Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz Jay Ley, we bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg
Speaker 1: dot Com, and of course, on the Bloomberg terminal. We
Speaker 1: do this each in every job's day A spirited conversation
Speaker 1: with the Secretary of Labor. Here is John Farrell u S.
Speaker 1: Labor Secretary Monty wolf Seconredy wolf St right to catch
Speaker 1: up with you, sir? Does this make your job a
Speaker 1: little bit easier going into the long weekend? It's certainly
Speaker 1: going to Labor Day weekend having fifteen thousand jobs, add
Speaker 1: the economy and the labor participation for what's number going
Speaker 1: up as well, So that's that's a good way to
Speaker 1: enter the Labor Day weekend. I been planning to ask
Speaker 1: you this question since I went to Jackson Holle and
Speaker 1: caught up with feedeficials last week. Love your reaction to this.
Speaker 1: Do you think how our unemployment is a price worth
Speaker 1: paying to get inflation lower? Say again, sorry, say it
Speaker 1: one mo time. Do you think higher unemployment is a
Speaker 1: price worth paying to get inflation lower. Uh No, I
Speaker 1: don't think so, And I don't think that with the
Speaker 1: case here. I think that. And again I don't want
Speaker 1: to contradict what what the folks in the fet are saying.
Speaker 1: But when you look at the job openings in America
Speaker 1: right now, I think we're going to be consistently strong
Speaker 1: as we move forward here. I think when to continue
Speaker 1: to people be going back to work, having the unemployment,
Speaker 1: having the labor participation rate getting bigger, I think that's important.
Speaker 1: I think what's going to reduce the inflation is obviously
Speaker 1: the inflation Reduction Acts will help us on that. The
Speaker 1: gas prices continue to come down will help us on that.
Speaker 1: And and then you know, I think the biggest unknown
Speaker 1: is going to be what's happening with Russia and Ukraine.
Speaker 1: This is what Chairman Pal said last week. He said
Speaker 1: higher interest rates, slower growth, and a softer labor market
Speaker 1: condition will bring down inflation. They will also bring some
Speaker 1: pain to households and businesses. He said this a failure
Speaker 1: to restore price stability would make far greater pain. You
Speaker 1: say you disagree with that. Secondly, Wolf, so you know
Speaker 1: I think I think that the Chairman certainly has has
Speaker 1: has has a lot more knowledge on this than I do.
Speaker 1: But what I my concern is, what I don't want
Speaker 1: to see is is people being laid off. I want
Speaker 1: to see continuou, seeing people go back to work, people
Speaker 1: being able to earn good wages. I think that you know, overall,
Speaker 1: and again, we're at a very interesting time when it
Speaker 1: comes to our economy. Nothing that's been predicted or no
Speaker 1: indicators that we've talked about in the last two years
Speaker 1: is like any other time in the history of our country.
Speaker 1: So I think that you know, as we think about
Speaker 1: inflation coming down, there's lots of reasons for why inflation
Speaker 1: went up, and it's not the same old pressures of
Speaker 1: the past. Well, this is what sentence Warren had to
Speaker 1: site to see an end over the weekend. Of response
Speaker 1: to some of this, she said, you know what's worse
Speaker 1: than high prices and a strong economy, it's high prices
Speaker 1: and millions of people out of work. I'm very worried
Speaker 1: that the FED is going to tip the economy into recession.
Speaker 1: Do you worry about the same thing. No, I think
Speaker 1: the Feds are going to be very careful and what
Speaker 1: they're doing. I think they're taking a very uh consistent,
Speaker 1: unique approach to what's happening here. And I think that,
Speaker 1: you know, again, as we were already seeing some of
Speaker 1: the inflationary pressures not come down enough, but we're starting
Speaker 1: to see those numbers go down in the right direction. Clearly,
Speaker 1: we have we have a ways to go before before
Speaker 1: we get to where we want to be in our
Speaker 1: economy when it comes to inflation and prices. But again,
Speaker 1: all of this wasn't all of those clouds for different reasons.
