Fed hikes, oil and AI risks put markets to the test 9/17/26

0:28Hey, Fidelity. Pro save big with early Black Friday deals at Lowe's. Shop new select DeWalt 20-volt max nailers under$350 for a limited time, like the 18-gauge Brad nailer, now just$269. Plus, get up to 50 % off select ladders. With deals like these, it's easy to keep your jobs moving all season long. Get Black Friday deals early at Lowe's, in-store and online. Valid through 1118, while supplies last. Selection varies by location. Bouncing back. I'm Dominic Chu and this is your morning call.

1:18Good morning. I'm Dominic Chu in for Morgan Brennan today and our top story and U.S. equity futures. They're bouncing back after the Dow's worst day since late August. As you can see right now, the Dow's implied higher. by 433 points, the S &P up by 68 and the tech heavier Nasdaq 100 up by north of 320 points as global investors continue to digest yesterday's Fed decision and its first interest rate hike going back to 2023. Fed chairman Kevin Warsh keeping the central bank's statement and post decision comments short and sweet relative to his predecessor defending the hike and hinting at more to come.

1:58Inflation remains elevated. Today's policy action will support a timelier return to the committee's 2 % goal. This committee will deliver price stability. All right, in light of those comments, let's check it. Is that inflation is too high and has been for too long. This summer's inflation readings do not tell me that underlying trends have meaningfully improved. All right, with those comments in mind, let's get to the Treasury reaction with the two-year note yield hitting its highest level in more than two years. And this morning, we're seeing a bit of a bid to those Treasury bonds and a drop in yields.

2:39The benchmark 10-year, back below the 5 % mark, 4.988%. And the two-year note yield, that kind of Fed proxy-ish part of the yield curve, 4.707 percent, and the 30-year long bond, 5.335 percent. Let's talk about energy prices, with oil falling back to that$100 per mark barrel and amid a report that President Trump is expected to hold a meeting with Gulf leaders on the sidelines of the U.N. General Assembly in New York next week. You can see benchmark West Texas Intermediate Crude,$101.33 cents off about one percent. Iceberg and crude futures, the world gauge one hundred and four dollars and twenty five cents off about one and a half percent.

3:20Now, speaking of President Trump acting quickly to express his thoughts on the Fed's quarter point percentage move, taking to truth social after the market closed, saying interest rates should be one percent or less and telling reporters in North Carolina he spoke with Warsh ahead of the decision. I talked to Kevin and I said, you might as well vote with the board because it's not going to matter. The board is very hostile. They're very political. They're doing the wrong thing. They're a bunch of politicians or people put on by politicians. No, I spoke. No, I didn't convince him. I said, do what you want.

3:55I said, do what you want because it doesn't matter because he doesn't have the votes. No matter how good a job, he's a good man. And maybe more notably, the president adding he still has confidence in Fed Chairman Kevin Warsh. Well, now let's see how Europe and Asia are shaping up. Karen Cho is in London with the latest trade from across the Atlantic. Karen, what can you tell us about the market action?

4:19Dom, good morning to you. There is an air of calm now on global equity markets, and that has been witnessed right here in Europe this morning after the Fed hiked rates for the first time in more than three years. Oil prices also softened, but still above that$100 per barrel mark. But you can see some of the slight risk on moves here in Europe. The FTSE 100 marking high almost half of a percent. We're seeing gains across on German, French stocks, Italian names, too, also bouncing by a third of a percent. So you are seeing that flavor of confidence thanks to the long end of the bond curve being tamed.

4:50Now, Asian equities are also digesting that increase from the Federal Reserve, with the Bank of Japan still capturing investor attention tomorrow. as it looks set to push rates to the highest level in 31 years. But as we round out the roster of central banks, the Bank of England today is widely expected to keep rates on hold at its meeting, despite August's inflation print breaking above the 3 % handle for the first time since March. Markets are pricing in an almost 80 % chance of a hold today, according to LSAC data. But traders do appear to be pricing in a hike before the end of the year. And you can see this is what it looks like at the short end of the curve, 4.8%.

5:27No doubt a lot of quizzing, too, as to what's happening on bond markets and the role of the Fed in helping price treasuries, as well as the rest of the global bond markets. Back to you, Dom. All right, Karen Cho out in London with the latest market action from across the Atlantic. Thank you very much for that. Now, sticking with the Fed and its first interest rate hike going back to 2023, the central bank also signaling that one more hike could come before the end of this year in what could be the beginnings of a rate hiking cycle for Kevin Warsh and company. Speaking to CNBC after the decision, Double Line Capital's Jeffrey Gundlach argued the Fed should have gone bigger with its rate hike.

