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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: US companies looking to protect the top and bottom line
Speaker 2: as the fedkicks off its easing cycle, or Lisa Command
Speaker 2: of JP Morgan Asset Management writing companies have been working
Speaker 2: hard to maintain margins by maximizing efficiencies wherever possible, Except
Speaker 2: for tech layoffs have not been and are not anticipated
Speaker 2: near term. Lisa joins us for more. Lisa, goamrnig. It's
Speaker 2: going to see you as always. Nice to see you too.
Speaker 2: Before we talk about margins, let's talk about top line
Speaker 2: new growth. Why do you think that's going to be
Speaker 2: so challenged in the it's accounty.
Speaker 3: Yeah, you know, it's been declining steadily when we look
Speaker 3: back over the trough in Ibadah. So you know, going back,
Speaker 3: let's say about a year that started to recover and
Speaker 3: it's really moving very nicely up, but revenue at the
Speaker 3: top line has just been slowing and slowing. I think
Speaker 3: that's consistent with a slower economy. But I think what's
Speaker 3: really fascinating about this is companies. I give this analogy.
Speaker 3: Companies are like a duck on the lake, right. They
Speaker 3: see this top line that's kind of waning a bit,
Speaker 3: and they're really trying to maintain margins and they're paddling
Speaker 3: faster and faster and faster, and they're doing a really
Speaker 3: good job of maintaining margins. When you look at the
Speaker 3: median company within our investment grade universe, they've been able
Speaker 3: to maintain margins at around fourteen percent on an operating
Speaker 3: margin basis. That's pretty good. So you know, really what
Speaker 3: we're waiting for now is can we start to see
Speaker 3: a kickstart to the top line. And I think this
Speaker 3: probably goes back to what the Fed's going to do
Speaker 3: with the economy.
Speaker 2: So what I'd be worried about, and this is me,
Speaker 2: I'm a worry. I've got Lisa for company. What I'd
Speaker 2: be worried about is that the next step is that
Speaker 2: they run out of their ability to maximize efficiencies and
Speaker 2: protect margins, and the next step is layoffs. Do you
Speaker 2: think we're easing early enough to say, really, the next
Speaker 2: STEP's top line revenue growth, the margins is going to
Speaker 2: be okay, right.
Speaker 3: Well, that's it's interesting you make this point because when
Speaker 3: we went through we looked sector bi sector, and as
Speaker 3: you mentioned in your lead in, you know, it's really
Speaker 3: just tech that has been the one area that's been
Speaker 3: laying off. Now, Tech has been using layoffs as a
Speaker 3: way to maintain margins for probably the better part of
Speaker 3: two years, so this is not a new phenomenon with tech,
Speaker 3: but you're right, other sectors really have not. And you know,
Speaker 3: we can look at you know, how they've maintained margins.
Speaker 3: So you look at energy companies, there's technological change. You know,
Speaker 3: companies have been very good about making acquisitions where they
Speaker 3: had more contiguous acreage, so there's no need to make
Speaker 3: layoffs there. Even the spot of consumer goods, for example,
Speaker 3: you know, companies built in a lot of resiltiancy in
Speaker 3: light of the supply chain problems that we had earlier,
Speaker 3: but maybe they don't need that anymore. So, you know,
Speaker 3: we've had the efficiencies come through. But I think you're right.
Speaker 3: If we don't start to see an improvement in the
Speaker 3: top line, can employment start to be the lever that
Speaker 3: they pull. So far, I think there's been a reluctance
Speaker 3: and maybe it's a little PTSD after what happened during
Speaker 3: COVID with finding people, training people and the like, but
Speaker 3: I think it's something that we're a little bit on
Speaker 3: a precipice here.
Speaker 4: I love the granularity that you have when you look
Speaker 4: under the hood, and I want to go a little
Speaker 4: further talk about the nature of how these companies look
Speaker 4: at employment because it speaks to the uncertainty that we
Speaker 4: see in the data. How much are companies not mace
Speaker 4: making broad based layoffs but not hiring either and kind
Speaker 4: of relying on attrition and expecting to end up with
Speaker 4: a smaller footprint relative to the size of their businesses.
