, the reason I say that is because I think they should have raised 50 today if they really respected what was going on. So, yeah, I mean, it's true that they're acknowledging that inflation, I mean, that was the whole focus of the press conference, really, was that inflation is not a problem or is a problem.

11:09Sorry, that they're not they haven't fixed the problem yet, but they're going to fix the problem. And I guess on the SEP, they said that the 2 % goal wouldn't be reached until 2029, which is just a continuance of where we've been for a couple of decades, which is the inflation rate is going to get to our target in two years or three years. It's certainly been the case since COVID, for sure. Kevin Warsh did not mention this time that they've been above their 2 % goal for five and a half years or more. So again, he's talking a lot about the inflation rate and promising. But I'm going to say it one more time.

11:47The two-year was 100 basis points above the Fed funds rate. And now it's rising again. So the market, I don't think, is really as pleased with this move as a 50 basis pointer would have been. It would have been a stunning gun. I get it. But I think it would have been a lot more impactful.

12:05Scott Wapner: What about, you know, this notion of, as you mentioned, you know, one and done as as people had had thought going in, would that be the case? It clearly doesn't seem as though it could be the case if for no other reason than if they put out as part of their statement, including the language, quote, a timelier return to a two percent target, obviously going 25 basis points. And for that matter, even if they would have gone 50 basis points today, doesn't do much to ensure a, quote, timelier return to a 2 percent target, does it? The implication I would take from this is that this is not one and done, that they're far from done.

12:48I think that I certainly agree that they're not done and I don't think they should be done. And I think they didn't do enough today. So, yeah, I see virtually no chance that this is the peak of the Fed funds rate. This hiking cycle is one hike. I think that that probability is extraordinarily low. It'll be interesting to see how the warp for December starts moving up. Everyone keeps saying that October is off the table, and they say it because of the proximity to the midterms. But I've always kind of dismissed that type of logic, because what percentage of Americans know that there is a Fed funds rate, let alone what the Fed funds level is?

13:31It's probably a smaller percentage even than those that are supportive of Congress, which polls down at about 14 percent or something. I think nobody knows what the Fed funds rate is. And I would advocate for them to hike in October if the data stays the way it is, particularly the commodity complex, the oil complex and all the knock on effects that are just really starting to get critical. And I'm talking about the Strategic Petroleum Reserve in the United States, which has been driven down pretty heavily in this war. And you can't take the Strategic Petroleum Reserve down to zero. You can't even get close to zero because it pollutes the oil, the conditions in the caves.

14:12And so we're getting pretty close. My energy team tells me it's, you know, their estimates vary, but it's not a long period of time before you can't draw the Strategic Reserve down. And that's also true around the world. The world petroleum reserves are at the lowest level of all time going back at least a couple of decades. And, of course, the world population and the world economy and energy usage is higher. So we're at kind of a critical level with that. So this may spread out. This inflation rate due to the high oil prices may spread out fairly rapidly. Fertilizer, sulfur, high-quality lubrication products, obviously fertilizer, diesel.

14:57In California, there's gas stations that have a conundrum. They have diesel, a gallon of diesel priced at$9.99.9. And the reason they're doing that, they want to actually raise it higher, is their pumps only have the three digits on them, the 999, the old Herman Cain. tax policy plan, 999. I'm sure they could retrofit their diesel pumps to make them sell diesel by the quart instead of by the gallon. And that way they could get the price up to$40. I sure as heck hope it doesn't go up there. But diesel prices are extremely important and they're very high. We've gone to new highs on diesel prices.

15:40And I also noticed, at least earlier in the day, we saw the mortgage rate that's commonly quoted at 7.2%, which obviously isn't helping affordability in any way. And one of the problems here, of course, is all of this issuance of bonds. The issuance of bonds has just exploded. The issuance of corporate bonds in just the past three years or so has gone up$2 trillion of corporate bonds. So we've had debt go up by a lot. Of course, we all know the Treasury bonds are going up with now bumping against the$41 trillion debt ceiling. There's just a lot of bonds to absorb. And what we're noticing, interestingly, in the credit market is in the investment grade market, we can divide it into, in the investment grade bond market, we divide it into the AI sector of corporate bonds, investment grade, and then everything but the AI sector.

