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Speaker 3: Out to run Temple send this.
Speaker 2: I still see you upside for USA Cares, but we'll
Speaker 2: have to be driven by earning's growth from here. So far,
Speaker 2: the upside in the S and P has been narrow,
Speaker 2: but I expect the earnings growth to broaden out as
Speaker 2: we move through twenty twenty four with better participation from
Speaker 2: other sectors beyond the tech and communications services and the
Speaker 2: FAB five runs with us around the table.
Speaker 3: Morning Run, Good morning.
Speaker 2: We're not talking about MAX seven, We're talking about Fab five.
Speaker 4: We draw well.
Speaker 1: If you look at the year today, basically Apple and
Speaker 1: Tesla have been a drag, even including yesterday's gains from Tesla.
Speaker 4: So really it's the five stocks.
Speaker 1: If I look at the earnings results so far this quarter,
Speaker 1: all of the earnings growth this five stocks again, so
Speaker 1: we're back in that story that we've had for the
Speaker 1: last two and a quarter years where the rest of
Speaker 1: the S and P five hundred is really not giving
Speaker 1: us much to get excited about.
Speaker 4: But I think that's going to change as we move
Speaker 4: through the year.
Speaker 3: What sounds you is going to change, well, part.
Speaker 1: Of it is I look at and say, the only
Speaker 1: way this demand for AI and technology investment can be
Speaker 1: sustained is if the customers get a return on investment.
Speaker 1: Companies aren't going to keep pouring money into these products
Speaker 1: and services unless they see some benefits. The key question
Speaker 1: to me is how quickly do we see those benefits?
Speaker 1: Do they show up in the twenty twenty four pn L.
Speaker 1: I'm a little skeptical. I'm hopeful on that front. But
Speaker 1: more importantly, I think as we start looking at the
Speaker 1: prospect of rate cuts, not just rate increases, interest expense
Speaker 1: will shift income statements in the market. And I think
Speaker 1: we're basically seeing an ongoing demand that shifted from goods
Speaker 1: towards services, and that should also brought learning growth.
Speaker 5: This was a story about six months ago too, and
Speaker 5: a lot of people are talking about eventually we'd start
Speaker 5: to see things broadening out with rate cuts, and then
Speaker 5: I got pushed out three months, then another three months. Basically,
Speaker 5: are we in purgatory until we get the sense that
Speaker 5: the Fed is actually going to cut rates and if
Speaker 5: they don't, you're not going to get a broadening out
Speaker 5: from the FAB five for the foreseeable future.
Speaker 1: Well, I guess this is where a key underlying assumption
Speaker 1: for me is I'm still optimistic on the inflation front.
Speaker 1: I fully recognized the first quarter was an ugly surprise.
Speaker 1: Right January, I thought, okay, we can look at this
Speaker 1: and maybe it's a January anomaly. We got February and
Speaker 1: February was much better, but then March was kind of
Speaker 1: crushing in terms of that optimism. We had service inflation
Speaker 1: X shelter go from five point one percent annualized in
Speaker 1: the fourth quarter to eight point seven in the first quarter.
Speaker 1: Core PCE went from one point six to four point four.
Speaker 1: I still think as we moved through the year, you're
Speaker 1: going to see the labor markets showing us an easing
Speaker 1: of tightness. And I think we're going to see that
Speaker 1: pricing pressure in the service sector start to ease. One
Speaker 1: of my favorite anecdotes, by the way, auto insurance has
Speaker 1: been basically eighty basis points of the three point eight
Speaker 1: percent of core CPI over the last year. It's three
Speaker 1: and a half percent of the index. Now, auto insurance
Speaker 1: rates are still going to go up for the next
Speaker 1: six months, probably, but.
Speaker 4: Not at twenty two percent annualized.
Speaker 5: Steeper shoot of though, of Massujo would say, you can
Speaker 5: cherry pick what you want, you still will have you
Speaker 5: you can get to two percent.
Speaker 6: Any which way. What would you have to see and
Speaker 6: some of.