Speaker 4: And I'm thinking of US banks where CEOs have even
Speaker 4: come out that's going to be the future? I mean,
Speaker 4: is that kind of what you're seeing in terms of
Speaker 4: this paddling duck type of corporate sphere that we're looking at.
Speaker 3: So far, not yet. I think if I were to
Speaker 3: get down to that level of granulary, I think we'd
Speaker 3: see that there is not necessarily new hiring. And so
Speaker 3: you know, how the drill goes, you take away the
Speaker 3: job openings that might be posted. Maybe you pull the
Speaker 3: back there so you're not actually removing workers from your company.
Speaker 3: But I don't know. I think as we maybe go
Speaker 3: further down the road, if we don't see the economy
Speaker 3: start to pick up, as John was saying earlier, I
Speaker 3: think we are going to see maybe some deeper layoffs.
Speaker 3: But again, nothing to indicate that at this point everything
Speaker 3: it's like the calm waters on the top the duck
Speaker 3: just paddling along.
Speaker 4: So moving from one thousand feet to five thousand feet,
Speaker 4: there's a question about the US. We're talking about companies
Speaker 4: here and their ability to withstand and maintain that fourteen
Speaker 4: percent margin. How different are things right now in Europe,
Speaker 4: in particular in Germany in the sphere that you're.
Speaker 3: Looking, Yeah, very very different. So we did a little
Speaker 3: comparison across Europe. We looked across sectors and said who's
Speaker 3: doing well in Europe? And who's not doing well. And
Speaker 3: what we found is companies with exposure to China, we're
Speaker 3: doing much worse than those companies that didn't have that exposure. So,
Speaker 3: just to throw a few numbers on it, if you
Speaker 3: look at EBADUG growth through the end of the year
Speaker 3: that we're projecting for Europe in general, we're thinking around
Speaker 3: three percent. If you're looking at companies with exposure to China,
Speaker 3: we're seeing those companies down five percent. So it is
Speaker 3: a vast difference. Now, granted, some of that is influenced
Speaker 3: by auto manufacturers, and auto is not just about China.
Speaker 3: There are other issues. But yet you see it in
Speaker 3: companies with retail exposure with consumer products. They're all starting
Speaker 3: to see or feeling that downturn and that lack of
Speaker 3: growth that's coming through in China. And I think that
Speaker 3: is the big difference between US companies and many companies
Speaker 3: in Europe, is that China representation.
Speaker 2: Lisa, do you think that's an opportunity given the easy
Speaker 2: we've started to say from Chinese authorities in the past
Speaker 2: twenty four hours.
Speaker 3: I think it's too early to know, I really do.
Speaker 3: We're just at the very early early stages. I mean
Speaker 3: autos are a different one, you know, different cattle of
Speaker 3: fish here because the China story is much more complex
Speaker 3: for autos. You know, what a lot of people may
Speaker 3: not realize is when you start to look through the
Speaker 3: surface at auto manufacturers, particularly European ones, where they're making
Speaker 3: their most money in China is not on evs but
Speaker 3: on ice vehicles. And ice vehicles are considered to be
Speaker 3: premium vehicles in China. Now, if you start to get
Speaker 3: tariffs put on Chinese EV's by the European authorities, do
Speaker 3: you get retaliation on ice vehicles in China? So there
Speaker 3: you have, you know, a little bit of a nuanced situation.
Speaker 3: And of course, as you alluded to earlier, for some
Speaker 3: of the auto manufacturers, there are very aggressive targets for
Speaker 3: emissions coming through and that's really forced a lot of
Speaker 3: these companies into making very large capital investments particulate a time.
Speaker 3: Now we're seeing with EV demand starting to wane.
Speaker 2: How investible a real tide credits right now? In Europe?
Speaker 2: I think so.
Speaker 3: Look, I think when we talk to the ratings agencies,
Speaker 3: what we're told is they will have some time. There
Speaker 3: is not an imminent downgrade expected for these companies and
Speaker 3: when you look back, think about during the COVID period,
Speaker 3: these companies made a lot of money, and so they
Speaker 3: have really a little bit of a like a little
Speaker 3: bit of money in the bank, let's put it that way.
