00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this out with stockslower and oil higher. Jeff youu of BNY Wright and the following Disinflation hopes are still carrying sentiment, growth, earnings and policy risks are harder to ignore. Jeff joins us now for more. Jeff, welcome, buddy. Let's frame the next twenty four hours together a new time with your priority. We've got earnings, We've got CPI, We've got Chef Kevin Wartss, we've got developments in South Korea and issues through the stradufor Merz. Where's your focus this morning? 00:01:00 Speaker 3: Well, so all of the above and how that impacts fed expectations how that impacts policy expectations. Full stop, everything will be fine as long as there's no major shift higher in inflation and inflation expectations. For now, that remains our base case and Frank don't think anything changes that we need healthy disinflation at this point. But I agree what you were saying earlier. What's going on in the Strait right now, it's a new equilibrium. We have to get used to it, not just in the short term but over the long term. 00:01:28 Speaker 2: Well, Jef, let's turn to eight thirty Eastern time tomorrow morning. CEPI drops. If we get an inline CPI, do you think that closes the door to a July ray hike? 00:01:38 Speaker 3: I would say the door wasn't really open, maybe a jar in the first place, but clearly yes. And to be Frank, I don't think any central bank right now, given the state of demand globally, should be thinking about ray hikes unless there's a serious change in the inflation outlook rin now via the Strait or otherwise. The US, the FED is a bit different, so you know where there's more of a demand impulse in the US, and you're driven by the kapex for the hyper scalers and the light driven by the AI view that you don't see in Europe. But right now, to be Frank, I really don't see a case for hikes anywhere. 00:02:08 Speaker 2: We see it in the market at the front end of the curve. Just the market starting to speak to their story. Jeff, the two year training this morning around four twenty one sixty four. So where are we something on fifty basis points above where the policy rate is at a federal reserve. Jeff, how do you see that spread closing? 00:02:24 Speaker 3: So the spread will closed with the CPI prints and with fed Chairwash is upcoming a guidance, and I think he will need to raise a very high bar for rate hikes. So it may not be the entire view on the FMC right now, and there's questions over how much he will be actively disclosed. And the bottom line is, again, given the state of demand, we keep on drawing comparisons with twenty twenty two, this is very different compared to where we are in twenty twenty two, So the bar is far higher, and I think he and his peers around the world, especially Madame Lagada might add need to make that clear. If that is set, then I think all of the hikes that were priced in around February and March and onwards. 00:02:59 Speaker 2: That should really come down Jeff if. 00:03:01 Speaker 4: You think, if you take this view that he's going to potentially be a little bit different than some of the other members and some of his colleagues on the FED. Who else are you looking at in terms of speaking this week we have a ton of FED speak, including Waller and Cook and Jefferson. 00:03:17 Speaker 3: So yeah, that's a really good question. You know, all of them, you know, will have their own views on this. But I think there are two things that matter. A do the individual views of the central bankers matter? And two how do we find a consensus? You know, there's an article today in the Noting just for the Bank of England, which is in a good place, and you've got diverging views across the board in the UK, and that's that's some starting to cause communications issues and market guidance. But at the same time, the Bank of England, taking a lead from what FED cher Bernanki advice, is looking at scenario. So the FED perhaps should be looking at scenarios. Maybe that's what the task force, you know, will try to elaborate upon as well. So which FMC member will adapt to which scenario. Where do we set the bar. Let's not look at individual names, but where the data conforms to the scenarios. 00:03:59 Speaker 2: Then we go from there. 00:04:00 Speaker 4: What traders are almost fully pricing in a hike in September. Do you think they're just getting used to this new normal? What's going on in the strait of hormos? 00:04:08 Speaker 3: So I think two aspects of that. I think less about the new normal and the straight of music fact to decompose and just ballpark numbers out the air probably twenty percent of most from the straight of hormus and remaining eighty percent from the capex trade in the US from the AI trade, because that's still what again is separating the US from the rest of the world. There is genuine growth, but why I mention that eighty percent number. If eighty percent of US growth is being generated from the AI view and the relevant investment, then that's what the pricing is. But then we get into an equity story. So if inflation comes off, but because demand is coming off from the AI side, but without anything on the consumer side, the household side to compensate, then I think that's where we get a few more wobbles. But let's cross that bridge when we get there. 00:04:47 Speaker 2: JEF, there is an inevitable home Buas to this conversation sitting here in New York, focused on US events CPI tomorrow Morning SHAREWASH as well for the global fixed income market. Which market is in the driving seat right now? Is it Washington or LASiS in Tokyo, Japan? 