16:32And on a duration and rating adjusted basis, the spreads on the non-AI sector of investment grade are still pretty stable. They've whined from about 70 basis points to 78 in the past few months, which is almost nothing. Whereas the AI investment grade bonds have whined out by 50 basis points over the last few months. When you go to the high yield markets, it's even more stark. The high yields, if you do the AI and XAI high yield bonds, the XAI high yield spreads have really not widened at all, whereas the AI high-yield bonds have widened by about 150 basis points over the past few months. In my view, the whole AI thing is showing red flags because AI, you know, is issuing so much, but just weeks or even days after a bond gets issued, the spread starts to blow out, which means that the corporate bond investors do not believe the ratings that are on these AI bonds.

17:33They're pricing them as if you widen 150 basis points on AI bonds, whereas non-AI corporate bonds are not widening at all. It means that the market is re-rating the AI bonds, and it's not to one notch lower with that kind of widening. It's a lot lower. And I think that the thing about AI that's really interesting is in June or July of this year, I feel like AI was at peak embracement in terms of enthusiasm. It was kind of an enthusiasm mania almost. And it was like, AI is going to let us all retire and live on Tahiti and live a life of luxury. And then people started to worry about job losses.

18:15But that didn't scare people enough. Now we have to go into it. We're all going to be dead by the end of the decade if we don't do something about this rogue AI thing, which to me sounds a lot like the COVID vaccine scare back in 2020. Like we're all going to die if we don't take seven or eight booster shots. I think that this is extremely concerning that we're now getting an attempt. This on the face of it to me is an attempt to get the government involved in picking winners and losers and actually maybe helping out with aiding and abetting financing in the AI situation. So I think that this is a really, it's not surprising that AI bonds are underperforming non-AI bonds, and that frankly, AI stocks are underperforming non-AI stocks.

19:07I've recommended the equal-weighted S &P, and it's outperformed in recent periods. And I think that it's a great I like the equal weighted S &P even better than I did before because it's completely eliminates the over concentration in this one sector, which is at about 40 percent, which is we talked about last time, is the type of level over the past sort of seven mania cycles where it kind of pooped out and started to, you know, reached its its apogee in terms of market concentration. And then it was kind of lights out. So we have these AI companies. It's clear that some of them don't like the other ones and want maybe even government help to slow their competitors down anyway.

19:55And that, to me, is sort of a sea change in what's going on. So I like the equal weighted even better. I still like the shorter part of the yield curve with the credit products I've talked about in the past. Not so much corporate bonds, but more securitized products. That type of portfolio strategy stock, Scott, this year is up 2%, where the Bloomberg bond index, the aggregate bond index, is down 1.5%. So concentrating on these type of higher tiers of credit, but still investing in credit, but more like seven years down to two years, has delivered positive returns anyway. This has been a bad year for the Bloomberg aggregate.

20:43Out of the last 50 years, we're down at number 32 or something like this, or even worse, in terms of down at the bottom of the heap. So it's a tough year to make bonds, but the recommendations I've given have worked. Also, the best performing sector, which I've also recommended and continue to recommend with confidence, is local currency emerging market bonds. which are the best performing sector of the global bond market, sadly, because they're only up something like two and a half to three percent.

21:16Scott Wapner: Jeffrey, let me Steve Leisman's come out of the room. I want to I want to get to him, if I may. Steve. Interesting, based on the fact that they hiked in and of itself, obviously. What's your greatest takeaway, do you think, today? And it really did sound as though the Fed chair, even though they made their first hike in a few years, wasn't really going to give all that much. News conference ended 20 minutes early. Answers seemed a bit abrupt to what we've become accustomed to. What was your big takeaway from all of it today? Yeah, I'm disappointed in that. The removal of the follow up question makes it very difficult to actually get some answers from a person who doesn't want to really give any answers.

22:03We're thankful, of course, we have the opportunity to ask the questions. I don't want to look the gift horse entirely in the eye. But but the point is this. It's very difficult to get the answers. He did not want to engage in a discussion. But my big takeaway from a market point of view, Scott, is that there's more to come. And I want to just play you some language from the Fed chairman and explain why I think you and Jeff are 100 percent right on the backside of this. I would be hard pressed to describe broad financial conditions as restrictive. This view was widely shared by the committee.

22:38Scott Wapner: So we removed a dose of accommodation. OK, stop it there. Accommodation. Let's talk about that. if this is neutral and the Fed was accommodative and it removed accommodation, it is at best neutral. He cannot exert any actual downward pressure on inflation, Scott, without going above neutral. That's how the Fed works. You have to be higher than neutral in order to exert that downward pressure on inflation. I guess you can remove the accommodation, be at neutral. Maybe that's what's stimulating the economy. But if he wants to get there and get there in a timely way, it suggests to me, Scott, there's more to come.

