Speaker 1: This is the Bloomberg Surveillance Podcast.
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Speaker 2: Let's get up front of Carl Worcadon, I got a
Speaker 2: bigger broad up question from Let's Go narrow tomorrow. How
Speaker 2: do you interpret average hourly earnings within the forty seven
Speaker 2: other measurements of wage growth that are.
Speaker 3: Out there well, Average early earnings are telling us that
Speaker 3: we are not there yet in terms of the FED
Speaker 3: being able to declare mission accomplished. Average oarly earnings running
Speaker 3: at four percent are still too hot for inflation to
Speaker 3: be sustainably at a two percent run rate, especially as
Speaker 3: we look at the core numbers. And even more important
Speaker 3: than average early earnings is the employment cost index wage
Speaker 3: and salary component that's running at four to six. It
Speaker 3: needs to be at three percent or less to be
Speaker 3: consistent with the two percent core PC inflation. So we
Speaker 3: are simply you know, there's lots of good progress. The
Speaker 3: glide path is looking in the right direction, but there
Speaker 3: is still further room to run before we can feel
Speaker 3: more comfortable.
Speaker 1: Karl, I got to go to sixty thousand feet here.
Speaker 2: You're really good at this. Peter Drucker, nineteen ninety one
Speaker 2: on the new productivity. Do we have any clue given
Speaker 2: our labor data that we're in right now, what the productivity,
Speaker 2: the efficiency, the efficacy of our labor is.
Speaker 1: I would suggest we're flying blind.
Speaker 3: I think we are still flying blind post pandemic tom
Speaker 3: and we've seen some wild swings and productivity due to
Speaker 3: labor shortages and then the rebound and participation. Lots of
Speaker 3: kind of wild swing factors are really distorting the numbers.
Speaker 3: That big surge we saw in GDP growth in Q three,
Speaker 3: of course distorts productivity. That's not the beginning of a trend.
Speaker 3: That was a one time flash in the pan. We
Speaker 3: can see that in the tracking forecast for Q four.
Speaker 3: So there really is still a lot of instability and
Speaker 3: noise that we have to look through to get a
Speaker 3: clearer perspective. Now, what I think does give us some
Speaker 3: sense of the trend. When we have extended periods of
Speaker 3: labor scarcity and high labor costs, typically that pushes businesses,
Speaker 3: encourages them to make the kind of productivity enhancing capital
Speaker 3: investments that do lead to a productivity boom. But we're
Speaker 3: still not out of the woods yet. The labor data
Speaker 3: does look to be moving to a more balanced state
Speaker 3: where maybe we have less labor cost pressure six months
Speaker 3: from now, for example, and then that would say maybe
Speaker 3: there'll be less of a productivity flare up than we
Speaker 3: might be anticipating. Of course, AI is a big wildcard,
Speaker 3: but I think it's a little bit too soon to
Speaker 3: be factoring that into the macroeconomic data on that kind of.
Speaker 4: Scale if you are just starting the program. We did
Speaker 4: just get a one two punch better than expected jobs
Speaker 4: data with the ADP orport coming in hotter than expected
Speaker 4: and that initial job was claims coming in lower than expected.
Speaker 4: You could see an extension in the move with ten
Speaker 4: yure yields now creeping closer to that four percent three
Speaker 4: point nine to nine percent if you round up about
Speaker 4: just less than one basis point, Carl, how much are
Speaker 4: you looking at a market that is screaming that we
Speaker 4: are not going to have any recession anytime soon without
Speaker 4: some sort of exogenous shock.
Speaker 3: Well, I think the market signal is very important, but
Speaker 3: that market signal will be very subject to the macroeconomic
Speaker 3: data trend. And we are certainly moving to a slower
Speaker 3: pace of activity than where we were, for instance, in
Speaker 3: Q three of last year. So it is a slower
Speaker 3: profile in the first part of this year, which will
Speaker 3: mean less hiring that puts pressure on margins and revenue
Speaker 3: gains and whatnot, slower nominal GDP than those things tend
Speaker 3: to slow down as well, So it will be a
Speaker 3: challenging macro environment, which will be an environment in the
Speaker 3: first half of this year where the macro variables really
Speaker 3: do drive the narrative, as we'll get some clarity on
Speaker 3: whether it's a bumpy landing, soft landing, no landing, et cetera,
Speaker 3: et cetera. And so I think we do have to
Speaker 3: pay very careful attention to that tug of war between
Speaker 3: what markets are seeing in terms of FED easing and
Speaker 3: whatnot and what the macro data are suggesting. And as
Speaker 3: we look at the claims numbers, right, this is consistent
Speaker 3: with what we said ahead of the data which is
Speaker 3: it's not layoffs that are cooling the labor market at
Speaker 3: the moment, it's just a reduced appetite for hiring.