00:05:03 Speaker 3: So we're trying to get a straight answer out of Tokyo. I guess, and I think what happens in Tokyo what matter for the US treasury market as well, given not just Japanese holdings but also broader North Asia holdings. But let's make it clear what gpif does you know what any one fund in Japan or elsewhere in Asia does is not enough. You need a comprehensive change in behavior. Total Japanese assets are ten times the level of GPIF. If we get a ten percentage point or more move in as allocation there, then that we can start to discuss whether it's a game change or not, especially if those in Korea, Taiwan and China follow onwards as well. For now, we're just talking about one fund, but I think that discussion is a healthy one. That's what's needed to change behavior to get dollar down against the rest of Asia because that's desperately needed. 00:05:51 Speaker 2: Right now, YEF, that discussion is live, so let's have it. Now. What do you think would change behavior? Regulation or price? And it's price right now sufficient to their money to come home? Right, it's price. 00:06:03 Speaker 3: And let me tell you my favorite headline this morning, Tokyo Disneyland is raising prices. 00:06:07 Speaker 2: Right. 00:06:08 Speaker 3: Those are the things that people on the ground will feel, and they'll ask why are they raising prices? Is it because the en is two weak? Or is it other aspects labor market too tight? A combination. But when you start to feel it in inflation that people look at every day, maybe Tokyo or Disney prices will go up as well. That one's even more popular. Then I think there will be pressure on the government to act. We need to get inflation over and beyond a certain level that's tolerable. And then you realize if the weekend is a part of that story, then behavior will start to change on parts of government and associated entergy. 00:06:37 Speaker 2: Jeff, Is the income and yield level available in Japan right now enough sufficient to offset some of those concerns? 00:06:44 Speaker 3: So you know right now, probably not. I think international investors are looking at three four percent, But again, let's go back to real yields, right, So if inflation hovers around two percent also, and then longer dated bonds you know, go three four five, You know those kinds of levels you get real yields are comfortable two percent, then I think more money stays at home, then you international funds going in as well. But has always given Japan's debts or can the government? Can the government's debt to GDP ratio and funding financing live with two percent real yield? That's a different situation, but there are trade offs, and I think right now the trade off with Dolly and is becoming a bit too hard to ignore. 00:07:15 Speaker 2: Stay with us more Bloomberg Surveillance coming up after this. Stephen Oth Federated Hermes are writing. Given high expectations, the setup isn't perfect for this season to ignite another big move higher in the next six weeks, but for longer term investors, this season should reinforce the ball case. Stephen joins us now for more. Steve, good morning, sir. I can't believe that's the last time I get to say that on TV. Stephen Oth retiring retiring in the next couple of months, Steve, can I just say how much I've learned from you over the last decade plus. I came from London in early sixteen, scarred by back to bank crises, obsessed with what can go wrong, and you told me pretty quickly to start thinking more about what could go right, and that risk can come both ways. You've writ the bull market the whole way up, and every time you've been on I've sat here opposite. You had said save what can go wrong? What can go wrong? And over time I've started to us more what can go right? What can come right? This morning, well, in. 00:08:20 Speaker 5: The long term, a lot of things are going right. I mean, earnings are exploding to the upside, Jonathan. I mean this bullmarket started with earnings down below two hundred dollars and we're looking at four point fifty. We raised our numbers twice now on twenty eight earnings. Kind of we'd like to look at where things are heading. I think this earning season, you know, looking at plus twenty twenty two percent year over year earnings growth, and those numbers are probably too low. So yeah, I mean the earnings stocks eat norminal earnings, and some of that is inflation. For sure, but that's why people invest in stocks and hot bonds because they eat nominal earnings. And yeah, I think it's going to reinforce the case. Now the stocks have run up into this. The cell side has raised their numbers into the earning seas less three months. Earnings are up about four percent estimates off of where they were three months ago. Normally we're cutting into earnings. So it doesn't seem us like there's going to be a big disappointment out there. There may be stock by stock, for sure, it's become a stockbicker's market, but it looks pretty solid to us. I mean the earnings, the bank's earnings. The banks have been raising dividends, you know, since their capital tests the last few weeks ago, so they're not doing that. Because earnings are about to surprise the downside. 00:09:39 Speaker 2: We should reflect on how unusual this is, though, in direction and in size, as you indicated, to be raising estimates into earning season and to have expectations this high outside of recoveries is incredibly rare, very very unusual. In fact, some people might say unprecedented. What's behind that positive earning shock? 