Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
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Speaker 1: perspective from William Dudley. Bill Dudley describe transitory on the
Speaker 1: way down. I don't understand that. How do we have
Speaker 1: transitory disinflation?
Speaker 2: Remember, goods prices went up dramatically because during the pandemic
Speaker 2: people bought a lot more goods and bought a lot
Speaker 2: less services as they stayed home. Now we're on the
Speaker 2: flip side of that, they're buying less goods more services.
Speaker 2: So goods prices are very weak and earned me very
Speaker 2: weak for a while as people have managed their inventories down.
Speaker 2: But once that comes to an then goods prices will
Speaker 2: level off, and so the benefit to line inflation from
Speaker 2: following goods prices will be over and you'll be stuck
Speaker 2: with what's happening in the services side. Look, I think
Speaker 2: this is a very good report today and the FED
Speaker 2: should be pretty cheered by this, But I don't think
Speaker 2: it changes what they're going to do at the July meeting,
Speaker 2: because they that they're looking at the totality of the
Speaker 2: data over the last three months going to the July meeting,
Speaker 2: and the reality is the commy is still doing quite well.
Speaker 2: We had two percent growth in the second quarter. If
Speaker 2: you look at the Ladd FED GDP now tracker for
Speaker 2: the third quarter, it's at two point three percent. So
Speaker 2: the e commy really hasn't slowed down enough to make
Speaker 2: the FIT confident that they're going to see that slack
Speaker 2: in all their work that they that they want. What
Speaker 2: I think this does do is opens up the question
Speaker 2: is could July be the last one? And that's certainly possible,
Speaker 2: because you know they won't they won't move at the meeting.
Speaker 2: After July. They'll take a break, just like they did
Speaker 2: this last time, and then we're going to get to
Speaker 2: November first. Well, it was a long time between now
Speaker 2: and November first. I can imagine by that point it's
Speaker 2: possible that they'll see enough news that makes some confident
Speaker 2: that they've done enough, so I think I think the
Speaker 2: November rate high is really up for grabs at this point.
Speaker 3: Bill, you talked about how disinflation might be transitory and
Speaker 3: that there could be a reinflation once the base effects
Speaker 3: are stripped out, and especially as real incomes continue to
Speaker 3: rise at a faster pace as inflation comes in. What
Speaker 3: do you have to see to believe in the disinflation
Speaker 3: that it will hold and revert back to a sub
Speaker 3: two percent inflation norm over the longer term.
Speaker 2: For me, it's all about the labor market. I want
Speaker 2: to see slow down and pay one plant growth. I
Speaker 2: want to see you rise in the interplaying rate, and
Speaker 2: most especially I want to see further moderation wages. So
Speaker 2: labor markets too tight, then you're not gonna get inflation
Speaker 2: back down in two percent.
Speaker 1: That's that's the key, Bill Dudley, thank you so much
Speaker 1: for joining us. Your commitment of Bloomberg surveillance really really appreciated.
Speaker 1: William Dudley, writing for Bloomberg Opinion, of course, a former
Speaker 1: president of the New York Fed. Thanks to zero Hedge,
Speaker 1: they had out yesterday a Michael Gape in production That
Speaker 1: is a chart from Bank of America that showed the
Speaker 1: fan distribution of our American inflation, where we could see
Speaker 1: the surprise of a normal disinflation back to the two
Speaker 1: percent level, or maybe something stasis three four percent, or
Speaker 1: dare I say we could even see sticky inflation and
Speaker 1: arise as disinflation moves a lower A lot of confusing
Speaker 1: trends in math. Michael Gaban joins US NOW head of
Speaker 1: US Economics. Michael, what's the key determinant of how disinflation unfolds?
Speaker 4: I think, I mean just I think it's catching on
Speaker 4: with what Bill Dudley just said. Does the labor market
Speaker 4: soften enough to give you confidence that services inflation will
Speaker 4: keep inflation running around two percent? So for me, it's
Speaker 4: about broad based disinflation across services. Yes, we should get
Speaker 4: some payback in goods prices, we saw that again this
Speaker 4: month with used cars. But can we get a combination
Speaker 4: of disinfl in services so beyond shelter? I agree with you.
