WEBVTT - Surveillance: Curve Flattening with JPM's Kelly

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<v Speaker 1>Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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<v Speaker 1>with Jonathan Ferroll and Lisa Brownwitz Jay Leye. We bring

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<v Speaker 1>you insight from the best and economics, finance, investment, and

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<v Speaker 1>international relations. Find Bloomberg Surveillance, an Apple Podcast, Suncloud, Bloomberg

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<v Speaker 1>dot Com, and of course, on the Bloomberg Terminal. Johnny

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<v Speaker 1>us now is David Kelly, the chief global strategist at

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<v Speaker 1>JP Morkan Asset Management. David, this quote from Morgan Standiy

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<v Speaker 1>and Mike Wilson on a spike in energy prices. Quote

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<v Speaker 1>would destroy demantain off you and perhaps tips several economies

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<v Speaker 1>into an outright recession, the polar vortex. David, you are great,

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<v Speaker 1>none of us, just none of us. Just the energy prices.

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<v Speaker 1>I mean there is a risk, of course, uh, if

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<v Speaker 1>we get in and all out worn Ukraine. I mean,

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<v Speaker 1>we don't know how far that goes in the the

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<v Speaker 1>long term implication, it could be significant. But if it's

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<v Speaker 1>just tensions higher oil prices, it's not enough. I mean,

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<v Speaker 1>there's a lot of momentum in the U S economies,

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<v Speaker 1>a momentum in global economies as we come out of

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<v Speaker 1>the pandemic there's a lot of pent up demand. So

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<v Speaker 1>I think the world can handle oil at night you

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<v Speaker 1>or oil at hundred UM. If it has to handle

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<v Speaker 1>that and a big war and all the uncertainty that

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<v Speaker 1>comes with that, it's a different matter. David Kelly. If

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<v Speaker 1>we assume buoyant nominal GDP whatever the makeup, is a

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<v Speaker 1>real g d P in the inflation dynamic as well,

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<v Speaker 1>how do we fair given buoyant nominal g d P. Well,

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<v Speaker 1>it helps corporate profits, um, and you know it is

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<v Speaker 1>it is kind of what it is. I mean, you know,

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<v Speaker 1>there's a lot of talk about FED policy and the

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<v Speaker 1>FED being more aggressive, but that's gonna have an impact

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<v Speaker 1>in later this year, in twenty three. Right now, the

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<v Speaker 1>economy is it's gonna be slow in Q one. Those

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<v Speaker 1>are still gonna be low numbers for Q one GDP.

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<v Speaker 1>Then it's gonna boom in Q two, and then it's

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<v Speaker 1>gonna slow as the year goes on. I think that's

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<v Speaker 1>true for um, you know, inflation is obviously high in

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<v Speaker 1>Q one, but I think inflation will also fading this

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<v Speaker 1>year goes on. So that that that's what we've got,

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<v Speaker 1>and I think the FED needs to just take it easy.

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<v Speaker 1>Here um in normalizing policy, and don't try to don't

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<v Speaker 1>think that they can actually fix all of this at

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<v Speaker 1>one sitting. Well, do you think that the message from

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<v Speaker 1>the yield curve is basically saying just that? And it's

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<v Speaker 1>an important and instructive tool right now for why you

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<v Speaker 1>think the FED should not move perhaps as aggressively as

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<v Speaker 1>people are pricing in, Yeah, because I think the yield

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<v Speaker 1>curve is telling us that the FED is going to

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<v Speaker 1>overreact and then pull back. Um. And that's exactly what

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<v Speaker 1>the FED should not do. The FED should do, is

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<v Speaker 1>what Mary Daily was saying over the weekend. Be patient,

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<v Speaker 1>be gradual, twenty five basis points per meeting, next four meetings,

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<v Speaker 1>get going in the balance, you know, over the summer,

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<v Speaker 1>but just keep at it um, you know, don't get

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<v Speaker 1>still get scooped and try to get back to normal rates.

