WEBVTT - Surveillance: Treasury Market Needs Fixing, Dudley Says 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownowitz Jaily. We bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com, 0:00:23.920 --> 0:00:30.600 and of course on the Bloomberg terminal. If you want 0:00:30.600 --> 0:00:33.720 to clear up John, you can go to Wikipedia and 0:00:33.800 --> 0:00:36.640 you can see the theory that the pros use off 0:00:36.680 --> 0:00:39.800 of what Chairman Paul yesterday. One of those expert on 0:00:39.920 --> 0:00:43.239 the theory is a gentleman from Berkeley. William Dudley joins us, 0:00:43.280 --> 0:00:47.080 the former president of the New York Fed. Obviously for 0:00:47.159 --> 0:00:51.559 years at Goldman Sex. Bill Dudley, you separate the men 0:00:51.680 --> 0:00:54.200 from the boys, the women from the girls with the 0:00:54.280 --> 0:01:00.480 logic theory of necessary and sufficiency in an undergraduate ass 0:01:00.520 --> 0:01:04.400 you speak of the necessary and the sufficiency that we 0:01:04.440 --> 0:01:08.280 saw yesterday from Chairman Powell. What did he do that 0:01:08.319 --> 0:01:13.880 you say was not sufficient? Well, I think that he 0:01:13.920 --> 0:01:17.440 did a good job and basically edging closer to the 0:01:17.480 --> 0:01:20.399 notion of we're gonna start to do the taper, but 0:01:20.520 --> 0:01:23.000 not so much so that it puts the markets on edge. 0:01:23.160 --> 0:01:26.160 The general expectation at this point is uh that probably 0:01:26.200 --> 0:01:28.800 won't start tapering, probably won't make the announcement on tapering 0:01:28.840 --> 0:01:32.160 until November December, and probably won't start until early next year. 0:01:32.200 --> 0:01:33.440 So I think we did a good job on that. 0:01:33.920 --> 0:01:35.440 Where I would but where I would say the Fed 0:01:35.640 --> 0:01:37.839 hasn't gone far enough is the changes that they've made 0:01:37.840 --> 0:01:40.480 in terms of there that's it, Danny repo facility that 0:01:40.480 --> 0:01:42.920 they announced yesterday. It's a good start to have a 0:01:42.959 --> 0:01:46.320 standing repo facility backstop the treasury market, but they capt 0:01:46.360 --> 0:01:49.720 its size at five billion, and they limited limited access 0:01:49.760 --> 0:01:51.800 to only primary dealers, and I think the access should 0:01:51.800 --> 0:01:55.760 be considerably broader than that to support to support the 0:01:55.760 --> 0:01:58.120 function of the treasury market. Also, I think they need 0:01:58.160 --> 0:02:01.360 to make changes to their capers so that when the 0:02:01.360 --> 0:02:04.640 FED buys treasuries and agency mortgage backed securies and that 0:02:04.720 --> 0:02:08.639 increases reserves in the banking system, that doesn't interfere but 0:02:08.760 --> 0:02:11.480 with good market functioning in the treasury market. These are 0:02:11.520 --> 0:02:14.880 delicate phrases and we appreciate the candidacy. As a former 0:02:14.919 --> 0:02:18.799 government official, Bill Duddley, we have the overnight repo market 0:02:18.880 --> 0:02:22.680 now moving back up through one trillion dollars. Let's cut 0:02:22.680 --> 0:02:26.080 to the chase here. If the overnight goes near a trillion, 0:02:26.240 --> 0:02:29.520 above a trillion, how will the FED adapt and adjust 0:02:29.560 --> 0:02:33.480 to that? There's no magic number that where where If 0:02:33.520 --> 0:02:35.959 the FED is soaking up a trillion dollars of of 0:02:36.280 --> 0:02:41.000 repo through their reverse overnight, that's not a problem. But 0:02:41.080 --> 0:02:43.600 I think it does tell you that there are consequences 0:02:43.639 --> 0:02:47.240 of of the FEDS asset purchases banking systems. It's essentially 0:02:47.240 --> 0:02:51.280 a washing reserves and that's making the leverage ratio more binding, 0:02:51.800 --> 0:02:55.600 which is constraining banks activities, and it's also causing banks 0:02:55.600 --> 0:02:59.280 to essentially push away corporate deposits. The thing could fix 0:02:59.360 --> 0:03:02.280 this by making changes to how the leverage ratio is calculated, 0:03:02.240 --> 0:03:04.880 and I think they should do this sooner rather than later. 