23:12He didn't want to have that discussion about how he thinks about it. I think everybody would be helped by having that discussion. But he is thinking about it. Everybody wakes up in the morning. I know Jeff does. You do. Think about what is the neutral rate? What will I take above the risk-free rate?

23:27Scott Wapner: I think without saying it, he almost said it by virtue of telling us how strong the economy is and the fact that it's strengthened. He used a number of economic descriptions today. They were all positive. He talked about how good a shape he thought the labor market was in as well, underscoring at least a couple of times that that gave them the ability to focus solely on the inflation side of the mandate. In other words, they did because they can and they may do more because they still can. I think those are excellent comments. And then the other side of that, Scott, is I think what we found and what we've been finding is that Kevin Warsh at heart is really a hawk.

24:12And at the end of the day, he is not comfortable with inflation running above the 2 percent target for an extended period of time. And there were things that perhaps were said that made people think differently during the effort to convince the president, to convince him or the campaign, if you will, for the Fed chairman's job. Now that he's got it, I think we have a better feeling that Kevin Warsh is very similar to the Kevin Warsh who was in office as a Fed governor back during the great financial crisis. And that is somebody who does not want to tolerate inflation. Notice this one thing. And if you don't mind, maybe on the backside of this conversation, you can ask Jeff about this.

24:49He keeps telling us in the statement it's a new feature that we have an ample reserve regime. That tells me someday that might change and that someday and maybe not too long from now, the Fed chairman may be pivoting to trying to reduce this balance sheet and maybe using the balance sheet to exert more downward pressure on inflation as an instrument. He's made clear that for now, the interest rate is his main tool. But that line has shown up only under Warsh and it remains there that he keeps telling us it's an ample reserve regime. What does that mean? Lots of money around for banks to lend overnight to each other.

25:23Scott Wapner: I appreciate it very much, Steve. I'm not going to ask Jeffrey that question because you just did. I'm going to have him answer it. Why don't you stick around for a moment to hear the answer as well? Jeffrey, I presume you did hear the question from Steve. Can you just paraphrase it for me? The question is about the ample reserves. What's the question? And about and about using the balance sheet in a in a more substantive way that that that is a tool that, you know, this chairman and this Fed can use in a much greater way than just affecting what, you know, interest rates do by by raising them, raising the federal funds rate.

26:06Scott Wapner: What do you think about the usage of the balance sheet from here? And I hope I paraphrase that out of respect for Steve. I think that's definitely something that's likely to occur. They've kind of signaled it. And even the Secretary of the Treasury is kind of in favor of kind of manipulating the bond market through Operation Twist. I've been thinking for a long time that sometime by 2030, there's going to be significant manipulation of the U.S. Treasury market. There's going to have to be because we're going to have an absurd expense problem with today's interest rates. And I noticed that the trend in interest rates still seems to be higher.

26:47I've got a lot of people pounding the table that you should buy 30-year Treasury bonds at five and a third and 10-year Treasuries at 5%. I think if you're going to do that, you can only do it if you really believe Kevin Warsh is going to get the inflation rate durably down to 2 percent, because I want at least a 300 basis point real yield premium of the inflation rate. And so five is only interesting to me on the 10 year if 2 percent inflation is going to arrive quickly, quite frankly, before 2029 and stay there. But with yields at these levels and this debt that's coming in, the interest expense is just going to keep getting much, much worse.

27:29And investors are going to realize that with this on top of all of this corporate bond issuance, it's very difficult for using market forces to believe you're going to get a downturn in long-term interest rates with these fiscal conditions and this inflation rate. So I think that it's sadly, it's quite likely that we're going to see a different regime, one in which there is ample usage of government resources and government facilities and balance sheets to control interest rates in the United States. That's the real rub here as a bond investor. If for some reason the 30-year Treasury bond got up to 6.5%, I would consider buying it.

28:18aggressively because inflation rate's running at about 3.5%. I think we're going to get some four prints. I think the October number, next month's inflation number that's reported in November, could very likely have a four handle on it, which doesn't sound anything like two. So I just don't want to believe that 2 % inflation is going to be here. And for that reason, And I would want to see interest rates the 30 year, maybe six and a half percent to think about buying it. But I don't know if the government or the Treasury, perhaps in conjunction with the Fed, will allow that to happen.

