11AM Hour: Perplexity CEO, Former Richmond Fed President on Jobs Number & Lululemon Shares Plunge 9/4/26

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1:14We're going to talk to one energy expert who sees the potential for more price spikes ahead. Plus, disappointing guidance sending shares of Lululemon tumbling further, pressuring the turnaround strategy for that retailer's new CEO. We're joined by one analyst who thinks investors should stay sidelined on that stock. And fresh off PC deals with NVIDIA and Apple, buzz about a soaring valuation. We'll be joined by Perplexity's CEO this hour. Talk about the state of the AI trade. Right now, though, the equity markets hovering around session lows. You can see the Nasdaq currently down 0.4%, opening somewhat close to the flatline, but trending lower from there.

1:51The Dow down about 0.7 % and the 10-year at around 4.778. percent. Let's begin with this morning's jobs number and a new threat this morning from the president to the Fed. Steve Leisman's got details. Morning, Steve. Hey, good morning, Carl. Yeah, ripping jobs report, which has the market pricing in Fed rate hikes, sparking a tweet from the president threatening tariffs if the Fed doesn't cut rates. But first, let's look at the numbers. Nonfarm payrolls 162 against an estimate of 53 unemployment. They are coming in unchanged and where it's been 4.1 percent for the past several months. Wages also relatively modest, up 0.3 percent, 3-1 on the year-over-year versus 3 % estimate.

2:28But Fed futures markets saw this as another notch in the argument to hike September. Fed fund futures for the meeting up to 61 % from 50 % before the number came out. And more confidence even in the second hike now at 88 % versus 51%. Yet the debate is whether today's number is a start of a resurgence of job growth or maybe a reversion to the mean after several months of weakness. Take a look here. The strong number followed job gains at just 21 ,000 in July and 31 ,000 in June. The three-month average now, 71 ,000. Healthy, but not a barn-burning job market overall. Leisure and hospitality gaining 62 ,000, but it had lost 75 ,000 in the prior two months.

3:10Local government education up 42 ,000. It had lost 58 ,000 in just the last month. Health care was stronger, 28 ,000. So were construction and manufacturing to be put together at 40 ,000. President Trump taking to social media to threaten tariffs on countries with which the U.S. has a trade deficit if the Fed doesn't cut interest rates. Quote, lower the rate, the president said, or I'll stop trading with countries with which we have a deficit. The Fed board with its great new leader must get smart. Be patriots for a change. I'd point out that macroeconomically, countries that have a deficit with the U.S.

3:40tend to recycle the dollars back into treasuries, putting downward pressure on interest rates. So it's at best unclear how halting the trade with these countries would help the president's cause. But it's the first time I can see that he's threatened the Fed with a tariff action. Carl? And, Steve, the list of countries that would ostensibly be included under that would include some of our largest trading partners. Not just our largest trading partners, which, Carl, you know is a tautology when I tell you they're also the people that hold the most bonds. Right? So China, Japan, all these countries that have trade deficits with the U.S., they buy our stuff.

4:11We give them dollars. They take those dollars. They buy our treasuries, put downward pressure on treasury rates and yields. We have an awful lot of debt to sell. I don't know we're positioned to be hurting our customers for that debt. Did you find the headline? It's on our website this morning, a piece about the Norwegian Sovereign Wealth Fund cutting exposure to government bonds, including treasuries. Did you find that significant? Potentially. Look, people don't buy our bonds out of charity, right? They buy our bonds because we're the most liquid market, the most stable market. If they had a better alternative with a higher yield, where they got the same liquidity and the same sense of trust that they could have in buying U.S.

4:55bonds, then I would be concerned. I just part of the reason why the U.S. wins this race is is we're the best market that's out there, especially you think about the person who has to make that decision. Right. You remember, Carl, the old days when they say IBM beat out Apple because no supply manager ever got fired for buying IBM. The same is true for U.S. bonds. Right. You don't get fired for buying U.S. bonds if you win or lose or make money or not in that market. There just aren't the alternatives out there. So we'll see if others follow and we'll see how much of what Norway is talking about ends up not in the U.S.

5:33bond market. There are other markets they can trade in, but none are as liquid. And when it's liquidity, what are we talking about? The ability to trade into that instrument and not make a mark on it, right? You can trade in or trade out. I'm not sure how true that is for big money all over the world. Well, the U.S. also maintains the reserve currency, and there's a perception it could never default on its debt because it could always just print more money to pay for it. Well, Leslie, if we got to a point where there was concern about default, we'd be having a much different discussion. And if that's why Norway is moving its bonds into a place where it's less concerned about default, that would be a different issue.

