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Speaker 2: I'm Lisa A.
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Speaker 2: Let's just get to James Apia in London, investment director
Speaker 2: over at Aberdeen. James, great to catch up with you.
Speaker 2: It's like the question of the week. What's it all about, James?
Speaker 2: What's behind this bond market move?
Speaker 3: Hey? John?
Speaker 4: Yeah, I mean it's a good question. It's been a
Speaker 4: very strange few trading days. We had stronger US data
Speaker 4: and the market seemingly couldn't sell off at all, and
Speaker 4: then we've seemingly got these kind of random sell offs
Speaker 4: out of nowhere with not much behind them.
Speaker 3: I mean, Larry Summer's there.
Speaker 4: I agree with you that it's all a bit spurious,
Speaker 4: some false accuracy in there, but I think that term
Speaker 4: premium element is certainly part of it. But if you
Speaker 4: look at the equity market eleven percent earnings growth price
Speaker 4: for twelve months ahead in the SMP and trading at
Speaker 4: twenty times roughly, that looks like a pretty nice, if
Speaker 4: not soft landing. Yet you've got this massive inversion in
Speaker 4: the bond yield curve.
Speaker 3: One of those is wrong, and it.
Speaker 4: Looks like they're kind of converging from both directions, which
Speaker 4: is probably reasonable given the data we're seen in the US.
Speaker 1: Does it make sense to you, James, that we're seeing
Speaker 1: risk acids hold in there despite some of the moves
Speaker 1: that we're seeing in Birchmark bond yields.
Speaker 4: Is that a loaded question, Lisa, because you and I
Speaker 4: tend to be the only bears that are speaking perfectly. Yeah, Mary,
Speaker 4: I found it difficult to explain or justify really that
Speaker 4: rally in the equity market from a fundamental or from
Speaker 4: a probability weighted, risk adjusted basis. It looked like there
Speaker 4: was a lot of short covering in that in spite
Speaker 4: of the fact that obviously the economic news has been
Speaker 4: has been better than expected. So I am generally surprised
Speaker 4: at how well equities can ignore some of the macro drivers.
Speaker 4: But it's hard to pick holes in for example, retail
Speaker 4: sales data this week. It's hard to try and claim
Speaker 4: that the consumer is on the precipice when the splending
Speaker 4: numbers are strong as that. And so while ever the
Speaker 4: data is okay, I think equities can hang in there.
Speaker 1: What about credit? We were talking about how narrow credit
Speaker 1: spreads were, and we were talking with one of Caesar
Speaker 1: about how much companies have readjusted to prolong some of
Speaker 1: their payment structures and increase their cash or up their
Speaker 1: ability to maintain themselves through this period. Are you getting
Speaker 1: bullish uncredit or do you think that it's over its skis?
Speaker 1: How do you sort of rationalize?
Speaker 3: Well, so, I think spreads are too tight.
Speaker 4: Broadly speaking, I don't think you're really being accurately compensated
Speaker 4: for the likely default risk. You can see that realize,
Speaker 4: defaults in most countries and regions have been ticking up
Speaker 4: to a far greater degree than we've been used to.
Speaker 4: So I don't think the spread component is necessarily attractive.
Speaker 4: But what the balls and a lot of credit guys
Speaker 4: will tell you is that the all in yield is
Speaker 4: very attractive, obviously because of the cheapness of underlying government
Speaker 4: bond shields.
Speaker 3: I think that's reasonable.
Speaker 4: So I think if you're being selective and choosing high
Speaker 4: quality corporate credits, you've probably got some nice investment opportunities there.
Speaker 4: One of the really interesting charts that I've seen recently
Speaker 4: has been that a lot of companies have actually benefited
Speaker 4: from higher rates.
Speaker 3: You know, they engaged in.
Speaker 4: Precautionary borrowing sort for five or seven years when rates
Speaker 4: were low, and now they get to part that cash
Speaker 4: at the deposit rate or at cash rates which are
Speaker 4: five five and a half percent, and so in spite
Speaker 4: of this monetary tightening, it's actually generating positive cash flow
Speaker 4: for a lot of these cash rich corporates.
Speaker 2: Hey, James, we've talked about this kind of stuff before,
Speaker 2: but there's often a geographic regional bias on certain issues.
Speaker 2: If you ask someone in New York on Wall Street
Speaker 2: about China, shrugger the shoulders, and the stereotype would be
Speaker 2: for the boomers at least tell me where the Dow
Speaker 2: is and move on with life. In London, there's a
Speaker 2: much more nuanced view about Macro and China specifically. James,
Speaker 2: what's the view on China right now in the city.