Speaker 1: And I think that, you know, we just need to
Speaker 1: continue to work on supply chain. We need to continue
Speaker 1: to get goods and service into our country and lawn term,
Speaker 1: we need to produce more here in the United States
Speaker 1: of America. Just for Americans looking down to DAYC at
Speaker 1: the moment Secredy Walsh, I think they're hearing the Chairman
Speaker 1: of the FEDS say one thing, and they're hearing another
Speaker 1: thing from the White House. The Chairman of the Fed
Speaker 1: is preparing the American people for pain, pain that we
Speaker 1: have to go through to get inflation lower. And I
Speaker 1: know other people out there think we can get a
Speaker 1: soft landing, but I'm not hearing that same concern about
Speaker 1: the future from from you, sir. Secondly, wish why are
Speaker 1: you a little bit more optimistic than say this Federal Reserve,
Speaker 1: because we have a star economy and the President is
Speaker 1: laid down some really good foundation here for the future
Speaker 1: of what we're doing here in America. The infrastructure billity,
Speaker 1: I take a different approach to this as as a former,
Speaker 1: as a former mayor of the city. I think about
Speaker 1: how do I grow my city. It's by investing an infrastructure.
Speaker 1: It's about creating more housing. The housing obviously is a
Speaker 1: little slow right now in the United States being built,
Speaker 1: but I think there's different reasons for that. Uh and
Speaker 1: and companies are still looking for people we have. You know,
Speaker 1: we had a meeting a couple of weeks ago at
Speaker 1: the White House that people were looking at for seven
Speaker 1: hundred thousand people working in SAP security. We have an
Speaker 1: ability to hire more nurses, We need more teachers. We
Speaker 1: have lots of jobs in our country that we need
Speaker 1: for the future of our country to stay open. So
Speaker 1: so I think that when we think about bringing down
Speaker 1: inflationary pressures, I think it's going to be looked very
Speaker 1: different than it has in the past. I think a
Speaker 1: lot of people that you're right, and some other people
Speaker 1: are round on that front. Secondly, Welsh, thank you sir.
Speaker 1: As always, we appreciate your time, especially ahead of a
Speaker 1: long weekend. Thank you very much. John Farrell was the
Speaker 1: Secretary of Labor there talking about it better than good
Speaker 1: Jobs report Randall Crossner. He's a former governor of the
Speaker 1: Federal Reserve System math from Brown and at Booth School,
Speaker 1: economics professor at the University of Chicago. Randy, I want
Speaker 1: to talk here about America's labor economy is being a
Speaker 1: homogeneous where we talk about an all in say three
Speaker 1: point unemployment rate, or is it about the halves doing
Speaker 1: well and a good part of America flat on their back.
Speaker 1: There is a lot of diversity in the and the
Speaker 1: labor market outcomes. I think you're exactly right, So this
Speaker 1: is not something that's even but as you were describing,
Speaker 1: this is really what the FIT is hoping for. More
Speaker 1: people are coming back into the labor market. That helps
Speaker 1: to reduce the tightness of that market. And you saw
Speaker 1: that manifest in slightly lower wage growth, which is exactly
Speaker 1: what the FIT is hoping for. That more people will
Speaker 1: come in leave some of the pressures in the market
Speaker 1: and take some of the pressure off some of the
Speaker 1: wage increases, so that will make it easier for the
Speaker 1: head to to try to bring inflation down to its
Speaker 1: two percent goal without pushing the economy too far too
Speaker 1: far down. Brandy, we've got at the participation rate to
Speaker 1: that point at sixty two point four percent, then how
Speaker 1: high can the Fed hope and wish and will that
Speaker 1: number to get? Well, they'd like to get a lot higher.
Speaker 1: Maybe we'll get a little bit higher. I think it's
Speaker 1: it's surprising how much it hopped up. My guess is that, um,
Speaker 1: it may not stay that high, or it might come
Speaker 1: down a little bit, but it's going in the right direction,
Speaker 1: which is exactly what we what we want to see
Speaker 1: see happening to reduce some of the labor shortages, to
Speaker 1: reduce some of the pressures of the labor market. Because
Speaker 1: it's been a bit surprising, given how strong the labor
Speaker 1: market is, that a lot of people haven't been bothering
Speaker 1: to even look Randy Crowsner, based on some of the takeaways,
Speaker 1: I think you're going to hear that word goldilocks a
Speaker 1: lot this morning. Would you push back against that characterization
Speaker 1: of this report given what you're expecting in the months
Speaker 1: to come. Well, it's just one number, so we wouldn't
Speaker 1: want to go go too far. But I think it's
Speaker 1: it's consistent with with with the FED wants to go.