Speaker 5: The numbers that are coming out starting with ECI, going
Speaker 5: to adults that we get tomorrow, going to the payrolls
Speaker 5: report on Friday as well as ISM data, what would
Speaker 5: you have to see the change of view, Well.
Speaker 1: I guess what I would want to see back to
Speaker 1: the data this week. I think the ECI is probably
Speaker 1: one of the best metrics for wage growth. It's fully
Speaker 1: comprehensive wages and benefits. It also works better in terms
Speaker 1: of adjusting for mixshift. If you look at average hourly
Speaker 1: earnings that we're going to get on Friday, that can
Speaker 1: be skewed. If you get more low paying jobs, it
Speaker 1: makes wage growth look lower, so that one is probably
Speaker 1: less valuable. So on ECI want to see basically anywhere
Speaker 1: from a ninety zero hundred basis point reading. It'd be
Speaker 1: great if we saw something below that. I don't know
Speaker 1: if we see a one point two one point three
Speaker 1: that's going to spook the markets. I think if we
Speaker 1: look at the Jolt stata questionable in terms of reliability.
Speaker 1: If you look at the response rate to the Jolt survey,
Speaker 1: it's gone from sixty five to seventy percent pre pandemic
Speaker 1: to thirty or thirty five percent, So some people do
Speaker 1: question if the data is there's reliable. I like to
Speaker 1: watch the quits rate within the Jolt stata. That tells
Speaker 1: you are people finding better jobs where they're getting higher
Speaker 1: wages and they're moving.
Speaker 4: So it's another anecdote.
Speaker 1: And then on Friday we'll wait and see the market
Speaker 1: is saying around two hundred and forty thousand new nonfarm payrolls.
Speaker 1: We need about one hundred and thirty to one hundred
Speaker 1: and forty thousand in a typical environment to keep pace
Speaker 1: with population growth. If we get a big upside surprise
Speaker 1: and more positive revisions. You know, that's going to make
Speaker 1: me a little more nervous that maybe this economy is reaccelerating.
Speaker 1: And by the way, if I take this alongside the
Speaker 1: data out of Europe this morning, upside surprises across the Eurozone,
Speaker 1: positive albeit marginal commentary coming out of the Pollitt Burou
Speaker 1: in China, you know, there is a risk that there's
Speaker 1: a reacceleration here and that would basically undermine some of
Speaker 1: my optimism on inflation.
Speaker 7: To John's point earlier, so do you think Europe and
Speaker 7: China are catching up to the US exceptionalism that maybe
Speaker 7: is petering out?
Speaker 4: That might be a little too optimistic.
Speaker 1: I guess I look at Europe and saying going from
Speaker 1: zero to something positive is really great. But you know,
Speaker 1: I do think there will be improvement this year. And
Speaker 1: I would also note, you know, I think the case
Speaker 1: for the ECB cutting rates is a lot stronger. I mean,
Speaker 1: you basically don't have debating and we're not debating whether
Speaker 1: Europe is reaccelerating. We're basically, you know, there's it's clear
Speaker 1: that Europe's going from zero to something very low on
Speaker 1: growth and inflation has been smoothly decelerating in Europe. So
Speaker 1: I think you're going to get one hundred basis points
Speaker 1: of rate cuts from the ECB this year. And very importantly,
Speaker 1: monetary policy decisions in Europe have a more immediate and
Speaker 1: magnified impact on the economy than the UMS because a
Speaker 1: lot more of the corporate rate is floating rate and
Speaker 1: a lot more of the household debt is floating rate.
Speaker 5: So right now you're saying that your base case is
Speaker 5: you're going to get inflation coming in lower and you're
Speaker 5: going to.
Speaker 6: Get some rate cuts.
Speaker 5: What's the playbook if you do see that reacceleration inflation
Speaker 5: and that case comes to play.
Speaker 1: Yeah, if you get a reacceleration, then I think the
Speaker 1: FED ends up keeping rates where they are. I don't
Speaker 1: think you're going to see the Fed raising rates from here.