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<v Speaker 1>But the yield curve saying no, they do. They go

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<v Speaker 1>aggressive and then they have to pull back when something

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<v Speaker 1>goes wrong with the market of the economy. It's kelly,

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<v Speaker 1>this idea of engineering soft landing. Just how wide open

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<v Speaker 1>is that window still to do so well? It's bumpy anyway,

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<v Speaker 1>It's it's kind of like a plane coming in with

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<v Speaker 1>the wings flap on all over the place. You're wondering,

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<v Speaker 1>you know, stually have the option going around trying it again. Um,

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<v Speaker 1>it's it is bumpy because we've got very low growth

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<v Speaker 1>in the first quarter, booming inflation. But again there's not

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<v Speaker 1>much we can do about it. A lot of this

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<v Speaker 1>has to do with just the waves of distortion caused

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<v Speaker 1>by the pandemic itself, and I think you just have

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<v Speaker 1>to sort of play it out. But you know, could

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<v Speaker 1>we achieve itself landing? Yeah, I mean the economy does

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<v Speaker 1>seem to have a natural tendency to put out sort

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<v Speaker 1>of two percent growth per year and two percent inflation

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<v Speaker 1>per year. There are a lot of years which look

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<v Speaker 1>kind of like that, and I think we can get

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<v Speaker 1>back to that. But it's it is looking a little

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<v Speaker 1>bumpy and challenging right now. Demie Kelly, thank you, sir,

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<v Speaker 1>as always of JP Morgan as in management. Let's get

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<v Speaker 1>to the bond market store. We can do that with

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<v Speaker 1>about a jamp at the heead of US right strategy

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<v Speaker 1>at sulk gen so Pantra. I don't expect to have

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<v Speaker 1>a crystal ball on things associated with geopolitics, risk and

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<v Speaker 1>military exercises. What I'd like to do with you is

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<v Speaker 1>try and understand how negative developments inside Ukraine would influence

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<v Speaker 1>central bank in central banking policy. From your perspective, how

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<v Speaker 1>do you think it would. I think it does play

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<v Speaker 1>a factor because of the fact that you don't want

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<v Speaker 1>to be seen as aggressively hawkish or raising rates too

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<v Speaker 1>fast at a time when geopolitics is a key concern.

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<v Speaker 1>I mean, to me, really the key indicator is the

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<v Speaker 1>two stands part of the curve that's at our body

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<v Speaker 1>basis points. So so really, any sort of more hawkish rhetoric,

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<v Speaker 1>if anything, it's going to flatten the curve because you're

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<v Speaker 1>going to see this sort of flight to quality, um,

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<v Speaker 1>you know, bid on the tenure. So again, I've said

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<v Speaker 1>this many times before. I think the last thing the

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<v Speaker 1>Fed wants to do is to raise policy rates too aggressively,

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<v Speaker 1>flatten out the curve and lead to a recession. I

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<v Speaker 1>think there's a lot of there's a lot already big

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<v Speaker 1>into the into the bond market right now. We're pricing

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<v Speaker 1>in six rate hikes by the end of the year,

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<v Speaker 1>five of which are delivered before September. So that's a

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<v Speaker 1>very aggressive policy path. Already, So I just don't think

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<v Speaker 1>you're gonna get much more of a hawk is shown

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<v Speaker 1>from the FED. They're gonna be very very cautious, especially

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<v Speaker 1>with the Ukraine situation. It's evangel what happens in Ukraine

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<v Speaker 1>will influence the decision of the e CP in a

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<v Speaker 1>different way. The spill over to the European economy will

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<v Speaker 1>be very different compared to site the US. How would

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<v Speaker 1>you expect the yield curves inside Germany and Italy to

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<v Speaker 1>develop off the back of those stories? So so far

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<v Speaker 1>we've seen sort of a steepening of the of the

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<v Speaker 1>yield curve in in Europe because of you FED hike, sorry,

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<v Speaker 1>ECB hike expectations getting priced into the into the market. UM.

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<v Speaker 1>I think that they're in a very tough situation with

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<v Speaker 1>with oil being a key issue and Ukraine you know,

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<v Speaker 1>in their backyard. Um, you're gonna see some of the

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<v Speaker 1>you know, the rate hikes getting priced out of the market.