Speaker 1: I think it has made the market says somewhat happy
Speaker 1: that because I think they were worried that there could
Speaker 1: have been a blowout report here. And unfortunately, good news
Speaker 1: in the labor market can be bad news because the
Speaker 1: FED will have to respond more. And so I think
Speaker 1: it's it's on a good path, but the FED is
Speaker 1: still going to be debating fifty or seventy five basis points,
Speaker 1: and I think it would end up but you know,
Speaker 1: very close to four by the end of the year,
Speaker 1: if not at four, and then be you know, hold
Speaker 1: with a four handle through much of Randy, Thank you,
Speaker 1: Randy Chryston there at the University Chicago, whether gloom or optimism.
Speaker 1: We speak with Jeffrey Rosenberg and black Rock portfolio manager
Speaker 1: for their systematic multi strategy fund thrilled he can join
Speaker 1: us each job day. Jeff, we need to recalibrate in
Speaker 1: the next year, or as John Farrell mentions, we need
Speaker 1: more data. But this seems to be one side relief
Speaker 1: equities up. How does the bond market have a sigh
Speaker 1: of relief, Well, it's a sigh of relief, Tom, because
Speaker 1: you had a lot of expectations really following the Jackson
Speaker 1: Hole presentations, speeches both by Powell and Schnabel that were
Speaker 1: very hawkish with regards to central banks, definitively stating that
Speaker 1: they were focused on inflation. And so the setup going
Speaker 1: into today was a little bit skewed to the downside
Speaker 1: that if it was a stronger report, that would have
Speaker 1: only solidified expectations for the seventy basis points in September,
Speaker 1: And if it was a significantly weak report, then the
Speaker 1: market might have looked through that as opposed to what
Speaker 1: we've seen, you know, in the last couple of payroll reports,
Speaker 1: particularly over this summer rally. Uh, it had been a
Speaker 1: market that, hey, if we got bad news, bad news
Speaker 1: is good news, and it may no longer be the
Speaker 1: case that bad economic news and slowdown is really going
Speaker 1: to push the Fed off of its tightening cycle, because
Speaker 1: they've been so clear to tell us it's really about inflation.
Speaker 1: So I think the look through for today, Tom, is
Speaker 1: really about what does the report signal about any kind
Speaker 1: of inflation look through, and I think the labor force
Speaker 1: participation rate number is really the key, uh takeaway? That
Speaker 1: is the most interesting pieces as you discussed a minute
Speaker 1: ago and Randy, which is you know, a little bit
Speaker 1: better than expected news. They're a little bit weaker than
Speaker 1: expected on the wage front, you know, modestly that's good
Speaker 1: news from the bond market perspective of not having to
Speaker 1: see the FED really react to inflation maybe as a
Speaker 1: strong again one data point, we're not going to overread that.
Speaker 1: But that's the one takeaway I would have from this
Speaker 1: report that I think is important is the look through
Speaker 1: to inflation. Okay, so I'll be in danger of over
Speaker 1: interpting one day to point then, Jeff, with that participation right,
Speaker 1: we've seen FED sports showing a pairing of bets on
Speaker 1: rate increases. Does it make sense then to expect less
Speaker 1: hiking from the Fed? And in what in what sense?