Speaker 1: I don't buy into that hawkish thesis at all. I
Speaker 1: think five and a quarter to five and a half
Speaker 1: on FED funds is plenty tight in real terms.
Speaker 4: And again I appreciate the question.
Speaker 1: But when I look at the data, there's one part
Speaker 1: where there's a lot of uncertainty, and that's really the
Speaker 1: service ex shelter.
Speaker 4: If we look at the shelter inflation.
Speaker 1: We know from the ZILO observed rent index, then inflation
Speaker 1: there has basically declined sharply. It still hasn't shown up
Speaker 1: in the CPI, but historically there's a one year lag
Speaker 1: between ZILO and CPI PCE.
Speaker 4: Based on ZILO, we know.
Speaker 1: Inflation from rent has gone from sixteen percent two years
Speaker 1: ago to less than three point six percent for the
Speaker 1: last nine consecutive months. CPI is still printing six so
Speaker 1: we know that part of inflation is coming down. We
Speaker 1: know core goods prices are still going to be soft
Speaker 1: because we can watch the Manheim Used car price Index.
Speaker 1: So when I piece it together for basically sixty nine
Speaker 1: percent of core CPI, I know inflation is staying lower,
Speaker 1: going lower. So I guess I have a hard time
Speaker 1: with the thesis that overall inflation is accelerating. I don't
Speaker 1: see that as likely, and I think we'd be better
Speaker 1: off focusing on what is the base case. We've gone
Speaker 1: from nine percent inflation to close to three. There's been
Speaker 1: a lot of progress, Real interest rates are up a lot,
Speaker 1: and I think it's time for the FED to basically
Speaker 1: start focusing on the other leg of the dual mandate.
Speaker 1: Which luckily they don't have to worry about because the
Speaker 1: job market is strong. But if we can have a
Speaker 1: three and a half percent unemployment rate and still get
Speaker 1: to the inflation target, that's how we should be thinking
Speaker 1: about later this year.
Speaker 3: Two phraces.
Speaker 2: I want to one pack with you plenty tight, plenty progress,
Speaker 2: plenty tye. What evidence is there that with plenty tie
Speaker 2: and on the plenty progress, how much evidence is there
Speaker 2: that that's just a supply side story, not a demand
Speaker 2: one driven by the FED, which you say is plenty tight.
Speaker 1: I'm really glad you went there because I think one
Speaker 1: of the other things that's happened is we look at
Speaker 1: growth expectations in the US. The consensus for twenty twenty four,
Speaker 1: sorry ECFC on your Bloomberg termine a new way you
Speaker 1: would got is two.
Speaker 4: Point four percent.
Speaker 1: You want to make sure I'm fresh two point four
Speaker 1: percent for this year. If you go back to October,
Speaker 1: it was fifty basis points. So there's a lot of
Speaker 1: optimism around economic growth in the US, but there are
Speaker 1: signs of cracks. If you look in the consumer mortgage
Speaker 1: and credit card delinquencies are up forty You're on year
Speaker 1: now again from a very low base autodelinquencies up twenty percent.
Speaker 1: In the Wall Street Journal this morning, there's another article
Speaker 1: about how many commercial real estate loans are coming to
Speaker 1: The Mortgage Banker Association is saying nine hundred and twenty
Speaker 1: nine billion dollars of maturities this year, two hundred and
Speaker 1: six billion of what's your office. You're going to see
Speaker 1: defaults on commercial property. We saw another bank failure in
Speaker 1: the last week. You're going to see more bank failures.
Speaker 1: There are going to be news stories that come through
Speaker 1: that start to chip away at some of this optimism.
Speaker 1: And so I think it's a little easy to get
Speaker 1: caught up in the excitement of current data and to say,
Speaker 1: you know what tightness. But the reality is monetary policy
Speaker 1: acts with long and variable lags, and I think we're
Speaker 1: going to see some of those lags come into play
Speaker 1: this year, as the consumers depleted their excess savings, has
Speaker 1: trouble paying their debts, and as corporates actually find carrying
Speaker 1: these much higher interest expenses gets pretty difficult over time.