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<v Speaker 1>I would think if the Ukraine situation gets worse, because

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<v Speaker 1>you know, natural gas is a very important, you know

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<v Speaker 1>issue for them. You know, energy prices have gone up

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<v Speaker 1>quite meaningfully again, you don't, you know, the ECB again

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<v Speaker 1>doesn't want to be punitive and sound very hawkish at

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<v Speaker 1>a time when geopolitics is is front and center, especially

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<v Speaker 1>because of the fact that I think higher oil prices

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<v Speaker 1>are going to eat into consumer spending, not just in

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<v Speaker 1>in Europe but also in the US. So I think

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<v Speaker 1>central backs are very aware of that. What is your

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<v Speaker 1>view of this distinction between a flat curve two s

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<v Speaker 1>tends equal yield or maybe you know, ten basis points

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<v Speaker 1>spread whatever, and an inverted curve. What is the difference

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<v Speaker 1>between those two for markets? Well, there isn't really much

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<v Speaker 1>of a difference per se, right if at these levels

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<v Speaker 1>your forty basis points away from being being close to

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<v Speaker 1>zero or inverted. So we're really watching the curve very

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<v Speaker 1>very closely to see what signals we're getting. Typically, a

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<v Speaker 1>flattish curve and an inverted curve is going to leave

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<v Speaker 1>to slow down and growth in about a year's time

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<v Speaker 1>or or two years time. In past Federate high cycles,

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<v Speaker 1>you tend to see that the FED hikes rates you know,

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<v Speaker 1>well passed inversion. You know, in the last two cycles

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<v Speaker 1>in the as well as in two thousand and five,

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<v Speaker 1>the high grades by you know, one and a quarter

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<v Speaker 1>to one and a half percent after the curve adverted.

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<v Speaker 1>This time around, I think they're gonna be very very cautious.

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<v Speaker 1>They're looking at the signals from the Yeld curve to

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<v Speaker 1>make sure that they don't tighten policy too fast and

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<v Speaker 1>slow down the economy, especially since we're the recovery is

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<v Speaker 1>still very fragile. Looking at the first quarter, where growth

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<v Speaker 1>is going to be quite meaningfully slower, you're looking at

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<v Speaker 1>perhaps a weaker retail sales number because of the Homicron variant.

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<v Speaker 1>So under those circumstances, I think the FED is going

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<v Speaker 1>to be, you know, very cautious when it comes to policy,

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<v Speaker 1>and policy is going to be very measured. Is this environment, however,

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<v Speaker 1>so bad we're getting more concerning for credit? Yeah, definitely.

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<v Speaker 1>I think you're starting to see credit spreads start to widen.

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<v Speaker 1>You're seeing, you know, the fact that the FED is

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<v Speaker 1>going to be stepping away from the market, especially acid purchases.

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<v Speaker 1>It's going to be less supportive for industrates in general.

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<v Speaker 1>And the talk is that, you know, there's going to

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<v Speaker 1>be a pretty decent rapid unwind or the balance sheet,

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<v Speaker 1>you know, sometimes starting in June or July of this year,

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<v Speaker 1>by the middle of next year. So again, you know,

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<v Speaker 1>the policy being accommodation being removed from acid purchases is

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<v Speaker 1>going to impact both you know, tragedies as well as

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<v Speaker 1>credit products. Broadly speaking, Spandra, thank you as always Sabantra

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<v Speaker 1>Sampi of sulk Jan on a flat up perhaps maybe

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<v Speaker 1>even inverted yield further down the road. In Alex Bordeaux,

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<v Speaker 1>we are thrilled to have with this practice at at

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<v Speaker 1>Eurasia Group for so much of the continent of Europe,

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<v Speaker 1>in Eastern Europe as well. Truly an authority, Alex. What

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<v Speaker 1>is the diplomatic construction if we choose to contain laddiber

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<v Speaker 1>and Putin, and if we choose to allow him some

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<v Speaker 1>form of saving face in the coming hours and the

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<v Speaker 1>coming days, what does the West need to do well?

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<v Speaker 1>I think that the package of diplomatic effort has to

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<v Speaker 1>include addressing a number of the issues that that Putin

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<v Speaker 1>has brought forward, and that includes some really tough issues

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<v Speaker 1>like Ukraine's membership in NATO. I think the comments from

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<v Speaker 1>Foreign Minister love Robin and Putin's ascent today are a

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<v Speaker 1>good sign that negotiations can continue. But it's been pretty clear,

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<v Speaker 1>especially in the last week, that there's really been not

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<v Speaker 1>much change for Putin on what issues really matter, and

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<v Speaker 1>it's this NATO Ukraine dynamic that I think is still

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<v Speaker 1>going to be very important. So ultimately they have to

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<v Speaker 1>come to some sort of agreement or understanding on that,

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<v Speaker 1>and that's really hard to do in this circumstances. I think,

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<v Speaker 1>you know, the the chances of a real diplomatic breakthrough

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<v Speaker 1>have actually gone down just in the last a few days.