Speaker 4: You mentioned the market signal, Carl, and I think that
Speaker 4: really follows nicely onto what we saw yesterday in the
Speaker 4: meeting minutes. J Powell kind of dismissed this idea of
Speaker 4: financial conditions in the December FMC meeting, and then he
Speaker 4: inserted that back in, or somebody did in the meeting
Speaker 4: minutes for suddenly they're worried about this easing and financial
Speaker 4: can conditions. Do you think that basically the implied rate
Speaker 4: cuts that we have seen priced into the market through
Speaker 4: the end of last year have made it more difficult
Speaker 4: to really achieve that price stability in a way that
Speaker 4: we see with ongoing labor market strength.
Speaker 3: I think that the easing of financial conditions, which is
Speaker 3: pretty substantial. Our own BMP Financial Conditions Index would say that,
Speaker 3: you know, the moves from the highs are equivalent to
Speaker 3: maybe one hundred basis points of FED cuts. That complicates
Speaker 3: the exit process. Now the FED knows full well that
Speaker 3: when they shift from the risk of there being more
Speaker 3: hikes to either being on perma hold or moving to
Speaker 3: a lower policy rate, that there's always going to be
Speaker 3: that kind of easing of financial conditions that takes place,
Speaker 3: but absolutely this does complicate the process. We heard that
Speaker 3: in the minutes, the line that said, you know, the
Speaker 3: easing of financial conditions, you know, the scope or the
Speaker 3: magnitude of it could jeopardize the Fed's path. If we
Speaker 3: have a real reacceleration in the economy, then that last
Speaker 3: mile in the inflation fight becomes more difficult, and that's
Speaker 3: going to slow down the FED in that process. What
Speaker 3: I thought was interesting in the minutes was the you know,
Speaker 3: the usually the FED has the boilerplate language, if it's hotter,
Speaker 3: we'll go higher, if it's cooler, will go lower, and
Speaker 3: they didn't do that. It was i think on page
Speaker 3: eight of the minutes where they talked about, you know,
Speaker 3: kind of maybe empty or somewhat empty rhetoric about saying
Speaker 3: that you know, there's a possibility of more hikes. Then
Speaker 3: they went on to say there's a possibility that we
Speaker 3: could take longer to pivot towards cuts, But they never
Speaker 3: then added the other side of the scale, which is
Speaker 3: and if things are cooler, we could go sooner, so
Speaker 3: that tells you they're very sensitive to the market reaction
Speaker 3: to the December press conference.
Speaker 2: Carl, the fact that we were all wrong last year
Speaker 2: and that we got this wonderfully buoyant economy and right now, John,
Speaker 2: a three point eight percent statistic on the unemployment rate.
Speaker 2: Guestimate for tomorrow, Carl, are we fully employed? I mean,
Speaker 2: there's a lot of Americans flat on her back, but
Speaker 2: are we fully employed in America?
Speaker 3: As we look at the aggregate data right the unemployment
Speaker 3: rate below four percent, If we look at the wage trends,
Speaker 3: I think it's pretty apparent that we have been in
Speaker 3: a period of full employment and that largely explains those
Speaker 3: wage pressures. Now the labor market is cooling. So while
Speaker 3: we may be fully employed now on the eve of
Speaker 3: the December jobs report, by the middle of the year
Speaker 3: or later, I think that there could be a hotter
Speaker 3: debate about whether we still are at full employment, because
Speaker 3: we will see those wage pressures coming down as the
Speaker 3: unemployment rate drifts higher, and that will create some slack,
Speaker 3: which is a welcome development after the last two years
Speaker 3: post pandemic environment to get us that last mile back
Speaker 3: to two percent. Of course, full employment is very important,
Speaker 3: but as Jerome Powell reminds us in nearly every press conference, right,
Speaker 3: price stability is the bedrock or the foundation of a
Speaker 3: stable act. So we can't just push the unemployment rate
Speaker 3: as low as we can go without taking into consideration
Speaker 3: that trade off with the with the inflation dynamics. And
Speaker 3: that was actually something that was highlighted in the Minutes
Speaker 3: yesterday as well, where now policymakers are starting to think
Speaker 3: about the tradeoff on the dual mandate, you know, so
Speaker 3: there's more weighting to both factors on the dual mandate
Speaker 3: relative to where we were over the last several quarters.
Speaker 5: Hey, Cole, just quickly, just to recamp expectations tomorrow.
Speaker 6: What are the numbers for you in a team.
Speaker 3: Well, I'm eyeing this hissing sound in the labor market.
Speaker 3: We're gradually losing momentum. So I think one sixty five
Speaker 3: ish on the number, which now turns out to be
Speaker 3: just slightly below the consensus forecast, and I would watch
Speaker 3: for some slack and the unemployment rate. I actually think
Speaker 3: maybe a two tenths increase up to three point nine
Speaker 3: percent with still those persistent wage pressures in the background.