6:06The 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 done, I get it, but I think it would have been a lot more impactful. I guess what your definition of pleased is matters here. For more, let's bring in Hartika Singh, economic strategist over at Fundstrike Global Advisors. Hartika, you heard the comments from Jeffrey Gundlach. You heard some of the comments from Kevin Warsh. Let's talk about the market reaction yesterday versus what we're seeing this morning.

6:42Does the market feel comfortable with the Fed's first rate hike since 2023 and the possibility for more down the line? I think until the very end, I and some other investors, too, were holding out hope that this scenario of a hiking cycle just doesn't come true. But then we were all surprised. Right. And many investors, I think, naively thought that this was going to be a one and done deal. The market reaction yesterday shows that they were not expecting the Fed to pencil another rate hike this year. Plus, Warsh's commentary was also much more hawkish than I was expecting it to be. Toward the very end, when we saw losses in stocks accelerate, a lot of it was because he said he's serious about this.

7:22If you look at the statement, they're going to be timelier with their responding to monetary policy. Now, the market reaction, though, between yesterday and today, juxtaposed against each other, indicates that the markets were perhaps already expecting, fully priced in, and that the move itself hadn't really dealt that much of a blow one way or the other, even with the press conference afterwards. I noticed the Nasdaq 100 trade and the Nasdaq, you know, composite trade was pretty much flat by the time the day was done. Yes, the Dow was down 630 points. So how exactly does that rate scheme play out through the equity markets, given the big bid we're seeing this morning?

8:00A lot of it is because I think because it was largely priced in. But then also, if you think about it, his commentary, though hawkish, he does see the economy as in a better place, which is just so strong. Right. Right. You know, it is possible that the economy could have handled a bigger hike. I don't know if it could take a rate hiking cycle right now. That is still to be determined. But tech stocks, they've already come down. So there's chances that a lot of the pullback that we've seen, it's already behind us and we may not get much more. But here's the thing. The word of the day, as good as any today, is probably the word cycle.

8:38Everyone's going to be talking about whether this is the beginning of a campaign of interest rate hikes. It doesn't seem like it right now. It could be one, a couple, maybe a few, but nothing more than that. If the conflict in the middle east comes down, if supply chains normalize for oil and gas and the whatnot. Does that seem to resonate with the economy and the markets? I'm in a different camp. So I don't agree with Jeffrey here because a lot of it is because the labor market is just not as strong as it looks on the surface. The way he's justifying his hiking and potentially a hiking cycle is because the labor market looks OK.

9:15I don't think OK is enough. It's resilient, but it's not strong. The main reason why I believe that is because all these jobs increases that we're seeing there in the health care and social assistance sector, where it's kind of starting to look like a retail job at this point. It's always going to be available. you don't need a lot of education for some of them, like a home health aide, a physician assistant. And you can just count on it to be kind of not great. Customers are going to be rude to you. Patients are going to be rude to you. But it's a job that's always going to be there. So I don't think the economy is necessarily as strong as he thinks it is.

9:49But at the same time, if he does give a lot of forward guidance, it isn't a place where it can handle it. One final point about that, though. If that is the case, there are a set number of data points, if they trend in a different direction, that could change your entire thesis. That was the most interesting thing to me, where he, too, was of the opinion that there's no longer going to be a concept of one data point being a make it or break it moment for the market. I know last week we saw the CPI and PPI print as one of those solidifying a rate hike, the case for a rate hike. But he seems more inclined to take it as a trend instead.

10:24I think that's a positive for equities because you do want to take a step back and just like reassess where the economy is. And I think that's what makes his meeting yesterday so much more insightful than his previous meetings. I think we got the most insight ever into how he's thinking. And it's very clear he's got to look at things very differently than Jerome Powell. Jerome probably would have paused right now saying this is a one off. This is transitory. But Warsh is being very proactive, but responding to rate increases. He doesn't want the second and third order effects. Let's see if it works out.