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<v Speaker 1>If we stagger from Yalta to the history of SAE

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<v Speaker 1>and then to now a new affirmation of what NATO

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<v Speaker 1>will be, what do you and I and Bremer perceive

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<v Speaker 1>the new NATO will look like? Well, what are the

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<v Speaker 1>interesting aspects of what's happened so far is that, in fact,

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<v Speaker 1>because of the military threat post to you craigbly seen

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<v Speaker 1>more cohesion and unity in NATO than we've really seen

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<v Speaker 1>in a long time, and a lot of that has

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<v Speaker 1>been directed at countering what is has been coming from

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<v Speaker 1>the Russian government. I think the diplomatic efforts of the

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<v Speaker 1>US have have has made towards European countries and NATO

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<v Speaker 1>allied members has been notable and actually has gone fairly

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<v Speaker 1>well so far. So we're seeing a fairly dynamic response there,

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<v Speaker 1>and I think the question is really it does that

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<v Speaker 1>pressure then lead to some level of concession on the

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<v Speaker 1>part of Moscow. The problem in the last few weeks

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<v Speaker 1>is that we really haven't seen that coming from Putin.

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<v Speaker 1>Alex won't have to has achieved so far over the

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<v Speaker 1>last few weeks. Well, they brought the West to the

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<v Speaker 1>table on some issues that clearly have mattered a lot

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<v Speaker 1>to Putin over the years. And this includes Ukraine's foreign

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<v Speaker 1>policy orientation, and it includes this issue of NATO's presence

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<v Speaker 1>on Russia's western border. Uh. And Putin himself has kind of,

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<v Speaker 1>you know, noted that that he thinks that the pressure

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<v Speaker 1>that's been brought to Barrassons November has actually led to

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<v Speaker 1>that result. Um. I think for Putin, he's still looking

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<v Speaker 1>for some type of diplomatic win here. Uh, and that's

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<v Speaker 1>probably going to involve something more than just getting everybody

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<v Speaker 1>to the table. Is going to going to involve some

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<v Speaker 1>level of concession. And that's where the problem is in

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<v Speaker 1>the diplomacy. What's his main motivation. I'm talking about Vladimer

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<v Speaker 1>Putin's domestic agenda versus in his international agenda. I think

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<v Speaker 1>that there are a number of security concerns that Putin

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<v Speaker 1>really perceives need to be addressed. Now, I would question

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<v Speaker 1>some of the you know, some of the underlying motivations

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<v Speaker 1>for some of that. We've heard of some of it

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<v Speaker 1>in his press ofference with Makron last week. Um And

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<v Speaker 1>but I think that he does think that Russia faces

0:12:06.120 --> 0:12:09.320
<v Speaker 1>a direct security threat coming from NATO and that he

0:12:09.440 --> 0:12:11.480
<v Speaker 1>is trying to address that, and Ukraine is kind of

0:12:11.480 --> 0:12:14.959
<v Speaker 1>a focal point for that. I certainly he has talked

0:12:14.960 --> 0:12:18.600
<v Speaker 1>a lot about his views of Ukraine and his links

0:12:18.640 --> 0:12:21.200
<v Speaker 1>to Russia, but I think the security matters have really

0:12:21.240 --> 0:12:24.080
<v Speaker 1>come through in the last couple of months in his

0:12:24.160 --> 0:12:26.800
<v Speaker 1>rhetoric Alex just finally before we let you go. Of course,

0:12:26.800 --> 0:12:28.560
<v Speaker 1>there is a lot of diplomacy still to take place

0:12:28.640 --> 0:12:30.760
<v Speaker 1>through the next twenty four hours. What are the kind

0:12:30.800 --> 0:12:33.439
<v Speaker 1>of words language that you're looking for that would indicate

0:12:33.840 --> 0:12:37.280
<v Speaker 1>de escalation or perhaps the opposite from Chancellor Shelves or

0:12:37.320 --> 0:12:39.559
<v Speaker 1>rather anyone else for that matter, through the next day

0:12:39.640 --> 0:12:42.920
<v Speaker 1>or so. I think one of the words that we've