Speaker 3: Keep in mind, inflation is a liking indicator, and so
Speaker 3: is labor inflation.
Speaker 5: Colt Rick adonad it Happy New Year, sir, cal Ricotono,
Speaker 5: BMP parapath joining us now, Katy Kaminski, chief research strategist
Speaker 5: of Apfasimplex, punishing that bond market, Katie, you were sure,
Speaker 5: We talked about it. It felt good for a while.
Speaker 5: Then this market turned, Katie. I guess you're still sure
Speaker 5: after the pain of the last couple of months and
Speaker 5: what changed for you?
Speaker 7: No, trend signals have finally turned long, and I think
Speaker 7: this is an epic signal for the market because we
Speaker 7: have been short for nine quarters. This has been one
Speaker 7: of the longest shorts in trend falling history over the
Speaker 7: last twenty to forty years. And I think this is
Speaker 7: important because it signals the end of the tightening cycle
Speaker 7: and it suggests that we're going through a regime change
Speaker 7: and that we need to start looking at the next
Speaker 7: phase of the bond market. And for me, that's looking
Speaker 7: for a steepral yield curve and I'm trying to think
Speaker 7: about what is going to be the catalyst for that as.
Speaker 8: The next phase of this trade.
Speaker 4: It's one thing not to be short, Katie, it's another
Speaker 4: thing to be aggressively long Where does trend following signal
Speaker 4: send you?
Speaker 9: So right now there's still rather muted.
Speaker 7: But I think the key that we're going to have
Speaker 7: to watch is how fast are cuts coming? And I
Speaker 7: also think we have to be a little bit nervous too.
Speaker 7: We need to watch what's happening with supply and treasuries,
Speaker 7: to look at the end of the curve to see
Speaker 7: what's happening there as well as we try to navigate
Speaker 7: this year as weaker data might come in and as
Speaker 7: we try to roll over debt throughout the year. So
Speaker 7: I think this is going to be a year to
Speaker 7: watch the shape of the curve and to see where
Speaker 7: the curve actually settles out.
Speaker 4: When you talk about a steepening in the yield curve,
Speaker 4: it can come from two places. It can come from
Speaker 4: short term yields coming down in response to FED rate cuts,
Speaker 4: or it could come to from longer term yields rising aggressively.
Speaker 4: Are you basically saying because you are no longer short
Speaker 4: treasuries that you see it more coming from the front
Speaker 4: end with more aggressive rate cutting cycle than people are expecting.
Speaker 7: Well, that's the trade that everyone's focused on and I
Speaker 7: think that's where everyone's focus. Now you're just mentioning it
Speaker 7: that you know, we're focused on how soon our cut's coming,
Speaker 7: and when are we going to see the shorter end
Speaker 7: of the curve sort of deep in so that we
Speaker 7: have this this more stepl curve, I think where you
Speaker 7: have to worry. The typical thing that would be the
Speaker 7: challenge is if we start to see more challenging effects
Speaker 7: on the long end of the curve, aka you know, poor,
Speaker 7: poorer fixed income market on the long end. So that
Speaker 7: would happen if we had trouble in terms of valuations
Speaker 7: for debt, and so that would happen if we had poor,
Speaker 7: you know, poor auctions in the treasury market. So that's
Speaker 7: something I'm going to be watching this year.
Speaker 2: Kay, Let's talk to Global Wall Street right now. That
Speaker 2: hangs on your every word on trend based CTA technical analysis.
Speaker 2: So we had a trend to a higher yield than
Speaker 2: a tenure we've rolled over the indeterminate point I call soup.
Speaker 2: Are we in a trend of soup now indeterminate? Or
Speaker 2: can you state that we have a trend towards lower yield?
Speaker 2: Is a trend in place of higher prices and lower yield.
Speaker 7: So we hit the inflection point and we've started moving
Speaker 7: towards longer, longer signals, especially in most asset classes, particularly equities.
Speaker 7: We've also seen very strong short signals in the US dollar,
Speaker 7: so we've really seen that inflation trade that we were
Speaker 7: seeing for pretty much two years dissipate and move past
Speaker 7: a point where we're moving towards a new trend.
Speaker 2: You sound like Luisa Mada there talking about dissipation. What
Speaker 2: will it take to get trend in place where there's
Speaker 2: a permanence to week dollar, a permanence to lower yield.
Speaker 7: I think rate cuts as expected would definitely continue that
Speaker 7: trend strongly, of course, not as weak data if we
Speaker 7: continue to see this sort of soft landing be a possibility,
Speaker 7: and I think that is going to be in question,
Speaker 7: of course, because my general view this year is that
Speaker 7: we're going to see a lot of variation in outcomes.