Speaker 2: The show answer is Way Run Temple of Last Run,
Speaker 2: Thank You, Sir, Love, a real time conversation supported by Blomberg.
Speaker 3: At its terminal we love that. Thanks for around of time.
Speaker 2: But a city's rough, cell kids cities rough, selk can
Speaker 2: joins us. Now looking ahead to the federal self tomorrow
Speaker 2: and the data on Friday, let's talk about the data
Speaker 2: that we just got.
Speaker 3: How much does that change things tomorrow?
Speaker 8: You know, this is a challenging print for the Fed.
Speaker 8: It's not quite a nightmare, but it's something akin maybe
Speaker 8: to a really bad dream.
Speaker 6: You know, coming in a one.
Speaker 8: To two is just evidence that the inflation data, the
Speaker 8: wage growth data, is moving in the wrong direction to
Speaker 8: be consistent with their target. And you already got a
Speaker 8: lot of hints of that with the Q one inflation data.
Speaker 8: And you know, a saving grace may have been if
Speaker 8: wage growth showed continue signs of cooling on a quarterly basis.
Speaker 8: But I think putting all that data together, it's going
Speaker 8: to be very hard for Powell not to lean a
Speaker 8: bit more hawkish into these figures and really see they're
Speaker 8: say they're not seeing the progress on inflation that they
Speaker 8: need to be confident to start to ease policy.
Speaker 5: This one point two percent increase in the employment cost
Speaker 5: index for the quarter was the biggest advance of a year.
Speaker 5: We're looking at a reacceleration at a time or even
Speaker 5: city group. You believe that there is going to be
Speaker 5: a rapid deceleration and still a significant number of rate
Speaker 5: cuts later this year. Does this make the rethink that.
Speaker 8: I think it's very challenging, because you know, our base
Speaker 8: case has been based on a market slowing in the
Speaker 8: economy as you get later in the year, and that
Speaker 8: on its own would give the Fed more confidence than
Speaker 8: inflation would continue to cool.
Speaker 6: But you've seen the start of this year.
Speaker 8: You know, GDP growth came in a bit softer than expected,
Speaker 8: but domestic demand was running near three percent, So I
Speaker 8: would call that a pretty strong economy. Labor market indicators
Speaker 8: are cooling but still at pretty solid levels, and as
Speaker 8: I mentioned, the wage growth data just not cooling enough
Speaker 8: for them that they can have confidence that the inflation
Speaker 8: moved back to target. I think really the data, both
Speaker 8: on the activity side and the inflation side are kind
Speaker 8: of moving against that.
Speaker 5: There's also a challenge in this the thesis that some
Speaker 5: of the employment numbers that have been really robust have
Speaker 5: been entirely driven by immigration, which has been disinflationary. You know,
Speaker 5: we've gotten full employment without inflation. Do you think that
Speaker 5: these data that actually strip out some of the wage
Speaker 5: adjustments that we're seeing in some of the overarching payrolls
Speaker 5: numbers really presents a significant problem for that thesis.
Speaker 6: Yeah, you know, then this is really key.
Speaker 8: You know, we get a lot of data throughout the
Speaker 8: quarter on the labor market, on wages, it's really when
Speaker 8: you get to the employment cost index that that's sort
Speaker 8: of supposed to be the be all, end all for
Speaker 8: wage growth. That is by far the best measure and
Speaker 8: indicator of wage pressures in the economy because, as you said,
Speaker 8: it controls for composition, a variety of other factors.
Speaker 6: Now, it's not perfect.
Speaker 8: Maybe we are seeing some distortions in the first quarter
Speaker 8: due to bigger price gains and wage gains that are
Speaker 8: hard to seasonally edge.
Speaker 6: Just or control for.