10:58It's a credibility issue for sure. Hartika Singh at Fundstrat, thank you very much. We appreciate the time. Thank you. All right. Well, we've got a lot more to come here on Morning Call, including the don't tap the brakes. Two more CEOs join the growing chorus, pushing back on Dario Amadei and other AI leaders, warning of the tech's doom and gloom if left unchecked. they'll figure it out. But the answer is not let's all collectively tap on the brakes, because I don't even know how one product solves that versus another. It's just doesn't really make a lot of sense to me. We've also got one resilient part of the market outperforming the U.S.

11:34and the names on the outer rim of that A.I. trade that you should be watching closely. We've got a very busy hour still ahead when Morning Call returns after this commercial break. This message comes from Wise Business, the only account your business needs to scale globally. You're building a business with global ambitions, but hidden fees are eating into your margins. With Wise Business, you can pay overseas suppliers without exchange rate markups. Have customers worldwide get payment details in 22 currencies, so you get more of each hard-earned payment without hidden conversion fees. Be smart.

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12:54But instead of waiting, we hang out with Chumba Casino. Social casino slots, bingo, solitaire, plenty of fun to keep us entertained. So why let a rain delay slow you down? Play now at ChumbaCasino.com. Let's Chumba! No purchase necessary. VGW Group Voidware prohibited by law. CT &C's 21 Plus, sponsored by Jumba Casino. Welcome back to Morning Call. Emerging markets are performing well this year, even in the face of rising energy prices and a shifting outlook on interest rates from the Fed and other central banks. The iShares MSCI Emerging Market Index, or EEM ETF, is up more than 20 percent, driven heavily by AI and semiconductors, which account for more than 40 percent of the index.

13:41Joining me now for this conversation is Will Sutcliffe. He's the head of emerging markets equity teams at Bailey Gifford. Will, this is an impressive move for the emerging markets, despite the fact that we've seen a little bit more volatility around the U.S. dollar and thereby emerging markets currencies. How exactly do you look at the way these emerging markets have performed, given some of the currency and rate volatility that we've experienced? Well, it's almost what the markets are not telling you. That's the interesting story here. Right. And what I mean by that is, as an emerging market investor, so much of what you talk about isn't to do with fundamentals in emerging markets.

14:25It's all about what's happening outside emerging markets and what's going on with U.S. policy in particular. And rising interest rates have historically not been great for emerging markets. And in fact, in every single crisis that's unfolded in emerging markets over the last 40 years, the basic playbook has been exactly the same, right? Which is the interest rates go up in the US and capital floods out of emerging markets back to the safety of the dollar and asset prices and growth rates collapse in emerging markets. But that's not been happening this time around in this cycle. And we've had a pretty good test if you go back to 2022 when Fed rates went from generational lows to generational highs.

15:12And the vast majority of emerging economies sailed through absolutely unscathed. So I think that's a healthy sign that investors are finally starting to look at emerging markets on their own fundamentals. fundamentals and those fundamentals look, from my perspective, better than they ever have in the 25 plus years that I've been looking at the asset class. So I think it's right that investors are starting to wonder, well, where is the risk? Is it in those youthful emerging markets where debt to GDP ratios are about half the level of developed markets and projected by the IMF to keep falling over the next five years?

15:49Or is the risk, in fact, increasingly in developed markets where debt rates are high and rising. Are emerging markets the new developed markets? Well, so here's the thing, Will, but here's the interesting part about that. I mentioned in the intro, one of the biggest drivers behind much of the emerging markets performance has been in the AI trade, an AI trade that has played out heavily in the developed markets and is now kind of playing out more in the emerging markets. Why the paradigm shift of investors perceiving emerging markets as a possible better relative play to those developed markets if we are so heavily skewed towards technology and AI plays, even with emerging markets trades?

16:32Yeah, I think, look, let's be absolutely clear. AI could not happen without emerging markets. They are the essential picks and shovels to the build out of artificial intelligence. And those companies you're highlighting there on the screen, Taiwan Semiconductor, Samsung Electronics, SK Hanex. SK Hanex and Samsung, memory is where the bottleneck is right now. So they are absolutely critical to the emerging markets trade. And intriguingly, from my perspective, they still trade on pretty big discounts to their developed market peers, despite, in my view, being clearly superior companies. They're on about half the multiple of their developed market peers.