Speaker 7: I want to point out one key fact a bond
Speaker 7: volatility still remains elevated and bond stock correlation still remains positive.
Speaker 7: Those are two technical factors that are very different than
Speaker 7: the classic regime, so we need to navigate those first
Speaker 7: before we can figure out sort of have we moved
Speaker 7: to sort of back to where we were or are
Speaker 7: we moving somewhere else?
Speaker 5: Ok, Katie, let's finish that. We caught it with someone.
Speaker 5: Just yesterday from JP, Mork and Lisa mentioned them. Phil
Speaker 5: Camporari talked about sixty to forty being back and the
Speaker 5: forty with an amble you to play defense.
Speaker 6: Is there any reason to believe that it is back?
Speaker 5: You're seeing anything that suggests that correlation is going back
Speaker 5: to what some people might call slightly more intuitive.
Speaker 7: I think everyone wants that, but I think the worry
Speaker 7: is what I just said. We're seeing very different asset
Speaker 7: class relationships.
Speaker 8: So we need to.
Speaker 7: Watch inflation and watch for how inflation behaves because inflation
Speaker 7: changes the nature of asset class relationships. If we should
Speaker 7: see inflation have upside risk potential, we will see more
Speaker 7: challenge that sixty forty narrative if in fact we can
Speaker 7: keep inflation under control.
Speaker 9: I agree the sixty forty is.
Speaker 7: A good place to be, but so watching inflation and
Speaker 7: keeping that in check, And that's why the Fed is
Speaker 7: probably being more conservative and being careful because they want
Speaker 7: to make sure that's the case.
Speaker 5: Casey appreciate the update. Happy New Year. It's going to
Speaker 5: catch up. Katy Commnce to give appasimplex.
Speaker 2: Edward Mills joins US ed Mills, Washington policy analyst at
Speaker 2: Raymond James, and you've got a very domestic note today
Speaker 2: with domestic issues. John Ferrell mentions the idea of our
Speaker 2: foreign wars. Is there a foreign policy stance among Republicans
Speaker 2: and Democrats on Capitol Hill.
Speaker 10: Tom, They're trying to find that, and I think that
Speaker 10: they do wrap it from a domestic agenda. What we're
Speaker 10: looking at for a January agenda is not just funding
Speaker 10: the United States government, but it's the national security issues.
Speaker 9: And so you have the supplemental.
Speaker 10: Looming in the background for Israel, for Ukraine, for Taiwan.
Speaker 10: But Republicans are saying, if we're talking about national security,
Speaker 10: we also have to talk about the border. So that's
Speaker 10: why Republicans were at the southern border yesterday.
Speaker 9: Right pushing four those border protections.
Speaker 10: But the problem for them is that they continue to
Speaker 10: lose members and they're down to two hundred and nineteen.
Speaker 10: Usually you need two eighteen to get something through the House.
Speaker 10: So they have really strong border policies, but right now
Speaker 10: they don't have the votes.
Speaker 2: What does the Democrat party view on a national security
Speaker 2: issue at the border?
Speaker 1: Do they agree?
Speaker 2: Is it a nuanced do they flat out disagree with
Speaker 2: Speaker Johnson?
Speaker 9: So I think it's a little bit nuanced.
Speaker 10: In the bill that filled in the Senate in December,
Speaker 10: there were some border funding provisions. What we have right
Speaker 10: now is that Democrats understand that they need to do
Speaker 10: more on the border. There's been negotiations, but they certainly
Speaker 10: don't want to go as far as House Republicans have
Speaker 10: been pushing for. They call it HR two, that Protect
Speaker 10: the Border Act. That's real changes to asylum, that's changes
Speaker 10: to kind of e verify systems in the United States,
Speaker 10: that's rebuilding the Trump border wall. Those are a step
Speaker 10: too far for Democrats. What I think we have to
Speaker 10: see is that Democrats have to go further than they're
Speaker 10: comfortable with to get the other provisions. But we are
Speaker 10: in that period of trying to figure out exactly where
Speaker 10: that line is, and so we're going to go right
Speaker 10: up to it and potentially have a government shutdown come
Speaker 10: January nineteenth or February second, the two funding deadlines that
Speaker 10: are approaching very.
Speaker 4: Quickly here, That's where I wanted to go in there
Speaker 4: seems to be a sort of a subtle shift in
Speaker 4: the Republican party moving away from just tying some of
Speaker 4: the border kinds of security provisions to funding for Ukraine
Speaker 4: and Israel, to moving it more broadly to shutting down
Speaker 4: the government if they don't get what they want. Does
Speaker 4: that make it so much more likely that we are
Speaker 4: going to get the government shutdown? It doesn't even matter.