Speaker 4: Yeah, I mean, I think people are nervous slash cautious,
Speaker 4: but to be honest, as is often the case, you know,
Speaker 4: most folks are biased to believe that we will see
Speaker 4: what we have seen, and that is when China has
Speaker 4: a bit of a wobble, we should just expect quote
Speaker 4: unquote stimulus and that'll lead to a positive reaction from markets.
Speaker 4: So it's not something that people are really kind of
Speaker 4: looking to play as a macro theme. And the door
Speaker 4: doesn't swing both ways. When the US sneezes, the world
Speaker 4: catches a cold. The US is a massive consumer with
Speaker 4: a huge current account deficit. China really is consuming domestically
Speaker 4: and exporting a lot, and so it's not the same linkage.
Speaker 4: But you are seeing I think places like Australia and
Speaker 4: Germany likely to struggle going forward, But most people I
Speaker 4: think want to buy dollar see and h as an
Speaker 4: expression of China concerns.
Speaker 3: Maybe sell the Aussie dollar, but not much else.
Speaker 2: So James, with that in mind, are we thinking about
Speaker 2: it the wrong way round? Not how China influences the US,
Speaker 2: but how the US influences China, given what's happened with
Speaker 2: real rates and what could happen with a dollar going
Speaker 2: forward from here?
Speaker 4: Yeah, to a very great degree, and you can see
Speaker 4: the Chinese policymakers, the PBOC really trying to offset this
Speaker 4: weakness in the UN. I guess they're worried about a
Speaker 4: similar situation to twenty fifteen, emerging and capital flight and
Speaker 4: creating bigger stability problems for themselves. But they are fighting
Speaker 4: what looks to be a pretty losing battle because the
Speaker 4: US data is just holding up that much better than
Speaker 4: everywhere else. And so in spite of the market desperate
Speaker 4: to trade carry to trade risk on the US dollar
Speaker 4: really is just starting to generate a bit of upward
Speaker 4: momentum because we are I think we are in a
Speaker 4: US exceptionalism world, at least for now, and that does
Speaker 4: create problems globally.
Speaker 3: It does create problems for dollar borrowers.
Speaker 2: We know that.
Speaker 1: So what are you doing right now, given the fact
Speaker 1: that some people are saying we're at an inflection point?
Speaker 2: Do you believe that?
Speaker 1: Are you shifting some of your allocations in response?
Speaker 4: I mean, I've been saying that we're on the precipice
Speaker 4: of an inflection for quite some time. And sometimes you
Speaker 4: look really clever and sometimes you look really stupid. It's
Speaker 4: been that kind of environment. Bare ball flatter steepner. We've
Speaker 4: had it all over the last eight weeks. I do
Speaker 4: think Europe is starting to show its true colors. They've
Speaker 4: got structural weakness and cyclical headwinds now because of policy
Speaker 4: and the pandemic effects subsiding, So increase a bit ofituation there.
Speaker 4: And I think the USUL curve, I think there's a
Speaker 4: good chance it can steep in both ways. I think
Speaker 4: it can bear steepen in a soft landing, it can
Speaker 4: ball steep and if the data disappoints, you know, I
Speaker 4: love an asymmetric position, so adding to steepening risk and
Speaker 4: actually been paying US five year five year because that
Speaker 4: looks really low. And if we get a bear steepener
Speaker 4: that should rock it higher. But beyond that, it's quite difficult,
Speaker 4: still trying to cling on to the more medium term positions,
Speaker 4: generally being defensive and hoping that the forward looking indicators
Speaker 4: will give us an accurate indication.
Speaker 3: And that suggests things will get worse from here.
Speaker 1: You mentioned a short squeeze. How much have the shorts
Speaker 1: been squeezed out? How much are people really long this
Speaker 1: equity market at a time or where there are some
Speaker 1: real questions.
Speaker 4: I mean It's always difficult to say with any degree
Speaker 4: of accuracy, but if you look at surveys, if you
Speaker 4: look at sort of FMS, Heartnet's flow Show type stuff
Speaker 4: from Bamel, and you look at various other indicators and
Speaker 4: surveys that we would look at, it does suggest that
Speaker 4: there has been a shift. Sentiment has shifted away from
Speaker 4: expecting a recession actually to the majority of people, not
Speaker 4: from people being underweight or short equities and decent size,
Speaker 4: to people being neutral to long. I think from a
Speaker 4: quantitative perspective that the CTA is the vole control of
Speaker 4: the risk parity. These guys have not only been buying
Speaker 4: on rising prices, but they've been adding gross risk because
Speaker 4: of falling implied volatility. So I do think we're getting
Speaker 4: to that stage where most folk are now on the
Speaker 4: other side of the boat.