6:11I don't know that that's the reason they're doing it. I would just take a, you know, take watch this and watch this space and see if others do it as well. There was that story about I guess it was the Netherlands moving gold out of New York. Look, I think we are going around making enemies of some friends and we'll see if there's a financial cost to that. Yeah, I don't think there's any indication they believe a default is imminent. But I do think that they're trying to diversify their risk posture in terms of their portfolio and exposure to government debt writ large. Steve, thank you. Pleasure.

6:44Steve Leisman for us. For more on how the market is digesting the August jobs report, let's bring in 314 Research co-founder Warren Pies. Warren, good to see you. So the market digesting this in the first 90 minutes of trading today as maybe a little net negative, given what it means for interest rates. Yeah, I think it is all eyes on the Fed at this point. And so after Waller's speech yesterday, I think that the market had decided that the default was probably a hole. I mean, it was 50-50 odds. and of course the CPI that comes out next week is going to decide it. If you read between the lines with what Waller was saying, anything that rounds up to a.3 month over month would be grounds for a hike.

7:32Anything that rounds down to a.2, they would be on hold. So we're getting to the 100th decimal place on the CPI here. .25 is kind of the line in the sand. I think this morning's jobs report coming in so strong And the labor force participation rate rebounding without pushing the unemployment rate up is kind of throwing a new wrinkle in here. And it puts the impetus on the probabilities on a hold. If I had to get down to that 100th decimal place like Waller kind of guided us to, I'd say anything above a 0.2 after this report, as long as oil stays up here around 90, we're probably going to get a hike or at least a very strong tightening forecast in the SEP in the September meeting.

8:22So that's what I think is going on with the market today. Yeah. You also know the importance of data center build out in terms of what it means for job creation. How durable do you see, you know, the numbers from August persisting throughout the remainder of the year? I mean, they've been durable through all of 2026. And to me, that's the big story. You know, one of the classic signals that you watch in macro is residential construction payrolls. It's like before every big recession, you get like a three to five percent drawdown in residential construction payrolls. That's kind of happened this year as the housing market has suffered.

9:00But the data is the non-residential specialty trades, which is really what you see from the data center build out. That group has really exploded. The odds there and more than offset the losses we've seen in residential construction. So I think it's an absolutely you're seeing CapEx numbers exploding through next year. Data center build out as long as we don't have a political hiccup, which I think is the new big risk to the trade. Then, yeah, I think it makes this this cycle durable. What do you mean by political hiccup? Is that the backlash that we've seen, the political backlash against data centers?

9:35And if that is the case, does the midterm election kind of represent a hurdle by which to surpass in order to get through it? Yeah, absolutely. I mean, if you start looking at, look, you saw Senator Sanders yesterday come out and basically had some very draconian suggestions, pausing all data center build outs, making AI models like anything over a certain level, banning them, making them illegal. I mean, these are I don't know how realistic that is to get that enacted, but I think it's a it's a risk and the market has to discount it. And then you look at how the semi group, which I think is the beating heart of the A.I.

10:13trade within the market. It's kind of locked. It's kind of started to move with the Republican odds of holding the Senate. So if we see a blue sweep coming out of the midterms and data centers have become a very hot button issue, you could see some real turbulence enter into the A.I. trade. I think that's the most important risk. The token declines and the fundamental stories that the bears like to tell, we don't see it. We see rental rates staying strong and actually turn around and going higher. We see availability on the floor. So you can't get these GPUs. So the fundamental story for AI is really strong.

10:48The political risk is now in focus. Yeah. Some argue it's probably maybe not as much of a federal issue as it is a state governor issue. and last couple of weeks, all the PIMCOs and the Evercores of the world say some of these candidates running for state office, you know, they might be just talking a good game. And once the election happens, they'll go easier. But they're they're likely to be more moratoriums among states in the in the months to come. Yeah, I mean, that's been the we've all looked for bottlenecks that's going to restrain the data center build out. And you I don't think you're really going to get like a true moratorium nationwide.

11:26why. It's just this could be sand in the gears of the data center build out for sure. And everyone's going to, the mantra will be slow down, go slow. And the market will have to discount all that. And that's a volatility inducing thing. I think that's one of the reasons we've seen semis after this Leopold liquidation haven't really been able to get their footing. I think that you're starting to get, obviously, the Fed's in focus, but beyond the Fed is the midterm risk. Yeah. Warren, really quick before I let you go, just on market structure going into the fall, we talked a lot about issuance normally creeps up on us once we get past Labor Day.