0:12:42.920 --> 0:12:44.800
<v Speaker 1>heard a lot, especially coming from the Russian side, is

0:12:44.800 --> 0:12:48.160
<v Speaker 1>the basis, Is there a basis for having a significant

0:12:48.160 --> 0:12:51.400
<v Speaker 1>concrete discussion on European security, and if we start to

0:12:51.400 --> 0:12:53.920
<v Speaker 1>get signals like that, I think that that would be

0:12:54.360 --> 0:12:57.640
<v Speaker 1>a good sign. Unfortunately, in recent days the indications have

0:12:57.679 --> 0:13:01.040
<v Speaker 1>been that that's not where we are. Alex, thank you

0:13:01.080 --> 0:13:03.200
<v Speaker 1>sir if he writes agree, particularly for that final comment.

0:13:07.679 --> 0:13:09.840
<v Speaker 1>Right now, Lindsay pag and joins us our first briefing

0:13:09.840 --> 0:13:12.040
<v Speaker 1>of the week. The chief economist at Stephen were thrilled

0:13:12.040 --> 0:13:14.800
<v Speaker 1>that she could join us. Uh this morning, Lindsey, let's

0:13:14.840 --> 0:13:17.079
<v Speaker 1>just get back to the recalculation. I'm sure you did

0:13:17.080 --> 0:13:20.480
<v Speaker 1>over guacamole last night on the couch, And that is

0:13:20.480 --> 0:13:24.280
<v Speaker 1>the terminal rate of inflation, whether it's the near rate

0:13:24.320 --> 0:13:27.240
<v Speaker 1>out say one year, or a rate farther out. What

0:13:27.440 --> 0:13:32.319
<v Speaker 1>is the trend that we're heading towards on inflation. Well,

0:13:32.440 --> 0:13:34.960
<v Speaker 1>right now it seems as if inflation has nowhere to

0:13:35.000 --> 0:13:37.640
<v Speaker 1>go but up. But as demand a pent up demands

0:13:37.640 --> 0:13:40.040
<v Speaker 1>excuse me, it is satisfied. And as we start to

0:13:40.080 --> 0:13:44.520
<v Speaker 1>see somebody's supply chain disruption smooth and balance is restored,

0:13:44.960 --> 0:13:47.600
<v Speaker 1>we would expect to at least see that second derivative

0:13:47.640 --> 0:13:51.800
<v Speaker 1>decline or a slower pace of positive price increase set

0:13:51.880 --> 0:13:54.240
<v Speaker 1>in by the second half of the year. Giving us

0:13:54.280 --> 0:13:58.320
<v Speaker 1>a nice downward trajectory that is we head into. And

0:13:58.400 --> 0:14:00.880
<v Speaker 1>this is really what the FED is baking on. The

0:14:00.960 --> 0:14:04.839
<v Speaker 1>FED is very much convinced that inflation is near or

0:14:04.880 --> 0:14:07.240
<v Speaker 1>at peak levels. Do you agree with this? I mean

0:14:07.240 --> 0:14:09.800
<v Speaker 1>the arch research, not this weekend. This is a two

0:14:09.960 --> 0:14:13.440
<v Speaker 1>or three percent? Is a statistic? Or is it four

0:14:13.520 --> 0:14:16.640
<v Speaker 1>or five percent? What is the path we're going to?

0:14:16.840 --> 0:14:20.200
<v Speaker 1>Even with FED hopes and dreams, I think we could

0:14:20.240 --> 0:14:22.200
<v Speaker 1>easily see four and a half percent by the end

0:14:22.200 --> 0:14:24.600
<v Speaker 1>of the year, and it continued downward trajectory as we

0:14:24.640 --> 0:14:27.920
<v Speaker 1>go into three. So when we put that in perspective

0:14:27.960 --> 0:14:31.120
<v Speaker 1>to the FEDS target of two percent, the takeaways that

0:14:31.160 --> 0:14:34.320
<v Speaker 1>were likely to be well above that target level for

0:14:34.400 --> 0:14:37.080
<v Speaker 1>quite some time. But again for the FED, for the market,

0:14:37.440 --> 0:14:40.400
<v Speaker 1>it's the trajectory of inflation that's really going to set

0:14:40.400 --> 0:14:43.680
<v Speaker 1>the tone for the expectation of a change in monetary

0:14:43.720 --> 0:14:46.120
<v Speaker 1>policy over the next twelve to twenty four months. Lindsay,