Speaker 3: That suggests it should take less to tip us over.
Speaker 2: I love the Flow Show note Michael Hartnett. It's one
Speaker 2: of my favorites. And on Friday, James, thank you love
Speaker 2: the new dress code over at Aberdeen as well, James
Speaker 2: athey there of Aberdeen. Let's get the conversation started on China.
Speaker 2: We can do that with Susan Thorden from Yale University
Speaker 2: Law School. Susan, wonderful to have you with us on
Speaker 2: the program. I think we've always given the Chinese policymaker
Speaker 2: the benefit of doubt that they can resolve these issues
Speaker 2: in an orderly way. Is there any reason to believe
Speaker 2: it is different this time?
Speaker 5: Well, I think there are a couple of things going
Speaker 5: on here. One is they're running into structural economic problems.
Speaker 6: Right.
Speaker 5: We've seen them trying to reform over the years, and
Speaker 5: they've obviously run into a lot of difficulty with that.
Speaker 5: And then you see the lack of confidence and the
Speaker 5: faltering and trust in the economic officials and the Chinese
Speaker 5: leadership after the COVID lockdowns and then the unwinding of
Speaker 5: COVID in China, and so I think we're really looking
Speaker 5: at a kind of a loss of confidence on the
Speaker 5: part of both Chinese participants in the Chinese economy and
Speaker 5: also foreign participants.
Speaker 2: We heard from the State Council today they promised to
Speaker 2: meet annual economic targets through quote targeted and forceful macroeconomic adjustments. Susan,
Speaker 2: what does that actually mean? What leavers do they have
Speaker 2: to restore confidence? As you say, there's been absolutely hammered
Speaker 2: over the last few years.
Speaker 5: Yeah, well, they've been struggling to try to find policy
Speaker 5: responses that are going to actually bring about what they need,
Speaker 5: which is they need households to start spending. And this
Speaker 5: has been a problem in the Chinese economy going way back.
Speaker 5: They've got the highest level of sort of savings in
Speaker 5: China and they can't seem to unlock that from households,
Speaker 5: and so I think what we've seen is they've tried
Speaker 5: to kind of lower interest rates, They've tried to push out,
Speaker 5: you know, tiny bits of stimulus, but they're loath to
Speaker 5: kind of push out a lot of stimulus because they've
Speaker 5: got a problem in the housing sector, in the real
Speaker 5: estate sector, and so I think they're really limited. I
Speaker 5: think what they probably need to do is to try
Speaker 5: to give some confidence back to the private sector, which
Speaker 5: is really sitting on the sidelines at this point looking
Speaker 5: to see what's going to happen and lost confidence.
Speaker 1: Part of this is international as well, because there was
Speaker 1: a lot of international investment from US, from European companies.
Speaker 1: We've seen an increasing number of US companies pull back
Speaker 1: just a bit or significantly. How much do the Chinese
Speaker 1: authorities want to see some of those international businesses come
Speaker 1: back versus embrace the isolation, the sort of domestic focus
Speaker 1: that seems to be a more front and center.
Speaker 5: Yeah, I think you really see them trying to do
Speaker 5: everything they can to encourage foreign businesses and foreign direct
Speaker 5: investments to come back into China. You know, it's been
Speaker 5: a tough five years for foreign businesses trying to work
Speaker 5: in China. I mean not just not just COVID, but
Speaker 5: all of this slew of regulations that have come out
Speaker 5: a lot of kind of chilling rules and laws that
Speaker 5: have been passed, especially on cross border data flows. It's
Speaker 5: been very hard for companies to deal with trying to
Speaker 5: get the data that they depend on to do their businesses,
Speaker 5: in many cases back and forth across the border. And
Speaker 5: so there's just been a whole slew of problems that
Speaker 5: have kept people kind of wondering what they should be
Speaker 5: doing about their China business and how they should be
Speaker 5: looking at this market long term.
Speaker 1: With all your years experience as a diplomat for the
Speaker 1: US to a host of Asian nations, I'm wondering if
Speaker 1: the economic difficulties that China is facing makes it more
Speaker 1: or less difficult for the US to negotiate. In other words,
Speaker 1: does the US have more leverage or less leverage as
Speaker 1: a result.