12:04I know you've written about sort of correlation risk and maybe some liquidity risk. Is that part of what makes September so fraught? Yeah, I mean, I think that's the setup right now. So we were overweight equities from mid-April all the way to August 10th. And so now we can see the Fed. I thought the Fed risk of a Fed hike was underpriced at that time. At this point, I think the market's got it about right. But the backdrop, the underlying market structure is that correlations are very low, especially when you come out of an earnings season. Usually correlations rise coming out of an earnings season.

12:37And the mechanics of this is it depresses volatility, depresses your headline VIX. And if you get a macro event like a Fed meeting or like an election that can come in and cause stocks to start moving together, Volatility could spike really fast. And so we saw that back in 2024 with this yen carry blow up. If you remember, correlations were very low in the summer of 2024. And then we had a spike, VIX rose. That's the kind of thing you have to worry about. That's why we took our equity overweight down to a benchmark. Let's get through this seasonal period before we get back into an overweight. Yeah, interesting times.

13:12Warren, we appreciate you being here on this important day for jobs, as well as your perspective on AI and data centers and the political risk there too. Thanks so much. Thanks for having me. Later on this morning, shares of Lulu tumbling, the worst performer on the SPX, that athletic wear company delivering disappointing results. They lower guidance again. We're going to talk to a top analyst who says stay sidelined. Plus, smart ring maker Aura just filing to go public. We'll bring you the details when Squawk on the Street returns. This message comes from Wise Business, the only account your business needs to scale globally.

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15:36year ago. During that time, Aura was also profitable. Yes, I used the P word there. With $61 million in net income, Aura generates revenue from the sale of its rings, priced upwards of $399 apiece, plus subscription revenue from the app that shows all of the metrics. Aura said it has 5 million paid members. Amidded filings that could come out in as soon as two weeks' time would provide more detail on targeted pricing and valuation, but reports have suggested Aura could, and it's selling shareholders. It's raising primary and secondary capital here. Raised billions of dollars from this IPO. You've got Goldman Sachs, Morgan Stanley, JP Morgan, Allen and Jeffries leading this offering, which is expected to list on the NASDAQ under the symbol O-U-R-A.

16:22Quite the ticker symbol. Yes. Company name. Five million members, including one Leslie Picker. Including me. You were showing me yours. Yeah. What's your take on it? Well, you were asking earlier whether you think it's a consumer product as in a diversification stock or a tech stock. Yeah, I do kind of wonder how it would be, or is it hardware? You know, because wearables in the past, we've seen a bunch of these go public. And, you know, even if they're a name brand, they can kind of fizzle out over time. I think what they're trying to really differentiate themselves here is by showcasing the analytics and preventative healthcare.

16:52You need this ring to tell you, Carl, that your stress is high. You've got, you know, indicators that show your resilience is low. your heart health, you may want to get checked out. I mean, these are all data points that people may want in terms of a ring. And the reason this was invented, according to the prospectus, was because they felt like watches and other wearables of the past, the battery life was so low that you had to kind of charge it every day. You may not have been able to sleep in it because, you know, you needed to charge it overnight. With the Oura Ring, I charge it like once every five days.

17:27So it really gets a lot of the sleep analytics, you know, included into the app. And I track, I mean. Oh, fascinating. Yeah. I thought it would make me kind of crazy. Like, oh, I'm not getting out of sleep. I'm not getting out of sleep. But it's kind of done the opposite because it counts things like steps up the subway as exercise and REM sleep. Yes. Even if you have fewer hours at night, you may have better REM sleep. So I like it. Yeah. Fascinating. I mean, whether Apple with watches, I mean, a new product category with rings. And who knows what OpenAI or whoever else might have in the future also gives us a nice peek into how the pipeline might be opening up once we get past Labor Day.

18:05Speaking of consumer products, Lulu shares are tumbling today, hampered by some weak comps and tepid guidance. Joining us this morning to discuss is Wells Fargo senior retail analyst like Barshow. Ike, welcome back. It's good to have you. One thing that took me by surprise, even with all their well-known and well-telegraphed troubles, Comps up to now at least had been able to hang on to the positive side, but no longer. Yeah. Hey, Carl. Yeah, look, Lulu is we're in a fairly unprecedented down cycle in athletic. And Lulu is one of the bigger victims to the current trend line. Comps globally had been positive.