0:03:05.240 --> 0:03:09.079 Is a treasury market as it is now broken? I 0:03:09.080 --> 0:03:12.120 don't think it's broken. It just needs a little bit 0:03:12.200 --> 0:03:16.239 more belt and suspenders. Uh. The standing repo facility is 0:03:16.280 --> 0:03:19.000 a good start, but as a Group of thirty report 0:03:19.040 --> 0:03:21.160 with published yesterday points out, there's a lot of other 0:03:21.200 --> 0:03:23.200 things that need to be done to the US treasury market. 0:03:23.600 --> 0:03:27.400 The G three report talks about central clearing of treasuries 0:03:27.880 --> 0:03:29.919 for customer trades that would make the market. I think 0:03:29.919 --> 0:03:33.400 a lot more solid talks about increasing the transparency in 0:03:33.520 --> 0:03:37.520 US treasury market. So having a standing repo facility is 0:03:37.560 --> 0:03:39.920 a good start, but there's a lot more to put 0:03:39.960 --> 0:03:42.480 the US treasing market on a firmer footing. This may 0:03:42.520 --> 0:03:45.600 sound esoteric, it is not. It is the underpinning of 0:03:45.640 --> 0:03:47.720 the what we pay for all of the loans that 0:03:47.760 --> 0:03:50.920 we take out is the fun underpinning, frankly, the functioning 0:03:51.080 --> 0:03:53.600 of Wall Street. And there is a question about the 0:03:53.640 --> 0:03:57.240 functioning of the treasury yield as as an indicator right now. 0:03:57.280 --> 0:03:59.560 Even fed share Powell came out and said he didn't 0:03:59.600 --> 0:04:02.600 quite a understand why yields where we're where they were, 0:04:02.720 --> 0:04:05.320 And a lot of analysts have raised the issue of liquidity, 0:04:05.640 --> 0:04:08.800 the fact that there are these malfunctioning aspects of the 0:04:08.840 --> 0:04:11.240 bond market that made it get very difficult to get 0:04:11.240 --> 0:04:14.720 a clear signal from treasuries. Do you think that that 0:04:14.880 --> 0:04:17.800 is a factor in yields that are persistently low given 0:04:17.800 --> 0:04:22.200 the inflationary outlook. Well, I'm surprised by how low long 0:04:22.279 --> 0:04:25.479 dated treasure yields are given the level of inflation. The 0:04:25.520 --> 0:04:28.280 fact that commedies and recovery mode. Uh. And the fact 0:04:28.279 --> 0:04:29.800 that feeds said that they're going to be very very 0:04:29.800 --> 0:04:32.240 patient before they actually ray short term interest rates and 0:04:32.279 --> 0:04:34.200 the environment, you would think treasure yields will be higher. 0:04:34.240 --> 0:04:37.520 I think what it's what's what's really happening is quantitative 0:04:37.520 --> 0:04:40.359 easing is very very powerful. As a federal reserve buys 0:04:40.400 --> 0:04:43.440 more and more assets those that creates deposits in the 0:04:43.440 --> 0:04:46.160 banking system that people don't want to hold, and as 0:04:46.200 --> 0:04:48.159 they don't want to hold those deposits, they bid up 0:04:48.200 --> 0:04:50.160 other financial assets. So I think we're just finding out 0:04:50.160 --> 0:04:52.760 the quantitative easing is very very powerful and pushing around 0:04:52.760 --> 0:04:56.040 bond yields and bond prices. We tossed around the phrase 0:04:56.120 --> 0:04:59.839 reaction function Bill Dudley and the media like it's a mint. 0:05:00.160 --> 0:05:04.239 There's a matthew nous to it. Can we generate constructive 0:05:04.279 --> 0:05:08.040 reaction functions given the wall of liquidity? Or do we 0:05:08.120 --> 0:05:11.080 just need to become a nerd to the idea we 0:05:11.120 --> 0:05:15.080 will have jump conditions, We will have suddenness over the 0:05:15.120 --> 0:05:19.839 next many two three, five years. Well, we'll have some 0:05:19.960 --> 0:05:22.039 suddenness in the sense that the FED at some point 0:05:22.120 --> 0:05:25.119 is gonna go from maximum Monterey policy stimulus to something 0:05:25.160 --> 0:05:26.960 else and at some point the FED has actually being 0:05:27.040 --> 0:05:30.080 a lift off and raise short term rates. Uh. You know, 0:05:30.120 --> 0:05:31.919 the FED, I think it's going to try to minimize 0:05:31.920 --> 0:05:35.280 that jump