Speaker 5: Well, I think what I've seen since the Chinese have
Speaker 5: really started to face up to the fact that the
Speaker 5: economy is not going to bounce back after COVID the
Speaker 5: way they were talking about initially. There's really been a
Speaker 5: big change, and I think sort of mindset about the
Speaker 5: need to maintain connectedness with the rest of the world economy.
Speaker 5: And I think there was a question about that at
Speaker 5: one point earlier, and there may still be a division
Speaker 5: inside the Chinese leadership on this, but certainly the technocrat
Speaker 5: economic experts in the Chinese government understand that the Chinese
Speaker 5: economy needs to maintain those connections Susan.
Speaker 2: Last week, the President of the United States referred to
Speaker 2: the Chinese economy as a taking time bomb. He referred
Speaker 2: to some government ofs is bad folks, and he said,
Speaker 2: when bad things start to happen, bad folks do bad things. Susan,
Speaker 2: what do you reckon he meant by that just last week.
Speaker 5: Well, it's very hard for me to get inside the
Speaker 5: head of leaders when they say things Hi Jinpang or
Speaker 5: Joe Biden, But My sense is that what he means
Speaker 5: is that the Chinese economy is not as impregnable as
Speaker 5: we've been thinking, that there could be real risks here,
Speaker 5: and that you know, the Chinese economy is really important
Speaker 5: to the sort of stability and psychology and internal kind
Speaker 5: of predictability of the Chinese state and the Chinese leadership.
Speaker 5: And so I think what he meant is that, you know,
Speaker 5: if the Chinese economy isn't going to be doing well,
Speaker 5: then the whole Chinese government is going to be getting
Speaker 5: more desperate, and we may see things that we know
Speaker 5: might not otherwise see. And I think he's worried about
Speaker 5: some kind of incident or accident. It might cause some
Speaker 5: kind of conflict or crisis that we wouldn't normally see
Speaker 5: if the Chinese were more confident than they are now.
Speaker 2: Susan, I have a failum. We'll be talking again soon.
Speaker 2: Susan's thoughts in there of the University law.
Speaker 1: School, we've been asking a lot of questions around how
Speaker 1: long the retailer can keep going, how long the consumer
Speaker 1: can keep spending, whether they're running out of cash, whether
Speaker 1: they're going to be challenged by some of their student
Speaker 1: loan payments, Matt Lazetti has been upgrading his expectation for
Speaker 1: growth in the US. He has been spot on pushing
Speaker 1: out his Recession call. Chief you as economist at Deutsche Bank,
Speaker 1: joining us here in the studio.
Speaker 6: Matt just first.
Speaker 1: Read and what we've seen in terms of retailers, the
Speaker 1: strength the labor market not cracking. Is this an economy
Speaker 1: that can subsist with rates where they are for a
Speaker 1: very long time?
Speaker 7: Look, I think right now it looks like the answers yes,
Speaker 7: in the near term. We just upgraded our Q three
Speaker 7: growth forecast to above three percent. You know, everybody was anticipating,
Speaker 7: I think including the Fed, as we saw in the
Speaker 7: minutes yesterday, that you would see this second half of
Speaker 7: the year growth slow down, that you're beginning to see
Speaker 7: rates bite, that the tightening of financial conditions and bank
Speaker 7: lining conditions was going to be impact in the economy.
Speaker 7: What it looks like we've seen with the data so
Speaker 7: far now it's only a very little bit of data
Speaker 7: for Q three is an acceleration for the consumer, for
Speaker 7: industrial production. It goes against certainly what we were anticipating
Speaker 7: at this point in time and raises really important questions
Speaker 7: I think for the FED one.
Speaker 1: Of the questions, and John asked it earlier. Are rates
Speaker 1: restrictive currently? How do we even know if they are restrictive?
Speaker 7: Yeah, I think the way that we typically view that is,
Speaker 7: you know, either through real rates. The FED leans very
Speaker 7: heavily on real rates, and there we are seeing very
Speaker 7: significant increases in that. You know, ten year reel yields
Speaker 7: at many year highs. I look at if you look
Speaker 7: five for or five year real ois, so some a
Speaker 7: measure of what our star type estimates are. All of
Speaker 7: these things have been rising pretty substantially. But then when
Speaker 7: you translated into financial conditions, it's not obviously that things
Speaker 7: are too tight. Most financial conditions into these are loose,
Speaker 7: have been loosening. The one area where there's tightness is
Speaker 7: bank lending conditions, but we haven't seen that impact the
Speaker 7: economy as of yet.