18:42They've been negative in North America for a while. Typically, when you see the core market decline, it usually means that at some point that will persist overseas. That's what happened last quarter. China, surprisingly, went negative. Rest of world ex-China was also negative. So now Lulu is comping negative in every region they operate in. Right. That said, we have seen some names in retail specifically where it did seem like all was lost. I'm thinking of Target last November. And then boom, new CEO, new approach, stock response. What would need to happen for that to be replicated here? Yeah, I think there's two main questions we kind of have to ask ourselves here, which is number one, which is pretty simplistic.

19:26Just how do you make the brand cool again with your consumer? But I think the second question is how long will this take? And what is interesting is 24 hours ago, the street was modeling peak revenue next year for Lulu, all time high revenue. So the work we've done kind of shows that there are no soft line brands that have ever gone through a turnaround that did not require greater than 10 percent revenue decline from peak and more than four years of work. So my comment would be this is going to take a lot of time. Their new CEO, Heidi O 'Neill, who came in from who's coming in from Nike. She hasn't started yet.

20:06So this is just I don't say it's the beginning, but this is not the late innings yet. The company is trying to minimize expenses in this turnaround effort. How do you think that they should really prioritize them? They want to increase marketing. They want to increase innovation and R &D and obviously the products that they're selling. What would you say that they should kind of work on first in terms of costs in order to make this turnaround maybe a little bit smoother and quicker than four years? Yeah, I mean, that's kind of the issue. I don't know if there's a great answer there. I mean, the cost structure needs to be completely adjusted.

20:42They need to stop opening stores, potentially looking at their fixed cost footprint. But they also need to accelerate investment because they're losing market share. They need to reinvest back into product quality. I mean, Chip Wilson, everything he has said publicly, I think is pretty accurate in terms of what's happened to this business. So I don't think there's a quick fix here. I don't think 2027 is any kind of inflection. I think 2027 is going to be an ongoing reset. And we might not be talking about stabilization for another 12 to 18 months before we can start to get comfortable. Ike, as far as your broader coverage is concerned, some of your colleagues on the street are pointing out the spread between their coverage, at least, and the S &P year to date continues to widen here.

21:27Only a handful of names positive on the year, like Williams-Sonoma, Costco, BJ, and then the discount on a P.E. basis. You think we're in the bottom range of that? I think the consumer space is under a lot of pressure right now. Part of it is energy prices and inflation taking share of wallet from the low end. Part of it is we're starting to lap tariff price increases where the consumer is just kind of pushing back. Part of it is just from a stock perspective, now we're talking about rates going up that's going to impact negatively, multiples and discretionary. So there's a lot of things that are going on that are just not good.

22:06That said, there are quality names that you're now able to look at that are much more, you're able to digest them much more in multiple. So a Tapestry, a Ralph Lauren, a Burlington, a Victoria's Secret, a Contour Brands. These are all names that are down fundamentally. They're very strong. So I still think there's ideas we can look at. I do think the athletic space is not really where you want to be looking for new ideas right now. And that includes Lulu, Nike, and names like that. Oh, yeah. Especially after the latest from On and Adidas and eesh, footwear is tough. Ike, please stay close. Hurry back.

22:40Thanks for the time, as always. Thanks, Carl. Bye. Still ahead, the CEO of AI company Perplexity will join us. That's as NVIDIA reportedly weighs investing in the company at a more than$30 billion valuation. Diesel prices, all-time highs today. We're going to talk to a top strategist about whether more price spikes may be on the horizon. We're back in a minute. it. Weren't agents supposed to take things off your plate? Building another to handle the others is a bit much. Don't make more work out of work. Gemini is the one agent that knows all parts of your business and actually gets stuff done.

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23:52Visit ixl.com slash 20 to get the most effective learning program out there at the best price. At Jared Jewelers, we know the right gift can bring a lifetime of meaning. A memory cherished forever. 20 % off storewide. Exclusions apply. See jared.com backslash radio for details. Jared, make the holiday last forever. Shop Jared Jewelers. It's been kind of a crazy week between Waller and, of course, today the jobs number. We've been all over the map. You know where we closed on Friday, S &P, last Friday? 7 ,709. Today, 7 ,708. And so much has happened in this first week of September. I know. And we've got a long way to go.