28:57Scott Wapner: Well, I mean, didn't they already tip their hand in terms of how the Treasury secretary feels about the 30 year, for example, barely above five percent by intervening in the market? Can you imagine if we were talking about 6.5 %? That's what I'm talking about. I mean, it was$2 billion, and people said it was going to be at least$4 billion of these buybacks. And now it turns out that it's$6 billion of bond buybacks. Whatever. That's like a day of the deficit. I mean, talk about kissing your sister. You're not going to get bond yields down by that kind of a milk-a-toast buyback program. You're going to have to ramp it up if you want to hold the level.

29:40It's just full-on yield curve control. Investors like me, given what I believe about the inflation picture and wanting, you know, since they're being thin on information and evasive on answers, I want extra compensation. So I want a 300 basis point real yield. But I don't think it's going to get there. It's just too economically prohibitive for the Treasury. So you've got to pick a point. When are they going to go big? And when they go big, you're going to get a big rally in the long bond. This is something I think about every single day. Like, what's the level? And what the market's telling you is, so far, the trend is toward higher yields.

30:27And the Treasury Department is only kind of warming up the motor on this buyback program, just to make sure the machine works. And then it can really gun it up.

30:38Scott Wapner: You don't declare yourself being, quote, the House if you're done now. I mean, to your point, and I think to what the Treasury secretary himself was saying, I'm the House. Implication being that the House always wins. He also says he has asymmetric information that most of the rest of us. Super secret information. Sure. What did you make of the I'm the House comment? I thought it was tough guy talk. Don't mess with me. I'm the house. You can bet a house against the house if you want. Well, guess what? The market has been betting against the house ever since, and they're going to keep betting on the house until he does something about it, which means someday he may do something about it.

31:23Just like Warsh, he's got to start doing something about this inflation rate. It's great. He's got an ante into the card game now. on dealing with the inflation trend. But I think it's a little soft, a little light. And we're going to see more action from both the rates going up on the Fed funds rate and from buybacks from the Treasury Department.

31:48Scott Wapner: Let me come back to you in just a moment. I still have Steve with me as well. You know, Steve, I'm looking at the market. And just to update our viewers here, The Dow's down 800. And what I see are the most acutely cyclical areas of the market, the stock market, that are dragging the overall market lower. Financials as a group down more than 2 percent. Energy is down by more than 3 percent. Consumer discretionary down by more than 1 percent. I wonder if in any way this is the stock market suggesting that this could be a mistake at what the Fed is doing, because let's not forget that there were many on the other side of this who said they should not hike interest rates today, that they can't affect the things that are most affecting and impacting inflation to begin with.

32:38Scott Wapner: And you only risk making the situation more difficult for people, whether it's the housing market, whether it's, you know, issuance, lending and things like that from the banks, it becomes more expensive. I just feel like the market's trying to make a statement here, albeit it's hard to judge in an hour's time. But something's going on. What do you think? Scott, I like the way you put that. I like the caution you put around your comment there, which is that sometimes the market has a reaction today or in the first hour and maybe sometimes it comes back. My thinking about this, Scott, starts with what I consider to be a pretty remarkable move in the two year.

33:17I believe the yield is up something like 13 basis points since the discussion there, since the statement came out, and then additional. So what this tells me is the market is thinking about more in terms of rate hikes than it previously had. And it's obviously Jeff's guidance over the years that has made me focus more on the two year, especially in this particular time, in the absence of commentary from the Fed chairman or an outlook. Look, and I think, Scott, the other point I would make is all of the things you're saying may be right. But I would add that this is also perhaps life in the fog lane, if I if I might, which is that we don't have really a framework or an outlook for how Kevin Worsh is really thinking about this.

34:02Other than he said inflation is too high and we need to bring it down in a timely method or timely manner. So this is the kind of volatility. This is the second time in the last two meetings we've had this kind of rather extraordinary volatility around bond yields, around both the Fed statement and the Fed chairman's press conference. And this may be a new feature, this kind of volatility. When we ask this question on the Fed survey, we ask people, what does it mean to get less guidance from the Fed chair? They all say greater volatility. They also say, by the way, less effective monetary policy.

34:37And I think the market is thinking there's more to come here. And if I had to make a bet based upon a risk management bet, I'd bet on more rather than less rate hikes from the Fed.

34:47Scott Wapner: Yeah. Steve, thanks, as always, for your insights. That's our senior economics correspondent, Steve Leisman, as we wrap it up with Jeffrey Gundlach. I guess I'm struck, too, Jeff, by, you know, the fact that you're not enticed at the long end yet, as people make the argument that there's finally competition for stocks because of where rates on the long end have gone. And you, I take from what you've already said, you're not willing to bite yet. No, I'm not. I mean, I want to follow up on something that Steve said. It's interesting. You know, the this SEP, if I heard it right, I think they expected PCE for this year to be three point seven.