Speaker 10: It's a great question, Lisa, and I think that we're
Speaker 10: kind of right on that precipice of either grand bargain
Speaker 10: or bust because we probably have to watch what develops
Speaker 10: in the Senate. But you do have this sense that
Speaker 10: Republicans want to fight, that they want to show that
Speaker 10: they are pushing for border security and want to push
Speaker 10: for more than what Democrats want, and sometimes by having
Speaker 10: that shutdown really elevates their point. However, Republicans also want
Speaker 10: to have the ability to say they got something done
Speaker 10: that when they run for reelection here in November, that
Speaker 10: they can point to an accomplishment, and so that's where
Speaker 10: the Grand bargain comes in. There is still a strong
Speaker 10: desire in DC to support Israel, Ukraine, Taiwan through defense
Speaker 10: supplemental and if you can put that all together, and
Speaker 10: we have to remember that even if we shut down
Speaker 10: the government, at some point, we're going to reopen it.
Speaker 10: So it's just a question of how far and how
Speaker 10: much drama there is. But at Raymond James we always
Speaker 10: do point out that in past government shutdowns, on average,
Speaker 10: the S and P five hundred has been up by
Speaker 10: three point two percent.
Speaker 9: So from a market perspective, we.
Speaker 10: Kind of tend to discount the fact that the government
Speaker 10: could shut down because it always reopens.
Speaker 4: Talking about drama, Donald Trump, we're talking about January fifteenth,
Speaker 4: We've got the Iowa CAUCUSUS. Then we've got New Hampshire
Speaker 4: on January twenty third, where we have the first primary
Speaker 4: in the country. How much does it change the calculus
Speaker 4: if Donald Trump, as expected, wins the primary races in
Speaker 4: those two states and we do get the sort of
Speaker 4: feeling that he once again is at the helm very
Speaker 4: much of the Republican Party.
Speaker 10: So, Lisa, I think at that point what you would
Speaker 10: see is that the voice of Donald Trump becomes even
Speaker 10: more important in congressional fits.
Speaker 9: Right now.
Speaker 10: A lot of the times when he sends out a
Speaker 10: message or sets of policy stands, it's.
Speaker 9: Noticed in DC, but it's not truly followed.
Speaker 10: If he re establishes himself as the head or the
Speaker 10: de facto head of the Republican Party and looks like
Speaker 10: it's going to be the nominee, then if he comes
Speaker 10: out and says kill this bill, don't vote for this,
Speaker 10: you have to fight stronger on border security. That makes
Speaker 10: it much harder for Republicans to cut the deal. And
Speaker 10: so that's putting pressure to try to do it sooner
Speaker 10: rather than later. If they can get it done by
Speaker 10: that January nineteenth deadline, that is after the Iowa caucuses,
Speaker 10: but before that, momentum could build. Alternatively, if you have
Speaker 10: someone like a Nicky Haley emerge, I think the markets
Speaker 10: would start to kind of search because there is a
Speaker 10: sense that she is a stronger candidate against Biden, the
Speaker 10: likely Democratic nominee, and it gives a little bit more
Speaker 10: wiggle room for House Republicans and House or Republicans generally
Speaker 10: in DC to potentially cut that deal.
Speaker 5: That's the range of outcomes said, You've got to tell
Speaker 5: me a base case for the next month.
Speaker 6: What a thing?
Speaker 10: So, yeah, the base case is drama breakmanship. It does
Speaker 10: seem like we could easily get that government shut down.
Speaker 10: But from a market perspective, yeah, I tell clients to
Speaker 10: kind of pay attention to.
Speaker 9: That longer term provision.
Speaker 10: I do think we will get government funded, we will
Speaker 10: get defend supplemental, we will get something on the border.
Speaker 9: It's just a question of timing.
Speaker 6: John, Thank you, buddy.
Speaker 5: Going to catch up a new year, Sir at Mills
Speaker 5: there of Raymond James. Steve Trent says American Airlines, American
Speaker 5: Airlines analyst over a city is still optimistic. Right in
Speaker 5: this premium economy, traffic flow, international momentum and loyalty and
Speaker 5: co prended card strength should continue to support network airline
Speaker 5: revenue TK. That is the constructive view from Steve and
Speaker 5: a team.
Speaker 2: Mister Trent owns a high ground on this. You do
Speaker 2: this with the grind at Stuyvesant, then under Pennsylvania, then
Speaker 2: you go north into the middle of nowhere where there's
Speaker 2: no airports, tuck, and you go someday, I'm going to
Speaker 2: be an airline analyst. Trent darkins ador, good morning. Great
Speaker 2: to have you with us here. What's the level of
Speaker 2: enthusiasm You have a buy in United you published that yesterday.
Speaker 2: People think you're nuts on this how do you have
Speaker 2: a buy on an industry that seems so believed.
Speaker 11: No, and thank you for having me in. Happy New
Speaker 11: Year to you guys. I think I have enthusiasm in spots.