Speaker 1: Less hiking in the natum or less hiking overall, less
Speaker 1: less hiking next year? What do we think? Yeah, it's
Speaker 1: it's definitely about the near term trajectory. I think what
Speaker 1: you're seeing in the markets today is is about you know,
Speaker 1: the seventy five versus fifty debate. Today's number, you know,
Speaker 1: maybe pushes back a bit, and that's why you're seeing
Speaker 1: the rally in the front end of interest rates. But
Speaker 1: that's not over interpret again one data point, Um, this
Speaker 1: isn't really going to significantly change the trajectory of the FED,
Speaker 1: and the terminal rate debate is still very much unsettled,
Speaker 1: and today's labor market report isn't really going to settle
Speaker 1: that debate. We're going to focus a lot more on
Speaker 1: the inflation and the inflation trajectory. You know, a minute
Speaker 1: ago Mike McKee mentioned the you know, some of the
Speaker 1: housing numbers. Um, you know, this is one of the
Speaker 1: big challenges here that we're seeing is a huge transition
Speaker 1: from homeownership to home renting, and and you know that
Speaker 1: rental prices is a huge component of that inflation outlook.
Speaker 1: So those things are not really being addressed here on
Speaker 1: this labor market report, and that still faces the market
Speaker 1: still faces, John Farrell, what's so important here, and you
Speaker 1: brought this up before, it's a key insight is what
Speaker 1: do we really learn about where the terminal rate is
Speaker 1: for the Fed? The answers this doesn't help us well, look,
Speaker 1: at the end of the day, I think if it's
Speaker 1: been pretty clear they want time to financial conditions and
Speaker 1: to some degree that's going to cap the upside over
Speaker 1: the next few months. Tim if they're not satisfied, and
Speaker 1: ultimately the FEDS in control. And we've said it a
Speaker 1: million times over the last week, we've gone from a
Speaker 1: FED put to a FED call the good news. I
Speaker 1: think for a lot of people, just for now, if
Speaker 1: you publish the secondary market, this is a relief. When
Speaker 1: it's sticked. By the end of the day, we'll sit
Speaker 1: features robbing overage just a little bit positive, behalf of
Speaker 1: one percent. I'll continue this conversation with Jeff's colleague Rick
Speaker 1: Reader will do that at the top of the looking
Speaker 1: forward to that conversation. Also catching up with Victoria Finanti's
Speaker 1: a cross mark, Michael Capin of Bank America, Jim Bianco,
Speaker 1: Pianco Research too, and Secondary Welsh at the White House,
Speaker 1: Tom All coming up Secondary Welsh about Eastern time. Very good.
Speaker 1: John Ferrell with the Secretary of Labor. We will look
Speaker 1: for that on radio and television. Joining us now excuse me,
Speaker 1: Jeff Rosenberg still with us as well. We've got a
Speaker 1: great team lined up here to get you out over
Speaker 1: the next seventeen minutes of this jobs report. Jeff, what
Speaker 1: are you seeing in flows? What's the fear level out there?
Speaker 1: I don't want to know inside black Rock baseball, But
Speaker 1: are are people selling bonds as money flowing out of debt? Yeah? Tom,
Speaker 1: as you can imagine. You know, the flows are highly
Speaker 1: reactive to the returns. And this has been a historic
Speaker 1: UH negative return year for all categories that fixed income
Speaker 1: and and we've seen that in the past week as
Speaker 1: well in terms of acceleration in terms of rates, higher, spreads, wider.
Speaker 1: This is a very challenging and ironment for fixed income
Speaker 1: because we've come we came into this year really pricing
Speaker 1: the old inflationary regime, and obviously the inflationary regime has
Speaker 1: surprised the Fed, it's surprised the bond market, uh and
Speaker 1: and we continue to see those surprises. And so until
Speaker 1: we get a sufficient inflation risk premium priced into the
Speaker 1: bond market, returns are are going to be challenged. Now,
Speaker 1: the good news is you're starting to get more of
Speaker 1: that priced in, more of it priced into the front
Speaker 1: end of the curve. You talked a minute ago about
Speaker 1: the terminal rate. It's the back end of the curve
Speaker 1: where you still see a lot of confidence in the
Speaker 1: bond market that inflation will fall back through the two
Speaker 1: UH target. And so this is this is a bond
Speaker 1: market that gives the Fed an incredible amount of credibility
Speaker 1: uh that remains uh you know, to be seen, and
Speaker 1: that's a vulnerability to future fixed income returns. Jeff Rosenberg,
Speaker 1: thank you so much, Really appreciate the O your time
Speaker 1: here on jobs day before a holiday weekend. Michael Purvis
Speaker 1: joins us from Todd Back and Capital, always writing really
Speaker 1: intelligent notes. Michael, let me cut to the chase. What
Speaker 1: is the why and the how we get the standard
Speaker 1: of pores. Well, Tom, you know one thing that's been um,
Speaker 1: kind of working in the market's favorite broadly, you know,
Speaker 1: putting aside positioning and relief rallies and and so forth,
Speaker 1: is that, you know, the corporate earnings machine has been
Speaker 1: really performing here. UM. Now, obviously there's a lot of
Speaker 1: questions about how whether that trajectory can be maintained into
Speaker 1: the end of the year, and in particular to teth
Speaker 1: has in twenty three UM. But look, you know, nominal
Speaker 1: GDP is very high it's the components of nominal GDP
Speaker 1: in terms of the waitings of inflation versus real growth
Speaker 1: are not what we want them to be. But we're
Speaker 1: still seeing seeing you know, nominal high nominal GDP drive
Speaker 1: drives nominal earnings right there, and so we were we
Speaker 1: are seeing you know, continued strength. If you look at
Speaker 1: Q two s reports they came in the surprise levels
Speaker 1: were better than they were in a Q on there um.