0:14:46.120 --> 0:14:48.760
<v Speaker 1>how do you push back against the assertion that inflation

0:14:48.840 --> 0:14:50.680
<v Speaker 1>is becoming more entrenched? And you can see this in

0:14:50.720 --> 0:14:52.640
<v Speaker 1>rent prices. You could see this in the fact that

0:14:52.720 --> 0:14:55.520
<v Speaker 1>cp I came in that much hotter than expectations. That

0:14:55.560 --> 0:14:59.560
<v Speaker 1>already were for a pretty hot inflationary environment. Well, remember

0:14:59.600 --> 0:15:02.080
<v Speaker 1>there's two types of inflation. There's the demand side and

0:15:02.080 --> 0:15:04.760
<v Speaker 1>then there's the supply side. On the supply side, production

0:15:04.840 --> 0:15:08.880
<v Speaker 1>costs moved up quickly because of these supply chain disruptions, distortions,

0:15:09.040 --> 0:15:12.520
<v Speaker 1>and imbalances. That's the component that the FED was very

0:15:12.560 --> 0:15:16.080
<v Speaker 1>much focused on, the transitory component, if you remember that language,

0:15:16.280 --> 0:15:18.520
<v Speaker 1>And we do expect that to ease in the medium

0:15:18.640 --> 0:15:21.680
<v Speaker 1>term again as balance is restored a clause across the

0:15:21.720 --> 0:15:25.120
<v Speaker 1>global marketplace, and we're already starting to see a little

0:15:25.160 --> 0:15:27.800
<v Speaker 1>bit of price pressures ease looking at the p p

0:15:27.960 --> 0:15:31.640
<v Speaker 1>I with this week's report expected to ease further. On

0:15:31.680 --> 0:15:34.200
<v Speaker 1>the other side, you do have the demand pressures, and

0:15:34.280 --> 0:15:37.560
<v Speaker 1>that's where the entrenchment, the concern of this wage price

0:15:37.680 --> 0:15:39.960
<v Speaker 1>spiral is really setting in, and that's going to be

0:15:40.000 --> 0:15:43.480
<v Speaker 1>the component more difficult for the FED to control going

0:15:43.520 --> 0:15:46.400
<v Speaker 1>forward if in fact, we do see this more entrenched

0:15:46.400 --> 0:15:49.200
<v Speaker 1>as prices rise across nearly every sector of the economy.

0:15:49.280 --> 0:15:51.320
<v Speaker 1>So do you see a wage price spiral at this point,

0:15:51.320 --> 0:15:54.240
<v Speaker 1>given the fact that real wages are still deeply negative

0:15:54.320 --> 0:15:57.840
<v Speaker 1>for for some measures, the most negatives is two thousand seven. Well,

0:15:57.880 --> 0:16:00.200
<v Speaker 1>they certainly are still negative. When we talk about that

0:16:00.280 --> 0:16:03.440
<v Speaker 1>five to six percent wage increase, it's certainly less impressive

0:16:03.480 --> 0:16:06.840
<v Speaker 1>against the backdrop of seven percent inflation. But we're still

0:16:06.840 --> 0:16:10.400
<v Speaker 1>seeing that cycle set in higher prices leading to higher

0:16:10.400 --> 0:16:13.680
<v Speaker 1>wages leading to higher prices. So the wage price spiral,

0:16:13.760 --> 0:16:17.600
<v Speaker 1>although still inefficient for workers, has very much set in

0:16:17.640 --> 0:16:20.280
<v Speaker 1>at least over the previous I would say about six

0:16:20.320 --> 0:16:22.960
<v Speaker 1>month period. Lindsay, let's look for to retail sales. We've

0:16:23.000 --> 0:16:25.360
<v Speaker 1>got a few distractions on a Monday morning, but the

0:16:26.000 --> 0:16:29.200
<v Speaker 1>key distraction of the week is this measurement of the

0:16:29.240 --> 0:16:35.160
<v Speaker 1>American consumer is a good math worth focusing on. Absolutely.