00:09:59 Speaker 5: A lot of it is margins, you know, the bears have been saying for the for actually the extent of this bull market, which has been almost fifteen years thirteen year anniversary a few weeks ago, the bears have been saying quarter after quarter were at peak earnings because it makes them crazy, I mean peak margins, rather that the margins keep going up. But the margins do keep going up because the mix of the US economy is shifting increasingly towards higher margin businesses, and the companies that are in the index are using things like now AI, but before that, the Internet of Things and the cloud. It's a transformative technological change that's driving across the board margins to go higher. And you know, one of the reasons we've had this broadening out idea for the market is that, you know, the first stage of AI was the spenders, then it was the you know, the companies that are immediately benefit is sharies of that, and now it's the guys that are using AI, which across the broader economy. So we see margins going up, and we've got margins continuing to rise over the next couple of years. 00:11:11 Speaker 4: I'm going to take the flip side of Jonathan's question, what could go wrong? 00:11:15 Speaker 5: Well, a lot of things could go wrong as usual. That's the wall of worry we're riding. But you know what is it? The straight of hormones. I was supposed to shut down everything, and what's happened is the world has figured out how to get oil out of the Mid East without the straight of horm moves. We were looking for ten million barrels a day. We're all hysterical. You know how many barrels a day are now getting through the strait or some other means. I said to you this a few months ago. If it can't happen, it won't happen. People are figuring out how to get the oil out. So I think it's I know it's the headline today, but my guess is a year from now, no one's going to really care about the straight oh hormose. 00:11:52 Speaker 4: But how long can we live in this somewhat purgatory. We're not at peace, we're not at outright war. 00:12:00 Speaker 5: It looks like we can go on for a while, Amory. I don't see it every day. The Iranian military capability is declining, so it doesn't It feels to me like we hit the peak of problems here probably three months ago and since then, it's been going down. It's going to be kind of like a purgatory, as you said, but we're finding other ways to get the oil out, and the market's kind of looking past this issue. You know, another thing, like the chip stocks today are getting hammered, and we talked about this on the show. You guys have been talking about this for a while, spot market versus futures market. And you know, one of the lessons I've learned over the years is focus on the futures market, not the spot market. So for oil, it became very obvious to people. Spot oil has a clearing price. Longer term investors were looking at the futures market. You guys kept talking about that that was the right thing to do. But if you think about it, even in the stock market, there's a kind of spot market for stocks and a longer term market for stocks. The spot market in chips ship stocks is being set in Korea. These are folks that are using the market as a gambling mechanism. They're playing short term movements, they're playing charts and not really look at fundamentals. So we had a huge move up five x. Now we're had a thirty percent correction, a long term investor looks at that and says, Okay, the first move up in these chip stocks was an earnings explosion. We've seen that. The next move now is a revaluation because now we're down to three manufacturers we had, which is a really well controlled oligopoly. Adding caps is very very expensive. So that is a discipline in itself. And what's happening is and we're seeing it. We've been expecting this. The chip manufacturers are now getting long term contracts with built in price increases. That's changing them from being cyclical growth companies to growth compounders. There's still priced like cyclical company. So somewhere out there is a revaluation in these stocks. 00:14:03 Speaker 2: Give me an idea what those numbers look like. They try to single digit pas right now, what should they do? 00:14:08 Speaker 5: You think they should probably over the next five years trade up closer to a market multiple at least a fifteen times. 00:14:15 Speaker 2: That's a big reevaluation. Sure, I think that's probably what convinced this market that this earning story is that durable. That's the thing. 00:14:21 Speaker 5: I think it's going to prove to booth. 00:14:23 Speaker 2: They've escaped the boom bus cycle. 00:14:25 Speaker 5: We'll see no I mean, not completely, Jonathan, but not like they had not boom Bus. Maybe a little more like this. 00:14:32 Speaker 2: They're less cyclical, which is what you get and. 00:14:34 Speaker 5: Gat right, why have they come? Revaluation takes more time. 00:14:38 Speaker 2: When we earth explain to everyone why they've become less cyclical. Well, we have this market right now not buying the valuations. 00:14:44 Speaker 5: You get six or seven of these guys. Every time prices went up, they any capacity and then it's like an airline, you know, too much capacity, You got to drive the price down until you can sell it. Now there's only three of them. It casts an enormous amount of money to build a fab nowadays, and being much more disciplined about adding capacity, and they're they're you know, they're basically don't have enough capacity for the next three years. So we've got a pretty good backdrop and now they're signing long term contracts. We think probably fifty percent of their revenue base over the next couple of years is going to be kind of locked not you know, softly locked in. 00:15:22 Speaker 2: Is this your contrarian bent right now? The revaluation trade of some of these names, because it feels slightly controlled, A lot of people are saying maybe this is the peak of the story, the starting to raise capital. This is eskehanis on Friday to build out capacity. 