WEBVTT - Boeing Deliveries Trail Airbus 0:00:00.600 --> 0:00:07.240 Bloomberg Audio Studios, podcasts, radio news. 0:00:09.960 --> 0:00:13.840 You're listening to the Bloomberg Intelligence Podcast. Catch us live 0:00:13.920 --> 0:00:17.000 weekdays at ten am Eastern on Apple, Cardplay and Android 0:00:17.000 --> 0:00:20.120 Auto with the Bloomberg Business App. Listen on demand wherever 0:00:20.160 --> 0:00:23.360 you get your podcasts, or watch us live on YouTube. 0:00:25.079 --> 0:00:29.200 So Southwest, so take our LUV is down fourteen percent, 0:00:29.400 --> 0:00:32.760 So the company plans to cut capacity this year, halt 0:00:32.800 --> 0:00:35.640 most hiring and review it spending plans and response to 0:00:35.880 --> 0:00:40.559 reduced aircraft deliveries from Boeing. Here's my question. Is this 0:00:40.600 --> 0:00:42.440 going to be as simple over the next year? All 0:00:42.479 --> 0:00:44.040 the airlines are going to raise their fees and they're 0:00:44.040 --> 0:00:45.479 going to say it's not our fall, we gotta cut 0:00:45.520 --> 0:00:48.199 capacity because of Boeing. I wonder if that's what we're 0:00:48.240 --> 0:00:51.159 gonna hear well? Joining us now is George ferguson Bloomberg 0:00:51.200 --> 0:00:54.840 Intelligence and your Aerospace, Defense and airlines analyst, George, is 0:00:54.840 --> 0:00:56.840 that the thing? Let's just blame Boeing for the things 0:00:56.880 --> 0:00:59.720 and then raise our prices well. 0:00:59.560 --> 0:01:02.400 So not everyone will be able to blame Boeing, right, 0:01:02.480 --> 0:01:06.119 So that there are airlines that are operating airbus aircraft 0:01:06.600 --> 0:01:12.039 companies like you know, Delta Jet Blue Frontier spirit. They 0:01:12.040 --> 0:01:15.119 won't have the problems that that airlines that are being 0:01:15.120 --> 0:01:17.679 supplied by Boeing will have, and they'll look to put 0:01:17.720 --> 0:01:20.440 as much capacity in the marketplace to take advantage of 0:01:20.480 --> 0:01:23.679 the fact that the airlines that are flying Boeing product 0:01:24.080 --> 0:01:26.520 aren't able to get all of the flying done that 0:01:26.520 --> 0:01:29.640 they want to do. You know, the truth too here 0:01:29.680 --> 0:01:33.200 is I think that you know, the Boeing challenges will 0:01:33.200 --> 0:01:36.480 provide a little bit of firmness to the marketplace. But 0:01:36.600 --> 0:01:38.800 I still see I think a US airline market that 0:01:38.840 --> 0:01:43.200 looks like it's got a it has plenty of capacity 0:01:43.280 --> 0:01:46.240 in it, and I still think fares. 0:01:45.840 --> 0:01:47.840 Are flatish to maybe. 0:01:47.480 --> 0:01:52.360 Going down for the year unless Boeing really curtails their 0:01:52.400 --> 0:01:53.280 deliveries for the year. 0:01:53.880 --> 0:01:56.880 Yeah, it's interesting because if I read this issue about 0:01:56.880 --> 0:02:00.000 Boeing and I read this cutting capacity, but my first 0:02:00.080 --> 0:02:02.040 thought is going to be that that means higher prices 0:02:02.080 --> 0:02:05.000 for consumers. So what accounts for the difference there? 0:02:06.320 --> 0:02:08.440 Well, first of all, I think the US market already 0:02:08.440 --> 0:02:12.480 had sufficient capacity last year, right, I think we're bouncing 0:02:12.520 --> 0:02:13.560 back from a pandemic. 0:02:14.360 --> 0:02:16.359 We saw a bunch of sort of revenge. 