0:16:35.480 --> 0:16:38.000
<v Speaker 1>It tells us the health of the consumer. It tells

0:16:38.080 --> 0:16:41.120
<v Speaker 1>us the comfortability of the consumer to move back into

0:16:41.120 --> 0:16:43.680
<v Speaker 1>the marketplace. Now, if you look back to the third

0:16:43.760 --> 0:16:45.720
<v Speaker 1>quarter and the end of the fourth, excuse me be

0:16:45.880 --> 0:16:48.200
<v Speaker 1>the beginning of the fourth quarter, we had sort of

0:16:48.200 --> 0:16:51.760
<v Speaker 1>this buy now mentality, the fear that inflation was going

0:16:51.800 --> 0:16:54.160
<v Speaker 1>to continue to rise, so we needed to buy what

0:16:54.200 --> 0:16:57.080
<v Speaker 1>we needed today because tomorrow it was going to cost

0:16:57.120 --> 0:16:59.560
<v Speaker 1>more if it was available at all. So what we

0:16:59.680 --> 0:17:02.120
<v Speaker 1>really saw it was a lot of these metrics pulling

0:17:02.200 --> 0:17:07.360
<v Speaker 1>forward traditional end of the year holiday spending. These these measures, though,

0:17:07.400 --> 0:17:10.040
<v Speaker 1>this momentum is likely to weigh as we look further

0:17:10.119 --> 0:17:12.520
<v Speaker 1>out into the first quarter. And we already saw that

0:17:12.600 --> 0:17:16.080
<v Speaker 1>weakness in December retail sales. So if in fact we

0:17:16.160 --> 0:17:18.920
<v Speaker 1>do see this weakness carry forward into the first part

0:17:18.920 --> 0:17:22.480
<v Speaker 1>of the first quarter, I think this reinforces the notion

0:17:22.640 --> 0:17:27.240
<v Speaker 1>that pent up demand is already being satisfied. Savings through

0:17:27.280 --> 0:17:30.560
<v Speaker 1>the pandemic are already being drawn down, that trillions and

0:17:30.640 --> 0:17:34.040
<v Speaker 1>savings has depleted markedly, and this is going to lead

0:17:34.080 --> 0:17:37.399
<v Speaker 1>to a much more modest pace of growth for the

0:17:37.480 --> 0:17:40.680
<v Speaker 1>longer run. In the domestic economy. Well, what is your

0:17:40.760 --> 0:17:44.119
<v Speaker 1>real and inflation call for this year that gets you

0:17:44.200 --> 0:17:47.040
<v Speaker 1>to nominal GDP. Give us those three statistics that you

0:17:47.080 --> 0:17:50.639
<v Speaker 1>see real g d P, the inflation out to the

0:17:50.720 --> 0:17:55.160
<v Speaker 1>end of the year, and the total nominal GDP statistic. Well,

0:17:55.200 --> 0:17:57.520
<v Speaker 1>I think real GDP slows to a range of two

0:17:57.560 --> 0:18:01.560
<v Speaker 1>to three percent, You factor on about a four percent

0:18:01.600 --> 0:18:03.399
<v Speaker 1>inflation figure at the end of the year, and you

0:18:03.440 --> 0:18:06.399
<v Speaker 1>have a nominal GDP rate around six percent. All right,

0:18:06.440 --> 0:18:08.560
<v Speaker 1>Lindsay pigs. One thing a lot of people are talking

0:18:08.560 --> 0:18:10.840
<v Speaker 1>about this morning is how oil prices might change the

0:18:10.880 --> 0:18:14.600
<v Speaker 1>equation pretty dramatically and actually could eliminate quite a bit

0:18:14.640 --> 0:18:17.159
<v Speaker 1>from GDP. How do you factor that in? What's the

0:18:17.240 --> 0:18:20.840
<v Speaker 1>choke point for oil prices? I think the fastest way

0:18:20.880 --> 0:18:24.200
<v Speaker 1>to derail the consumer in the American economy is raising

0:18:24.520 --> 0:18:28.399
<v Speaker 1>gas prices, is sustained elevated gas prices, and we're already

0:18:28.440 --> 0:18:31.720
<v Speaker 1>seeing that with double digit gains across the country, with

0:18:31.760 --> 0:18:33.760
<v Speaker 1>some of the highest prices of course being felt out

0:18:33.760 --> 0:18:35.879
<v Speaker 1>on the West coast. And so when we look at

0:18:35.920 --> 0:18:37.920
<v Speaker 1>the consumer, when we look at the health of the consumer,

0:18:38.160 --> 0:18:40.480
<v Speaker 1>and we talk about businesses being able to pass on