Speaker 8: But this is supposed to be the one that the
Speaker 8: Fed hangs has had on to tell really where wages
Speaker 8: are going. So I do think this is this is
Speaker 8: pretty difficult news for them.
Speaker 7: If wages are too high and companies are keeping up
Speaker 7: with these higher costs, could this spell then maybe layoffs?
Speaker 8: Well, you know, right now, what we're seeing is labor
Speaker 8: market has been fairly strong terms of hiring wage growth
Speaker 8: has been somewhat elevated, inflation's falling, so real rages have
Speaker 8: been pretty have been pretty good, and that's fueling ongoing
Speaker 8: strength and consumer spending, which in turn is fueling more
Speaker 8: strength in the labor market.
Speaker 6: And so and right now we're.
Speaker 8: Really not seeing much appetite for layoffs. So I think
Speaker 8: more likely is you could get an environment where the
Speaker 8: economy stays resilient, but inflation just stays much stickier than
Speaker 8: expect Mamma kay.
Speaker 2: We wanted to bring it back into the conversation on
Speaker 2: the lip of market. Can we talk about some of
Speaker 2: the numbers we're expecting to get out in the next
Speaker 2: few days tomorrow, IDP and Jolts Thursday claims Friday Pairos,
Speaker 2: what are even the same fun is done?
Speaker 4: Well?
Speaker 9: I think the Fed and therefore me are most focused
Speaker 9: on Friday's excuse me, payrolls, because that'll tell us something
Speaker 9: about how tight the labor market is and whether this
Speaker 9: wage pressure will continue. If we continue to get the
Speaker 9: same kind of job creation, it doesn't suggest any relief
Speaker 9: on the wage side unless there's a big addition to
Speaker 9: the labor force. So it is something the FED is
Speaker 9: going to be watching Jolts was important less important now
Speaker 9: it's been coming down. As long as it continues to
Speaker 9: come down, vacant number of vacancies continue to come down,
Speaker 9: the Fed will be less concerned about that. So I
Speaker 9: think it's really the payrolls creation number and perhaps wages
Speaker 9: and salaries within that that are going to attract the
Speaker 9: most attention from policymakers. Unfortunately, after their decision this time.
Speaker 3: Mike, I get a drink.
Speaker 2: It's going to catch up with the key there breaking
Speaker 2: down the economics day to get into the Federal Reserve tomorrow.
Speaker 2: Payrolls in our survey, the estimate two hundred and forty thousand,
Speaker 2: you've got no tid two hudred ky on Friday. We's
Speaker 2: that coming from? And why do you expect downside risk
Speaker 2: from here? What's guiding that view? I know it's a
Speaker 2: house few of a city, Andrew tannisis every time it
Speaker 2: comes on, where's that house few coming from?
Speaker 4: Yeah?
Speaker 8: Absolutely, And we are expecting the labor market to still
Speaker 8: hold up well, as you said in this report, and
Speaker 8: the idea of the economy slowing is that we are
Speaker 8: starting to see in some areas a few cracks. In particular,
Speaker 8: if I was highlight on the labor market side. If
Speaker 8: you look at some of the small business indicators that
Speaker 8: we track, those are looking kind of worrying, especially in
Speaker 8: the survey data within the NFIB that would argue that
Speaker 8: slow that hiring is likely to slow A fair amount.
Speaker 6: That being said has noted.
Speaker 8: You know, the data have been kind of going against
Speaker 8: it in the first quarter, and we've seen upside surprises
Speaker 8: and payrolls throughout the first quarter and over two hundred
Speaker 8: thousand in aprils a fairly in a is fairly strong number,
Speaker 8: So you.
Speaker 6: Know, that's kind of the basis for it. But right
Speaker 6: now I think the labor markets holding up fairly well.
Speaker 5: There's been an ongoing debate through the show this morning
Speaker 5: about whether or not FED chair of J. Powell is
Speaker 5: going to be interesting at all, but also whether he's
Speaker 5: going to answer the question about whether a rate hike
Speaker 5: could potentially be on the table for any reason.
Speaker 6: You don't think it would be.