Speaker 3: When we look at leverage, it's very low. Margins are
Speaker 3: still pretty good, but they're coming down. So again, the
Speaker 3: health is not bad. The ratings agencies don't appear to
Speaker 3: be primed at least at this point for downgrades. But
Speaker 3: I think you're subject to headline risk and that is
Speaker 3: likely to continue for the next month too. But I
Speaker 3: think at that point you may have an opportunity, once
Speaker 3: we see spreads really compensate you for some of that
Speaker 3: headline volatility, to get back into the space.
Speaker 5: When you think of volatility, you have to think of
Speaker 5: the US election. How much do you see these companies
Speaker 5: basically waiting on the sidelines so they have a little
Speaker 5: bit more clarity.
Speaker 3: Yeah, I wouldn't blame them for rating on the headlines.
Speaker 3: I mean, yesterday there was a good headline on deer
Speaker 3: that we're all aware of. And I think what this
Speaker 3: speaks to is really I think companies want certainty, particularly
Speaker 3: if you're looking at making large capital investments. And so
Speaker 3: until the elections have been decided, and also the composition
Speaker 3: of Congress is decided, I would suspect that many companies
Speaker 3: would probably take a wait and see approach.
Speaker 2: The autope sector is in such a tight spot right now.
Speaker 2: The remedies that are required in Europe to cut capacity,
Speaker 2: to cut jobs, there's going to be massive opposition to
Speaker 2: them from unions and from government officials, particularly in Germany.
Speaker 2: And so Lisa's point the outlook for terrists. You've got
Speaker 2: no idea what the next twelve eighteen months is going
Speaker 2: to look like for some of these companies.
Speaker 4: Yeah. I love her point about the difference in the
Speaker 4: cars that get purchased in China. Are speaking to your
Speaker 4: car manufacturer from Germany and they said that they're designed
Speaker 4: differently in China because normally it's the driver's seat that's
Speaker 4: really nice and that has enough space, and that the
Speaker 4: cars that they sell to China, it's actually the passenger
Speaker 4: seat because there's always.
Speaker 2: A driver live to be driven, yes, not to drive?
Speaker 6: That is that your call?
Speaker 2: Basically that's what rolls roysters are for.
Speaker 3: Right.
Speaker 2: It gets so I wouldn't to be driven into taxis Lisa?
Speaker 2: Thank you? It's good to see. Thank you very shot
Speaker 2: that Lisa Carmen there, JP Morgan start a page of
Speaker 2: this story. The OECD releasing its latest economic outlook, expecting
Speaker 2: global GDP to stabilize with continued disinflation. Central banks still
Speaker 2: have room to cut rates, but debt sustainability is still
Speaker 2: a top issue. Joining us now, Alvaro Peretta, Chief Economists
Speaker 2: at the OECD. Avara, Welcome to the program, Sir. I
Speaker 2: want to begin with the United States and get to
Speaker 2: some of your forecast on the US GDP. Growth in
Speaker 2: the United States projected to slow but becustioned by monetary policy,
Speaker 2: with growth projected to be at two point six percent
Speaker 2: in twenty four this year and one point six percent
Speaker 2: in twenty five. Two part question why the slow down?
Speaker 2: One and two? Why do you think we can actually
Speaker 2: stabilize around one and a half percent GDP in America
Speaker 2: and not go to someplace worse.