function by communicating clearly. And I think they've 0:05:35.279 --> 0:05:37.160 done a pretty good job in terms of, you know, 0:05:37.320 --> 0:05:39.600 signaling when the taper might take place and that it's 0:05:39.640 --> 0:05:42.880 going to take place in a gradual, in in an 0:05:43.040 --> 0:05:45.760 organized type of way. Before we came on, we were 0:05:45.760 --> 0:05:49.599 alluding to Alan greenspan and build uh and to Arthur 0:05:49.640 --> 0:05:53.120 Burns And do you just assume and I say this 0:05:53.279 --> 0:05:56.800 Dr Dudley very carefully, that we have is we become 0:05:56.880 --> 0:06:00.279 less accommodative a measured green spanning in a pro coach? 0:06:00.720 --> 0:06:02.520 Are we going to go back to a FED that's 0:06:02.520 --> 0:06:04.919 more at hock like we saw was some of the 0:06:05.000 --> 0:06:09.800 sudden lifts and larger lifts in the Burns era. Well, 0:06:09.800 --> 0:06:11.560 I hope we don't go back to the Burns theory 0:06:11.640 --> 0:06:14.080 because at that point the time that that was very 0:06:14.160 --> 0:06:17.880 very late in terms of raising interest rates and pushing 0:06:17.920 --> 0:06:20.800 down inflation. That would be a very bad model. I 0:06:20.839 --> 0:06:22.919 think that what the FED is doing, though, is basically 0:06:22.920 --> 0:06:25.160 saying we don't really know exactly where full employment is, 0:06:25.200 --> 0:06:27.039 and so we want the economy to run a little 0:06:27.080 --> 0:06:29.800 hot so we can find out where full employment is 0:06:29.839 --> 0:06:32.239 and make sure we employ the maximum number of people 0:06:32.279 --> 0:06:36.240 we can without having a long term inflation problem. Bill 0:06:36.360 --> 0:06:38.719 always got to get your vs. Especially twenty four hounds 0:06:38.760 --> 0:06:41.600 after the fetist Matt that blood bug opinion columnist and 0:06:41.640 --> 0:06:48.960 fum A Federal Bank of New York President Michael Schumacher 0:06:49.080 --> 0:06:52.000 long agoing far away, there was a CCUM five stripe. 0:06:52.279 --> 0:06:55.200 That's a stick the rich kids had, And you say, 0:06:55.279 --> 0:06:57.479 this is a yield that's gonna look like a CCUM 0:06:57.560 --> 0:07:01.120 five stripe hockey stick discussed that the nirvana out to 0:07:01.200 --> 0:07:05.600 a higher yield. Yeah time, especially when you consider the 0:07:05.640 --> 0:07:09.640 idea of really yields in the US being minus one 0:07:09.760 --> 0:07:13.360 some crazy number in ten years. It makes very little sense. 0:07:13.960 --> 0:07:17.120 Really yields that this negative level are remarkably unusual. It's 0:07:17.120 --> 0:07:19.280 happened only a couple of times. Last time was just 0:07:19.320 --> 0:07:22.360 before the Taper tantrum. And you've got to ask yourself, 0:07:22.560 --> 0:07:25.560 what is the economic backdrop today versus twelve months ago? 0:07:26.040 --> 0:07:29.120 Substantially better. We can talk about COVID case counts going 0:07:29.200 --> 0:07:31.640 up recently, et cetera. But still it's pretty hard to 0:07:31.680 --> 0:07:33.720 dispute that things look a lot better now they did 0:07:33.760 --> 0:07:36.760 then get yields are much more negative in real space, 0:07:36.960 --> 0:07:39.120 and we think this is a bit crazy. Frankly, So 0:07:39.160 --> 0:07:42.600 when you've got high inflation, it should push up nominal yields. Really, 0:07:42.640 --> 0:07:45.440 yields probably follow suit. We think the stage is set 0:07:45.480 --> 0:07:47.960 for yields to climb. However, I've said that before in 0:07:48.000 --> 0:07:49.840 this show, and in the last couple of times it's 0:07:49.840 --> 0:07:52.840 been wrong. So I think little humilities in order. We 0:07:52.880 --> 0:07:54.680 think it's going to take a while, probably three to 0:07:54.760 --> 0:07:56.800 four months for this move to get in trained. I 0:07:56.840 --> 0:07:59.680 think it's probably a November December type of scenario. It's 0:07:59.760 --> 0:08:01.120 on the stand why they're going to go high, Mike, 0:08:01.160 --> 0:08:02.680 I need to understand why they went lower in the 0:08:02.680 --> 0:08:06.080 first place. Why did they