Speaker 1: So just taking a step back for a second before
Speaker 1: we get to the nitty gritty and I ask you
Speaker 1: best student loan repayments and all sorts of other issues
Speaker 1: that are capturing people's attentions.
Speaker 2: There is a question of.
Speaker 1: Whether this is long and variable lags, or if this
Speaker 1: is companies that have pushed out the maturities consumers that
Speaker 1: have pushed out their maturities, and a lot of resilience
Speaker 1: at a time where consumers keep spending. Is this an
Speaker 1: economy that can keep humming along even if the ten
Speaker 1: year rate continues to go up, even if we see
Speaker 1: four point three percent on a sustainable basis.
Speaker 7: Yeah, So our baseline is no, you know, we still
Speaker 7: have this mild recession in the forecast, that we still
Speaker 7: think the bank lending condition tightening, that we've seen the
Speaker 7: real rates that we've seen, some of the headwinds for
Speaker 7: the consumers that are coming up, the student debt payments,
Speaker 7: a slowing labor market, you're seeing rising delinquencies within the
Speaker 7: consumer for both credit cards and autos, And so our
Speaker 7: baseline is no, that you know, this is an acceleration,
Speaker 7: but it'll be short term. Eventually you'll see monetary policy
Speaker 7: tightening take hold. But on the other side, you know,
Speaker 7: we're being surprised by the data here, and when you
Speaker 7: look at the incoming data for the labor market, obviously
Speaker 7: initial jobless claims not showing any uptick, any softening there.
Speaker 7: Where you're seeing in the retail sales report is broad based.
Speaker 7: Consumer confidence is picking up a little bit, so there
Speaker 7: are you know, some elements there which make you a
Speaker 7: little bit more cautious or in terms of thinking about
Speaker 7: that slow down in the economy.
Speaker 1: What do you have to see to change your view?
Speaker 7: So I think you know to go fully towards the
Speaker 7: soft landing, and I think we've been noting the prospects
Speaker 7: that have been rising.
Speaker 6: Here.
Speaker 7: You need a few things. I think you actually do
Speaker 7: need to see the economy slow. And the reason that
Speaker 7: you need to see the economy slow is because the
Speaker 7: Fed has been very adamant that if it doesn't, they
Speaker 7: think that they have more work to do and that
Speaker 7: they can't have confidence that inflation is going to come
Speaker 7: down to target. We heard that from pal at the
Speaker 7: July fome C, meaning I thought we heard it, and
Speaker 7: that was the big takeaway from yesterday that they need
Speaker 7: to see a slowing economy in order to get confidence
Speaker 7: that inflation is coming down. So I think you need that.
Speaker 7: You need to see wage and price pressures coming off.
Speaker 7: We're seeing some evidence of that the last you know,
Speaker 7: two inflation or some CPI have been very supportive. The
Speaker 7: PC report next week will be a little bit less so,
Speaker 7: but I think that's what you need. We're not getting
Speaker 7: that evidence on the growth front as of yet, and
Speaker 7: so I would anticipate from PAL probably next week. Jackson
Speaker 7: Hole from the FED that they lean into a hawkish
Speaker 7: bias still, that the September SCP probably still shows some
Speaker 7: idea of rate hikes in the profile, and then more
Speaker 7: importantly that they will probably hold that for even longer
Speaker 7: than anticipating.
Speaker 1: Let's talk about some of the potential drivers for weakness
Speaker 1: that might take hold next year. It's what everyone's been expecting,
Speaker 1: and they've been saying this for quite a while, so
Speaker 1: we'll put that as a Caveat student loan repayments, this
Speaker 1: has been a hotly debated topic, with some people coming
Speaker 1: out and saying, well, you know, if students don't want
Speaker 1: to pay, or former students don't want to pay, they
Speaker 1: don't have to. They're not going to be penalized for
Speaker 1: twelve months, and other people saying, well, you know they're
Speaker 1: going to try and they're going to have to pay
Speaker 1: back eventually. It'll crimp their discretionary spending. Where do you
Speaker 1: fall on.