17:17So that, That, I think, is the interesting thing. The pushback, however, is that those companies are now about 30 % of the MSCI Emerging Markets Index. So one of the questions we get from clients is, well, are emerging markets just a one-trick pony? And it says emerging markets on the tin, but am I just doubling up on my exposure to hyperscaler capex here? We think that emerging markets, although recently those gains have been led by a relatively narrow section of AI winners, we think there is a lot of breadth here. And just look at what's going on in the commodity complex, I think, is an example of that.

17:57Commodity prices, of course, that's partly related to the AI theme, given the very physical and material intensive nature of the data center buildup. But it's part of a broader theme where you have countries everywhere in the world looking for self-sufficiency and security and rebuilding their supply chains. And that's very good for commodity producers, which are a big part of the emerging markets index and the commodity economies like Peru, where income levels rise with commodity prices. OK, so, Will, if those commodity plays are one of the places you're looking, what other companies, what kind of picks do you have to take advantage of that thesis?

18:33One of the debates we're having is increasingly, you know, should we be looking less at the companies that are helping to build out that intelligence and more about how companies are using that artificial intelligence? And I think there's a gap opening up here that is helping the best companies to drive home their competitive advantage. And I, you know, I'd look at a company like Mercado Libre in that context, which is the Latin American e-commerce giant. This is a company that's done very well operationally and in share price terms over the 10 plus years that we've held it. But more recently, it's not done well.

19:09The markets began to worry that it's a loser from the AI trade as we all start to use agentic AI commerce to buy everything for us. I just don't think that's right. And I look at the way that MercadoLibre is using AI to improve their own offering, to improve their own conversion rates and to improve returns for their own advertising. And the best bit of all here is that MercadoLibre is still competing mostly with offline retailers, old economy banks, given the very early surge of development. I mean, 85 percent of e-commerce in Latin America is still done offline. So I think the market is incorrectly labeling companies like MercadoLibre as losers from the AI trade, whereas I think they are very clearly winners.

19:54So it's those sort of overlooked opportunities that we're increasingly interested in these days. An interesting pick in MercadoLibre. Will Sutcliffe at Bailey Gifford. Thank you very much for the time. We appreciate it. We'll see if that emerging markets outperformance continues into the end of the year. We appreciate it. Thank you, sir. All right, straight ahead on the show here, the resilient retail trade and a frontline look at one key player focused on the higher end. Speaking of commerce and retail. But first, watching shares of Goldman Sachs after closing down nearly 4 % yesterday after CEO David Solomon warned of softness in the bank's fixed income trading business, also flagging higher expenses across all businesses.

20:31Those shares this morning are recovering a bit, up 1.25%. Morning calls back after this.

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22:02New customer offer for initial plan term only. Greater than 50 gigabytes may slow when network is busy. See terms. Welcome back to Morning Call. U.S. retail sales rebounding sharply last month as consumers increase purchases on a range of goods while also spending at restaurants and bars, even as they remain worried about the effects of inflation. Sales jumping 1.2 percent, the biggest increase since March as spending is being supported by steadier wage growth and, of course, stock market gains. Luxury retail is maybe not surprisingly also holding up despite economic and geopolitical pressures.

22:36The U.S. market is projected to top$100 billion this year, according to eMarketer, making it the largest and most critical market for luxury brands. That's ahead of, by the way, Europe and China. Joining me now is Michael Klieger, the CEO of Lux Experience, which operates several high-end online sites and platforms, including MyTeresa and Net-A-Porter as well. Michael, thank you very much for being here with us. We want to get your kind of pulse check on the consumer, but you serve as a higher end of that kind of consumer spectrum. We wonder if the data macroeconomically is at least concurring with the data that you have from a corporate standpoint on how people are spending.

23:19Good morning, Dominic. Yes, as you said, we serve a higher tier in the consumer sector, but what we see, particularly in the U.S. market, is fully in line. The spending of our consumers correlate very much with stock markets, with commodity prices, with real estate value. And that looks macroeconomically still very good. And therefore, our businesses had significant growth in the last quarter. My Teresa, one of our businesses, grew 39 percent in the U.S. in the last quarter. Do you anticipate, Michael, that that trend stays intact? I ask not just because of your business, but because maybe our audience wants to know if you feel as though the stock market and real estate gains will continue to grow at some kind of a pace in the coming months and quarters, keeping that spending intact.