0:02:15.960 --> 0:02:19.120 Travel, you know, earlier in this in this bounce back, 0:02:19.840 --> 0:02:22.320 I don't and that was very leisure driven. I don't 0:02:22.320 --> 0:02:24.239 think we're going to see as much of the leisure 0:02:24.360 --> 0:02:27.160 driven travel this year, not that I got to pay 0:02:27.200 --> 0:02:29.720 whatever it's going to take to get down to Disney, 0:02:29.960 --> 0:02:33.639 so you'll see it maybe a small a smaller growth 0:02:33.639 --> 0:02:36.919 amount in leisure, and business isn't fully back. 0:02:36.960 --> 0:02:40.200 We know that. So we've got twenty nineteen more. 0:02:40.040 --> 0:02:43.160 Than twenty nineteen levels of capacity in the marketplace, less 0:02:43.240 --> 0:02:47.520 business and maybe a little more leisure. So when I 0:02:47.560 --> 0:02:49.480 add that all up again, I kind of see a 0:02:49.520 --> 0:02:52.520 market that looks like it's got plenty of capacity. If 0:02:52.600 --> 0:02:55.760 you look at the guidance that Southwest gave on revenue 0:02:55.800 --> 0:03:00.720 per available seat mile, they lowered that at this discussion, 0:03:01.720 --> 0:03:04.000 so tells me that the market is weaker. You know, 0:03:04.040 --> 0:03:06.840 at this guide's point, the market is weaker than they 0:03:06.880 --> 0:03:07.680 initially thought. 0:03:07.960 --> 0:03:10.080 And at the same time, fuel prices were a little 0:03:10.120 --> 0:03:12.000 bit higher. So what it looks like to. 0:03:11.960 --> 0:03:14.400 Me is Southwest numbers are going to come in lighter 0:03:14.440 --> 0:03:16.639 than we expected in one queue. 0:03:17.240 --> 0:03:18.640 That's not a super healthy market. 0:03:18.639 --> 0:03:21.359 That's on a market that's got so much constraint that 0:03:21.400 --> 0:03:23.840 they can price whatever they want to for airline tickets 0:03:24.040 --> 0:03:25.239 and make lots of profits. 0:03:25.320 --> 0:03:28.079 Okay, so it's a trifecta. Like they do have a 0:03:28.120 --> 0:03:30.840 specific Boeing issue and the fuel prices and then the 0:03:30.840 --> 0:03:35.360 broader softer market that's a general airline issue. United also 0:03:36.280 --> 0:03:38.880 told Boeing to stop building seven thirty seven Max ten 0:03:38.960 --> 0:03:42.280 jets for the carrier. Okay, that sounds dramatic and bad. 0:03:42.280 --> 0:03:43.400 What does that actually mean? 0:03:44.520 --> 0:03:46.800 You know, I think it sounds like Scott Kirby, the 0:03:46.840 --> 0:03:48.960 CEO of United, is just getting real about what he 0:03:49.000 --> 0:03:51.280 thinks Boeing can deliver in the near term. I guess 0:03:51.360 --> 0:03:53.440 you know, if you sit around and you kind of 0:03:53.520 --> 0:03:55.080 hope and hope and hope they're going to get the 0:03:55.080 --> 0:03:58.680 Max ten certified, and you wait on those deliveries based 0:03:58.720 --> 0:04:01.200 on that hope, and the certificatetion keeps getting pushed out 0:04:01.200 --> 0:04:04.960 and it's really hard to plan. So Scott Kirby said, hey, look, 0:04:05.320 --> 0:04:07.920 stop worrying about the Dash ten. Just bring me dashed on. 0:04:08.040 --> 0:04:10.720 He was saying, look, I just want airplanes. Bring me airplanes. 0:04:11.000 --> 0:04:13.400 I think the market's generally going to be strong for me. 0:04:13.920 --> 0:04:16.200 He's in the premium segment too, right, which I think 0:04:16.240 --> 0:04:19.039 from the guidance we saw today from airlines, premium is 0:04:19.040 --> 0:04:22.919 holding up better. So he wants airplanes. He wants to 0:04:22.920 --> 0:04:24.840 go out and find some of those three twenty one 0:04:24.920 --> 0:04:29.040 larger scale from Airbus. Again, I think it's okay. I 0:04:29.040 --> 0:04:31.599 think Scott's being a realist. There's a lot of challenges 0:04:31.680 --> 0:04:34.159 right now at Boeing, and it feels to me like 0:04:34.240 --> 0:04:37.200 certification for the DASH seven and the Dash ten, you know, 0:04:37.240 --> 0:04:39.040 the DASH ten being the biggest variant of. 0:04:39.000 --> 0:04:39.960 The seven thirty seven. 0:04:40.560 --> 0:04:42.719 There's just almost no way they're going to get pushed 0:04:42.720 --> 0:04:45.599 out longer than what we expect given the problems in 0:04:45.640 --> 0:04:47.120 manufacturing and Boeing right now. 0:04:47.680 --> 0:04:49.599 And what is that? So is there any redacross that 0:04:49.600 --> 0:04:51.279 we should start thinking about for Airbus? 