Speaker 5: You think that we're sufficiently restrictive, but do you think
Speaker 5: that this is a federal reserve that has to indicate
Speaker 5: some level of sort of I don't know, retracement from
Speaker 5: the pivot last year, just simply because you need an
Speaker 5: economy to run cooler with a market that really.
Speaker 6: Does sell off. And this is a key point.
Speaker 8: And I think for the FED, and you've heard Pal
Speaker 8: say something along these lines, they do feel they're restrictive.
Speaker 8: They would rather just hang out at these levels for
Speaker 8: longer than have to raise rates. Again, I don't think
Speaker 8: it's completely off the table. I think it would take
Speaker 8: something like an acceleration in inflation from where we are
Speaker 8: and a continued acceleration through the year to really get
Speaker 8: that conversation on the table of raising race.
Speaker 6: So I don't think you'll lean into it.
Speaker 8: I think you'll still say that they feel they're restrictive,
Speaker 8: but that they could hang out here for longer if
Speaker 8: they need to.
Speaker 5: Do you think he's going to be boring or do
Speaker 5: you think he's going to come out and try to
Speaker 5: make people feel a little bit more bearish.
Speaker 6: I think he's going to be a little bit a
Speaker 6: little bit boring.
Speaker 8: I would expect him to come in and say that,
Speaker 8: you know, not to say the fetcher is ever boring,
Speaker 8: but uh, they'll come back colistically and basically say that
Speaker 8: exactly we're seeing that they're not. They don't have enough
Speaker 8: confidence yet. They had that the economy remains resilient. They
Speaker 8: do think inflation will move back down to target, but
Speaker 8: the data are kind of moving against them.
Speaker 2: Would you like us to do a shout tomorrow when
Speaker 2: we don't have to you know, we don't.
Speaker 6: Have to turn up a him were you loving?
Speaker 2: Just you know, for the people who make the promos,
Speaker 2: who are in the news room, if you want to
Speaker 2: put that promo on.
Speaker 3: Yeattle bit later.
Speaker 2: Just tight the three guests we've had this morning, that
Speaker 2: just site's going to be boring and suggesting Sham and
Speaker 2: Poushi and Aim spake. Robisk assists. Rob's going to say it.
Speaker 3: Thank you, sir.
Speaker 2: A gross amandalinam right in this policy normalization in response
Speaker 2: to improved inflation is a supportive backdrop for credit, and
Speaker 2: extended delay beyond twenty twenty four for rate cuts because
Speaker 2: of economic strength would likely be more easily digested by
Speaker 2: credit versus a postponement of rate cuts because of a
Speaker 2: sustained reacceleration of inflation. Mana joins us, now for more, Amanda,
Speaker 2: this is brilliant. Not all rate cuts are created equally,
Speaker 2: not all delays are either.
Speaker 3: Is this a healthy delay?
Speaker 10: Well, good morning, Thank you for having me so far,
Speaker 10: it seems like a healthy delay because it's supported by
Speaker 10: resilient growth. I think the concern that we have is
Speaker 10: that the longer that these rate cuts are postponed, the
Speaker 10: more credence we get to the possibility of rate hikes,
Speaker 10: and that uncertainty around monetary policy is just not a
Speaker 10: great backdrop for credit. It's not a great backdrop for
Speaker 10: M and A or deal making. It's clarity on the
Speaker 10: macro that we need, not necessarily a favorable macro in
Speaker 10: terms of rate reductions. It's really that clarity its key.
Speaker 2: So that's why we're focused on what we've had so
Speaker 2: far this year has been a pretty resilient credit market
Speaker 2: in the face of a repricing of interest rates higher.
Speaker 2: What's behind that resilience if you could go through the
Speaker 2: list for US, so.
Speaker 10: A couple of things. One is resilient growth, and I
Speaker 10: think that's been particularly important for speculative grade issuers that
Speaker 10: are more growth sensitive, so IG issuers have more of
Speaker 10: a cushion they can handle a downturn in growth. High
Speaker 10: yield and leverage loan issuers not the same defensiveness there,
Speaker 10: So growth is number one.