24:12Well, I'm a retailer. I'm not an economist. What our data shows is at the moment we don't see any indication that spending slows down. If anything, in our tier, spending goes up. We have seen 18 % more top customers, highest level in our business. Their spend has increased 5 % per capita. At my Teresa, 9 % per capita. at Netaporta, one of our other stores. So I don't have any indication that there is any slowdown coming. But again, I'm not an economist. I'm a retailer. So we deal with the demand that comes to our store. All right. Fair enough. So I'll lay the economics questions aside and ask about a retailer's point of view on what types of products you sell a range of them.

25:03Where are you seeing the most strength? Is it apparel? Is it footwear? Is it handbag? I mean, what types of things are starting to resonate more with your customers? I mean, what we have seen in the recent quarters is really a polarization of the market. The high spenders, they continue to spend. It's really in the so-called aspirational customer base that spending has declined. And that has an impact on what sells. So bags are a bit sluggish because that is often the very first luxury item people buy or the once a year gift they purchase. The high spenders, they are really driven by occasions, vacations, social events, and therefore apparel.

25:49Gowns are working very well. Fine jewelry are working very well. So everything that resonates with the lifestyle of this upper tier, with many occasions, many trips, being in charge of companies, of charities, and therefore apparel is a key driver. 55 % of our business is actually luxury apparel. All right. Very interesting views for sure. Michael Klieger, CEO at Lux Experience. Thank you very much. We'll see you again soon, sir. Thank you very much. All right. Well, still on deck for the show here, mini steel making. Why next week's UN General Assembly may be key to ending the U.S. war with Iran.

26:28That story is coming up when Morning Call continues after this break. I'm Dominic Chewin from Morgan Bread and welcome back to Morning Call. To our top story and U.S. equity futures bouncing back after the Dow's worst day since late August. Right now, the Dow is implied higher by 458 points, the EPS &P up by about 70 points, and the tech-heavier NASDAQ 100 trade up by 330 points. Global investors are continuing to digest yesterday's big Fed decision and its first interest rate hike since 2023. Chairman Kevin Warsh keeping the central bank statement and post-decision comments short and sweet relative to his predecessor, defending the hike and discussing his frustration with current inflation levels.

27:12The plain fact is that inflation is too high and has been for too long. This summer's inflation readings do not tell me that underlying trends have meaningfully improved. Well, the Treasury market reaction with the two-year now yield, hitting its highest level in more than two years, but backing off a little bit right now. You can see the benchmark two-year note yield, 4.715 percent, so a bid to bond prices, a drop slightly in yields. And then the 10-year note yield, 4.992 percent, again, a slight drop there. And the 30-year long bond, 5.338 percent there. Also, energy in focus, with oil falling back towards that$100 per barrel mark.

27:54Amid a report, President Trump is expected to hold a meeting with Gulf leaders next week. We'll have more on that story in just one moment. In the meantime, U.S. benchmark West Texas Intermediate,$101.96, off by about one half of 1%, and ice Brent crude the world gauge$104.91, off by about three quarters of 1%. We're going to check on some of this morning's top headlines. President Trump says he will put in, quote, very serious tariffs on the European Union if their invitation for Canada to become an associate member is deemed hostile. The president speaking with reporters late yesterday.

28:55All right. So there's your setup, because as we speak, you're looking at a live shot from Strasbourg, France, and a look at the EU parliament or Canada's Mark Carney is about to speak. You can kind of see there a lot of people gathering. We're awaiting any kind of comments or anything that happens. We'll bring you any headlines that come out of it. But right now, we're going to wait and see whether Canadian Prime Minister Mark Carney says anything noteworthy in response to that invitation from the EU to become its first, quote unquote, associate member or trade partner. Well, House lawmakers last night passing a bill aimed at protecting families from rising electricity costs tied to data centers.

29:39With just three members opposing, the bill would require state utility regulators to consider whether large electricity users, like data centers, should bear the costs of the power infrastructure built to serve them. Also, Exxon is reportedly in talks to return to Venezuela for the first time in 20 years after CEO Darren Woods back in January called the country, quote, uninvestable. The company has so far remained on the sidelines as President Trump urges companies to return to Caracas. This after Harold Hamm's Continental Resources signed a preliminary Venezuela oil deal of its own yesterday.