0:04:52.680 --> 0:04:56.280 Well, I mean, here's the challenge of this industry right 0:04:56.720 --> 0:04:59.000 the readacross is look, Airbus ought to be able to 0:04:59.040 --> 0:05:00.240 go get a lot more. 0:05:00.120 --> 0:05:02.000 Orders for its Airbus A three twenty one. 0:05:02.560 --> 0:05:05.279 But the problem Scott has, and he's a really good 0:05:05.279 --> 0:05:08.240 customer and they're working hard to find him slots, is 0:05:08.240 --> 0:05:10.919 that they probably can't get him three twenty one's for 0:05:11.120 --> 0:05:13.800 four or five years from now. Wow, So that doesn't 0:05:13.839 --> 0:05:17.440 fix his near term problems, and customers that would be 0:05:17.520 --> 0:05:20.640 smaller than United have an even larger problem because the air 0:05:20.600 --> 0:05:22.000 bus isn't going to work as hard to try to 0:05:22.000 --> 0:05:26.600 get him into the delivery cadence. The industry is definitely 0:05:26.680 --> 0:05:29.360 is operating at sort of max capacity. 0:05:29.400 --> 0:05:29.640 Now. 0:05:30.040 --> 0:05:33.479 It's pushing its supply chains to do better, but we 0:05:33.600 --> 0:05:36.680 just don't see increases of you know, build rates kind 0:05:36.720 --> 0:05:39.360 of more than ten percent per year at best. 0:05:39.680 --> 0:05:41.840 It's really hard to bring up that supply chain. 0:05:42.400 --> 0:05:45.920 So I think the duopoly means that Airbus can't really 0:05:45.960 --> 0:05:47.039 capitalize that well. 0:05:46.880 --> 0:05:50.039 On this just anecdotally. I flew to Houston for like 0:05:50.040 --> 0:05:52.400 a day last week, and I flew there on a 0:05:52.480 --> 0:05:55.400 new Boeing jet for United and back on an old 0:05:55.440 --> 0:05:59.919 one and a man that was different, a very different experience. 0:06:00.120 --> 0:06:02.200 Bring a wrench with you, Okay. 0:06:02.240 --> 0:06:03.880 I did text my husband and I was like, hey, 0:06:03.960 --> 0:06:06.400 so I'm on this Boeing plane just in case something happens. 0:06:07.480 --> 0:06:09.720 What did I know? I'm like that, what is the 0:06:09.720 --> 0:06:12.520 floor though? George? For Boeing, I mean the stock is 0:06:12.520 --> 0:06:14.919 literally dropping like a knife. Here are we looking at 0:06:14.960 --> 0:06:17.479 the October low? Is what we have to be watching, Like, 0:06:17.520 --> 0:06:20.159 where's the support and where is the support gonna actually 0:06:20.160 --> 0:06:20.719 come from? 0:06:21.400 --> 0:06:23.920 So like it's you know, Boeing has been through some 0:06:24.000 --> 0:06:27.120 real troubles and the bad news sort of keeps coming. 0:06:28.680 --> 0:06:30.960 Like it's hard to say what a price would be 0:06:31.040 --> 0:06:33.760 on that floor. I will say that I think they're 0:06:34.200 --> 0:06:38.080 purchase a Spirit that they've proposed could start to put 0:06:38.120 --> 0:06:41.599 a floor underneath their problems. I see that direct line 0:06:41.839 --> 0:06:46.360 of management from the Spirit floor in Wichita, Kansas, all 0:06:46.400 --> 0:06:49.159 the way up to Boeing in rent and Washington as 0:06:49.240 --> 0:06:54.120 being the ultimate solution to improving quality, you know, oversight. 0:06:54.680 --> 0:06:57.680 So I think we have to watch that development closely. 0:06:58.360 --> 0:07:01.080 It's going to require getting some of the Airbus business 0:07:01.240 --> 0:07:05.240 outside of Spirit, because Spirit builds products for the A 0:07:05.360 --> 0:07:08.120 three twenty for Airbus and the A three fifty. I 0:07:08.120 --> 0:07:11.000 don't think you want that inside Boeing. So this is 0:07:11.000 --> 0:07:15.040 going to be a complicated procedure, a complicated purchase. But 0:07:15.120 --> 0:07:18.080 I think that's the beginning of Boeing really getting to 0:07:18.200 --> 0:07:23.000 stabilize their builds, improve quality, and get and that's going 0:07:23.080 --> 0:07:26.440 to make the fa free up FAA time and open 0:07:26.480 --> 0:07:30.720 the FAA's mind up about certifying Max seven and ten. 0:07:31.160 --> 0:07:32.760 So I think that that's the beginning of it. 0:07:33.480 --> 0:07:35.840 I mean, if you think about what the challenges are 0:07:35.840 --> 0:07:38.480 facing Boeing, is there much of a difference to the 0:07:38.520 --> 0:07:40.800 company if we get a soft economic landing, a hard 0:07:40.840 --> 0:07:42.360 economic landing, or no landing. 