Speaker 7: Well, good morning, great to be on the show. Well,
Speaker 7: first of all, I think it's important to realize that
Speaker 7: we're talking about a very robust US economy compared to
Speaker 7: the rest of the world. Because we see we came
Speaker 7: back to China. China is slowing down quite significantly. We
Speaker 7: also think that Europe is not doing as well as
Speaker 7: he could and other parts of the world are not
Speaker 7: doing so well. So under the circumstances, knowing that we
Speaker 7: had a huge pandemic and a big energy crisis, the
Speaker 7: United States is doing fairly okay. So what explains the slowdown? Well,
Speaker 7: first of all, there's a statistical carry out issue. Is
Speaker 7: basically the last quarter of twenty twenty three was stronger
Speaker 7: than we expected. It has a statistical carryover, and so
Speaker 7: that explains part of the slowdown. And so if you
Speaker 7: take into account quarter on quarter, we would forecast, you know,
Speaker 7: for one point nine for a slowdown will be from
Speaker 7: one point nine to one point six. But the second issue,
Speaker 7: why is this happening? Well, first of all has to
Speaker 7: do with consumption, and so a lot of people have
Speaker 7: savings during the pandemic and they are running out and
Speaker 7: so this is not so good for consumption. So there's
Speaker 7: slow down in consumption. There will be a slowdown in
Speaker 7: government consumption, which is welcome because we think that both
Speaker 7: the deficit and the debt in the United States, you know,
Speaker 7: we should go back to fiscally prudent policy. So I
Speaker 7: think it's very important to go there, And obviously there's
Speaker 7: also an issue regarding experts and investment, But we think
Speaker 7: that main reasons why the United States will continue to
Speaker 7: do well is because it continues to be a very
Speaker 7: dynamic economy compared to other parts of the world. Even
Speaker 7: though certainly the slowdown is explained by the consumption, both
Speaker 7: of the government and the individuals.
Speaker 4: Make a great case for why we could see something
Speaker 4: of a slowdown in the US, but still why the
Speaker 4: US is a better growth trajectory than say Europe. So
Speaker 4: then why don't you have the Europe region actually increasing
Speaker 4: to one point three percent. I know it's downgraded from
Speaker 4: your previous estimate in twenty twenty five, but where are
Speaker 4: the accelerators to get us away from what we're seeing now,
Speaker 4: especially given some of the trajectory in the industrial base
Speaker 4: in Germany.
Speaker 7: Well, with Germany is almost stagnated this year, almost close
Speaker 7: to zero this year. We see France doing a little
Speaker 7: bit better, partly because of the Olympics, but partly because
Speaker 7: of the consumption as well, one point two one point
Speaker 7: two percent, and we have Italy doing so so Spain
Speaker 7: much stronger. Next year, we think that there'll be higher
Speaker 7: growth in Europe and not fantastic when we're talking still
Speaker 7: one point thirty percent. But we see higher growth because
Speaker 7: we think that the recovery that we see in terms
Speaker 7: of purchasing power will continue, so because wages are recovering
Speaker 7: and so this will happen, will have an impact on consumption.
Speaker 7: But we also think that some investment will take place,
Speaker 7: partly linked to the Resilience Fund that were spent by
Speaker 7: the Europeans on infrastructure projects, so this will help a
Speaker 7: little bit. So that's what explains a little bit better
Speaker 7: performance of Europe, but certainly not spectaclical growth rates.
Speaker 4: All things being equal, Where is the growth really going
Speaker 4: to come from? Where is the growth engine the new
Speaker 4: growth engine in Europe at a time where some of
Speaker 4: the challenges for Germany are structural, especially the time where
Speaker 4: Chinese growth has been unreliable.
Speaker 7: I think you just mentioned something that is absolutely essential.
Speaker 7: Part of the problems with Germany right now are cyclical,
Speaker 7: so it's coming out of the energy cry, and we
Speaker 7: know that there's been downward trajectory for part of their
Speaker 7: manufacturing but also services, and also because consumers in Germany
Speaker 7: have been very prudent, so they've been saving more than
Speaker 7: other parts of Europe. But there's also structural issues. You
Speaker 7: mentioned something that is absolutely true, which is a competition
Speaker 7: with China and particularly in manufacturing, and there's less demand
Speaker 7: from China as well for German manufacturing, so that is
Speaker 7: having an impact. But also there's another issue that I
Speaker 7: think is important to highlight. We think that German should
Speaker 7: focus on first of all, improving their infrastructure, especially on
Speaker 7: digital infrastructure. They are lagging compared to other parts of Europe.
Speaker 7: But in particular it's time to go back to reforms
Speaker 7: in Germany. There's many competition friendly reforms that I needed.
Speaker 7: There's too many barriers to services in many parts of
Speaker 7: the German economy. It's still too difficult, too much red
Speaker 7: tape around, and we think this is having an impact.