Speaker 1: And on the other side, on the valuation side, look,
Speaker 1: you know we have had, you know, you go through
Speaker 1: this massive FED pivot over the last twelve months. It's
Speaker 1: been pretty remarkable, but it's also really well priced, and
Speaker 1: PE multiples are and the equity risk premium by by
Speaker 1: my measures, have really calibrated appropriately here. So look, if
Speaker 1: we wake up and you know, next week the ten
Speaker 1: years had four percent, which which is which I won't
Speaker 1: be but but you know, if A were to do that,
Speaker 1: then obviously we're probably going to see some further the
Speaker 1: contraction and so forth there. But I think right now
Speaker 1: the markets are going along and so I think, you know,
Speaker 1: we need to get through this uh September FED meeting.
Speaker 1: We need to get through some uh you know, look,
Speaker 1: economic data is good. UM. Unemployment data, UM, you know
Speaker 1: it's still really Rebut the I s M. We just
Speaker 1: got maybe and maybe, Michael. What we're seeing here is
Speaker 1: markets responding or coming around to that view because US
Speaker 1: ten year yields, thirty year yields resume their rise. Ten
Speaker 1: year yields up to three points to seven percent. Right now.
Speaker 1: You talk quite positively about stalks and about the earnings story,
Speaker 1: but others say that the earnings need to catch up
Speaker 1: with reality, and that means that we need to see
Speaker 1: cuts to expectations around corporate profits. Why do you not
Speaker 1: see that? Well, look, I think part of this is
Speaker 1: simply comes back to nominal GDP being being high this
Speaker 1: year and probably pretty high next year as well. My
Speaker 1: biggest risk to earnings next year. I mean, of course,
Speaker 1: if we get a big recession, yes that's gonna there's
Speaker 1: no question that will be a big hit to earnings here.
Speaker 1: But you know what are the other real risk for
Speaker 1: earnings next year? Simply inflation coming down a lot. If
Speaker 1: that were to happen, a lot of the earnings will
Speaker 1: come in and some companies will certainly see some some
Speaker 1: margin depression there. I want to give you a victory
Speaker 1: lab Michael Purvis. We had pre amsra on earlier with
Speaker 1: the call of the summer on curve inversion, and every
Speaker 1: once in a while Purvis absolutely nails it, folks. A
Speaker 1: few years ago, Michael, you nailed a d X Y
Speaker 1: the blended Pacific RIM currency regime X Japan. We now
Speaker 1: have a yen through a new level moments ago one
Speaker 1: forty point eight zero on Japanese yen. Many talking one
Speaker 1: weaker yen. Michael Purvis right now on what it means
Speaker 1: to see such currency weakness and strong dollar on the
Speaker 1: Pacific RIM, well, I think it's it's very significant. I mean,
Speaker 1: the fact is is that the United States dollar relative
Speaker 1: to so many currencies to Europe, but particularly the yen
Speaker 1: and and many e M currencies, is sort of effectively
Speaker 1: a pectrocurrency um certainly on a relative basis here. So
Speaker 1: you know, if you're talking about the end, you have
Speaker 1: to consider high threw carbon vulnerabilities, and they're as as
Speaker 1: painful as oil prices are here, it's a lot less
Speaker 1: so than it is in places like Japan and the Eurozone.