0:07:43.240 --> 0:07:45.920 Honestly, I think for all the air framers there isn't. Right. 0:07:46.000 --> 0:07:50.920 So again, Airbus and Boeing building aircraft at rates much 0:07:51.000 --> 0:07:53.960 lower than their customers are demanding right now. You know, 0:07:54.000 --> 0:07:56.080 customers like Scott Kirby want to come in and buy 0:07:56.120 --> 0:07:58.800 a three twenty one's next three or four years. 0:07:58.640 --> 0:08:00.960 Can't get them. So I think even in a. 0:08:00.880 --> 0:08:06.040 Hard landing, soft landing, no recession environment, these folks just 0:08:06.160 --> 0:08:09.560 keep working on making the supply chain better, so the 0:08:09.560 --> 0:08:12.040 supply chain can put more of the components on the 0:08:12.040 --> 0:08:14.920 factory floor and build more aircraft. 0:08:14.960 --> 0:08:15.720 Although I would. 0:08:15.520 --> 0:08:19.480 Say maybe in a harder economic landing it might free 0:08:19.560 --> 0:08:22.240 up some of the labor that they need and keep 0:08:22.280 --> 0:08:25.560 some of the labor more stable at their suppliers. And 0:08:25.600 --> 0:08:29.320 that's really the challenge right here, is labor at the suppliers. 0:08:29.720 --> 0:08:32.920 Stabilizing it. You need smart people there who've been doing 0:08:33.160 --> 0:08:35.080 the process for a long time, so they do it 0:08:35.160 --> 0:08:38.040 right all the time, know the right processes and procedures. 0:08:38.280 --> 0:08:40.800 Hey, George, if anyone listens to the show or watches 0:08:40.840 --> 0:08:43.480 TV with me, I am a deal person. I like 0:08:43.520 --> 0:08:45.600 me deals. I like all the deals, whatever the deals. 0:08:46.200 --> 0:08:48.840 If I want to look for deals for flying, where 0:08:48.880 --> 0:08:50.360 am I going to get that? Like, is it literally 0:08:50.400 --> 0:08:54.280 going to have to be sort of regional companies exposed 0:08:54.280 --> 0:08:56.320 to Boeing? Am I going to have to get that 0:08:56.400 --> 0:08:57.240 granular here? 0:08:58.640 --> 0:09:01.640 Well? No, right way? I mean airline seats. 0:09:01.640 --> 0:09:04.320 I mean that all the CEOs would complain that I 0:09:04.360 --> 0:09:07.240 say this, but I really find them largely as commodities, right, 0:09:07.320 --> 0:09:09.719 and so if you're going to find lower fares, I 0:09:09.760 --> 0:09:12.720 think you're typically going to find them lower across the 0:09:12.760 --> 0:09:15.520 board we are seeing. You know, it does seem to 0:09:15.559 --> 0:09:20.479 me that non premium leisure is an area of especially 0:09:20.480 --> 0:09:23.880 good you know, a lot of seats available, especially good prices. 0:09:24.679 --> 0:09:27.040 Maybe and maybe the further down the curve you go 0:09:27.080 --> 0:09:28.439 on it, you may not want to go that far 0:09:28.960 --> 0:09:32.400 down to the spirits and frontiers would even be some 0:09:32.440 --> 0:09:35.199 of the best deals. But you know, Southwest guidance today 0:09:35.280 --> 0:09:39.080 means that even in a nicer, you know, a non 0:09:39.120 --> 0:09:42.520 premium product, they're still having challenges getting fair and so 0:09:42.559 --> 0:09:43.400 I think that's important. 0:09:43.440 --> 0:09:44.440 That's good. 0:09:44.720 --> 0:09:48.400 Oh man, fine, George ferguson Boomberg Intelligence and your aerospace, 0:09:48.440 --> 0:09:50.839 defense and airlines analysts. And let's be fair. I mean, 0:09:50.920 --> 0:09:52.280 like I want to sit in the front of the plane. 