Mike? Yeah, A bunch of 0:08:06.120 --> 0:08:08.200 things came together, John, and in fact yesterday is a 0:08:08.200 --> 0:08:10.760 good example. So why did yields drop in the last 0:08:10.800 --> 0:08:13.280 hour two a trading yesterday? Well, one of these arcane 0:08:13.320 --> 0:08:16.840 things we think there was tips investors adding duration before 0:08:16.920 --> 0:08:19.440 month in which is tomorrow. So not the sort of 0:08:19.480 --> 0:08:21.600 thing necessarily tied to a FED meeting. But it did 0:08:21.640 --> 0:08:25.080 crop up. But I suspect the bigger thing going back 0:08:25.120 --> 0:08:28.000 to the June FED meeting is the FED really gave 0:08:28.080 --> 0:08:30.440 the green light for people and they said, look, we're 0:08:30.440 --> 0:08:32.600 not going to do anything for a while. We'll sit here, 0:08:32.760 --> 0:08:34.680 maybe we'll put a mention of taper in the statement, 0:08:34.720 --> 0:08:38.000 that sort of thing, but we won't actually really change 0:08:38.040 --> 0:08:41.199 policy for quite some time. So a lot of investors 0:08:41.240 --> 0:08:43.240 out there look at the yield back drop and say, well, 0:08:43.240 --> 0:08:45.520 it's super low. I have to do something. I've got 0:08:45.520 --> 0:08:47.000 to pick up a few pennies in front of the 0:08:47.000 --> 0:08:49.680 Steamberen or what can I do. I can move out, 0:08:49.840 --> 0:08:53.280 I can buy longer maturity, longer duration bonds, maybe I 0:08:53.320 --> 0:08:55.800 can sell some options, that sort of thing. But the 0:08:55.840 --> 0:08:58.360 FED really put that back in play in June, and 0:08:58.360 --> 0:09:00.560 we think that was perhaps the big drive her. On 0:09:00.640 --> 0:09:02.720 top of that, you've got overseas flows which have been 0:09:02.760 --> 0:09:05.520 pretty strong. Mike. One thing that always confuses me, and 0:09:05.559 --> 0:09:07.600 I'm a little bit uncomfortable with, is when people take 0:09:07.840 --> 0:09:09.560 the price of the bond market and say this is 0:09:09.559 --> 0:09:13.000 what the market is looking for inflation x percent over 0:09:13.360 --> 0:09:15.920 whatever time period. Might I'm uncomfortable with that because some 0:09:15.960 --> 0:09:20.720 people buy inflation protection, not with conviction but as a hedge. 0:09:21.160 --> 0:09:23.240 And I just wanted to Mike whether we misread what 0:09:23.360 --> 0:09:25.880 markets are actually tanning us behind the motives of the 0:09:25.920 --> 0:09:31.360 people making these decisions. Like another way to consider that, John, 0:09:31.640 --> 0:09:36.720 is does the inflation market that we trade so tips, swaps, etcetera. 0:09:37.160 --> 0:09:39.800 Is that really predictive of future inflation? I would say 0:09:39.840 --> 0:09:42.120 not very well. I think you make a good point 0:09:42.200 --> 0:09:45.080 that quite a few investors and other players out there 0:09:45.200 --> 0:09:48.679 by inflation protection because they need to, not because they 0:09:48.720 --> 0:09:51.920 want to. It's probably the case again, but still in 0:09:52.000 --> 0:09:54.400 terms of short term market dynamics are have a fairly 0:09:54.440 --> 0:09:57.240 big effect. I think another way to to consider this 0:09:57.360 --> 0:10:02.040 question is do forward rates in aitals really predict future 0:10:02.240 --> 0:10:06.040 actual yields? And the answer consistently from academic after academic 0:10:06.080 --> 0:10:09.280 has been known. And if we take that analysis today, 0:10:09.559 --> 0:10:11.960 the forward ten year treasury rate at year ends about 0:10:12.000 --> 0:10:14.640 one forty Does anyone really think that's a great predictor 0:10:14.679 --> 0:10:16.560 of where it will be? I would say not. So 0:10:16.600 --> 0:10:18.640 what do we have to see? What's the trigger to 0:10:18.720 --> 0:10:22.360 get real yields less negative off their lowest levels ever seen? 0:10:23.679 --> 0:10:25.600 At least I think a few things have to come together, 0:10:25.760 --> 0:10:28.800 probably even more strength out of the labor market. Thinking 0:10:28.800 --> 0:10:31.199 about some of the comments that chair Pole made yesterday, 0:10:31.360 --> 0:10:34.040 very few specifics, a lot of generalities, but one thing 0:10:34.120 --> 0:10:36.800 that came through is more and more strength out of 0:10:36.800 --> 0:10:40.480 the labor market. There's been a lot of concerns, speculation, 0:10:40.679 --> 0:10:45.040 hope perhaps that come September, maybe October, the labor market 0:10:45.040 --> 0:10:47.760 would be much stronger in the US, and it has been. 0:10:48.360 --> 0:10:51.240 If that happens, that probably pushes yields up quite a bit. 0:10:51.360 --> 0:10:55.240 If instead we get a reaction where the COVID case 0:10:55.320 --> 0:10:59.439 counts half worsened, delta seems to becoming almost endemic, that 0:10:59.559 --> 0:11:02.319 scares a lot of people. That keeps yields pretty low. 0:11:02.520 --> 0:11:04.439 So I think the tipping point my colleagues on the 0:11:04.440 --> 0:11:06.920 Walls Fargo Economics team would share this view as well, 0:11:07.520 --> 0:11:10.400 is going out two to three months you really get 0:11:10.400 --> 0:11:12.839 a break. Does that supply chain really start to move 0:11:12.960 --> 0:11:15.840 to the labor market? Clear up, that's the key question, 0:11:15.880 --> 0:11:19.000 Mike for everyone Right now, my shoemaka west Fonca, Global 0:11:19.040 --> 0:11:27.439 head of Macris Strategy, we're getting into a Christianity starting 0:11:27.480 --> 0:11:29.560 to tear it apart for our top Live team, and 0:11:29.800 --> 0:11:32.400 Johnny makes very clear consumptions there. We're gonna get a 0:11:32.440 --> 0:11:36.000 breakout on that data as it comes along. But again 0:11:36.040 --> 0:11:38.560 that goes to where David Rosenberg is, which is not 0:11:38.679 --> 0:11:41.240 the numbers we're looking at right now, which is the 0:11:41.320 --> 0:11:44.920 last three months. But where are we right now? And John? 0:11:45.040 --> 0:11:47.520 That is a raging debate. Let's go right to this 0:11:47.720 --> 0:11:50.520 right now with Matthew. Lizette thrilled he's with us with 0:11:50.600 --> 0:11:53.920 a more optimistic Deutsche Bank right now, Matthew, this data 0:11:54.200 --> 0:11:58.360 totally unfair question. But it's unfair Thursday. Does this data 0:11:58.480 --> 0:12:03.319 allowed Deutsche Bank to adjust to a more cautious economic growth? 0:12:04.840 --> 0:12:07.400 Sure than Thanks so much for having having me. Um. 0:12:07.440 --> 0:12:09.480 You know, I don't think it in and of itself 0:12:09.520 --> 0:12:11.320 really really changes too much. We'll have to see the 0:12:11.360 --> 0:12:13.960 details they are out there. It looks like consumer spending 0:12:14.000 --> 0:12:17.040 was actually a good amount stronger than expected, uh in 0:12:17.200 --> 0:12:19.720 Q two. I think the key question for the growth 0:12:19.720 --> 0:12:22.120 trajectory over these quarters is it is actually a lot 0:12:22.160 --> 0:12:25.160 about inventory. So inventories was expected to be a big 0:12:25.240 --> 0:12:27.160 dragon Q two. We expect to get a big boost 0:12:27.240 --> 0:12:29.959 boost in Q three. But I think you're you're absolutely right. 0:12:30.000 --> 0:12:33.160 You know, this data is backward looking it is Q two. 0:12:33.800 --> 0:12:35.600 I think what is most important for markets and the 0:12:35.600 --> 0:12:38.040 FED right now is the labor market data and the 0:12:38.080 --> 0:12:40.280 stalling on a jobless clims that we've seen is an 0:12:40.280 --> 0:12:43.160 important development. Uh. You know, jobless claims have not been 0:12:43.200 --> 0:12:46.040 as reliable as they wear pre COVID, but it is 0:12:46.240 --> 0:12:49.360 evidence of you know, some stalling out or some softening 0:12:49.400 --> 0:12:52.000 and the improvement that we've seen there. If that continues, 0:12:52.040 --> 0:12:54.360 it's it's certainly an important development from the Fed's perspective, 0:12:54.400 --> 0:12:58.520 because pal noted yesterday, certainly that is the key consideration 0:12:58.559 --> 0:13:00.840 for when they are going to take Matt. For many 0:13:00.880 --> 0:13:04.880 people September and Q four, it's just huge. It's going 0:13:04.960 --> 0:13:07.360 to be massive to shape some of these debates. Golben 0:13:07.400 --> 0:13:10.840 out earlier this week suggesting that that full service sector 0:13:11.120 --> 0:13:12.920 recovery is going to take a little bit more time. 0:13:12.960 --> 0:13:15.000 They downgraded their estimates. Where are you given the team 0:13:15.040 --> 0:13:18.959 at Deutsche Bank on that algument right now, Matt, sure, 0:13:19.080 --> 0:13:21.960 I think there's you know, this is the area of debate. 