Speaker 11: So when we look at what's going on in the
Speaker 11: space right now, you're really seeing a lot of the
Speaker 11: economic value going largely to two airlines, Delta and United.
Speaker 11: If we're talking about the United States market, you can
Speaker 11: actually extend this thesis to let's say Air Canada north
Speaker 11: of the border, and let's say further down south Panama's
Speaker 11: COPA Airlines, where international long haul is doing well. The
Speaker 11: network airlines have adapted very well to what I would
Speaker 11: characterize as.
Speaker 8: The new normal.
Speaker 11: We have most consumers only in the office three days
Speaker 11: a week. That has resulted in a blended travel let's say,
Speaker 11: with very good demand indicators for premium economy. Basic economy
Speaker 11: is a different story. Your domestic is also a different story.
Speaker 2: You and I were weed one this and the answer
Speaker 2: is Robert Crandell changed the business years ago to American Airlines.
Speaker 2: You sat out there and said, we're doing price discrimination.
Speaker 1: Of that, what our audience knows.
Speaker 2: Is tickets are cheaper now than they were a year ago.
Speaker 2: Two years ago. How do you have a buy in
Speaker 2: the stocks if they're giving away seats again.
Speaker 11: So I think there are pieces of the space where
Speaker 11: we're not optimistic. We certainly don't have a buy on
Speaker 11: the whole group. We're far less sanguine on those domestic
Speaker 11: oriented carriers. But when one looks at the supply situation. Now,
Speaker 11: if you go back to twenty nineteen and compare domestic
Speaker 11: capacity versus the US economy, you roughly had twenty three
Speaker 11: dollars and twenty some odd sense of economic activity pervailable
Speaker 11: seat mile. Go to twenty twenty three, we had roughly
Speaker 11: twenty eight dollars of economic activity prevailable seat mile. So
Speaker 11: capacity has grown, the US economy has grown more. I
Speaker 11: think the argument we're trying to make is not to
Speaker 11: buy everything, but to be selective in those network carriers
Speaker 11: that have very specific attributes such as very strong loyalty
Speaker 11: and co branded card. We think that's helped these carriers
Speaker 11: to divus their earning stream international long haul and this
Speaker 11: very good setup in terms of their cabin offering blended travel,
Speaker 11: you know, economy plus that's really been the big mover.
Speaker 4: How much would oil prices have to rise for you
Speaker 4: to get less constructive at American.
Speaker 11: You know, in terms of Delta and United those are
Speaker 11: the really the two I like, and you know, less
Speaker 11: sanguine on the others. Quite frankly, I think if oil
Speaker 11: prices rise, it would really depend how they rise. Do
Speaker 11: you get an oil price rise because there's better global
Speaker 11: economic activity, I'm not necessarily perturbed by that because you
Speaker 11: have the likes of Delta COPA that can price that
Speaker 11: in to business travelers and higher end travelers. If we
Speaker 11: get an oil price spike that you know, creud goes
Speaker 11: up twenty bucks a barrel overnight, that's a whole different ballgame,
Speaker 11: which is I don't see anybody predicting. But if we
Speaker 11: in that instance, for example, that's actually a tough situation
Speaker 11: to the group because it's very hard to pivot maybe
Speaker 11: in lesser Southwest airlines and at least temporarily you have
Speaker 11: a large hedge position.
Speaker 5: At least has talked about this, the way these airlines
Speaker 5: are essentially just credit card companies now with airplanes bolted
Speaker 5: onto them. Who's absolutely now their lawless program. When you
Speaker 5: look across these airlines, these companies, who's got and out down?
Speaker 11: Delta's really I think head and shoulders above most everybody.
Speaker 11: So if one looks at their brand, you know they
Speaker 11: were thinking back to those you know, terrible pandemic days.
Speaker 11: They were the very last airline to finally unblock that
Speaker 11: metal seat as consumers were just starting to get comfortable
Speaker 11: again with sitting next to strangers, even strangers wearing masks.
Speaker 11: Delta is the only major US airline that did not
Speaker 11: diluted sequity holvers during the pandemic. No convertible debt offerings,
Speaker 11: no equity offerings.
Speaker 1: No seats in their lounge.
Speaker 2: Bramo, but fell off her chair there when you're talking
Speaker 2: about give us an anecdote on.
Speaker 4: Delta, Lisa, No, I mean, listen, this, get the smallest
Speaker 4: violin possible out. But I'm just thinking, you know, of
Speaker 4: all of the massive lines outside the Delta lounge with
Speaker 4: people bringing their American Express card and pulling it out
Speaker 4: and saying, but I'm the real guy. I mean, how
Speaker 4: much is this really going to diminish the people who
Speaker 4: are loyal flyers?
Speaker 9: You know what?