Speaker 1: So I think I think there's there's that you know,
Speaker 1: if you tell me Tom that oil is going to
Speaker 1: one fifty. I'll you know, I I can't imagine how
Speaker 1: the end wouldn't get a lot cheaper or the euro
Speaker 1: get substantially ship re religive to the dollar here. So
Speaker 1: I think that's one of the weird dynamics. It's that
Speaker 1: oil is leading, is a key thing that's driving, that's
Speaker 1: leading currencies around by the notes, Does that lead to
Speaker 1: a change in bo J policy? Michael, Is that where
Speaker 1: they well, well, I guess we've all been waiting for
Speaker 1: that for some time. I think there's a you know,
Speaker 1: there's certainly an interesting um sort of game of chicken
Speaker 1: the b o J has been playing here. We'll see
Speaker 1: at what level of sensitivity they have. But I think there,
Speaker 1: you know, after like you know, three decades of very
Speaker 1: very considered deflation disinflation in Japan, you know, maybe that
Speaker 1: they feel this is what it's sort of needed, kind
Speaker 1: of wake up um the economy there. But it is
Speaker 1: a dangerous game I think they're playing at some point.
Speaker 1: Michael Purvis, thank you so much greatly a previous We're
Speaker 1: appreciative there right now, Tiffany Wild with this uh PIMCO
Speaker 1: chief yours economists understanding that Paul Sweeney and I are
Speaker 1: not prime age, but Tiffany Wilding is prime age good
Speaker 1: prime ate statistics. Tiffany Wilding and that we're getting back
Speaker 1: to pre pandemic levels. Describe what prime ages please, morning,
Speaker 1: Tom and Paul. Yeah, so prime age is and it
Speaker 1: is exactly what it suggests that, Um, you know, this
Speaker 1: is the prime working years as defined by I guess
Speaker 1: the Bureau of Labor Statistics. Now, now keep in mind,
Speaker 1: though that prior to the pandemic, you're actually seeing people
Speaker 1: participate in the labor market longer. Um, so you actually
Speaker 1: did see participation rates for that kind of fifty five
Speaker 1: to sixty five or even because you have an older increase,
Speaker 1: but that all changed after the pandemic. We have a
Speaker 1: large wave of retirement. So now, um, you know, kind
Speaker 1: of the prime age participation rate is a really key
Speaker 1: focus here for um, you know, for broader participation rate trends. Well, okay,
Speaker 1: it's a key focus. Is the prime age. Is the
Speaker 1: rest of the economy getting back pre pandemic? I mean
Speaker 1: the compendium of statistics you look at, is that a
Speaker 1: unique idea or are we really getting back to what
Speaker 1: Paul January two thousand twenty that level. Well, so I
Speaker 1: think what's interesting and this came out I think in
Speaker 1: the various papers that were presented at Jackson Hole. UM.
Speaker 1: You know that a lot of the statistic it's been
Speaker 1: a lot of the underlying structural trends in the US economy, uh,
Speaker 1: you know, like participation rates or um, other you know,
Speaker 1: labor market trends or or like the productivity reports and
Speaker 1: things like that. They all actually are kind of behaving
Speaker 1: in a way that you would expect. So they're getting
Speaker 1: back to where they were prior to the pandemics. They're
Speaker 1: kind of normalizing, if you will. What looks to be
Speaker 1: a more structural change, UM is of course the inflation data. UM.