0:13:22.000 --> 0:13:26.080 We have expecting good spending to be coming off, durable 0:13:26.120 --> 0:13:28.360 good spending, housing to be coming off, and we were 0:13:28.360 --> 0:13:31.080 anticipating that services would help lift the economy to to 0:13:31.120 --> 0:13:33.120 a stronger growth profile and in the second half of 0:13:33.160 --> 0:13:37.200 the year. Obviously the return of COVID and the delta 0:13:37.280 --> 0:13:40.240 variant is a downside risk to that, but I view 0:13:40.240 --> 0:13:42.560 it as a downside risk, not something that impacts our 0:13:42.600 --> 0:13:45.800 baseline outlook at significantly at this point. I think Cherpowe 0:13:46.000 --> 0:13:48.000 made a good point yesterday. If we look back at 0:13:48.040 --> 0:13:51.280 these past waves, they were not as impactful as we 0:13:51.280 --> 0:13:54.720 were anticipating. I anticipate that will probably be the case again. 0:13:55.080 --> 0:13:56.840 And when we look at those states that are probably 0:13:56.880 --> 0:13:59.560 most susceptable, that have lower vaccination rates, I think they 0:13:59.559 --> 0:14:01.520 are also us likely to bring back restrictions. You are 0:14:01.559 --> 0:14:03.800 so less likely to see there's people pulled back from 0:14:03.800 --> 0:14:06.640 economic activity. So it is no data downside risk to 0:14:06.679 --> 0:14:09.840 growth over these coming quarters. But that's how we're viewing it, 0:14:09.920 --> 0:14:12.240 not not impacting our baseline outook at this point, Matt. 0:14:12.280 --> 0:14:14.800 When you dig under the headline of the GDP number, 0:14:14.880 --> 0:14:17.840 are we getting whiffs of stagflation? And I know that 0:14:17.880 --> 0:14:21.320 this is the pendulum of doom. However, residential investment spending 0:14:21.560 --> 0:14:24.640 fell about a ten percent annualize. Paces has to do 0:14:24.640 --> 0:14:26.840 with supply chain issues, a lack of lumber, and of 0:14:26.840 --> 0:14:30.720 course the high prices are the high prices headwind to 0:14:30.800 --> 0:14:34.720 growth at this point. I think in certain areas that 0:14:34.760 --> 0:14:37.960 they certainly are. Housing is one uh and yes there 0:14:37.960 --> 0:14:40.440 are supply chain issues, but we're seeing demand come off. 0:14:40.480 --> 0:14:45.480 Mortgage purchase applications have weakened, perspective, bio traffic has has softened, 0:14:45.480 --> 0:14:48.040 so demand is being impacted. But I don't want to 0:14:48.040 --> 0:14:51.520 just focus on the prices either. We've seen, you know, 0:14:51.640 --> 0:14:55.480 durable good spending was six above where was pre COVID trend. 0:14:56.200 --> 0:14:58.280 Housing jumped above the pre COVID trend. So this is 0:14:58.280 --> 0:15:01.480 a very unusual recovery. It was a very unusual recession, 0:15:01.800 --> 0:15:04.360 and we've been anticipating that these cyclical sectors will come 0:15:04.360 --> 0:15:06.600 off even if you didn't get these these price pressures. 0:15:06.640 --> 0:15:09.560 So that that does make the services sector really critical 0:15:09.600 --> 0:15:12.120 to the trajectory of the economy from here on out, 0:15:12.640 --> 0:15:14.200 and we do think that it will help to carry 0:15:14.200 --> 0:15:16.000 stronger growth over the second half of the year. Do 0:15:16.040 --> 0:15:18.240 you think that this is indicative the weakness or at 0:15:18.280 --> 0:15:21.280 least the disappointments that we're seeing in economic data points. 