Speaker 7: This, Yeah, so we think we've thought that it's going
Speaker 7: to be this meaningful head winto the consumer. If you
Speaker 7: look at student debt payments in the daily Treasury account,
Speaker 7: they're down about seventy billion dollars relatives where we thought
Speaker 7: they would have been, So that's a meaningful hit to
Speaker 7: consumer income if it gets paid in full. There's been
Speaker 7: certainly programs there that are trying to alleviate some of
Speaker 7: the pressure on consumers in terms of paying that over
Speaker 7: the next year or so. But we can track it
Speaker 7: on a daily basis, and if you look at the
Speaker 7: Treasury daily account, you are seeing a meaningful uptick in
Speaker 7: payments taking place. So people are paying down their student
Speaker 7: debt that we're not doing so previously. But my guess
Speaker 7: is that the impact is going to be less than
Speaker 7: anticipated or less than it was previously, simply because there
Speaker 7: are these programs that are trying to take away some
Speaker 7: of the pain.
Speaker 1: We speaking with Matt Zeti, chief US economist over at
Speaker 1: Deutsche Bank at a time where we're seeing strength pretty
Speaker 1: much across the board. We got reports out of retailers
Speaker 1: including Walmart, Tapestry, Target yesterday, all of them showing strength
Speaker 1: in the consumer spending. Are you seeing any evidence that
Speaker 1: people are wholesale pulling back or not able to spend
Speaker 1: with such profligacy of the recent past.
Speaker 7: Yeah, I think, you know, some things that you would
Speaker 7: would point to are are not primary but kind of secondary.
Speaker 7: So there's you know, evidence that that excess savings have
Speaker 7: been drawn down. The San Francisco Fed put out a
Speaker 7: piece just this week saying that that it'll be gone
Speaker 7: in Q three.
Speaker 1: The current talking about this forever, have you even saying
Speaker 1: it's going to run out, It's going to run out
Speaker 1: and never does.
Speaker 7: So that that part, you know, our view is always
Speaker 7: to the back half of this year, at the end
Speaker 7: of this year, and so I think that part is
Speaker 7: coming to fruition. I think you're seeing the evidence of
Speaker 7: that through. You know, you saw rising credit card borrowing,
Speaker 7: you're seeing rising delinquencies. You know those are now higher
Speaker 7: for autos and credit cards than they were before the pandemic,
Speaker 7: and so there are some strains there now. Obviously, so
Speaker 7: far that has not translated into retail sales data. It
Speaker 7: has in chart translated into the high frequency credit card
Speaker 7: spending data that we've seen, and so so far there's
Speaker 7: not evidence of that. You know, obviously, the big question
Speaker 7: is can that continue to run even as you have
Speaker 7: credit card debt picking up? You have delinquencies, rising strains
Speaker 7: are there, Excess savings come down, student debt payments come
Speaker 7: back again. Are baseline is that it can run forever
Speaker 7: and that you'll see a slowdown that takes place, But
Speaker 7: the data have surprised the upside.
Speaker 1: Everything that we're talking about almost presumes American exceptionalism, that
Speaker 1: the US economy can remain divorced from everything else that's
Speaker 1: been going on elsewhere. And I think about China, and
Speaker 1: every morning we come in and we open with China
Speaker 1: and we discuss everything that's happened in the weakening there.
Speaker 1: When you look at the connections between the world's two
Speaker 1: biggest economies, how divorced is the US from catching a
Speaker 1: cold from what China seems to be experiencing right now?
Speaker 7: Yeah, maybe through two channels. I think directly economically, as
Speaker 7: we look at the US economy today, I think it
Speaker 7: is primarily domestically driven. It's about the services economy. It's
Speaker 7: about the US consumer and whether or not, you know,
Speaker 7: Chinese consumers is strong and that environment is less relevant,
Speaker 7: so that that direct economic impact to the US I
Speaker 7: think is probably more muted. Where I think it can
Speaker 7: have important linkages is through financial markets. And I think,
Speaker 7: you know, some of the risk of version that we're
Speaker 7: seeing is certainly being driven by by what we're hearing
Speaker 7: in the daily headlines that you get out of China.
Speaker 7: If it is to impact the US economy more significantly,
Speaker 7: I think it has to be through financial markets that
Speaker 7: you get turmoil that takes place there. I think it's
Speaker 7: an interesting question. We talk about high real yields. High
Speaker 7: yields maybe not impacting the US consumers much, but perhaps
Speaker 7: where we're seeing it is more on the global sphere,
Speaker 7: and that that's where it's beginning to bite, and maybe
Speaker 7: they will be spillovers, but through financial markets.
Speaker 1: And this is the reason why people are wondering whether
Speaker 1: things are getting close to a breaking point at a
Speaker 1: time where the fundamental economy seems to be doing just fine.
Speaker 1: How closely do you watch that the financial transmission mechanisms,
Speaker 1: the surveys that come out, but also just some of
Speaker 1: the fissures happening on the global market sphere.