00:15:35 Speaker 5: Well, we've been warning our investors that a correction was coming across the board. To us, the spot market for stocks in general has gotten kind of overheated. What we've been happy to see has been more of a rolling correction, which is a healthier way to do it. You guys have been talking about that as well in the show and on the chip stocks. Yeah, I mean, this has been a pretty serious correction, and usually in Bullmark it's twenty to thirty percent pullbacks are the time to be for long term investors to add. Now, do I know anything about the spot market? Not much more than you. It can be down to another ten twenty percent the next three weeks, but I think layering into stocks, into these stocks here. 00:16:14 Speaker 2: Mike, we've got some time for some final words of retirement, wisdom of your career, gun back to when the ities credential. 00:16:20 Speaker 5: Yeah, right, eighty seven. 00:16:23 Speaker 2: What have you got to share with us this morning? Just reflect on that, just some advice to the next generation of investors. What's your advice for them? 00:16:30 Speaker 5: Well, you know, the big piece I'm writing a book about this humility at the highs, but humility at the highs, confidence at the lows, integrity always those three lessons, inequities or in any other form of advancement in life, make a lot of sense. 00:16:46 Speaker 2: Stay with us multile Impeck Savanan's coming up off to this. 00:16:59 Speaker 1: I am here in Atlanta at the headquarters of Delta, and I'm here with Ed Bashi and the chief executive officer of Delta after reporting earnings, overcoming what was a record bill for fuel and still continuing to maintain full year forecast. You talk about the difficulties of this quarter as well as the resilience of the US consumer. How much momentum is there under the US consumer. 00:17:23 Speaker 6: Well, first of all, thank you for coming down. There's not just one consumer in our marketplace. But broadly speaking, I think the consumer is doing well. Certainly the higher end consumers doing very very well. That's our consumer base. When you look at what's happening in the market. When you see what's happened in real estate, opportunities for that consumer to invest in themselves, invest in the experience economy. They may not be buying things as much, but they're investing in things they care about for themselves or families, their friends in the future, and that's travel. 00:17:54 Speaker 1: You also talk about the difficulty, and we have seen oil prices inflect a bit higher. How much room do you have to maneuver if this is a new normal, or potentially eighty dollars on Brent crude is a new normal which we're just up against. 00:18:07 Speaker 6: I think we'll do just fine. You know, we looked at our business model. Our business model is geared towards a higher end consumer, so our consumer has the ability to sustain this level. In fact, we saw it in the quarter we made at nine percent operating margin with fuel prices much higher than where they are in the existing you know, the existing landscape. So I think I think oil is going to stay sticky for longer. I'm not sure it's going to be incrude, though. I think the refined cost or crack spreads are where you're going to find. It's going to take a lot longer for that to come down. All that's going to mean is that those brands that have bring value to consumers in terms of experience being opportunity for people to go and explore and give them an adventure as their means for enjoying life and getting away, and that our international travel season is looking very very healthy. The business's international law as like just said, American Express, our loyalty programs, our cargo business, arum. We have so many different lines of business, including here in the US our domestic travel. It's all doing very very well, and I don't see fuel prices. 00:19:15 Speaker 7: To turn that. 00:19:16 Speaker 1: You talk about how this has been a sea change in terms of the ability for airlines to catch up with a pace of inflation, not. 00:19:23 Speaker 2: Completely, but enough. 00:19:24 Speaker 1: You saw a big jump up in airline prices over the quarter. How much further does it have to go to catch up and potentially offset stick your oil prices. 00:19:33 Speaker 6: I's a look at posts COVID airfares are about ten to fifteen percent below where inflation has been, so I think there's still significant room. 00:19:42 Speaker 1: So if oil prices go further, you think that airfare prices could go higher without causing just demand destruction. 00:19:49 Speaker 7: I think so we just saw it in the quarter. 00:19:52 Speaker 1: Is it going to come across the board or more particularly with the premium cabin It's. 00:19:55 Speaker 7: Going to be in the premium cabins. 00:19:57 Speaker 6: When we look at the lower end of the market, the low fare carriers, they're still losing a lot of money. And so while Delta, which is at the top of the food chain, did very well, we represented sixty percent of the overall profits for the industry are estimated in the quarter, despite only having twenty percent share, means the other eighty percent still has a lot of work to do to get caught up. And it's going to happen by being more disciplined in terms of the strategies they deploy. 