35:26And they predicted it's going to be on the SEP two point three at the end of next year. Now, what magic wand is going to be waived that's going to have inflation go from what's probably going to be four on the CPI at some point later this year down to 2.3 next year with oil over$100 a barrel and not even really fully fanning out its blast radius for the other adjacent commodities and products and transportation of products and the like? It strikes me that if you if you're saying three, seven this year, two, three next year, you got more than than one hike. You've got you've got more than two hikes in the possibility.

36:11So we'll have to see what the what data comes. But I'm not I'm not a buyer of the long end at this at this level relative to my inflation framework.

36:20Scott Wapner: OK, we we'll leave it there. I appreciate the time as always. I think I can guess as to why you're in the New York area. And I think you'll be replacing that sport jacket with a Josh Allen jersey for the breaking in of that new stadium tonight. But that's just what I wish. I wish. No, I'm doing business here in Manhattan, but I am going to Bill's Patriots on October 4th. I will be in Buffalo for that. So watch for me on the visitor's side of the 35 yard line. OK, we'll look for you and I'll see you next Fed meeting. I appreciate your time as always, Jeffrey. Thank you. Thanks, Scott. Good luck, everybody out there.

36:56Scott Wapner: It's going to get rougher, I think, as we move forward. All right. That's Jeffrey Gunlock. Coming up, more market reaction to today's decision from the Fed. Fundstrat's Tom Lee. Solace's Dan Greenhouse. They join us next. Legacy credit scores only look at a brief snapshot in time, and that limited view often leaves millions of qualified credit seekers out of the picture. Vantage Score is changing that by modernizing credit scoring. Vantage Score uses 400 % more credit and alternative data to create a fuller picture of financial behavior, including trended credit data, rental payments, and timely utility payments.

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38:54Scott Wapner: Back today from Los Angeles, let's bring in CNBC contributor Fundstrats Tom Lee and Solace's Dan Greenhouse. Gentlemen, it's good to have you. Tom, you first, you told me you don't think that the Fed should have hiked. That's what you told me yesterday. Now that they have, what do you think? Scott, you know, market was pricing a hike. The market's reaction is, as you pointed out, the stock market doesn't seem happy with the hike. I would say for the viewers, the Fed, even if they add 50 basis points, it's not a level that's going to topple the economy. And it really is showing you the economy is strong enough to handle that.

39:32And I think earnings revisions still go up. So to me, I would be buying this dip. And I do view this as an overreaction to the downside to the Fed action today. Wow.

39:42Scott Wapner: Dan Greenhouse, how about you? Yeah, I didn't think I thought they could have waited. I mean, there's a lot of reasons for them to have tightened. Obviously, they did. And it was unanimous. So that's obvious. But in terms of the market reaction, as Tom said, generally speaking, we were priced for this, the move in the two year yields over the last few days, if not the last few months. The market's already off the lows. I'm looking. We were down one one and change one and a quarter percent of the lows were already a couple of basis points off the lows. A lot of that's going to be algo-driven. To Tom's point, I don't know.

40:14The whole argument is that 25 or 50 basis points doesn't derail the economy. You're just, quote, taking back the accommodation, as Chair Worsh said. So I don't think they should have, but neither do I think that a 25 basis point hike is something to run for the hell from.

40:29Scott Wapner: Tom, what do I do in the market? If you say you buy the dip, what dip am I buying specifically? Yeah. I listened closely to what Jeff was saying, because I think he represents a very well-thought view. But I might disagree. He has sort of a view that in the next 12 months, inflation is going to worsen dramatically. I was doing the mental math. For his view to be correct, oil would actually have to get close to 200 because we're already at 100. And to amplify and add to inflation, it has to go up. But as Goldman's pointed out, a lot of these temporary effects start to fade, subtracting almost 100 basis points in the next six months on top of the anticipated revisions of almost 40 basis points coming, which is expected between now and year-end.

41:17So core PCE at 3.3 is going to have a two-handle. I think the market's going to not only respond positively to that, I think everything getting hit today, the cyclicals and the tech and consumer discretion and the financials are all going to perform and positively respond. So to me, I think it's a very good setup. We have a surging mix and a sell-off in these groups that think inflation's here for a long time. If that doesn't happen, we're going to have a big rally.