Speaker 7: I think you have to follow financial conditions, however you
Speaker 7: might define them very very closely. I think we always,
Speaker 7: you know, part of the reason that we anticipate, or
Speaker 7: people are anticipating, we can get the soft landing is
Speaker 7: because you're getting the economic data take place. You're gaining
Speaker 7: to FED that was hawkish and raise rates very substantially,
Speaker 7: but financial conditions have not fallen apart. I think if
Speaker 7: you see equities come down, credit spreads widen, you know,
Speaker 7: the vics come up, financial conditions tighten in a sharp
Speaker 7: and aggressive way. That often leads to very quick changes
Speaker 7: in narratives. And so if you get that taking place,
Speaker 7: for whatever the reason might be, I think you'll see
Speaker 7: kind of a downgrade of soft landing prospects.
Speaker 1: What do you think people are getting most wrong right now?
Speaker 7: It's a difficult environment. You know, if the economy is
Speaker 7: actually accelerating, then that is certainly I think one that
Speaker 7: that's that that is is getting wrong on our baseline.
Speaker 7: You know, we still think that you have a recession.
Speaker 7: That is not the prevailing narrative in the market right now,
Speaker 7: even if it's you know, the baseline for most economists.
Speaker 7: So I think if you get that, you know, the
Speaker 7: correction markets that we would need to see would be
Speaker 7: pretty substantial. The extent of FED rate cuts next year
Speaker 7: would be far more substantial than what the market is pricing.
Speaker 1: Mala Zeti a chief US economist joining us here over
Speaker 1: at Deutsche Bag.
Speaker 2: One company that's doing well Walmart, once again raising its
Speaker 2: annual profit forecast. This for the second straight quarter. The
Speaker 2: stock is high here by about one point one percent,
Speaker 2: better numbers, a beat on the top and bottom line,
Speaker 2: and a raise to the outlook as well. Joe Fouden
Speaker 2: joins us now the SITY research analyst and Assistant director
Speaker 2: of Research at Taosi Advisory Group. Joe, great to catch
Speaker 2: up with you, sir, and good to continue this conversation
Speaker 2: on US retail. We asked the question, I know you've
Speaker 2: got the answers. If Walmart is doing well, what about
Speaker 2: everybody else?
Speaker 6: Yeah, you know, it really does reflect that there could
Speaker 6: be some concern for other parts of the economy. You know,
Speaker 6: we continue to see the high end doing well, the
Speaker 6: low end is seeking value, the middle income consumer has
Speaker 6: been trading down and seeking value, and now we've seen
Speaker 6: that with Walmart. You know, Amazon recently have very good
Speaker 6: results and even Target yesterday, you know, their food and
Speaker 6: consumable side of the business was pretty healthy and people
Speaker 6: were trading down there in that area. So you know,
Speaker 6: we're seeing increased traffic at Walmart. You're seeing higher sales
Speaker 6: of groceries and basic items and consumables, So you know,
Speaker 6: the consumer is still putting food on the table and
Speaker 6: that's an area of focus. But discretionary has been soft,
Speaker 6: that's for sure, Joe.
Speaker 2: How much clarity have you got on where marches are
Speaker 2: going to be over the next couple of quarters.
Speaker 6: Yeah, you know, I'll tell you. Walmart keeps putting up
Speaker 6: better margines than expect it. You know that. I think
Speaker 6: the lower freight costs are helping, and that's helping all
Speaker 6: of retail. Remember a year ago, two years ago, freight
Speaker 6: costs were through the roof, especially ocean freight, and that's
Speaker 6: come down quite a bit, So that's actually helping to
Speaker 6: provide a little bit of a tail in and give
Speaker 6: some confidence I think for Walmart and others to raise
Speaker 6: numbers for the back half. I mean, others are not
Speaker 6: doing that, but Walmart, for sure. You know, the raise
Speaker 6: that they gave is just really that confident in the
Speaker 6: fact that they're getting the traffic, they're getting the sales
Speaker 6: on the top line, and you know they really they
Speaker 6: are getting the profitability they need to drop to the
Speaker 6: bottom line.
Speaker 3: Joe.
Speaker 1: When you look beyond Walmart, when you look beyond target,
Speaker 1: when you take a look at other retailers, do you
Speaker 1: have a sense of discretionary spending money that people have
Speaker 1: parked in the bank. Do you have a sense of
Speaker 1: whether consumers are running out or whether they're doing just fine.