Speaker 4: I'm not sure ourline Ferris fell eight percent on the month,
Speaker 4: But is it broad based enough to make you confident
Speaker 4: that the new trend or we're back to our prior
Speaker 4: trend of roughly two percent?
Speaker 3: What do you make of what Billaudly was just talking about, Michael,
Speaker 3: that you can't see this ongoing disinflation unless the labor
Speaker 3: market cracks, unless you see a bit more loosening in
Speaker 3: what we see in the job space.
Speaker 5: Do you agree with that?
Speaker 3: Do you think we need to see that pain in
Speaker 3: order to create a subsistence in this low inflation.
Speaker 4: I do agree with it. Now, it doesn't necessarily mean
Speaker 4: the FED keeps hiking. I agree with the narrative of
Speaker 4: I think the FED will hiking in July. I're if
Speaker 4: we're posting point two's on core from here, it'll call
Speaker 4: into question what they have to do after that. So
Speaker 4: they may stay on hold. They may be reluctant to
Speaker 4: cut until they see more evidence that the labor market
Speaker 4: is imbalance, that supply of labor and demand for labor
Speaker 4: are more imbalanced. So that argument may be more about
Speaker 4: how quickly the FED cuts or when it cuts, than
Speaker 4: it is how high the FED goes in the near term.
Speaker 3: This is an interesting distinction because Bill Dudley has been
Speaker 3: pretty hawkish in terms of the FED having to do
Speaker 3: more in order to get inflation under control, and yet
Speaker 3: he just came on and said, this is a great
Speaker 3: report and this may be the last rate hike that
Speaker 3: we see from the Fed this month. They may not
Speaker 3: go in September. That brings us to November. A lot
Speaker 3: of data in between. Is that bullish or bearish for bonds?
Speaker 3: Is that bullish or bearish for the idea of how
Speaker 3: long the Fed can hold rates at a high level?
Speaker 4: I think unbalanced. You'd have to conclude that it's bullish
Speaker 4: in the sense that we're seeing disinflation in the US
Speaker 4: economy that is gradually becoming more broad based in an
Speaker 4: environment where the labor market still is very healthy and
Speaker 4: the unemployment rate is low. So again, I think what
Speaker 4: Bill was saying was if this is the new run
Speaker 4: rate eight, then yes, it would call into question hikes
Speaker 4: beyond beyond July, and it might give you more confidence
Speaker 4: that's a less pain in the labor market is needed
Speaker 4: to convince and give the Fed confidence that inflation stability,
Speaker 4: price stability will be restored. So on net, I think
Speaker 4: it's hard to argue that disinflation in an environment of
Speaker 4: a strong labor market, you know, is bearish. I think
Speaker 4: at the moment that's a bullish view.
Speaker 1: Where are you a nominal GDP? I mean, Michael Gaban
Speaker 1: just simply here, if we go out one year, dare
Speaker 1: I say out two years? Not that anybody's modeling out
Speaker 1: to twenty twenty five, but do we get back to
Speaker 1: some kind of four percent top line GDP? Two percent
Speaker 1: inflation two percent real GDP?
Speaker 4: Probably not until twenty twenty five, if most of our
Speaker 4: baseline forecasts are accurate. For let's call it gradual disinflation
Speaker 4: and perhaps a hiccup in growth here in the short run,
Speaker 4: if growth continues to slow down, you might get you
Speaker 4: might get something around four percent temporarily, but I think
Speaker 4: nominal GDP growth is likely to remain pretty healthy until
Speaker 4: you get into twenty twenty five and inflation maybe is
Speaker 4: settled down to around two percent.
Speaker 3: Or speaking with Michael Gape and if Bank of America
Speaker 3: and Michael you were saying that if this data does continue,
Speaker 3: that does seem like a likely case. I just want
Speaker 3: to get a sense from you on the real wages point.
Speaker 3: How much does that make it difficult to see ongoing disinflation,
Speaker 3: that real wages are rising at an accelerating pace.