Speaker 7: In fact, we calculated what's the impact of all this
Speaker 7: and we say that for the OECD economy is in
Speaker 7: order to be with the best practices, arnemies like Germany
Speaker 7: could profit. It could increase growth by three percent over
Speaker 7: ten years if they would do this type of reforms.
Speaker 7: So besides the structural and the issues linked to China
Speaker 7: and the structure of the economy, we think that is
Speaker 7: important also to go back to reforms for Germany.
Speaker 5: Well, let's talk about China. The PBOC out with another
Speaker 5: move today. Do you think any of this is going
Speaker 5: to help spur the Chinese economy?
Speaker 7: Well, we are forecasting four point nine percent for this
Speaker 7: year and four point five percent next year. This was
Speaker 7: before the stimulus. But I don't think that there'll be
Speaker 7: a huge change in the forecast right now for two reasons.
Speaker 7: We know that their exports Chinese exports are doing fairly
Speaker 7: well in terms of manufacturing particular, they're doing fairly well.
Speaker 7: But consumption continues to be a bit subdued in China.
Speaker 6: So this could help.
Speaker 7: Some of these messages could help a little bit, but
Speaker 7: we think really the main ailment of China continues to
Speaker 7: be high debt, private debts. So remember private debt is
Speaker 7: there about one hundred and seventy percent of GDP. It's
Speaker 7: mostly quasi because it's see that, but it's quite private debt.
Speaker 7: And on top of this, we know that there is
Speaker 7: a very large real estate market, much larger than most economies,
Speaker 7: and so there's some adjustment that will have to continue.
Speaker 7: And so the question is whether these measures we'll be
Speaker 7: able to help demand or not. It's a question mark
Speaker 7: that we'll see in the next few months. But to
Speaker 7: be honest with you, if you look at our historical
Speaker 7: examples of other countries, when you have a big real
Speaker 7: estate adjustment, very often takes a bit longer than authorities
Speaker 7: would like.
Speaker 2: Avar I appreciate the update as always, says thanks for tuning.
Speaker 2: Joining planned out to host the likes this this morning,
Speaker 2: applications to refinance home loan searching for a second week.
Speaker 2: According to the Mortgage Bankers Association, homeowners are looking to
Speaker 2: take advantage of the lower rates a thirty year fixed
Speaker 2: mortgage sitting at just over six point one percent. Daniel
Speaker 2: Helfrelter dot Com saying this surveys show that consumers expect
Speaker 2: additional mortgage rate declines in the next year now that
Speaker 2: the Fed's a longer waited cut has arrived. However, the
Speaker 2: improvements may be more modest than we've seen to date. Danielle,
Speaker 2: John Deers Moore, Danielle, Welcome to the program. So we've
Speaker 2: seen refis explode search over the last few weeks. How
Speaker 2: low do you think that rate needs to go before
Speaker 2: we start to see home purchases actually start to accelerate
Speaker 2: in a more material way.
Speaker 6: Yeah, thanks for having me.
Speaker 1: So we've started to see a bit of a week
Speaker 1: to week uptick in the purchase applications, but it takes
Speaker 1: time for buyers to become aware. And remember the mortgage
Speaker 1: application is a later stage in the home buying process.
Speaker 1: You have to have an offer on a home that
Speaker 1: has been accepted before.
Speaker 6: You go to apply for a mortgage. So what we
Speaker 6: will actually likely.
Speaker 1: See is that pending home sales start to pick up,
Speaker 1: and then mortgage applications follow. The pending data is a
Speaker 1: monthly series, the mortgage applications are obviously weekly, so the
Speaker 1: timing wise, you might see the result in the mortgage
Speaker 1: applications first, but there's an order.
Speaker 6: Of operations here, so offer is accepted.
Speaker 1: And the buyer applies for a mortgage, and that's when
Speaker 1: we see it reflected in this MBA data.
Speaker 4: Danielle, what do you make of the fact that actual
Speaker 4: listings have increased. It seems like there is some motion
Speaker 4: in the pool of existing homes that are actually finally.
Speaker 6: Up for sale.