Speaker 3: Two is the yield backdrop.
Speaker 6: We've talked about this before. Spreads are tight, but yields.
Speaker 10: Are really attractive in the context of the post financial
Speaker 10: crisis era. So if you're an insurance company, a pension
Speaker 10: and endowment, you're looking for yield.
Speaker 3: It's been an.
Speaker 10: Attractive area to deploy credit, deploy capital into credit, but
Speaker 10: it's not been resilient across the board. I heard your
Speaker 10: earlier segment where you were talking about kind of triple c's.
Speaker 10: It is true that Triple c's outperformed on a total
Speaker 10: return basis, but that's largely been driven by rates because
Speaker 10: Triple c's are less duration sensitive than say Double b's
Speaker 10: that high end of the high old spectrum. If you
Speaker 10: isolate credit spreads, which I would argue is actually the
Speaker 10: true measure of credit risk at Triple c's have been lagging.
Speaker 10: And so if you take the index level spread of
Speaker 10: high yield two ninety nine very tight, that would suggest
Speaker 10: that Triple c should actually be somewhere around six hundred.
Speaker 10: They're around seven to twenty and spread. So Triple c's
Speaker 10: on a spread measure, which I believe again is isolating
Speaker 10: that credit risk has not kept pace with the tightening overall.
Speaker 10: That's also true in the loan market, where triple c's
Speaker 10: have lagged, so the market is efficient and telling you
Speaker 10: that not all of these companies can navigate high for
Speaker 10: longer the same way.
Speaker 5: And that also expresses some concern about a lack of
Speaker 5: clarity around what the path of rates is going to
Speaker 5: be and how punitive that's going to potentially be for companies.
Speaker 5: Earlier this morning, we had Julian Emmanuel who was talking
Speaker 5: about popping in the question, and he was talking about
Speaker 5: how someone maybe Michael McKee is going to ask the Fed, well,
Speaker 5: under what circumstances could you imagine ever hiking rates or
Speaker 5: is that off the table? Do you also think that
Speaker 5: that actually could really cause a massive dislocation in credit?
Speaker 5: If he answers, yes, we think that we could under
Speaker 5: certain circumstances.
Speaker 10: Right, So two things I'm watching for tomorrow. One is
Speaker 10: is there an acknowledgment that we are at peak policy rates?
Speaker 10: It seems to me like maybe the chair wants to
Speaker 10: step back from overstating that emphasis like he has in
Speaker 10: the past, So that's one. Two is how patient will
Speaker 10: they be to get down to their policy objective? So
Speaker 10: how many more months of this kind of middle ground
Speaker 10: of not sustained reacceleration but also not declining inflation. Can
Speaker 10: they tolerate? So that's what I'm watching for tomorrow as
Speaker 10: it relates to credit. Yes, it will have implications, but
Speaker 10: I would expect that theme of dispersion, not widespread market disruption,
Speaker 10: to remain intact. One of the really interesting points so
Speaker 10: far this year is that over thirty percent of the
Speaker 10: defaults that we've seen in twenty twenty three, and this
Speaker 10: trend has continued in twenty twenty.
Speaker 4: Four, has been repeat to faulters.
Speaker 10: So these are companies that have previously filed and they're
Speaker 10: filing again, or they've previously completed a distressed exchange and
Speaker 10: they're doing another one. Why do I mention that, It's
Speaker 10: because a lot of these companies that are under stressed
Speaker 10: are not coming as a surprise to the market. Right,
Speaker 10: So long as we have this high for longer environment,
Speaker 10: what you would expect is that the same troubled sectors,
Speaker 10: capital structures that were kept afloat by low rates but
Speaker 10: are not actually growing in a capital efficient way, would
Speaker 10: remain under stress. Does that cause broad market disruption and credit?
Speaker 10: I think the bar is still high for that. What
Speaker 10: could cause that is a sustained reacceleration flat.