24:33September is such an eventful month. It has been a remarkable final week of the summer season. VIX, obviously, with about a 14 handle, awfully close to 13. But things could change dramatically once we get into the fall and CPI next week. Yeah. PPI, CPI next week. Fed meeting after that. Lots to get through. Time now for a news update. Pippa Stevens has that for us. Hey, Pippa. Hey, Leslie. President Trump reportedly plans to fly to Ireland next week on the new Air Force One gifted to him by Qatar. The Washington Post reports a senior White House official says the president will be using it on his first international trip since a security threat prompted him to leave Turkey in July aboard another plane.

25:12Two senior aides to right-wing party leader Nigel Farage in Britain stepping down today after an undercover investigation alleging the party broke the law by arranging for foreign donors to pay for political polling. Farage and the party deny wrongdoing, claiming to be victims of a hoax by climate activists. Farage is already under investigation in Parliament over earlier foreign donations. And WNBA Commissioner Kathy Engelbert will retire at the end of the year. NBA Commissioner Adam Silver made the announcement highlighting Engelbert's seven-year tenure as the most significant period of growth in the league's history.

25:48At the end of last season, Minnesotan Lynx star Nafisa Collier drew headlines and wide support from other players when she called Engelbert negligent and said the WNBA had, quote, the worst leadership in the world. Carl, back to you. Yeah, WNBA and NBA have been going through some things. Pippa, thank you. Pippa Stevens. Still to come this morning, the CEO Perplexity will be with us after the company just struck a partnership with NVIDIA to develop a PC. Plus, former Richmond Fed President Jeffrey Lacker will join us, his reaction to this morning's jobs number and what it means for this month's upcoming Fed meeting.

26:22We're back in a moment. Welcome back. Perplexity recently striking a partnership with NVIDIA to launch a PC as NVIDIA reportedly weighs investing in the company at a more than$30 billion valuation. Our Kate Rooney joins us this morning with the CEO. Morning, Kate. Good morning, Carl. Thanks so much. We are here with Aravind Srinivas, Perplexity CEO. It's great to see you in person. Welcome. Thank you for having me here. There's a lot to talk about. I want to start with what Carl just teed up and you guys pushing in pretty much the opposite direction, it feels like, than what we've talked about with a lot of the industry.

26:54There's this race night right now for tech giants to build out data centers. You guys are now pushing towards local hardware. You had this NVIDIA partnership, also partnered with Apple to basically take all of this and put it on your desktop, on a local device. How does this actually work and how does it change the economics for AI? So perplexity is the first and only tool that can orchestrate computer in every direction, any model, any tool, any chip. The thing about computer, our perplexity computer product is it is designed to do everything. And one thing people want to do is use their own local hardware.

27:28and for a variety of reasons. Some people want to do that because they're worried about cybersecurity risks. They're worried about their IP leaking to frontier labs. And some people are cost conscious. Some people are just privacy conscious. It doesn't matter what the reasons are. We just want to do whatever our users want. And so there are two versions of this that we've released in the last week or so. The first version is a fully local implementation where you own the entire agent stack. Literally, a mini data center is living, like, you know, is on your desk. And so the product, the model, the agent, everything runs inside that hardware.

28:06That's the version we released with NVIDIA called Portable Computer on DGX Park. And we found a lot of interest in our finance users who literally want even an air-gapped implementation of that. So this is a bank. In this example, this is an enterprise. Yeah, a Morgan Stanley or a JP Morgan could be an example of that. And another version that we released is hybrid compute, where you don't want to give up on intelligence. You still want access to the frontier intelligence on the cloud. But when it comes to accessing very privacy-sensitive files, your health records or your financial documents, your tax returns, you want the model that runs locally on your own hardware to take care of that part of the task.

28:49So that is the orchestration, that inherent model routing we perform. We're the only company that can do that because we're model agnostic. And so we automatically orchestrate down to a lower intelligence local model in that scenario. I want to unpack this a little bit, but as we talk about this, it feels like if there's a possibility to move away from data centers, to move away from the cloud. And like you're saying, there's privacy advantages, there's cybersecurity advantages. What does that mean for this entire data center build out? Is the AI industry overbuilding right now? Firstly, the models that run locally are not quite there to compete with the frontier.

29:26The frontier is advancing rapidly, just like how models that can run locally are also advancing. And that's why we believe in a hybrid solution. And in both these versions, you can orchestrate up and down. In the fully local version, where the model is running entirely locally, we still give the user the option to orchestrate up to a frontier model in the cloud, only with the user's permission. And in the other version where it starts from the cloud, we give the user the option to orchestrate down when we feel like it's sensitive PII information. So I think it's not a question of, like, are we doing a lot of build-out or are we not?