0:18:40.600 --> 0:18:44.200
<v Speaker 1>these cost increases, well, if the consumer is already absorbing

0:18:44.359 --> 0:18:47.760
<v Speaker 1>sizeable price increases and some of these very key categories

0:18:48.040 --> 0:18:51.240
<v Speaker 1>I eat, energy and groceries, businesses are going to have

0:18:51.359 --> 0:18:55.480
<v Speaker 1>an increasingly difficult time passing on further price increases if

0:18:55.480 --> 0:18:58.440
<v Speaker 1>the household ballot sheet, the majority of the household balance

0:18:58.480 --> 0:19:01.080
<v Speaker 1>sheet is being allocated to those two categories. So, lindsay,

0:19:01.119 --> 0:19:02.919
<v Speaker 1>do you have a level of choke point level? And

0:19:02.920 --> 0:19:04.879
<v Speaker 1>I wonder because I heard some people say a hundred

0:19:04.880 --> 0:19:07.080
<v Speaker 1>and fifteen dollars in barrel, some people saying it has

0:19:07.080 --> 0:19:08.680
<v Speaker 1>to get back to a hundred and fifty dollars in

0:19:08.720 --> 0:19:12.480
<v Speaker 1>barrel simply because of inflation. Oh, I think the consumer

0:19:12.520 --> 0:19:14.280
<v Speaker 1>is a much more fragile footing than that. I think

0:19:14.280 --> 0:19:16.159
<v Speaker 1>the choke point would be a lot lower between nine

0:19:16.600 --> 0:19:20.280
<v Speaker 1>hundred dollars. So we're rapidly approaching or even teetering into

0:19:20.280 --> 0:19:24.879
<v Speaker 1>that category already. So I'm just wondering, lindsay just quickly

0:19:24.960 --> 0:19:27.600
<v Speaker 1>to follow up here this idea of nine hundred dollars

0:19:27.640 --> 0:19:30.480
<v Speaker 1>of barrel. We're there. Are you saying that at this point,

0:19:30.720 --> 0:19:33.440
<v Speaker 1>if oil prices are sustained where they are, the US

0:19:33.520 --> 0:19:35.760
<v Speaker 1>will not be able to avoid some sort of downturn.

0:19:36.920 --> 0:19:39.720
<v Speaker 1>I think it's very clear that as the economy continues

0:19:39.800 --> 0:19:42.680
<v Speaker 1>to recalibrate to a new normal level, we are already

0:19:42.720 --> 0:19:45.720
<v Speaker 1>set to slow markedly from that four and a half

0:19:45.720 --> 0:19:48.320
<v Speaker 1>percent range in the second half of last year. I

0:19:48.359 --> 0:19:52.240
<v Speaker 1>do expect GDP to remain positive, but slow to a

0:19:52.400 --> 0:19:55.080
<v Speaker 1>range nearer two to three percent, which, if you remember,

0:19:55.480 --> 0:19:58.320
<v Speaker 1>is very much in line with pre pandemic growth. We

0:19:58.359 --> 0:20:01.200
<v Speaker 1>tend to romanticize where we were prior to the crisis,

0:20:01.520 --> 0:20:04.480
<v Speaker 1>but growth was already slowing from three percent in twenty

0:20:04.560 --> 0:20:07.520
<v Speaker 1>eight down to two percent in twenty nineteen, and with

0:20:07.600 --> 0:20:12.960
<v Speaker 1>a moderate consumer, with elevated inflation and rapidly rising energy costs,

0:20:13.160 --> 0:20:15.600
<v Speaker 1>I think it's a very clear trajectory back to that

0:20:15.720 --> 0:20:20.520
<v Speaker 1>pre pandemic growth rate of near two to gdp. Lindsay,

0:20:20.520 --> 0:20:24.560
<v Speaker 1>Thank you Lindsay of Stay Fold. This is the Bloomberg

0:20:24.640 --> 0:20:29.000
<v Speaker 1>Surveillance Podcast. Thanks for listening. Join us live weekdays from

0:20:29.040 --> 0:20:32.439
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0:20:32.480 --> 0:20:36.800
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0:20:37.040 --> 0:20:41.960
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0:20:47.240 --> 0:20:50.840
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0:20:50.880 --> 0:20:53.560
<v Speaker 1>Tom keene In. This is Bloomberg.