0:09:53.160 --> 0:09:53.760 Who doesn't. 0:09:53.920 --> 0:09:55.880 I mean, you know you want to pay, you want 0:09:55.920 --> 0:09:57.960 first class, but you want to pay Coach. 0:09:57.800 --> 0:09:58.960 Boom He gets me. 0:10:00.920 --> 0:10:04.800 You're listening to the Bloomberg Intelligence Podcast. Catch us live 0:10:04.880 --> 0:10:08.400 weekdays at ten am Eastern on applecar Play and Android 0:10:08.440 --> 0:10:11.199 Auto with the Bloomberg Business Act. You can also listen 0:10:11.320 --> 0:10:14.400 live on Amazon Alexa from our flagship New York station, 0:10:14.760 --> 0:10:17.520 just say Alexa Play. Bloomberg eleven thirty. 0:10:19.120 --> 0:10:22.080 Small business optimism dropped nine month low. There's that. Also 0:10:22.240 --> 0:10:25.120 a CPI month on month coming in at four tens 0:10:25.120 --> 0:10:28.760 of one percent for February, so slightly higher sequentially. For 0:10:28.840 --> 0:10:31.079 the year, you're looking at three point two percent, also 0:10:31.160 --> 0:10:36.040 higher sequentially as well. So warmer wasn't hot, but did 0:10:36.080 --> 0:10:38.800 prove that January maybe wasn't a blip. I was calling 0:10:38.840 --> 0:10:41.240 it warm. Let's get the take now from Jeffrey Cleveland, 0:10:41.440 --> 0:10:43.920 a chief economist over at Peydon and Regal. He is 0:10:43.920 --> 0:10:47.320 standing by with us for more, Jeffrey, is warmer the 0:10:47.400 --> 0:10:49.679 right way to phrase a CPI report or is there 0:10:49.720 --> 0:10:52.320 another temperature degree word you might use? 0:10:53.640 --> 0:10:58.600 Maybe spicy, still say still too hot to handle? 0:10:58.880 --> 0:10:59.200 Okay? 0:10:59.280 --> 0:11:01.920 For Paul Makers, I think, I think, I think they're 0:11:01.920 --> 0:11:04.280 going to be unhappy with this sort of reading. So 0:11:04.400 --> 0:11:06.800 you know, maybe maybe one of those monikers would would 0:11:06.840 --> 0:11:07.520 work here. 0:11:09.040 --> 0:11:12.079 I like spicy, Yeah, I mean, especially in food, but 0:11:12.120 --> 0:11:14.560 maybe not so much in inflation readings. So can you 0:11:14.559 --> 0:11:16.680 talk a little bit to us a little bit about why, 0:11:16.840 --> 0:11:20.559 you know, you've got this concern about the what seems 0:11:20.600 --> 0:11:22.120 to me just to be a little bit of a 0:11:22.200 --> 0:11:25.679 over an overshoot versus expectations for inflation, because there's a 0:11:25.679 --> 0:11:28.240 lot of, you know, enthusiasm in the equity markets, for example, 0:11:28.240 --> 0:11:29.360 that the FED might be on track. 0:11:30.679 --> 0:11:33.360 Yeah, okay, So I think the context here is Powell 0:11:33.440 --> 0:11:36.800 appeared on Capitol Hill last week and he reiterated his 0:11:36.960 --> 0:11:40.480 view that we need to see monthly readings like we 0:11:40.520 --> 0:11:42.240 saw in the second half of last year. 0:11:42.679 --> 0:11:45.200 So I think he's referring there to core. 0:11:45.040 --> 0:11:48.240 PCE, not so much Core CPI, but we had some 0:11:48.320 --> 0:11:52.000 soft month to month change readings in the core measures 0:11:52.280 --> 0:11:53.800 in the second half of last year, so we need 0:11:53.800 --> 0:11:56.320 to see more of those, not necessarily better, but more, 0:11:56.840 --> 0:12:00.280 and a number like point four for core CPI month 0:12:00.320 --> 0:12:03.840 to month for January and again in February. 0:12:03.880 --> 0:12:06.360 For me, that's too that's too hot. 0:12:06.520 --> 0:12:09.360 So it's it's going to disappoint policy makers from that 0:12:09.360 --> 0:12:12.200 perspective because they want to be convinced that inflation is 0:12:12.200 --> 0:12:14.280 going to sustainably return to two percent. 