30:01I think the right answer is you need to be able to orchestrate up and down, and we want to position our product as a way that allows users to do that. Now, obviously, one of the biggest bottlenecks in data center build-outs, when you talk to people, they're going to say power, permits, and the other thing they're going to say is memory, HPMs. There's a lot of RAM in our own devices. There's a lot of power in our own offices, in our own homes that we're not actually tapping into for AI inference. Today, like most people are not running 24-7 agents. If a billion people need to run 24-7 agents, they're going to need a terawatt of power and a lot of memory.

30:40And so you're not going to be able to do this just with data centers. You need to be able to tap into power and compute and memory that lives on our own local devices. And that requires hybrid orchestration. And that's exactly what we are trying to do. So you mentioned cyber as part of this. What about running locally actually protects you from some of the cyber risk? And I would love to get your take as well on some of these headlines. We just this morning got another report that OpenAI agents hijacked. This is a Reuters headline, a German website. This was a previously undisclosed AI breakout.

31:13It feels like we get these headlines every day. How are you thinking about cybersecurity and how worried should the average person be when we talk about all of these cyber breaches at a time when enterprises are also supposed to be adopting this widely? We should 100 % be aware of it first. We should try to understand the details. We shouldn't be paranoid about like small, like, you know, misinformation. But definitely these models are not as controlled as they can be. We're still, you know, moving really fast. And so that's also why we're trying to release these kind of agents where the user can have full control over what they're doing.

31:48And they don't have to be plugged into the internet if they don't want to. And we'll give them full control. You should give the user as much power, compute and control and intelligence that they can own on their own. But by being offline, going back to the bank example, is it an advantage for an enterprise to say, I don't even want to risk it and go into the cloud? Does that actually help you avoid some of the cyber risks that we've talked about that I'm sure viewers, CFOs, CTOs that might be watching this would say, oh, that's actually, that's a huge advantage because I'm not putting my customer's data at risk and there's maybe a lower risk of a hack.

32:22That's one of the reasons that the users that really liked the portable computer we released with NVIDIA on DGX Park are actually from financial and regulated industries. Last question, Arvind. There was a report that NVIDIA is in plans to back Perplexity at about a$30 billion valuation. Any plans to raise more capital? Can you say anything about that report? We're not in a position to talk about our investments. Perplexity and NVIDIA are both big supporters of open ecosystem, obviously, and we want to find, we've been adopting Nematron models and Perplexity's products, and we want an open ecosystem to flourish.

32:57We've been trying to make Perplexity work on local hardware so that AI can diffuse more widely to society. And perplexity goes to be the Switzerland of AI. And the nice thing about Switzerland is that's only one Switzerland. And you need to be a neutral orchestrator across models, files, tools, and chips. There you go, the Switzerland of AI. We should also say NVIDIA just bought Hugging Face for$13 billion. So it seems like they're on the hunt. Anyway, Arvind, it's great to see you in person. Appreciate your time. Thanks for being here. Thank you. And guys, we'll send it back over to you. Good try there, Kate.

33:26Great Great interview all around, though, and interesting to get an inside look at that relationship with NVIDIA and what they're doing on data privacy as well. Still ahead, diesel prices hitting a record high today. We'll discuss the impact with Rapidan Energy Group's founder, who says that while gas prices get more attention, diesel is the real workhorse of the broad economy. We're back in a moment. Welcome back. Diesel prices all time high today, breaking the record set about four years ago. The ongoing wars in Ukraine and Iran knocking out refineries, prompting this global supply crunch. Joining us this morning to talk about it, Bob McNally, founder and president of RapidAn Energy Group.

34:01Bob, happy Friday. Thanks for the help today. Same to you, Carl. Great to be with you. We've tried to do a good job in talking to viewers about how this is going to manifest itself in their everyday lives. Food is a good example. Are there workarounds in diesel that we're just not thinking of short of demand destruction? You know, not really. You know, diesel is the real workhorse of the economy, and it's embedded in so many sectors, unlike gasoline. Gasoline's great. We all see it. We all pump it. It gets us from A to B. Diesel does much more. It transports stuff by rail, by road, by plane. Jet fuel is almost like diesel.

34:37It's used as a heating fuel. It's used for power generation. It's used in boilers. It's used in mining, construction, defense. Diesel is everywhere. It's not as visible to the consumer, you and I, but it's in there. It's the silent workhorse of the economy. And when it goes up, it raises pricing costs across many supply chains. So it's a different order. And look, Carl, we had some buffers that helped us on crude, right? When we lost it straight to four moves, China went on a crash diet, stopped importing five million barrels of their crude. We released strategic stocks, crude oil, distillate diesel didn't have that.