30:15The invite list keeps growing here. We're following multiple reports. Apple executive chairman Tim Cook and OpenAI CEO Sam Altman will now be attending the state dinner for Chinese President Xi Jinping coming up next week. And shares of Lennar are lower as high mortgage rates hit its bottom line. Third quarter profits coming in at$284 million, half of what it saw a year ago. The company's CEO says the quarter reflected the challenging economic environment, which has deteriorated since last quarter. Those shares, as you can see, down about two and a half percent. Well, turning back to the war in Iran and a new report from President Trump is looking to meet with Gulf leaders next week to discuss potential next steps and a possible end game.

30:58Our Dan Murphy joins us now from Abu Dhabi with more on that report. Dan. dom good morning to you well president trump is expected to meet gulf leaders in new york next week to discuss what comes next after this war axios reporting today the meeting will happen on the sidelines of the un general assembly on tuesday citing three sources with direct knowledge now this report also says that the state department sent initial invitations out on wednesday and And as for the guest list here, it's expected to be leaders or foreign ministers from all six GCC states. So we're talking Saudi Arabia, the UAE, Qatar, Bahrain, Kuwait and Oman.

31:41The White House hasn't officially commented on the report yet. And CNBC has, of course, contacted Gulf foreign ministries for comment. But what's also interesting here is that Axios also reported that Israel's prime minister, Benjamin Netanyahu, who also wants to meet Trump in New York, but it's not clear if a meeting has been scheduled. President Trump also saying on Wednesday, hopefully we're towards the end of the war. The president once again claiming Iran wants a deal here and also said that Washington has heard that directly from Tehran. But the state of play in the region this morning, Dom, hasn't necessarily changed.

32:17We know Hormuz and the Bab al-Mandeb remain disrupted and Saudi Arabia's critical east-west pipeline still effectively closed here. And that supply shock continues to add a premium to front-month crude and products like diesel and gas oil. And of course, WTI and Brent both holding above triple digits in that 100 USD range as we speak. So any meeting next week would be a pretty welcome chance to find some kind of off-ramp to the conflict ahead of the midterms and Arab support for a post-war strategy for managing Iran. But remember, Iran isn't going to be in the room if this meeting takes place.

32:56So all eyes on exactly what could be discussed. Back over to you, Dom. All right, Dan Murphy, live in Abu Dhabi, the latest on the state of play in the Middle East. Thank you very much for that. We've got a lot more to come here on Morning Call, including more models going rogue, details on the new revelation by OpenAI about issues with its AI and what more tech CEOs are saying about tapping the brakes and calls to slow down the technology, including the CEO of Genpact, who's standing by as well. After this, Morning Call is back. All right, welcome back to Morning Call. OpenAI is disclosing in a new blog post six new instances of concerning model behavior since March.

33:35Beyond the recent hacking of hugging face, the company's also committing to a new reporting system for future instances of model misbehavior. The development's coming as two more voices push back against pumping the AI brakes. As a product company, there's the hygiene you put in place through engineering, quality, reliability, safety. They'll figure it out. But the answer is not, let's all collectively tap on the brakes because I don't even know how one product solves that versus another. It just doesn't really make a lot of sense to me. AI is an amazing technology. I think what we have in front of us is once in a lifetime opportunity to embrace something that is going to be so impactful across the board.

34:20And I don't see how it's going to slow down. I don't see researchers not wanting to win. As I've said, there's no competitive support where I found people saying, oh, wait a minute, let's all take a break together because we should slow it down. I think the right conversation is how do we make sure all the power of AI can be harnessed for the right reasons and for good? And that's the conversation that should be had. All right, let's add another voice to this discussion. For more, let's bring in BK Kalra, the president and CEO of Genpact, also working on these AI models. BK, thank you very much for the early wake-up call and joining us here.

34:55You heard the comments from both of those CEOs, Nikesh Arora and Renee Haas. I would point out that both of them make components that need to be purchased for the AI build out to happen. So maybe they have an ax to grind, so to speak, on maybe not tapping the brakes. But this debate is playing out in your world as well. Can you take us through how you are navigating through this discussion right now as an AI CEO? Absolutely. Thank you, Dom. Thank you for having me. Good morning. Look, I think I'll give you two perspectives. One, everybody understands that the foundation models and the progress that they have made has been exceptional.

35:32That is unquestionable. And if I look at our client base, which is largely Global 2000, I would say aspirations are high because whatever happened in Silicon Valley, but readiness is low. Readiness is low. And I think taking a pause, or I don't think slamming brakes, but taking a pause is not such a bad thing and creating a breathing space so that the capabilities catch up in this global 2000 companies. And we are one of the bridges and catalyzing force to create that momentum. Second point. Yeah, I was going to say, in that light, it's not just about the capabilities. It's also about how people view them and how people want to view them.