0:12:14.360 --> 0:12:18.280 I think this raises some questions. January could have been 0:12:18.280 --> 0:12:21.040 a fluke, but two months in a row not so much. 0:12:21.080 --> 0:12:23.240 So does that mean we have to lower our expectations 0:12:23.520 --> 0:12:27.079 for inflation like it's a trajectory, it's not the final 0:12:27.120 --> 0:12:29.840 destination kind of thing, as I think Powell's been alluding to. 0:12:30.880 --> 0:12:34.600 I think investors should imagine that the FED probably will 0:12:34.679 --> 0:12:38.360 cut rates this year, but it will happen later and. 0:12:38.360 --> 0:12:40.880 There'll be fewer cuts. So we have the first cut. 0:12:40.720 --> 0:12:43.560 In September and we have only two cuts for the year. 0:12:44.120 --> 0:12:46.200 That's going to be disappointing for only. 0:12:46.000 --> 0:12:46.880 Two cuts for the year. 0:12:47.120 --> 0:12:50.720 Okay, that's interesting, that's right, and that's looking at the 0:12:50.760 --> 0:12:54.200 destination where we think core inflation will end the year, 0:12:54.240 --> 0:12:57.680 but also thinking about the path to get there. You know, 0:12:58.040 --> 0:13:00.720 I think, well, there's not a one for one here 0:13:00.760 --> 0:13:04.120 between core CPI and core PCEE could imply that when 0:13:04.120 --> 0:13:07.600 we do see the core PCE numbers later this month, 0:13:07.640 --> 0:13:11.720 they will also be a bit spicy, and so that 0:13:11.720 --> 0:13:14.080 that's going to be again disappointing for policy makers. 0:13:14.640 --> 0:13:17.079 What do you make of the markets reaction? I mean, 0:13:17.120 --> 0:13:19.200 we had very little movement and bond youill to start with, 0:13:19.240 --> 0:13:21.120 but now equities are very firmly up. 0:13:22.120 --> 0:13:23.240 Yeah, yeah, I don't know. 0:13:23.400 --> 0:13:26.560 Maybe investors had a hint that things the inflation would 0:13:26.559 --> 0:13:29.439 come in stronger, That could be possible, or maybe it's 0:13:29.480 --> 0:13:31.800 just going to take a bit more time to digest 0:13:31.800 --> 0:13:32.880 the implications here. 0:13:33.280 --> 0:13:35.280 I also, I know, you know, just from talking to. 0:13:35.960 --> 0:13:40.640 Colleagues and co workers and competitors, you know, you hear 0:13:41.400 --> 0:13:45.040 kind of some positive spin here, the fact that February's 0:13:45.080 --> 0:13:48.160 core reading wasn't as bad or wasn't as hot as January's. 0:13:48.559 --> 0:13:52.160 So we did see we did see a little bit 0:13:52.200 --> 0:13:53.920 of a cooling relative to January. 0:13:54.080 --> 0:13:55.680 So maybe some good hints in there. 0:13:56.200 --> 0:13:57.920 But you know, I like to look just you know, 0:13:57.960 --> 0:13:59.840 looking at core CPI month a month, but also looking 0:13:59.840 --> 0:14:03.080 at median CPI. The median CPI just looking at the 0:14:03.120 --> 0:14:06.760 median price change that just dropped from Cleveland FED and 0:14:06.800 --> 0:14:08.520 that was also. 0:14:08.040 --> 0:14:10.840 Point four month to month after a point five. 0:14:10.920 --> 0:14:14.400 So I still think underlying core inflation is a bit 0:14:14.440 --> 0:14:17.720 too strong. Market probably will wake up to this over 0:14:17.760 --> 0:14:19.040 the over the next few days. 0:14:19.080 --> 0:14:21.520 Okay, so market wakes up to it. I appreciate your 0:14:21.520 --> 0:14:24.080 an economists, but what happens, Like, we've already seen some 0:14:24.120 --> 0:14:26.200 selling across the bond market. We've seen sort of the 0:14:26.240 --> 0:14:28.920 back end catch up a little bit here with yesterday 0:14:29.000 --> 0:14:31.040 is selling in the front end. What's going to be 0:14:31.040 --> 0:14:31.720 the ramification? 0:14:32.520 --> 0:14:35.040 Yeah, I think higher, higher bond yields across the curve. 