41:45Scott Wapner: That's the exact area of the market that I was pointing out to Steve Leisman, right? Why do you think financials are down 2 %? I think part of it is a reflexive reaction to the flattening of the curve. Part of it's a reaction to the idea, oh, the Fed wants to remove accommodation. Are they trying to engineer a soft landing? Financials won't like that. I don't think that's really the Fed's view. I think it is correct to say the Fed thinks you can raise 50 and the economy can handle that. So I think it's an overreaction to the financial selling off today. Yeah. Dan, do you have a take on why those cyclical areas are specifically getting hit the hardest?

42:28Scott Wapner: I mean, energy obviously down more than three percent. Financials down to discretionary coming off the low. but still near a 1 % decline? I mean, the point I would make is just when you look outside of the data center build out, the economy is not going bang busters. And I pointed this out a few times, but to repeat, particularly residential and non-residential construction is not doing phenomenally well. And investment outside of data centers and related areas of the economy are not doing super well. No, the Fed chair said that the economy is strengthening, Dan. He went down the list pointing it out.

43:05Scott Wapner: Look at the retail sales report. This is this is actually this is surprisingly bigger than the A.I. story, which has been, at least if you hear some speak, the whole story. It clearly isn't. Well, it's not. It never was the whole story. The strength in the consumer, we keep calling the consumer resilient. But I mean, how many quarters can go by where the consumer continues to do the same thing? I think at some point, call it after two years, we should stop using the word resilient. But yes, I don't mean to suggest that the AI is all the way. OK, let's just call them strong. Let's just call them strong.

43:41Consumers doing just fine. That's right. And the AI investment cycle is probably somewhere between a quarter and a third of, call it, total GDP growth to oversimplify a longer conversation. But outside of that, on the investment side of things, the areas of the economy that would be hit particularly hard by higher interest rates, it is not great. And I'll mention again, non-residential construction has been a drag on GDP basically every quarter for the last, I don't know, eight or nine quarters. That part of the economy is not great. So that might be, OK, well, now we have higher interest rates.

44:12You're going to make that part of the economy, dare I say, worse. Now, listen, I think one thing we have left out, which I alluded to before, but there's repeating, is any time you have a short market reaction after a headline, a huge chunk of it, if not the entirety, has to be chalked up to performance of algos. So I don't know that I would read too much into anything just yet. But that said, I didn't think they should hike rates. And maybe more people agreed with Tom and I than perhaps we originally thought.

44:41Scott Wapner: Dan, what if yields do continue to back up like Gunlock thinks they might? What ultimately does that mean for the stock market, do you think? Well, listen, the two years, since that's what you, Jeffrey, and Steve were spending so much time on, the two years up something like 135 basis points since March. So call it over the last six months or whatever. Over those same six months, I have to double check the math, the stock market's up like 14 % or 15%. Now, it's not super broad. There are only a couple of sectors called three or four that are doing better than the market. It's energy. its financials, its energy, et cetera.

45:17But every sector basically is up except for the interest rate sensitive ones, utilities and staples. So you don't need my opinion. We can look at the last six months or whatever it's been and say the broad market has held them pretty well despite this big rise in both short and long term interest rates. And I think there is a level, of course, there always is, where rates, quote unquote, break the economy. But to again echo Tom's point, I'm just not sure if they're only doing one or two more hikes, that's sufficient to do it.

45:46Scott Wapner: Tom, did the Fed just kill the broadening trade? Are we going to be back focusing once again on the biggest technology stocks in the market, which are going to be once again viewed as safety names, especially if you have concerns among cyclical parts of this economy now? I mean, there's a lot of logic to that in the short term, Scott, because we know These large companies already fund at the lowest cost in the world, and they don't really care if rates go up. And that's why these stocks are outperforming today. But by the same token, I think that broader economy remains healthy. And if the labor market is holding in, then this trend of broadening earnings growth is still intact.

46:28And we know earnings have risen almost 25 percent, you know, forecasted for next year. So the stock market has gotten cheaper. I think the P.E. is contracting so much. Even if yields are moving up, the P.E. still has a good case for expanding.

46:44Scott Wapner: Gentlemen, we'll talk to you soon. I appreciate you both being with us on this very important day. That's Tom Lee and Dan Greenhouse. Coming up next, more on the market's reaction to today's critical Fed decision, hiking for the first time since 2023. Inside the Market Zone next.