36:13And maybe more importantly, how sovereigns will want to regulate them. Exactly. And I think the other piece from a research lab standpoint is, look, they are talking about safety because the capability has been developed, but the governance frameworks have not been developed. And that's where people like GenPAC, companies like GenPAC come in, where we have brought in agentic operations, where governance is an integral and structural part of our offerings. And I think I do agree that slamming brakes is not the right thing. However, how do you speed up the governance, speed up all of the structural pieces on safety that you need to bring in?

36:56But for overall global 2000, you know, just taking a pause, I think the capabilities will catch up. And one final point here about this. I mentioned the sovereign side of things. This is an industry and globalized effort in kind of pushing forward AI. But governments themselves also have their own agendas and their own views on how AI should be developed and deployed. How does a company like yours and others navigate those particular different points of view, specifically from governments around the world? Just 30 second plug on GenPAC first, Dom. We spent three decades running mission-critical operations for largest enterprises.

37:38Think of finance, supply chain, sales, HR, banking, insurance. And with the turn of technology, we pivoted to agentic ops, which is moving from human-processed, human-validated, to machine-processed, human-validated still, all wrapped in responsible AI. And as we run these, as these foundation models meet the operational context, the rich process intelligence that we bring to place, you know, we are building these solutions for sovereign AI, as well as ramping these mission critical operations so that we deliver far more durable solutions for our clients. All right. E.K. Kalra at GemPak, thank you very much.

38:23We appreciate it. And please come back and update us with your latest progress. Absolutely. Thank you, Don, for having me. All right. We appreciate it. We're back after this. Keep it right here. Welcome back to Morning Call. Time for your call sheet where we look at the topics driving the trading day ahead. The crew members assembled today are Jay Woods, Chief Market Strategist at Freedom Capital Markets. He's also, by the way, a CNBC contributor. Citi Economist Veronica Clark and Miller Tabak, Chief Market Strategist Matt Maley as well. Thank you all for being here as part of this conversation.

38:49Let's start with the first and front and center one, which is the Fed, right? And what happened yesterday. It was not a shock. Prediction markets and Fed fund futures had a roughly 90 percent probability of a Fed rate hike happening for a quarter percentage point. So let's talk, first of all, with the economist about this. So take us through exactly, Veronica, what you thought about the decision and maybe more importantly, the comments from Chair Warsh. Yeah, yeah. I mean, the decision, of course, itself was not surprising in the end, although it's not what we were expecting just a couple of weeks ago.

39:20It was really about that data that we got in that blackout period that got us to price that hike. It was a bit more of a hawkish hike than we were expecting. To be honest, though, I still think it's the only hike that we'll see. So our forecasts are always based on how we think the data will evolve. And in the updated forecast, the SEP, we did see inflation was a bit higher. I think we'll see lower inflation than what the Fed's expecting, and this will be the only hike. All right. So that's the only hike. Matt Maley, how exactly then do you figure the path for markets going to the back quarter of this year at this point?

39:55Yeah, Dom, I think that there's a concern. I mean, obviously, we're seeing the futures bouncing back this morning and frequently we don't get the actual the real reaction to the Fed announcement or press conference until the following days. The problem is that, you know, we just have so many things here that are coming to a head that we tend to see at a top. I mean, whether it be don't fight the Fed, even if it's only one rate cut, we've seen, you know, long term interest rates rise for, you know, for many months. And same thing with higher oil prices, something that's been taking place for many months.

40:26These are the things that we see at key tops, especially when we're also seeing the stock semiconductor diverge from the S &P 500, the high yield market diverging from the S &P 500, etc. So I just think people need to be a little bit more careful. The market may hold up through the election, but things are at a situation where we need to be a little bit more cautious, in my opinion. Jay, from a market strategy standpoint, you're a kind of guy, you stare at a lot of charts all day. I'm wondering, over the course of the past few months leading up to yesterday's big kind of culmination event for the Fed, have there been notable divergences and convergences that have caught your attention that maybe should be on our radar, given the Fed?