0:14:36.680 --> 0:14:41.000 Implication would be, you know, pricing of fewer cuts, pushing 0:14:41.000 --> 0:14:43.280 out the timing of cuts. That could also have an 0:14:43.280 --> 0:14:47.480 impact on risk assets, equity prices, credit spreads in the 0:14:47.480 --> 0:14:50.760 bond market. I think that could ripple through as well. 0:14:50.920 --> 0:14:54.400 So you know, really it's the bond market that is 0:14:54.440 --> 0:14:58.160 the key driver here of everything else. So the implication 0:14:58.280 --> 0:15:00.720 is higher, higher bond fields for longer. 0:15:01.400 --> 0:15:03.120 So now I want to ask you about a theme 0:15:03.200 --> 0:15:05.360 that you know. Alex and I were discussing this earlier 0:15:05.400 --> 0:15:07.600 and we had some guests talking about the election coming 0:15:07.640 --> 0:15:10.200 up this year, how do you see things developing in 0:15:10.240 --> 0:15:12.600 the second half, and indeed in this second quarter or 0:15:12.600 --> 0:15:14.640 the fourth choir, I should say, because if you've only 0:15:14.680 --> 0:15:16.960 got two rate cuts, one of them's going to have 0:15:17.000 --> 0:15:20.960 to come either immediately after the election or in December, 0:15:21.000 --> 0:15:23.200 and so you must have a very particular view about 0:15:23.200 --> 0:15:26.040 what sentiment around lower interest rates is going to be 0:15:26.080 --> 0:15:26.720 at that time. 0:15:27.960 --> 0:15:31.400 Well, I just think back to twenty sixteen we saw 0:15:31.520 --> 0:15:34.920 rate hike at the end of the election year. There's 0:15:34.960 --> 0:15:37.200 been some other instances, you know, twenty eighteen we had 0:15:37.240 --> 0:15:40.480 four rate hikes throughout the year despite we had midterm elections. 0:15:40.520 --> 0:15:44.640 I think investors like to talk about elections, they love 0:15:44.680 --> 0:15:47.240 to talk about politics, but really I think it's going 0:15:47.320 --> 0:15:50.800 to be the inflation trajectory that determines what happens with 0:15:50.920 --> 0:15:55.200 interest rates, not the election. So really coming back to 0:15:55.240 --> 0:15:58.840 that path for core inflation and then ultimately the destination. 0:15:59.080 --> 0:16:02.240 If we're right that the a is bumpier and we 0:16:02.320 --> 0:16:04.520 end up with higher core inflation at the end of 0:16:04.520 --> 0:16:08.080 the year than the market currently expects, then we'll get 0:16:08.280 --> 0:16:11.000 fewer we'll get the fewer cuts the Fed funds rate 0:16:11.040 --> 0:16:12.040 will end up being higher. 0:16:12.160 --> 0:16:13.760 I think that's the key story the election. 0:16:14.320 --> 0:16:16.080 What happens there is not I don't think it's going 0:16:16.160 --> 0:16:18.960 to change that now for twenty twenty five, that's where 0:16:18.960 --> 0:16:21.560 the election really matters, right, because that could change the 0:16:21.600 --> 0:16:25.960 tone of fiscal policy in the coming year. So I 0:16:26.880 --> 0:16:30.800 do think if the Republicans take back the White House, 0:16:31.000 --> 0:16:34.760 then you could have a more aggressive or expansionary fiscal 0:16:34.760 --> 0:16:37.280 policy in twenty twenty five. And again that could have 0:16:37.320 --> 0:16:39.920 some some BONDI old implications, but it's probably a story 0:16:39.960 --> 0:16:42.240 for late twenty four and into twenty five. 0:16:42.520 --> 0:16:45.360 Let's put that aside for a second. So you see 0:16:45.360 --> 0:16:47.880 two this year, and then how many cuts? Then are 0:16:48.160 --> 0:16:50.600 you sort of mapping out for twenty twenty five, like 0:16:50.640 --> 0:16:52.000 the whole rate I think cut cycle. 0:16:52.680 --> 0:16:55.240 I think it's possible that you could see one, you know, 0:16:55.280 --> 0:16:57.800 sort of a pace per quarter in twenty twenty five 0:16:57.840 --> 0:17:01.000 of one cut per quarter, so you get an additional 0:17:01.040 --> 0:17:04.000 three or four in twenty twenty five, something like that. 0:17:04.600 --> 0:17:07.800 So certainly no slashing of the Fed funds rate, not 0:17:07.920 --> 0:17:12.919 anticipating on a twelve month horizon a recession. So I 0:17:12.920 --> 0:17:15.040 guess this would be more similar to what you saw 0:17:15.080 --> 0:17:17.399 in the mid nineteen nineties where we had, you know, 0:17:17.400 --> 0:17:20.560 the early nineteen nineties, the Fed hiked a lot, rates 0:17:20.600 --> 0:17:23.040 went up a lot, but the economy continued to grow 0:17:23.080 --> 0:17:24.000 throughout that decade. 