35:12Indeed, things got worse. China stopped exporting so much diesel. And the Ukrainians have been so successful at destroying Russian refining capacity that Russia, the second largest diesel exporter after the United States, has had to ban exports. So everything sort of went right with crude oil so far, went wrong with diesel. So there aren't workarounds. It's a very important fuel and a very serious situation, Carl. Yeah. And we've shown some charts looking at how it's totally separated from crude over the last few months. Is the best hope in the near term that Russia is able to start exporting again?

35:48Yeah, I wouldn't bet on that anytime soon. I think they've banned exports through September. They will probably have to continue that if they can't keep repair and keep the refineries running. The Ukrainians have been very successful at hitting them. I think at this point we need to pray for warm weather, especially in Europe. No hurricanes, exactly. The U.S. refining sector has stood up like a champ. We're at record high diesel exports. We can't fill the whole gap in the world, but we are the only game in town. So we don't want to have any unplanned outages, no storm outages. Warm weather would be helpful.

36:23And, you know, eventually, if we can get Hormuz open, because we lost a lot of diesel through Hormuz as well, other petroleum products for which there are no real work around. So hopefully the U.S. military will succeed, continue succeeding at keeping those flows. If we can get this war tamped down, normalize production, hope for warm weather, and then maybe early next year we get out of the hole. But we're in deep doo-doo, Carl, going into winter here. In the meantime, is there anything that the rail companies can do, the truck companies can do to hedge the rising costs? And do they tend to do that, especially if you're looking at a prolonged period where prices remain elevated?

37:02You know, some can and some do. And hopefully those have those that can and do have done so early this year. It's getting a little late for that right now. But some some can and some do. Certainly airlines can do that as well. But again, you know, no one imagined this situation. A prolonged closure of Hormuz is something that simply was not even considered as possible before February 28th. And therefore, I don't know how well hedged those sectors are. They can do it. Those that have are probably feeling pretty lucky. Where are we on EU net gas? Four straight weekly gains. The Germans have said storage is OK going into winter, but how much do they need to worry?

37:45Well, they've sort of moved the goalposts, as I understand it. It used to be you want to get to 75 % storage levels, injection is a minimum. I think they've lowered that and said something like 65 is OK. Don't quote me, but something along those lines. I think the Germans are sort of saying we're going to be really tight, but it's OK, which is a little bit whistling past the graveyard. Europe is short. U.S. exports are maxed. We do have some cargos we can sell them. Europe's going to have to bid for those cargos to get them in this winter. And again, if it's cold, they're going to have a really tough time.

38:17They're going to have to pay very high prices to attract those stray LNG cargos to get them into Europe. They're in big trouble if it's cold. Yeah, they're going to have a tough time. It's just low stocks. Then on U.S. retail gasoline, we're looking at our Bob there at 319. I guess that does suggest that September is not going to be that helpful to the downside. Do you what do you think you think there's danger of taking out the the triple A highs of the summer? certainly there's a risk of that yes rapidan we're constructive on crude oil prices we think the market has been complacent and we think some of the buffers that have helped contain crude oil prices are either starting to reverse china's coming off a crash diet and it's hungry and the spr releases are starting to wear off and if we don't get hormuz open or god forbid if the Iranians are successful at further curtailing flows or destroy infrastructure, the risk to us for crude oil prices is higher.

39:17So even if refinery cracks and gasoline margins come in, if crude is going higher, the pump price the UNIC could go higher. So yes, we would think the risk is to the high side, possibly revisiting 450 or so average, hopefully not going back to the old high, a little over$5 a gallon in June of 2022. Then we'd have two highs, diesel now, gasoline later. Hopefully we avoid that. But could we revisit the old summer highs this year? Certainly. Just a remarkable conversation to have going out of summer driving season, Bob. I really appreciate the insight. Please come back soon. Good to have you. Bob McNally over at Rapidown.

39:58Still ahead, former Richmond Fed President Jeffrey Lacker will join us with his reaction to this morning's jobs report and what it means for the upcoming Fed meeting. We're back in a moment. Welcome back. The jobs report coming in much stronger than expected earlier today. 162 ,000 new payrolls in August. Let's get a read on what it means for the Fed's upcoming meeting with former Richmond Fed President Jeffrey Lacker. Good to see you. So what does this mean for the prospect of rate hikes? Presumably it keeps them on the table. Yes, so it confirms the view that the labor market is in fine shape.