41:11Yeah, without a doubt. As we go into this election season and now we are in a hiking environment, we'll see if it's one or two by the end of the year. there are some things that concern me. Semiconductors. You know, you can point out two stocks in particular. NVIDIA because of its weighting and double top and its retracing. We don't have that catalyst right now. Between now and October 13th, there are no earnings. You know, it's going to be quiet. So I think what's going to take center stage is some of the political theater that we may get in reaction to this Fed hike. And the table is set for us to correct.

41:48That was 72.50 is what I'm calling for over the next few weeks. Still a great buying opportunity for a long term. We're in a long term secular bull market. But as you said, there are some divergences we're seeing. And those leaders, those semiconductors, those tech names are under some pressure. And we're not getting the strength from a wide array of stocks. If there's one sector I do like, it's cyber stocks. OK, so let's talk a little bit about some of the rate risks that are involved right now as well. Veronica, let's talk about whether or not we do see any kind of an issue with the data developing that could kind of muddy the rate path story or maybe set it on a path that we all wanted to see maybe months ago at this point.

42:27Yeah, there are a lot of hikes priced in. So I do think there's a lot of risk that we could price some of that out. It's a quiet week next week. But I think the next thing I'm most focused on is September 30th. We're going to get revisions to core PC inflation. And it doesn't look like Fed officials incorporated those revisions in their forecast yesterday. I do think that means core PC is about 30 basis points lower than what they're currently forecasting. That same week, we'll get the jobs data that's still going to matter, of course. But it's really that inflation data that I think will come in weaker than they're expecting and can price out some of those hikes.

42:58And Jay, the rate risks also play out in certain key parts of the market as well. How do you think the markets will react if we do see a maybe more accelerated rate path campaign cycle? Those are words we're hearing a little bit more these days. Accelerated rate path cycle, I don't think that's the concern. It all goes back to oil. I mean, that is the reason that they raised rate geopolitical concerns. If this war can stop, if they can come to some resolution tomorrow, the rally that we get in this market, we're going to be talking S &P 8000. I don't see a quick resolution to this. So to me, everything in the economy is running smoothly except for what's happening in the strait.

43:37And these energy prices, the price of diesel, the transports are breaking down. The industrials are breaking down. The old school doubt theorists are not happy about what the market is telling us right now. So I think we are kind of in the penalty box as we go into this election season. Let's see what the president has to say, because there could be a new tariff war to come on my drive into work today. I saw in New Jersey diesel prices at 625 to 645, depending on where you kind of go. So it's kind of crazy at this point, to your point. Let's go to our next topic here, which is the at risk part of the market that people are maybe rightfully most concerned with.

44:13The mathematically most influential part, the A.I. trade, because it's become such a big part of the market. The momentum. Matt Maley, how much of that momentum is going to be already, by the way, taken out of the market, but taken down even further based upon what we saw from the Fed yesterday? Well, I think it's, you know, it's again, don't fight the Fed. I mean, again, if it's if it's only one rate hike, that's fine. But my concern is if we only get one rate hike, that's because the economy is slowing in a significant way. And that's the type of thing that really doesn't bode well, obviously, for a market that is driven by earnings right now.

44:50But the thing is that the The markets, you know, we've seen a narrowing of the market once again. We've actually seen, for instance, the Russell 2000 and the I'm sorry, the S &P equal weight index start to underperform. And when you're concentrating on so few names, it makes it a much more dangerous situation. I guess my my my thinking is we we heard this in the beginning of 2022. Don't worry. Fed's going to be hiking. It's going to be OK. And then, of course, the market went down 25 percent. So it's it's a situation where people need to be very careful about what's been happening over the last couple of months, because the market always ignores higher interest rates, higher oil prices for a while.

45:35But eventually they do. Jay, what parts of that A.I. trade in your mind are the most vulnerable? You mentioned the semiconductors. That's one part you're watching. Yeah, the data centers. I think that hype is going to be quelled because of the election. It's the one bipartisan thing that people agree on, not in my neighborhood. So there's going to be a stall with these data center bills, but the benefactor are going to be these cyber names. We're seeing CrowdStrike, Palo Alto Networks, Cloudflare. They're all breaking out. They're all at 52-week highs. I think the opportunity is there because people want to regulate AI.

46:05How do you do it? More cybersecurity is going to be a part of that puzzle. All right. Veronica Clark, Jay Woods, Matt Maley, thank you very much for the conversation and being part of the call sheet today. We appreciate it. Thank you. All right. Markets right now are solidly bid. We'll see you tomorrow.