0:17:24.040 --> 0:17:25.880 So the FED funds rate stayed. 0:17:25.640 --> 0:17:28.520 In a pretty narrow range from say, nineteen ninety five 0:17:28.720 --> 0:17:31.440 until nineteen late nineteen ninety eight. 0:17:31.800 --> 0:17:33.440 And there's nothing more like that. 0:17:33.480 --> 0:17:38.720 There's no dramatic falloff. Then, in that depective, the. 0:17:38.760 --> 0:17:41.679 Question is, how would you get a dramatic falloff? To me, 0:17:41.800 --> 0:17:44.199 it has to be an economic downturn. It has to 0:17:44.200 --> 0:17:46.440 be a recession, so you have to have that in 0:17:46.200 --> 0:17:49.360 your your forecast. We're more upbeat. We think the economy 0:17:49.400 --> 0:17:51.159 will continue to grow out over the next year. 0:17:51.760 --> 0:17:54.640 Doesn't he He is here even like looking about on YouTube, 0:17:54.640 --> 0:17:56.200 like his energy is like he's into it. 0:17:56.320 --> 0:18:00.480 He's he's He's still California. The California vibe here makes sense. 0:18:01.480 --> 0:18:03.919 The good weather, Yeah I know. But now look, let 0:18:03.960 --> 0:18:06.600 me ask you about consumer sentiment, because you know, there's 0:18:06.680 --> 0:18:10.640 the inflation squeeze pinches everyone's pockets, and yeah, inflation is easy, 0:18:10.760 --> 0:18:12.640 but the prices are still a heck of a lot 0:18:12.720 --> 0:18:15.200 higher than they were before. And this is something that 0:18:15.320 --> 0:18:19.000 we've been well established has been weighing on enthusiasm for 0:18:19.040 --> 0:18:21.600 the Joe Biden economic program. So how do you see 0:18:21.600 --> 0:18:24.080 consumer development, consumer sentiment developing. 0:18:25.040 --> 0:18:29.720 Well, just talking to virtually, you know, all clients, they say, hey, Jeffery, 0:18:29.720 --> 0:18:32.600 you're saying that inflation is cooling off. But you know, 0:18:32.680 --> 0:18:36.560 I still see prices elevated at the pump, or I 0:18:36.600 --> 0:18:40.400 still see expensive food prices. So I mean, the difference 0:18:40.440 --> 0:18:43.840 there is just rates versus level. Central bankers are focused 0:18:43.880 --> 0:18:46.959 on the rate of inflation. I think the average consumer 0:18:47.760 --> 0:18:50.000 is focused on the level of inflation. So that's the 0:18:50.040 --> 0:18:54.080 disconnect you see as a result, that's weighing on consumer sentiment. 0:18:54.320 --> 0:18:56.040 And so that's just a fact. I don't think there's 0:18:56.080 --> 0:18:57.240 any way around that. 0:18:57.280 --> 0:19:00.399 But this was brought to the attention here knows this, 0:19:00.440 --> 0:19:02.480 but Jerome Powell was asked about this last week on 0:19:02.480 --> 0:19:05.160 Capitol Hill and he said, look, we're we're not expecting 0:19:05.200 --> 0:19:08.880 to see price level fall, the average price level fall. 0:19:08.920 --> 0:19:12.160 That only happens in very adverse you know, economic scenarios 0:19:12.160 --> 0:19:15.840 like a recession. You know, what they're trying to achieve 0:19:15.920 --> 0:19:19.480 is a slowdown in the rate of increase, trying to 0:19:19.480 --> 0:19:21.720 get that back to two percent. But we've already talked 0:19:21.760 --> 0:19:24.320 about there's problems even then. I think inflation is a 0:19:24.320 --> 0:19:26.119 little bit stickier even on that slowdown. 0:19:26.640 --> 0:19:29.960 All right, really good stuff. Appreciate the positivity. Jeffrey Cleveland, 0:19:30.200 --> 0:19:33.320 chief economist at Paydon and Regal. He joins us there, 0:19:33.480 --> 0:19:35.600