Speaker 4: I think it makes it difficult if you're a policy
Speaker 4: maker and you're thinking, you know, I need to get
Speaker 4: demand and supply into better balance. But what I'm seeing
Speaker 4: as a consumer that continues to want to spend and
Speaker 4: is getting significant increases in real wages, so it may
Speaker 4: be hard for them to, you know, again, make that
Speaker 4: conclusion that we're on a path back to two. It's
Speaker 4: about confidence in that outlook. So you need a combination
Speaker 4: then of actual evidence on the ground that you know,
Speaker 4: where is the new trend in inflation, for example, is
Speaker 4: it point two or is this a one off and
Speaker 4: we go back to a point three point threees are
Speaker 4: more the run rate or you need a collection of
Speaker 4: evidence on what the new run rate is, plus where
Speaker 4: spending in real wage data evolve. Again, this may ultimately
Speaker 4: be about the timing of cuts and how quickly those
Speaker 4: cuts come in, and the near term path for the
Speaker 4: FED may be more about these prints on inflation. Inflation
Speaker 4: may dominate whether the FED hikes beyond July, but the
Speaker 4: cutting environment when they're back to a neutral rate of
Speaker 4: interest on the other side, could very much be about
Speaker 4: that labor market story.
Speaker 3: Meanwhile, counter programming as Richmond FED President Tom Barkin, who's
Speaker 3: speaking at a separate event that came out in tandem
Speaker 3: with the CPI data saying that the inflation rate is
Speaker 3: still too high, that the FED has been moving aggressively
Speaker 3: as aggressively as it could against inflation, and talking about
Speaker 3: the longer term view. Michael, if we do see the
Speaker 3: rate hike that we get this month as the last
Speaker 3: in the rate hiking cycle, how long do you expel
Speaker 3: rates in the US to remain about five point three percent,
Speaker 3: give or take, for the foreseeable future.
Speaker 4: Well, we have the first cut coming in May of
Speaker 4: next year, next year, so our baseline still has another
Speaker 4: hike beyond July, but we've highlighted that that ultimately will
Speaker 4: be data dependent and we'll have to see how things evolve.
Speaker 4: Our first cut in an end to balance sheet runoff
Speaker 4: would be in May of next year. So the debate
Speaker 4: on the committee is some combination of higher or for longer,
Speaker 4: and I think they would be inclined to want again.
Speaker 4: This is about the evidence, the accumulation of evidence and
Speaker 4: confidence about restoring price stability. So we don't have that
Speaker 4: first cut until May of next year.
Speaker 1: Michael Gape, and thank you so much, and congratulations on
Speaker 1: that really informative Bank of America charter. The last twenty
Speaker 1: four hours. Megan Horneman joins us downt investment Officer Verdant's
Speaker 1: Capital Megan. Do you change your outlook with this disinflation report?
Speaker 6: No, I think this was a good report. I do
Speaker 6: agree with that inflation's going in the right direction. Disinflation
Speaker 6: is starting to take hold, But I don't think it
Speaker 6: changes the move in July from the Fed. They can't
Speaker 6: take their foot off the pedal yet. There's still three
Speaker 6: things that they're looking at, and they're not necessarily looking
Speaker 6: at airline fares. What they're looking at is housing, which owners'
Speaker 6: equivalent rent is still slightly elevated. They're looking at earnings,
Speaker 6: which we've just finished talking about how real earnings now
Speaker 6: are higher. And they're also going to be looking at
Speaker 6: the service sector. So those three things they are improving.
Speaker 6: You can't deny that in the report today. But I
Speaker 6: just don't think it's enough for the Fed to say
Speaker 6: we're completely done.
Speaker 3: Do you think, though, that there is a greater likelihood
Speaker 3: as a result of this report, that this raid hike
Speaker 3: at this month's meeting will be the last.
Speaker 5: If this is the trend that continues.
Speaker 6: Yes, Let's keep in mind there's a lot of base
Speaker 6: effects in this report, so we don't want to take
Speaker 6: one month as a trend. But if this continues, I
Speaker 6: think this may be the last. But I don't think
Speaker 6: they're going to be cutting, And that's something that we've
Speaker 6: been saying for a long time. The market is too
Speaker 6: optimistic about the path and the timing of rate cuts.
Speaker 6: We think they're going to stay higher for longer. They've
Speaker 6: told us that, and they can afford, especially with the
Speaker 6: consumers still wanting to spend to take their foot off
Speaker 6: the gas here.
Speaker 3: That said, how does this shift your view on how
Speaker 3: to allocate your assets at a time when a lot
Speaker 3: of people are betting that the economy can remain strong
Speaker 3: even as we continue to see price stability restored to
Speaker 3: the market.