Speaker 11: And that's actually a hallmark of success right there. So
Speaker 11: if you look at the you know, the loyalty program revenue,
Speaker 11: they did four point one billion and twenty twenty one,
Speaker 11: they did five and a half some add billion. In
Speaker 11: twenty twenty two, they're probably going to close in on
Speaker 11: seven billion. They're gonna I think the print for four
Speaker 11: Q is on January twelfth of theirabouts. So that trajectory
Speaker 11: and what they're doing on the co branded card. They
Speaker 11: have such a good brand and for any large bank,
Speaker 11: they're probably the best counterparty and get very good economics
Speaker 11: on this program.
Speaker 4: Fast forward five years from now, how much of the
Speaker 4: revenue of a delta is going to come from the
Speaker 4: card effort?
Speaker 11: Yes, I think if one looks at the pure economics
Speaker 11: of it versus just the stuff that runs through the
Speaker 11: income statement, sort of two different pieces of flow there,
Speaker 11: I think that, you know, you could have something conceivably
Speaker 11: five years from now that's a good you know, ten
Speaker 11: to fifth teen percent higher than it is today, which
Speaker 11: on the surface doesn't sound like that big a deal,
Speaker 11: But when one thinks about what kind of margins you
Speaker 11: get on co branded card revenue, you know, versus main
Speaker 11: cabin passenger revenue, you know, the mixed impact is big.
Speaker 11: You know, the d risk of the earning stream is
Speaker 11: also significant, you know, So once again I'm not constructive
Speaker 11: on any every single US earline. There are two I
Speaker 11: really like, and then I'm less sanguine on most of
Speaker 11: the rest.
Speaker 5: I can tell you the loyalist programs, the actual loyalist
Speaker 5: Tom hate this. The people who actually fly on the planes,
Speaker 5: they hate it because they believe that if you can
Speaker 5: acquire the same state, it's just my spending on a
Speaker 5: credit card.
Speaker 6: It's just a cheat code.
Speaker 5: It's not the same as actually being a loyalist and
Speaker 5: flying every single day on the planes.
Speaker 6: I know you're one of them. I know a lot
Speaker 6: of people following this program. I mix the same as well.
Speaker 4: I'm mixed because on one hand, it's a democratization of
Speaker 4: a very otherwise sort of gross system where some people
Speaker 4: are preferred and that you know, are allowed in for
Speaker 4: and you're better and this and that, like it's sort
Speaker 4: of this. It's sort of a social experiment when you
Speaker 4: go to the airport and people start getting angry and start,
Speaker 4: you know, filing up and pushing each other to your
Speaker 4: good point.
Speaker 2: I had a round trip recently where there was not
Speaker 2: a single available seat in the lounge both ways.
Speaker 1: As well.
Speaker 2: Steve Tron, I've got to talk to you about the
Speaker 2: dangers that.
Speaker 1: Are out there.
Speaker 2: All of us were just foundationally shaken by what we
Speaker 2: sawt I needed in Tokyo here in the last couple
Speaker 2: of days, I think of kaivon rumored Cow and you're
Speaker 2: a great colleague here in the aerospace and airline game
Speaker 2: and the dangers that are out there. Kai lived decades ago,
Speaker 2: is well on an ugly flight. How safe our runways
Speaker 2: with all of your knowledge, all of your intake, how
Speaker 2: safe are the runways of American airports?
Speaker 1: Yeah?
Speaker 11: Great question, and my heart goes out to you know,
Speaker 11: the folks over in Japan, not just for the play
Speaker 11: and accident, but the earthquake itself. When one looks at
Speaker 11: the system in the United States, we have very strict
Speaker 11: rules here, very strict rules on air traffic limitations on
Speaker 11: how many air traffic movements each controller is supposed to monitor.
Speaker 11: So I don't have big concerns about the safety. There
Speaker 11: are definitely bottlenecks out there in terms of the supply
Speaker 11: of air traffic controllers, and there are arguments that you know,
Speaker 11: US air traffic system to some extent is anequated. You
Speaker 11: know that being said, how have officials responded to it?
Speaker 11: They have forced the industry to reduce air traffic movements
Speaker 11: in some places. So I think that's unfortunate for the
Speaker 11: consumer on some levels, but I'm happy to see them
Speaker 11: doing that in terms of you know, safety first.
Speaker 6: Yeah, stay, this is tring to catch up. Thank you, sir.
Speaker 6: It's going to say it after year.
Speaker 5: You think trend that of safety.
Speaker 2: Let's get shor it right now, Sarah Hugh and joining us,
Speaker 2: and this is something John Farrell has not forgotten about
Speaker 2: I have. And they're a europe ahead of Europe in
Speaker 2: America's research and standard at charge. I want to digress here, Sarah,
Speaker 2: away from the US economic data. We're going to see
Speaker 2: we haven't even addressed at the beginning of the year
Speaker 2: the challenges of Christine la guard. How are her inflation
Speaker 2: challenges different than those of Jerome Power.