Speaker 1: And it's not just you know, the prices data obviously,
Speaker 1: but the wages data. All the wages came in maybe
Speaker 1: a little softer than expected this month. Overall, wages have
Speaker 1: been really strong and price have been really strong. So
Speaker 1: that you know, in terms of thinking about the scars
Speaker 1: post pandemic, it's really the inflation and data that looks
Speaker 1: the most changed at this point. How do you think
Speaker 1: the Federal Reserve will look at this labor market given
Speaker 1: the data point that we had just today, Yeah, I mean,
Speaker 1: so I think I think clearly the question that markets
Speaker 1: will be grappling with is are they going to move
Speaker 1: fifty or seventy five basis points at this upcoming fl
Speaker 1: MC meeting. You know, I think I think today's report
Speaker 1: probably didn't change people's views tremendously on that, and it's
Speaker 1: really going to come down to the inflation report, the
Speaker 1: CPI report, which will get next week. UM. You know,
Speaker 1: I think overall the data, you know, would UM, the
Speaker 1: data that we've seen since the last UM fl MC meeting,
Speaker 1: in particular the inflation expectations data. The FED cares a
Speaker 1: lot about a Philadelphia Fed survey of professional forecasters because
Speaker 1: they tend to be less moved by energy and food prices,
Speaker 1: which can be volatile, that they have moved up their
Speaker 1: longer term inflation expectations. UM, I think, more materially, and
Speaker 1: so that's important for the Fed. UM, you know. And
Speaker 1: I think overall this employment report, you know, even though
Speaker 1: you know, maybe there was UM, it's it's I think
Speaker 1: it's it's consistent with an economy that's still quite resilient
Speaker 1: and in a labor market that's still quite resilient and
Speaker 1: not clearly slowing. So I mean that's something that the
Speaker 1: Federal Reserve is going to be focused on. Not to
Speaker 1: give away at Vatican secrets, but Tiffany at PIMCO, surrounded
Speaker 1: by bond people, bond animals, I'm fascinated if you are
Speaker 1: advising them on an inflation function that gets their bond
Speaker 1: market back to seven percent or five percent or four
Speaker 1: percent or three point six away from the two percent
Speaker 1: required mantra of Fed officials. Are they modeling towards something
Speaker 1: higher than two? Well, I mean, I think you bring
Speaker 1: up a really good point, and that's if you look
Speaker 1: at you know, Taylor rules, which is, you know, kind
Speaker 1: of where the Fed funds rate you know, should be
Speaker 1: kind of a normative rule given on you know, given
Speaker 1: the inflation that we're seeing, given the unemployment trends, etcetera. Um,
Speaker 1: then the Fed funds rate should be much higher, you
Speaker 1: know than it is right now. You know. Now. Of course,
Speaker 1: explaining that difference is the fact that you do still
Speaker 1: have I think pandemic related thing, a pandemic related issue
Speaker 1: is that are impacting inflation. Um, and those things will uh,
Speaker 1: you know moderate so um, you know, the we've seen
Speaker 1: a moderation in logistics and shipping costs for example. Um,
Speaker 1: things from a global supply chain perspective look like they're
Speaker 1: getting back to normal. Of course, demand for goods was
Speaker 1: was really outside as results of pandemic et cetera. Those
Speaker 1: things should calm down. Um. But ultimately, if you kind
Speaker 1: of look past those things, underlying inflation, uh, and the
Speaker 1: underlying trend, and inflation looks like it's it's increasing higher.
Speaker 1: So I do think that, you know, we're getting to
Speaker 1: a point, and the FED has said this as well,
Speaker 1: we do need to be restrictive. So that means rates
Speaker 1: above probably the terminal level that we were that we
Speaker 1: saw in the last rate hiking cycle. Um, you know,
Speaker 1: and then those restrictive levels probably need to stay in place.
Speaker 1: And of course that's what the FED officials really kind
Speaker 1: of tried to hammer home at Jackson Hole, Um, that
Speaker 1: they're not going to be quick to sort of turn around. Um,
Speaker 1: you know, they're gonna they want to keep things restrictive
Speaker 1: to make sure inflation gets back to where they want
Speaker 1: to be. Tiffany, I try and get my head around
Speaker 1: this recession call. I mean, Tom and I tried to
Speaker 1: go out for cocktail after work yesterday, but we could
Speaker 1: not find an empty barstool anywhere in midtown. People are
Speaker 1: out and they're for the ending sunning. It is stunning
Speaker 1: to coast. What do you make of the consumer? What
Speaker 1: do you make of the consumer's ability to maybe stave
Speaker 1: off a recession? Yeah, I mean, I think over all,
Speaker 1: the consumer looks really strong right now. UM. I think
Speaker 1: the areas that that don't look as strong are the
Speaker 1: productivity statistics. Were basically our productivity recession. Usually you think
Speaker 1: about productivity is being very much linked to corporate profitability um.