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47:48Welcome to the circle. In this game, you never meet the other players. Your goal is simple. Become the most popular. But should you play as yourself or catfish as someone else? With the new host, celebrity contestants, and this time, audience voting will influence the game. You decide who has what it takes to win. Watch the Hulu original series, The Circle, on November 17th. Streaming on Hulu and Hulu on Disney Plus for bundle subscribers. Terms apply.

48:21Scott Wapner: All right, the market zone from Los Angeles today. Mike Santoli and Truist Keith Lerner here to break down these crucial moments of the trading day. Oliver Rennick is standing by live from the SIBO Global Markets in Chicago. We're also looking at two sectors moving on today's rate decision. Leslie Picker with more on the banks. Diana Olick with more on housing. Mike Santoli, your take first. Obviously, the market has to wrap its head around the tone of Kevin Warsh's press conference, which was a little bit more skewed toward, hey, we have a lot of economic momentum. Financial conditions should be a decent amount tighter than they are right now.

48:55He characterized the current situation, as you were discussing, as accommodative. And I do think that one of the relevant reactions is maybe not so much this backup in equity indexes. We're tested 7 ,500 on the S &P and then bounced off of that. But it's the fact that longer term treasury yields did not settle down. They're not up much, but 10 year above 5 percent again. And that goes along with what I was saying for a while, for a few days here. This consensus that built that a rate hike would bring some relief on the long end, I thought was maybe a little bit counter to what we were likely to see.

49:29Or at least there was a chance that it wouldn't work that way. So obviously, as everybody always says, sometimes there's a rethink the morning after. there was a little bit of pressure on the parts of the market that are most exposed to higher rates. And I do think it brings up the risk for stocks that the FOMC's assessment of how much economic momentum there is starts to look like a stale take if we start to see the lagged effects of higher rates in oil on the consumer. We're definitely past earnings growth peak. We might be past the, you know, even the rate of change of CapEx peak. And if that's the case, maybe we have to sort some things out.

50:06But, you know, I said there's room for relief in stocks. Not really happening right now. But we, you know, any much more downside is we'd be oversold enough to say that it was likely to stretch far enough to get a rally.

50:18Scott Wapner: What are you and Mel going to do about this top of the hour? Yeah, I mean, all of it. I mean, we got we got Jim Paulson. Pretty sure he thinks it was a mistake to hike. We've got a couple of fixed income analysts. We got the Barclays economists. So we're going to surround it in that way. I also got to talk banks, as you were mentioning. They've obviously been taking it hard so far. Yeah, no doubt. And we'll talk that in a moment with Leslie. Mike, thanks. We'll see you top of the hour in overtime. Let's go to Chicago. Oliver Rennick is watching the options market. What do you see there? Hey, Scott, VIX pushed 19 almost today, the highest in a week.

50:50Arguably at that level, the S &P 500 should have been moving more, roughly about 1.2 percent, according to back of hand VIX math. But the VIX has been overestimating the stock move for the better part of the past week. So you're kind of going to get two things here, which is either VIX is going to have to come down or the stock market's really going to have to move here. Right now we're at 17.7, so VIX has come in. But what's interesting is we actually saw some of the biggest action today in gold, where we saw a ton of buying at the 450 strike calls by someone who scooped up more than 100 ,000 contracts across two different pieces of 50 ,000 contracts each.

51:27It is a bet that GLD will rally 17 percent into year end. And I got to wonder what that guy is thinking. Gold into a rate hike cycle, usually not good. So a super interesting trade, Scott.

51:38Scott Wapner: Oliver, appreciate you flagging that for us. That's Oliver Rennick. We mentioned what's been happening with the banks really all day, but certainly since the Fed decision. Leslie Picker is following that trade for us. What do you see? Yeah, Scott, Mike alluded to it. The big banks were mixed in earlier trading today, but moving a bit lower around 2 p.m. Eastern when the Fed officially decided to raise interest rates. You could see the move there. Regional banks also dipping on that news. The declines may be in response to the yield curve flattening that we saw. It may also be a bit of selling the expected news as higher short-term rates can bolster earnings for loan making, particularly for money center banks where funding costs are a bit lower.

52:16However, stubborn inflation led the committee to unanimously make today's rate hike decision and they signaled another one could occur this year. So that could start to unleash some concerns about credit quality, which has otherwise held up remarkably well in recent quarters. Scott.