Speaker 6: So we've been taking the opportunity this year with the
Speaker 6: big rally we've seen across the global equity sector, to
Speaker 6: start to reduce some of the allocation. We want to
Speaker 6: get more to a neutral waiting to our benchmark, because
Speaker 6: we're not while we're looking at a period where the
Speaker 6: Fed may be near the end of their aggressive tightening cycle,
Speaker 6: we're not calling for cuts. There is still, as we said,
Speaker 6: there is still some inflation in the pipeline that.
Speaker 5: They have to get under control.
Speaker 6: Our bigger concern is that the market's got a little
Speaker 6: too optimistic about the economy. We continue to see in
Speaker 6: a lot of these reports underneath of the details that
Speaker 6: there is significant weakness in the economy and especially the consumer.
Speaker 6: We've talked about this before, the FED tightening cycle as
Speaker 6: well as now tightening lending conditions. This takes time to
Speaker 6: work into the economy. We haven't seen those full effects.
Speaker 5: The labor markets now starting to show signs of weakness.
Speaker 5: This is all negative for the consumer.
Speaker 6: So we're concerned about the consumer in the second half
Speaker 6: of this year despite some of this positive inflation report,
Speaker 6: because we just don't see the spending that we saw
Speaker 6: on the first part of this year sustainable.
Speaker 1: So to cut to the Chase Magan, I think this
Speaker 1: is really important. A tep of economy just simply means
Speaker 1: less revenue for corporations, and that's where the earning shortfall begins.
Speaker 6: Right, And this is you know, we're getting ready to
Speaker 6: start this earning season here in the second quarter. This
Speaker 6: is the first the it's expected to be the worst
Speaker 6: earning season that we've seen since the pandemic. And we
Speaker 6: don't really think that this is completely over from an
Speaker 6: earning's perspective, I.
Speaker 1: Look Megan the step forward here, and I get that
Speaker 1: this is one report. Lisa's told me that three times today.
Speaker 1: Maybe you take a smooth three month moving average of disinflation.
Speaker 1: Did the disinflation vector change enough for you to have
Speaker 1: to sit down and recalibrate getting to the third quarter?
Speaker 5: No, not yet. I still think, like I mentioned, there's
Speaker 5: three things.
Speaker 6: That's what the Fed's looking at, and they have gotten
Speaker 6: slightly better. But even if you look at the owner's
Speaker 6: equivalent rent component that was running a five tents on
Speaker 6: a month of a month basis, Oh, it's slipped to
Speaker 6: four tenths. Is that enough for the FED? I don't
Speaker 6: think so. I still think that's a concern for the FED.
Speaker 6: So I'm not ready to make any changes. We're sitting
Speaker 6: neutral with our equity exposure. We have a nice cash
Speaker 6: position because we are earning now on that, and we're
Speaker 6: looking for the potential that we could see some weakness
Speaker 6: of the equities in the second half this year.
Speaker 3: I gotta say, Tom, I'm looking at Bespoke Investment. They
Speaker 3: put out a report saying that at the headline level,
Speaker 3: there have only been two stronger than expected CPI readings
Speaker 3: in the last year, which is the fewest and twelve
Speaker 3: month period going back to November twenty nineteen on a
Speaker 3: core basis just three stronger than expected monthly CPI readings
Speaker 3: that has been the fewest since November twenty twenty. There
Speaker 3: is a sense that Wall Street doesn't have as much
Speaker 3: faith in the disinflation as is actually coming through in
Speaker 3: the number.
Speaker 1: This is really well timed that you bring this up,
Speaker 1: because doctor Dudley alluded to that when he did as
Speaker 1: Newtonian calculus in English, where we talk about the first derivative,
Speaker 1: the second derivative, you'd make jokes if you're particular, if
Speaker 1: you had a hangover from course three to light, you'd
Speaker 1: make a joke about the third derivative or the fourth derivative.
Speaker 1: But all of this anecdotal evidence leads to some form
Speaker 1: of vectors which say the agony of this inflation is over.
Speaker 1: Then the debate begins.
Speaker 3: From an investment perspective, Megan, is it time to get
Speaker 3: out of CA maybe not go into risk your assets,
Speaker 3: but lock in yields.
Speaker 5: At a higher level data.