0:15:21.280 --> 0:15:22.680 And I don't want to stop call a six and 0:15:22.720 --> 0:15:26.560 a half percent growth weakness, but we have gotten disappointment 0:15:26.640 --> 0:15:30.040 after disappointment. Does that indicate a trend that will carry 0:15:30.040 --> 0:15:32.200 into the end of the year or could things change 0:15:32.200 --> 0:15:36.640 in September when kids supposedly go back to school. Yeah. 0:15:36.720 --> 0:15:38.920 From a labor market perspective, I think we are all 0:15:38.960 --> 0:15:42.360 anticipating in share powel that is certainly anticipating that that 0:15:42.400 --> 0:15:44.800 will help to open up labor supply. Um. You know, 0:15:44.880 --> 0:15:47.560 we have focused on COVID as being a big driver 0:15:47.640 --> 0:15:50.960 of the constraints on labor supply, not necessarily the unemployment 0:15:50.960 --> 0:15:53.600 insurance benefits, and so whether or not schools that are 0:15:53.720 --> 0:15:58.240 schools are able to reopen significantly on September fully in person, 0:15:58.520 --> 0:16:02.280 I think is a critical question for the labor market outlook. 0:16:02.520 --> 0:16:04.520 You know, at this point we just don't know. We'll 0:16:04.520 --> 0:16:06.640 have to see how the variant evolves over the next 0:16:06.640 --> 0:16:09.360 couple couple of months, how policy evolves over the next 0:16:09.360 --> 0:16:11.840 couple of months, But that will be a really important 0:16:11.880 --> 0:16:15.600 consideration for getting back to maximum employment or these types 0:16:15.600 --> 0:16:17.920 of labor market numbers that then wants to see. There's 0:16:17.960 --> 0:16:19.680 a lot we don't know. There's a couple of things 0:16:19.680 --> 0:16:21.360 we can take a good guess on. One of them 0:16:21.400 --> 0:16:23.240 is inventories, and you mentioned that earlier on Matt. This 0:16:23.280 --> 0:16:25.800 is what Luke Kawa had to say of UBS. The 0:16:25.880 --> 0:16:28.120 one point one percentage point drank from injurantries in Q 0:16:28.320 --> 0:16:31.640 two is just not sustainable in the slightest Yesterday straw 0:16:31.680 --> 0:16:34.960 downs equal tomorrow's demand, Matt, would you go with that 0:16:35.000 --> 0:16:36.720 as well? That seems to be what has led us 0:16:36.760 --> 0:16:40.920 towards this downside surprise this morning. Absolutely so, we were 0:16:41.000 --> 0:16:44.160 below consensus on on this GDP print, the key driver 0:16:44.240 --> 0:16:46.880 of that being a big drag from inventories. We know 0:16:47.000 --> 0:16:49.600 we have in the retail and especially in the auto sector, 0:16:50.240 --> 0:16:52.880 very low inventories, which we expect to begin to build 0:16:52.920 --> 0:16:55.160 in the second half of the year. And so I 0:16:55.160 --> 0:16:56.960 think what you tend to see in these numbers, if 0:16:57.200 --> 0:16:59.680 private final demand is actually pretty strong, which it looks 0:16:59.680 --> 0:17:02.360 like it might be given a strong consumer spending, you 0:17:02.360 --> 0:17:04.560 should get a reversal of inventory and that should help 0:17:04.560 --> 0:17:07.520 to lift your Q three growth number versus Q two. Mozz, 0:17:07.680 --> 0:17:09.679 you want to use the word for Jean Clautriche that 0:17:09.720 --> 0:17:11.199 he loves to use and he says it with a 0:17:11.240 --> 0:17:13.840 French accent, which has got a lot more punache than 0:17:13.880 --> 0:17:16.280 you and I are going to do. And that is diffusion. 0:17:16.800 --> 0:17:20.040 There's a belief here in a mystery about the diffusion 0:17:20.560 --> 0:17:25.280 from a good centric consumer over to a service sector consumer. 0:17:25.400 --> 0:17:28.120 Do we see that in this data or does that 0:17:28.160 --> 0:17:32.920 wait for another quarters report? We have been seeing it 0:17:32.960 --> 0:17:35.800 in the monthly data, no doubt. We've seen good spending. 0:17:35.800 --> 0:17:39.199 Retail sales in nominal terms has has flatlined out over 0:17:39.240 --> 0:17:42.080 the past couple of months, and adjusting for prices, given 0:17:42.119 --> 0:17:45.040 how strong price games have been, we've seen weakness in 0:17:45.080 --> 0:17:47.760 real spending on goods. I want to emphasize that was 0:17:47.840 --> 0:17:50.240 to be anticipated. We were well above trend on on 0:17:50.359 --> 0:17:53.720 good spending, and price pressures are obviously having an impact. 