52:32Scott Wapner: We'll follow this trade, of course, in the days ahead. Leslie, thank you. Leslie Picker, Diana Olick, let's talk housing. The big home builders all down. Not a big surprise. No, higher rates have slammed the start of this fall's housing market pretty badly. Let's take a look first at where the 30-year fixed is now. Now, it came down very slightly this morning to 7.19%, according to Mortgage News Daily. But the 10-year, of course, moving higher now, so lenders are likely repricing again. Two reads earlier today were not pretty. First, mortgage demand from homebuyers dropped 19 % last week from the year before, and refinance demand was down 65%, according to the Mortgage Bankers Associations.

53:14And homebuilder sentiment dropped much more than expected to the lowest level in a year. Builders pointed to high mortgage rates, labor shortages, and rising material costs. Of the index's three components, future sales expectations dropped the most. 66 % of builders reported using sales incentives in September. That's up from 63 % in August and the highest share since last December. And 38 % cut prices. That's going to hit margins. And we are about to hear from Lenar in quarterly earnings for Q3 coming up in the next hour, Scott.

53:47Scott Wapner: Oh, how timely. Thank you. That's Diana Olick. All right, Keith Lerner, you suggest the bull market remains intact. Tell me more. Yeah, we do, Scott. But as we've discussed with you a few weeks ago, we just thought we were moving into this macro-driven market. And it's just a much bumpier period because we don't have earnings to the rescue. And I just think that this chop continues. It's even normal outside of what happened with the Fed. And we're seeing the market actually act to scrip somewhat. We're seeing the VIX move up. We're seeing a choppier market. I will say we do agree with some of the comments you brought up earlier that we think this bodes well on a relative basis, at least for tech, in that if you're concerned about these higher rates biting, then tech on a relative basis looks good with the strongest earnings momentum in the overall market.

54:32But the other thing I would say, Scott, I mean, ultimately, we still think the bull market goes higher. But we just think we're in this phase for longer where it's going to chop. And, you know, the downside, even if we stress test the P.E. multiple down to the terraflows is probably, you know, five to seven percent based in our work. And we would look at a deeper pullback as an opportunity at this point.

54:50Scott Wapner: What if it's the first of several hikes? Does that change anything in your mind? You know, not at this point. I mean, it's certainly a risk to the overall market that we're watching closely and we're watching credit spreads. You know, historically, I don't know if we have a great sample on this, Scott, but when we look at the modern day Fed after they raise rates for the first time, The next one to three months actually has a negative bias overall. But as you move over the next 12 months, it tends to be positive. And historically, it has not been the norm or the tendency for the bull market to end on the first rate hike.

55:21But, of course, it's injecting some volatility. I'd also say, like, you know, look at some of the areas that we're talking about, like homebuilders and, you know, some of the consumer discretionary. I mean, a lot of these names are already down 10, 15, 20 percent. So I don't think they're leadership, but it's not as if this is new news for the market on that side either.

55:38Scott Wapner: No, but it's sort of worse news, isn't it? I mean, especially if this is the first of several. Why would you jump in and buy stocks that were already screaming? Yeah, I'm not normally more of a bottom picker. I like relative price strength and also earnings momentum. And again, that pulls me back to tech where you're actually seeing that. And I like the fact that there's been a lot more scrutiny and questions about the overall trade. If you think about the technology sector at a 21 multiple, you're back now to the multiple you were when ChatGPT launched in late 2022. So we think that's an opportunity longer term.

56:13And we think that that AI bull market is still intact.

56:17Scott Wapner: Yeah, I mean, it does feel like I'm not of course you can't make too many judgments based on the hour beyond a Fed decision and a news conference. But Apple's up, NVIDIA's up, Meta's up, AMD's up, Marvell, Oracle, Palantir. It is noticeable that you do have money either going into or sticking with tech. Yeah, that's right. And, you know, we've had a 35 percent re-rating down in tech. And again, I mean, if you believe that this AI bull market and the spending continues, which we do, even if the pace slows down somewhat, which, again, we're not seeing as of yet, then we think that continues to be leadership.

56:55And the tech sector is still down about 4 % or 5 % from where it was in June. So we think we're actually setting up for leadership in the fourth quarter for tech. And again, for those investors on the way, we would look at that as an opportunity.

57:07Scott Wapner: Good comments as a Nasdaq fighting it out to go green as we finish it here. Keith, it's good spending some time with you today as well. Again, the Fed raising interest rates, markets trying to make sense of it both in stocks and in bonds. So we'll follow the close. Big shout to the crew here in Los Angeles for having us. Big shout to our team back in the control room in Inglewood Cliffs. It's a busy day. I'll see you back east into overtime.

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