Speaker 12: Sure that there are too many differences in terms of
Speaker 12: the challenges because in both cases you have a strong
Speaker 12: labor market, and the question is, you know, are is
Speaker 12: the fact the ECB are they taking a different approach
Speaker 12: to those strong labor markets. We had a very very
Speaker 12: clear message from Christine Laguard at the last ECB meeting
Speaker 12: that domestic inflation pressures with a concern that full employment
Speaker 12: and ongoing labor market pressures were a concern, and that
Speaker 12: that's why the ECP is cautious, why they're not talking
Speaker 12: about rad cups. The FIRDS view seems to be, you know,
Speaker 12: we're getting a soft landing, inflation is coming down, We're
Speaker 12: not too concerned about labor market strength. But I would
Speaker 12: note what happens to wage growth tomorrow. We saw for
Speaker 12: the November payroll report AVAGALLI earnings up stronger than expected,
Speaker 12: so that could be a concern going forward.
Speaker 2: Let's go right there, because I was a thought the
Speaker 2: high point of your research note on wage growth.
Speaker 1: You take average hourly earnings AG.
Speaker 2: I bring it over to ECI, which is wages and benefits.
Speaker 2: What's the efficacy of AG for you tomorrow?
Speaker 12: At eight thirty, I think that I mean we are
Speaker 12: expecting a slowdown. To be fair, we think that we'll
Speaker 12: see softer monthly growth, but that's against a backdrop of
Speaker 12: last time around higher year on year, higher monthly, higher
Speaker 12: on a three month and six months annualize, all the
Speaker 12: sorts of measures.
Speaker 8: That the Fed likes to look at.
Speaker 12: And the reason why I think it is still very
Speaker 12: much worth taking account of what's going on there is
Speaker 12: because the disinflationary forces that have weighed on inflation to date,
Speaker 12: goods inflation, imported inflation, commodity prices, we're starting to see
Speaker 12: those reverse. Now we're seeing a pickup in commodity prices.
Speaker 12: Obviously geopolitical factors are behind that. Higher freight costs, so
Speaker 12: real jump in freight costs when we've got used to
Speaker 12: seeing them really flatlining over the past year or so.
Speaker 12: And what central bankers will be concerned about is that
Speaker 12: you haven't brought your core inflation down far enough before
Speaker 12: the benefit from weaker energy and food prices that starts
Speaker 12: to reverse, and your headline inflation catches up and starts
Speaker 12: to take over.
Speaker 8: So the wage earning.
Speaker 12: Section is very important, not just for the FED, but
Speaker 12: also for the ECB. But I would say at the moment,
Speaker 12: central bankers are taking a slightly different slant on what's
Speaker 12: going on and those fundamental drivers of domestic inflation pressures.
Speaker 5: With that mind, Sarah, when you compare and contrast you
Speaker 5: and a team, the difference is between the ECB and
Speaker 5: the Federal Reserve. How different are the thresholds for rate cuts?
Speaker 5: Who goes first? What if you penciled in for twenty
Speaker 5: twenty four.
Speaker 8: Well, we do have.
Speaker 12: The ECB going first, we think that they'll cut by
Speaker 12: the second quarter.
Speaker 8: They're shrugging aside.
Speaker 12: Weakness in the economy, but we think that that is
Speaker 12: going to become more of a factor. Obviously, inflation this
Speaker 12: time around for December is likely to nudge higher year
Speaker 12: on year because of base effects, but the broad trend
Speaker 12: is moving in the right direction, and ultimately we think
Speaker 12: that by the by the second quarter, by the next
Speaker 12: set of forecasts that we get, I guess for June,
Speaker 12: they will be signaling clearly that there will be inflation
Speaker 12: on target over their time horizon. Possibly they get there
Speaker 12: a little bit earlier, but we do see a sort
Speaker 12: of more cautious approach from ECB.
Speaker 8: So we think second quarter rate cups for the Fed.
Speaker 12: We've got the third quarter factored in. But I have
Speaker 12: to say that the commentary that we had at the
Speaker 12: last FOMC seem to be giving greater emphasis to.
Speaker 8: The perhaps the.
Speaker 12: Underlying growth of the economy and potentially the need to
Speaker 12: not over titan or not hold rates too high for
Speaker 12: too long, which could suggest that they move earlier than
Speaker 12: the third quarter. Obviously, markets are expect that they could
Speaker 12: move as soon as the next couple of months. We
Speaker 12: think that that will be too soon the minutes, I
Speaker 12: suggest we're more cautious than maybe than Pal's commentary after
Speaker 12: the last FMC meeting.
Speaker 5: That tug of war between market expectations and communication from
Speaker 5: the FAT continue. Sarah Grads catch ump. Happy New Year, Sarah.
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