0:17:54.440 --> 0:17:56.679 So we expect this handoff to the services sector to 0:17:56.760 --> 0:17:59.200 continue over the next couple of months. The next couple 0:17:59.200 --> 0:18:01.879 of quarters. We're still below uh you know where we 0:18:01.920 --> 0:18:05.440 anticipated we would be in leisure and hospitality UH and 0:18:05.560 --> 0:18:07.800 and all these other services items. So I think that 0:18:07.840 --> 0:18:10.720 should continue to be the key driver for growth going forward. 0:18:11.160 --> 0:18:13.600 Matlazette of Deutsche Bank cannot align, so it's going to 0:18:13.680 --> 0:18:21.960 catch up, thank you very much. The movable feast here, folks, 0:18:22.040 --> 0:18:24.720 is the market reaction and maybe some of the childish 0:18:24.760 --> 0:18:30.320 interpretation into very sophisticated political economics. Jeffrey You has made 0:18:30.320 --> 0:18:32.720 a career of this at B and Y Melon as 0:18:32.760 --> 0:18:35.840 their senior strategists. John, why don't you bring in Jeffrey 0:18:35.840 --> 0:18:39.879 You with his perspective synthesizing all this together for vision. 0:18:40.000 --> 0:18:41.960 Jeff You joining us now from BN Y Melon a 0:18:42.040 --> 0:18:45.399 senior strategist. Jeff, as always, you're gonna be super helpful 0:18:45.440 --> 0:18:48.280 working away through this issue for us, all walk me 0:18:48.320 --> 0:18:51.040 through what we need to pay attention to and what 0:18:51.200 --> 0:18:56.600 is worth ignoring. Right, So, firstly, pay attention to differentiation 0:18:56.920 --> 0:18:59.440 what you're seeing with individual companies in China and in 0:18:59.560 --> 0:19:03.080 terms of vidual sectors. The regulatory crackdown. There are different 0:19:03.080 --> 0:19:08.720 motivations behind it. Some have to do with international capital involvement, 0:19:08.840 --> 0:19:11.800 especially in the education sector. For example, they've stressed this 0:19:11.960 --> 0:19:14.719 so much money pouring into an arms race amongst Chinese 0:19:14.760 --> 0:19:17.479 families to get their kids ahead. Um, it's you know, 0:19:17.680 --> 0:19:20.359 it's seen as damaging. So they want to treat this 0:19:20.600 --> 0:19:24.359 on an individual basis. Now, the second part of it 0:19:24.440 --> 0:19:30.440 is this framework of international investors investing in China. How 0:19:30.480 --> 0:19:32.040 should it be done? Should it be in the U S. 0:19:32.040 --> 0:19:34.040 Should it be closer to China. That is something they're 0:19:34.040 --> 0:19:35.800 going to be looking at as well. And here's where 0:19:35.800 --> 0:19:38.159 you know, geopolitics can come into the phrase. Thirdly, and 0:19:38.200 --> 0:19:39.840 most important, I think what people are missing right now. 0:19:39.880 --> 0:19:42.160 We're talking too much about the equity market. Right now, 0:19:42.240 --> 0:19:44.679 we're talking too much about individual companies. What about the 0:19:44.720 --> 0:19:47.080 growth Embarber And no one's talked about the triple our 0:19:47.119 --> 0:19:49.320 Cup that has happened and more that may come now. 0:19:49.440 --> 0:19:51.960 No one's talking about the delta variants starting to spread 0:19:52.000 --> 0:19:55.720 and multiple provinces and the intalities in China. Growth expectations 0:19:55.720 --> 0:19:57.800 are coming off. And this is what we need to 0:19:57.800 --> 0:19:59.440 be a team to heading into the second half of 0:19:59.480 --> 0:20:01.600 the year. Let's build on that, Jeff. The degree to 0:20:01.680 --> 0:20:04.280 which the issues in the property market now are linked 0:20:04.520 --> 0:20:07.600 to perhaps a downgrade to the outlook on the Chinese economy. 0:20:09.800 --> 0:20:12.280 So two things here. Firstly, let's stick with property now, 0:20:12.320 --> 0:20:14.080 so any day now and you're normally it comes out 0:20:14.119 --> 0:20:16.240 around the end of July. In the early August, we 0:20:16.320 --> 0:20:19.680 get the two thousand twenty one Financial Stability Report from 0:20:19.680 --> 0:20:22.160 the pbo C. This is a brilliant report and they 0:20:22.200 --> 0:20:24.159 look at and they do stress test the entire banking 0:20:24.160 --> 0:20:27.520