40:35Demand and supply seem to be in rough balance. There have been a little bit of whiffs of weakness that people have picked up on in the past, but concerns about that have diminished substantially. So I don't think there's any worry about cracks showing up in the labor market. People have figured out that labor supply is growing much more slowly now than it has in the past. They've accommodated themselves to a much lower average rate of job growth. In terms of inflation, we were just having a long conversation about the role of diesel in particular and its pass-through into all areas of the economy, whether it's food or other goods that are shipped.

41:16Do we get any resolution on inflation until we get oil and diesel and other types of commodities under control? There's always something. There's always one thing that's growing, whose price is growing more rapidly than others. And it's attractive. It's tempting to focus on that and call it a driver of inflation. But the key thing is the total overall level of dollar spending. ending, that's what drives the overall average rate of inflation. And on that front, the picture isn't good. Inflation came down to the Fed's credit, and in December of 2023, around the year-end there, reached around 3%.

42:00It's averaged around 3 % through the beginning of this year, and then it started creeping up. The last couple of months have been a little more favorable, but it's still above where it was for the last three years. The signs of disinflation are really hopes. They're really conjectures at this point. And the Fed's got some work to do to get inflation down. That's why I'm expecting that they ought to be raising rates soon, whether they do that or not. Jeffrey, that's why this whole people are citing the Waller line quoting John Lennon or paraphrasing John Lennon, give disinflation a chance. Is that a risky framing just a couple years out of the transitory debacle?

42:46I noticed that he focused on three-month average inflation. If you plot that, yeah, it's fluctuated, but it's gone from 2 % to 4.5%, and now it's down to 3%. So it doesn't look like it's breaking out from its trading range of the last four years. So where he gets hints of disinflation, I'm not quite sure. And I think conducting policy on that basis is a bit risky for them. They've clung to this claim that recent inflation trends have been dominated by one-off upward factors like oil or tariffs, and that inflation is about to start coming down to 2%. But that claim is wearing thin. The credibility is really questionable at this point.

43:39I think they seem to want to have a reason not to raise rates, but I think they're going to get the end of the rope on that at some point. At some point, it won't be credible anymore to claim that disinflation is right around the bend. And running policy on the basis of hints of disinflation seems to me not a balanced approach. I mean, the data is clear. Inflation is above 3%. All the available policy rules that have characterized good policy in the past, all the versions of that are pointing to interest rates being higher than they are now, recommending policy rates higher than they are now. So I think their credibility is on the line here.

44:23Yeah, that's something we heard kind of reflected by Jeffrey Gunlock. Is there a sense that maybe the market rates are doing the work for the Fed, that they're doing tightening just by seeing yields at the long end of the curve move higher, that gives them a little more space, a little more breathing room to raise rates themselves? Lots goes on between the overnight rate and the 10-year and 20-year, 30-year horizon. I think that it's an attractive narrative, but supply and demand at that horizon reflects expectations about future real rates and the like. I don't think it does work for the Fed.

45:02I think it reflects market forces. I think the Fed needs to guide short-term rates in a way that's appropriate and is doing the work of restraining the growth in dollar demand at the present time. All right, Jeffrey, thank you so much. Appreciate your time. Hope you have a great Labor Day weekend. You too. Take care. Bye. Pretty steady action here as we're just a few points up ahead of where we closed a week ago today. Next week's going to get interesting. Goldman Sachs, Communicopia, we're going to get a lot more clarity or granularity on tech and the way in which J.I. is getting folded into enterprise, at least.

45:42CPI, of course, we've talked about. And then, you know, within two months of the midterms, you'll probably get more desk notes trying to quantify political risk going into midterms. I think J.P. Morgan just this week started rolling out trade ideas. If there's a split Congress, if there's a Dem Senate and a Dem House, that's going to get interesting. Yeah, really interesting. Full calendar next week. also Oracle earnings, which should help kind of bolster or create some caution around that data center narrative and what it means for the AI build that we talked to Oliver about, just these split options read heading into that print.

46:15But a full calendar next week. So it's definitely going to get very interesting with a lot of important questions answered around inflation, AI, earnings, tech. I mean, rest up. Summer went fast. Leslie, thanks for all the help this week. Thank you. Have a good Labor Day weekend. All opinions expressed by Squawk on the Street participants are solely their opinions and do not reflect the opinions of CNBC or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet, or another medium. You should not treat any opinion expressed on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion.

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