Speaker 1: And there the data at least that the government provides
Speaker 1: has been maybe a little bit more mixed on that.
Speaker 1: So I think, you know what what we're looking for
Speaker 1: here in terms of a recession, UM, is that you
Speaker 1: have increasing costs of which can't be passed on to
Speaker 1: consumers as easily anymore. So you get a you know,
Speaker 1: kind of more of a profits decline and that results
Speaker 1: in uh, you know, in in some labor uh you know,
Speaker 1: changes in labor and maybe even some firing that we're
Speaker 1: starting to see in some sectors like the tech sector
Speaker 1: for example, um, you know, and others maybe real estate
Speaker 1: type of sectors. Um. I mean, so we are starting
Speaker 1: to see that so, but I think overall the consumers
Speaker 1: still strong. But that's because the labor market is so strong.
Speaker 1: Aggregate incomes are strong, um, but the labor market lags.
Speaker 1: Keep in mind, so when you have, you know, these
Speaker 1: shocks of the corporate sector, you know, that will filter
Speaker 1: through to labor markets and then to consumption with a
Speaker 1: little bit of a lag. Is this is this the
Speaker 1: Roaring twenties? My grandmother was that the ten twelve twelve
Speaker 1: years old in the pandemic of night and she would
Speaker 1: always talk and we laughed at her. Of course she
Speaker 1: was nuts boom right, a lot of people died, but
Speaker 1: she talked Tiffany about the rebound before the depression crept
Speaker 1: in of the Roaring twenties. Is that the behavior you
Speaker 1: witness now in the consumer Paul Sweeney just described, Well,
Speaker 1: I mean, I think, you know, overall consumption is kind
Speaker 1: of back to levels that we saw pre pandemic. Um.
Speaker 1: You know, I guess I wouldn't you know, think of
Speaker 1: consumption right now. Is is anywhere close to like kind
Speaker 1: of an irrational exuberance, you know? And I do think
Speaker 1: there are indicators that, um, you know, some consumers are
Speaker 1: actually struggling quite a bit here under the increases in
Speaker 1: prices that they've seen, so low income consumers, we've seen
Speaker 1: savings rates on those fault, increases in credit card debt
Speaker 1: and things like that. UM. So those consumers are struggling,
Speaker 1: you know, quite a bit here. But I think overall
Speaker 1: the consumer they're they're pretty pretty strong, um coming into
Speaker 1: this and pretty strong balance. She's coming in this as
Speaker 1: a result of the fiscal stimulus that we saw, um
Speaker 1: and they're still pretty strong. So it really comes down
Speaker 1: to the labor market here, I think. And if you
Speaker 1: see a deterioration, now keep in mind, how does the
Speaker 1: futtle reserves slow down the economy and slow down inflation. Well,
Speaker 1: they have to put enough pressure, um, you know on
Speaker 1: the broader corporate sector that you do start to see
Speaker 1: some labor market week is um. So that's really the
Speaker 1: key here, I think to the recession call. It's that
Speaker 1: you know, you have the FED that you know is
Speaker 1: going to restrict the economy. You know, it doesn't kind
Speaker 1: of get away from them, you know, And I think
Speaker 1: history sort of suggests that when they do restrict the
Speaker 1: economy that you know, it's hard to start, you know,
Speaker 1: it's hard to control that and fine tune it um
Speaker 1: and what can you know, what can be a period
Speaker 1: of below trend growth can turn into a recession, you know,
Speaker 1: kind of stall speed, if you will, can start to
Speaker 1: contract very easily. So I think that's what the concern is. Tiffany,
Speaker 1: Thank you so much. Tiffany. Welcome with him Cooke. This
Speaker 1: is the Bloomberg Surveillance Podcast. Thanks for listening. Join us
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Speaker 1: the terminal. I'm Tom Key even This is Bloomer