Speaker 5: Well, especially because Dan Greenhouse Solicilia was saying that basically
Speaker 5: this isn't my mother's high yield market. That this has changed, right,
Speaker 5: and then essentially we're looking at something that's grown up
Speaker 5: and become much better quality. Does that mean that the
Speaker 5: risk has migrated to private credit where you have a
Speaker 5: higher degree of less tested companies.
Speaker 10: Actually, I don't think that the risk has migrated to
Speaker 10: private credit. I think in syndicated high yield, syndicated leverage loans,
Speaker 10: and private credit, you can find vulnerable companies anywhere. And
Speaker 10: in fact, what we're actually seeing is an overlapping of
Speaker 10: the addressable market between public credit and private credit, where
Speaker 10: companies are demonstrated access to both. I just I really
Speaker 10: think what it is is that say, take triple c's
Speaker 10: in the US higheld market. This is using Bloomberg data,
Speaker 10: interest coverage is one point one times. Just the margin
Speaker 10: of cushion to navigate a prolonged environment of high interest
Speaker 10: rates is very, very slim, and for most of the
Speaker 10: credit market, we don't view a twenty five or fifty
Speaker 10: basis point rate cut as material or game changing in
Speaker 10: terms of their capital structure, But there are some companies
Speaker 10: where they actually do need that, and I think what
Speaker 10: the market is telling you is you is that on
Speaker 10: the margin there will continue to be dispersion. I think
Speaker 10: there are some themes like the repeat defaulters that we've mentioned.
Speaker 10: Loan only capital structures have also been leading the charge
Speaker 10: in terms of defaults, not surprising. So there are pockets
Speaker 10: of vulnerability that you can find, but I don't think
Speaker 10: that it's a wholesale shift in risk.
Speaker 2: Could you give us some perspective on the all in
Speaker 2: yield opportunity right now?
Speaker 3: Great is it? How big is it? So?
Speaker 10: On a percentile basis using the post financial crisis period,
Speaker 10: it ranks around the eightieth to ninetieth percentile, depending upon
Speaker 10: the region and the race that you're seeing. So what
Speaker 10: is that saying. It's saying that actually eighty or ninety
Speaker 10: percent of the time yields have been lower than where
Speaker 10: we are now. On the spread perspective, it's the exact opposite,
Speaker 10: where we're kind of hovering around the ten percent percent tile.
Speaker 10: So basically spreads have been wider than this year.
Speaker 3: Help made?
Speaker 5: Is it?
Speaker 3: Good opportunity? This is a great opportunity.
Speaker 10: This is so maybe this is a little too nerdy
Speaker 10: for early morning TV. So yes, it's a great opportunity
Speaker 10: to deploy in an all end yield basis, but we
Speaker 10: acknowledge that the opportunity for material spread tightening is pretty limited,
Speaker 10: just given that we're at two ninety nine the post
Speaker 10: financial crisis average for high yielders around.
Speaker 6: Four to six days.
Speaker 2: You see an equity investors migrate into your world. Because
Speaker 2: we had a guest Lisa mentioned Dan Solis earlier, Dan
Speaker 2: Greenhouse of Solace earlier on the program, and he was
Speaker 2: talking about very specifically about energy. He thought, relatively speaking,
Speaker 2: the opportunity was better in equity than it was in credit.
Speaker 2: Could you describe maybe a similar dynamic.
Speaker 10: I would say on the margin, we actually kind of
Speaker 10: see the opposite where we see equity investors on and
Speaker 10: I would say this is very on the margin, take
Speaker 10: some chips off the table after some pretty strong performance
Speaker 10: and deploy into credit to lock in some yields. But
Speaker 10: I would say the conversation can go either way. It
Speaker 10: really depends on what the risk tolerance is, where the
Speaker 10: sector focus is.
Speaker 2: Appreciate the depths, Amanda, thank you, thank you so much
Speaker 2: for Madam Lning there. This is the Bloomberg Surveillance Podcast,
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