Speaker 3: Kelly, if we are seeing inflation come in.
Speaker 6: And we actually started to do that, recently as well,
Speaker 6: we moved our duration of our fixed income investments out
Speaker 6: a little bit, not significantly long at this point, because
Speaker 6: I still do think there is that uncertainty around the FED. Yes,
Speaker 6: it looks like they may be able to be done
Speaker 6: in June, I mean in July, but when it comes
Speaker 6: to ray cuts, when are they really coming in? And
Speaker 6: we don't think that's the story until twenty twenty four.
Speaker 6: So it's not a rush to run into the long
Speaker 6: term yields at this point, but we do think you
Speaker 6: should move out some of those shorter durations into more
Speaker 6: of an intermediate intermediate duration.
Speaker 1: Megan, Thank you so much. Meghan Hartman with Verdant's Capital Advisors.
Speaker 1: Right now we have a Darta moment. Michael Darta joins
Speaker 1: us MKM Partners and the chief economists is also disinflation
Speaker 1: strategist for Roth MK Partners. Michael, data is disinflation in place.
Speaker 7: Hi, Tom, thanks for having me. It certainly is in place.
Speaker 7: So maybe these numbers came as a bit of a
Speaker 7: surprise to some, but frankly, if you've been tracking the macroeconomy,
Speaker 7: what we're seeing is a rapid deceleration in nominal GDP growth.
Speaker 7: Aggregate demand. In fact, we've got some numbers on same
Speaker 7: store sales going into July that are comping negative now,
Speaker 7: so nominal growth momentum has really hit a wall here.
Speaker 7: And if you just look at an indicator like the
Speaker 7: ISM Manufacturing Index, their prices paid component has just collapsed
Speaker 7: and that leads the headline CPI by four to six months.
Speaker 7: So you know, this rapid rollover that we're seeing in
Speaker 7: flexible price inflation shouldn't be a big surprise. And we've
Speaker 7: got a good number on core today. You know, those
Speaker 7: numbers tend to be stickier because they're tied to contracts
Speaker 7: and leases, so they tend to lag the business cycle.
Speaker 7: But the market, you know, is certainly being lifted on
Speaker 7: a sentiment basis from that.
Speaker 8: So how do you think our Federal Reserve kind of
Speaker 8: takes in this print we're going to get some PPI
Speaker 8: tomorrow as it relates to kind of where they want
Speaker 8: to go over the next several meetings.
Speaker 7: Well, I think this is a case of you know,
Speaker 7: once bit and twice shy, So they obviously didn't have
Speaker 7: the correct inflation forecast coming into the cyclical upswing, and
Speaker 7: I think they've already tightened enough to put the economy
Speaker 7: into a eventual recession. And so you know, the equity
Speaker 7: market is acting like a soft landing is at hand,
Speaker 7: and most commentators on your network and others are, you know,
Speaker 7: seemingly falling into that camp. Yet historically, if you take
Speaker 7: a look back at the data, you don't get soft landings.
Speaker 7: When the FED raises rates, inverts, the yield curve collapses,
Speaker 7: money growth presides over a drastic in sustained tightening in
Speaker 7: lending standards and focuses on backward looking information. And that's
Speaker 7: exactly where we are now. Equity markets, you know, I mean,
Speaker 7: they can defy gravity for a while. We've had a
Speaker 7: heck of a rally this year that few people have predicted,
Speaker 7: Present Company included. But the equity market is up on
Speaker 7: a zero earnings growth. This is an entire entirely driven
Speaker 7: by valuations and long term interest rates really haven't come
Speaker 7: down if you go back to the October lows of
Speaker 7: last year, no earnings growth, about a flat ten year
Speaker 7: treasury yield and a four point multiple expansion. I mean,
Speaker 7: you know, I think investors do themselves a disservice if
Speaker 7: they are going to chase a market that's been propped
Speaker 7: up in that fashion.
Speaker 8: Michael Darta earning season kicking off in Earnest Friday with
Speaker 8: some of the big banks. What are you looking for
Speaker 8: from this earnings cycle?