Speaker 1: Yeah, we've seen the number of homes on the market
Speaker 1: for sale growing very slowly over the year, but we're
Speaker 1: now up about thirty six percent compared to last year,
Speaker 1: so it is a substantial improvement. Big picture context, we're
Speaker 1: still down pretty substantially from the twenty seventeen to twenty
Speaker 1: nineteen period, which suggests to me that there's more room
Speaker 1: for recovery in the market. And you know, as we
Speaker 1: see more sellers come into the market, we'll see that
Speaker 1: room improved. And I think it's important to note that
Speaker 1: existing home sellers are often also buying another home, so
Speaker 1: when we see existing home listings increase, increasing both supply
Speaker 1: and demand in the housing market, which will help increase
Speaker 1: the turnover rate in home sales that has been rather
Speaker 1: sluggish in recent months.
Speaker 4: I see a number of reports Staniel that show that
Speaker 4: it really homes haven't moved as quickly as some people
Speaker 4: had expected, So even though there are more listings, it's
Speaker 4: not as they're flying off the shelves. And understanding that
Speaker 4: mortgage rates are still relatively high to orere they used
Speaker 4: to be, how much do you view this as a
Speaker 4: sign of what's to come that essentially, as you DeFreeze
Speaker 4: this market, you won't necessarily see the same kind of
Speaker 4: price increases as some people are calling for on the
Speaker 4: heels of lower mortgage rates.
Speaker 1: Yeah, I think with affordability as stretched as it is
Speaker 1: in the housing market, there's less room for prices to run.
Speaker 1: That said, everyone I think has been surprised at how
Speaker 1: resilient prices have been in the face of higher mortgage rates.
Speaker 1: So buyers have been willing to stretch affordability as opposed
Speaker 1: to necessarily waiting for home prices to fall, and the
Speaker 1: big picture inventory shortage that we see is a big
Speaker 1: explanation for that.
Speaker 6: So if we look over the last decade, we are.
Speaker 1: Several million home short of the number of households that
Speaker 1: have been added. And when you have that kind of
Speaker 1: scarcity in the market, it's hard to see prices really
Speaker 1: relax or decline in any meaningful sort of way. So
Speaker 1: I do think as mortgage rates improve, we are going
Speaker 1: to see buyers come back to the market. If we
Speaker 1: look at the time it takes to sell a home,
Speaker 1: we are seeing homes take longer to sell than.
Speaker 6: One year ago.
Speaker 1: But again, if you compare to that pre pandemic benchmark,
Speaker 1: we're still seeing home sell about a week faster, and
Speaker 1: so I think we have some more room for the
Speaker 1: time on market to slow. At the same time, technology
Speaker 1: has improved and it's much easier for I think shoppers
Speaker 1: to find a match in a home now than it
Speaker 1: was four or five years ago before the pandemic, and
Speaker 1: so we may see some.
Speaker 6: Of those that market speed.
Speaker 1: Kind of stay as a factor in the housing market,
Speaker 1: and so buyers may have to make quicker decisions. But
Speaker 1: I think there are two things going on. There's a
Speaker 1: market momentum and then there's this seasonal momentum that we see,
Speaker 1: and fall tends to be a slower period for the
Speaker 1: housing market.
Speaker 6: We see buyer demand wane. It's one of the.
Speaker 1: Reasons that we identify next week actually as the best
Speaker 1: time to buy, because buyers have some seasonal advantages. With
Speaker 1: fewer of them and a good number of sellers still
Speaker 1: in the market, they have more negotiating power and often
Speaker 1: tend to see lower home prices than we do at
Speaker 1: the peak of the summer.
Speaker 6: So for buyers who are flexible.
Speaker 1: And are not trying to sell a home as well,
Speaker 1: it can be a really good opportunity to get into
Speaker 1: the housing market. And the fact that reads are coming
Speaker 1: down now is just an added bonus.
Speaker 2: We've got a flexible buyers sitting around the table, so
Speaker 2: we appreciate that particular advice. Danielle Thank you, Daniel, how
Speaker 2: They're a rilter. This is the Bloomberg Surveillance Podcast, bringing
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