00:20:25 Speaker 7: Mayge certain that they can only put out. 00:20:29 Speaker 6: Capacity that is profitable that will return a margin to them. 00:20:32 Speaker 1: Do you think that there's going to be more consolidation? Have you been surprised that there hasn't been more during this period of higher prices. 00:20:38 Speaker 6: No, I'm not surprised. There's been some in the market on the lower end. There's been there's been some. I think we're going to be fine. We're going to get through this period of time. 00:20:47 Speaker 7: Now. 00:20:48 Speaker 6: If you said that this is going to four hour oil, it's going to be sustainable for a very long period five of course there will be, but not in this marketplace. I don't see oil prices returning back to the peaks of a few months ago. 00:21:01 Speaker 1: Going forward, you talk about how the premium really is where the revenue driver is, and you recently had the basic. 00:21:07 Speaker 2: Business roll out. 00:21:08 Speaker 1: What prompted sort of pairing back or a more specified product offering at a slightly cheaper price point, but still with the flatbeds. 00:21:16 Speaker 6: Well, we've been talking about this for a while. As an airline. You know, we're good about transporting people, we're not necessarily great at merchandising and retail strategies, and we kind of blunt force instruments. Had you had your main cabin, you had first class and not a lot in between. Consumers want different value decisions to take, and if you can give people the opportunity to sit in first class, they may not want different elements. 00:21:44 Speaker 7: They may not need to go. 00:21:45 Speaker 6: In the lounge, they may not care as much about certain aspects of what the fully bundled first class fair is. 00:21:52 Speaker 7: If maybe they just care about the seat. 00:21:54 Speaker 6: And that's actually what consumers care more about than anything, is the seat. Well, the other things are nice, but it's the seat and then to the seat that's most important. We can find different ways to bring greater value, to reduce fares at some times, or increase fares in terms of people saying, do you want to have the elite services drive you to the club? Do you want you want extra freaking fire miles? We can become a much better merchandiser because we're a consumer brand, you know. I think that's been the biggest change we've seen a Delta over the last decade. We're now not just a consumer brand, We're a loved consumer brand, and we can pull this stuff off. 00:22:30 Speaker 1: You talk about how there is flexibility to raise prices at the premium. A lot of people are getting in because it is lucrative. We see, for example, even Southwest trying to get into the premium or Jet Blue. Of course, United has made pretty significant inroads. How competitive has this area gotten. 00:22:46 Speaker 7: I think that's the strategy. 00:22:47 Speaker 6: You know, we laid it out, We started this path fifteen years ago, and you know, it's not easy. It's easy to say you're going to be it's harder to do. It requires having great reliability, creating a great experience, building building trust with your consumers, having the technology, having the corporate market share. Delta is the number one in terms of corporate share in the US, and we've been the number one business traveler for the last fifteen years in terms of all the surveys, So you know, those are moats that are going to hard. 00:23:16 Speaker 7: But there's room for more. 00:23:17 Speaker 6: I mean, we're only twenty percent of the overall share in the market, so there's certainly opportunities for more, but it's much easier said than done. 00:23:25 Speaker 1: Is there the beginning of pushback on the economy side of things in terms of pricing or just in general as capacity has come in, as flights have gotten reduced, have you started to see some fly fatigue in the main cabin? 00:23:39 Speaker 6: We had good results in the main cabin. In fact, to your point, we reduced some of the supply and main cabin in the current quarter given the fact that we were concerned with oil prices what that meant to fairs, But our unit revenue growth in the main cabin was ten percent a year over year or so. 00:23:58 Speaker 7: It looked pretty healthy. 00:23:59 Speaker 1: Do you think that you're to continue to constrain capacity? 00:24:02 Speaker 7: You know, we're going to be disciplined. You know, we've got a strategy. 00:24:05 Speaker 6: And airlines historically have been accused of you know, when times are good, they grow fast, only to find out then they bring too much supply and all of a sudden, then fares go down and the airlines are losing money, and it's they up and down the roller coaster. We've been on a strategy path to kind of only put in the marketplace capacity and share that we know is going to be profitable and that consumers are going to value, and so we don't follow. 00:24:31 Speaker 7: The day to day around the ages. 00:24:33 Speaker 6: Maybe one to two points here, one to two points there, but we're very disciplined and if you look at our history, you'll see Delta will lead the way. 00:24:40 Speaker 1: One issue has been pilots going forward, and I just wonder from your perspective, do you think you're at a good staffing level currently or do you still expend a plan to expect expansion of the pilot staff. 00:24:51 Speaker 6: We're at a good level. We've been hiring pilots this year. We had a number of changes in the contract that created some difficulties of respect to recover from interrupted operations as quickly as we'd like to making progress on that, and we'll continue to make progress. 00:25:06 Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.