Speaker 7: Well, you know, we've already got a earnings recession well underway,
Speaker 7: so we have three quarters now we're the SMP operating
Speaker 7: earnings have fallen. There's a huge and growing divergence between
Speaker 7: the GDP based NIPPA profits that cover all US corporations
Speaker 7: and SMP operating earnings. That's been a late cycle recession
Speaker 7: bear market flag in the past. And then I mentioned
Speaker 7: the nominal growth momentum fading on the back of tighter
Speaker 7: monetary policy. If top line growth is weakening or especially
Speaker 7: contracting relative to slower moving cost variables on the wage side,
Speaker 7: that is a setup for a margin squeeze. So I
Speaker 7: think we're going to have difficulty going forward. And then
Speaker 7: we have to ask ourselves why is this equity market
Speaker 7: performing the way it is. It is simply pricing in
Speaker 7: a huge turnaround in earnings. Do the forward indicators tell
Speaker 7: you that there's no there there? And then eventually I
Speaker 7: think we're looking at lower equity prices.
Speaker 5: Michael.
Speaker 8: So if you look at the SMP earnings for twenty
Speaker 8: twenty three about two hundred and twenty dollars per share.
Speaker 8: A lot of folks will come in to the studio
Speaker 8: and say, hey, that number could be even closer to
Speaker 8: two hundred dollars, maybe even south of two hundred dollars.
Speaker 8: How much earnings risk do you think is still left
Speaker 8: in this market?
Speaker 7: Yeah? I think there is considerable risk. You know, you're
Speaker 7: running the mill. Recession is going to put forward estimates,
Speaker 7: you know, down at least fifteen or twenty percent, and
Speaker 7: then you know the actual trailing operating earnings typically fall
Speaker 7: more than that, and you've got this big divergence between
Speaker 7: the economy wide profits now in S and P operating earnings.
Speaker 7: None of that adds up to a highly confident full
Speaker 7: run or risk assets in my opinion. So you know
Speaker 7: this is you know, I can understand why people are
Speaker 7: getting more optimistic, because you know, everyone tends to get
Speaker 7: whipped around by the market. The market has done well
Speaker 7: this year, but I think we need to take a
Speaker 7: step back and look at this in a sober fashion.
Speaker 1: Unfair question, but I'll conflate the two DARTERA would give
Speaker 1: me a C minus on this can we say that
Speaker 1: we're going to get a constrained near four percent nominal
Speaker 1: GDP and at the same time, does that reaffirm John
Speaker 1: William's quest for a low our start.
Speaker 7: Yeah, Tom, we're actually already there. So the last time
Speaker 7: the three of us talked, we were talking about gross
Speaker 7: domestic income and nominal GDP, and the divergence is there,
Speaker 7: but if you sum that, you know, if you average
Speaker 7: the two rather, we were actually already there. Over the
Speaker 7: last two quarters for which we have data, were just
Speaker 7: below four percent on the average of nominal GDP and
Speaker 7: nominal gross domestic income. And prior to that, the recovery
Speaker 7: average was thirteen percent annualized. So we were in this
Speaker 7: booming nominal activity environment on the back of very easy
Speaker 7: monetary policy. Policy has been tightening rapidly and nominal aggregate
Speaker 7: demand is weakening, and so in that environment, you know,
Speaker 7: the neutral interest rate is not going to be consistent
Speaker 7: with a thirteen percent nominal top line number. You know,
Speaker 7: it's going to be much lower. If we're trending around
Speaker 7: four and I don't see any pickup, and you know,
Speaker 7: we're talking about structural stuff. Really that means supply side.
Speaker 7: So what is the trend in nonfarm productivity, it's actually
Speaker 7: zero growth since the recovery started. We obviously didn't have
Speaker 7: a baby boom, at least that I'm aware of, and
Speaker 7: so there's you know, there's no improvement in terms of
Speaker 7: working age population growth. So I don't really understand the
Speaker 7: story here that the neutral interest rate is going to
Speaker 7: be higher over the long term in a cyclical sense. Yes,
Speaker 7: if you have a boom, then the neutral rate is higher.
Speaker 7: But you know, again, if there's some long term structural shift,
Speaker 7: why is the yield curve upside down? Why is money
Speaker 7: supply collapsing? Why is bank credit collapsing? You know, those
Speaker 7: questions are just unanswered by some that are making, in
Speaker 7: my opinion, not very well thought out arguments.
Speaker 1: Michael Darta, thank you so much. With ross MM partners.
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