Speaker 6: Her few is that the consumer is under some pressure
Speaker 6: and they have some money to spend, but it's only
Speaker 6: in pockets. So if you've planned a trip and you're
Speaker 6: going to Europe or you go in other parts of
Speaker 6: the US, or if you've planned a big event, you
Speaker 6: know you're going to Taylor Swift concert, you know that
Speaker 6: might take up a good chunk of your discretionary dollars
Speaker 6: that you would otherwise have spent on some goods. And
Speaker 6: I think during the pandemic when we saw people spending
Speaker 6: a lot on goods, especially home and coming out of it,
Speaker 6: you saw a lot of spend on a parrel last
Speaker 6: year that those dollars that kind of shifted elsewhere. So,
Speaker 6: you know, we've looked at credit. I know consumer credit
Speaker 6: has been rising, but not to alarming levels as of yet,
Speaker 6: and so the consumer is out there and able to spend.
Speaker 6: At the moment. You know, wage growth is still pretty solid,
Speaker 6: employment levels are good, but they're not spending broadly. They're
Speaker 6: just spending within different silos. Obviously food is one of them.
Speaker 6: But right now services going out to eat, while that
Speaker 6: is starting to moderate, you know, they are they have
Speaker 6: been spending there versus goods.
Speaker 1: This sounds prudent, This sounds like good balance sheet management.
Speaker 1: This sounds like actually responsible consumer spending habits. Doesn't it
Speaker 1: seem sustainable and doesn't really speak to some sort of
Speaker 1: broad slow down in retailing that a lot of people
Speaker 1: say has to happen, or consumer spending that has to
Speaker 1: happen for the US economy to soften.
Speaker 6: Yeah, I think that's a fair statement. You know, I
Speaker 6: think that, you know, when you look at retail broadly,
Speaker 6: you know, again, anybody offering value, those catering to essential
Speaker 6: goods are doing well. You know, where there was a
Speaker 6: lot of pull forward of demand during the pandemic. We're
Speaker 6: still in a normalization phase coming off of that, and
Speaker 6: I think the consumer has been very prudent with how
Speaker 6: they've been spending, and you know, we're hopeful that we're
Speaker 6: going to have a solid back half and a decent
Speaker 6: holiday season. We'll hear more from Walmart when they speak
Speaker 6: in a few minutes, But you know, it just seems
Speaker 6: that the consumer has been more resilient than I think
Speaker 6: a lot of us have given credit at this point
Speaker 6: in the year.
Speaker 2: Before you run off for that call, and I know
Speaker 2: you've got to listen to that. Target. Yesterday said this Joe,
Speaker 2: that the resumption of student loan repayments would cause additional
Speaker 2: pressure on strained consumer budgets. Lisa has been saying this
Speaker 2: all week. The White House instituted a twelve month on ramp.
Speaker 2: Are they just setting up a decent thing to blame
Speaker 2: later on this year? Joe, what's your read on that?
Speaker 6: Yeah, well, you know, so we did a deep dive
Speaker 6: report on this and an analysis of student loan debt,
Speaker 6: and you know, there's seventeen percent of the US adult
Speaker 6: population has student loans, federal student loans that are going
Speaker 6: to have to start being paid back. Now it won't
Speaker 6: be penalized perhaps for a year, so there's a little
Speaker 6: bit of a grace period. But you know, our thought
Speaker 6: process on this was that again that middle income, middle
Speaker 6: to upper is where you start to see more of
Speaker 6: that pressure. Those are the people that do have the
Speaker 6: student loans. Target's customer is really that customer, and so
Speaker 6: we called out in our report that we thought Target
Speaker 6: was among those that might see a little more of
Speaker 6: an impact from student loans. Maybe less so at a
Speaker 6: place like Walmart, which sells so much grocery and people
Speaker 6: have been trading down and seeking value. You don't quite
Speaker 6: have that at a Target. So I think there is
Speaker 6: some reality there. I don't think the student loan thing
Speaker 6: will be broad based for everybody. Again, you know, the
Speaker 6: very high end won't be a bit an issue, and
Speaker 6: then that really the low end doesn't. It may not
Speaker 6: be as much of an issue either. It's really the
Speaker 6: middle of it. Once again, it's going to get squeezed on.
Speaker 3: This, Joe.
Speaker 1: I'm just curious where we are in some of the
Speaker 1: durable goods sectors, which a lot of people are wondering
Speaker 1: how long can keep contracting. Are we at a point
Speaker 1: an inflection point to the other direction where suddenly people
Speaker 1: are starting to go back to things that they shunned
Speaker 1: after the mass bingebig during the pandemic.
Speaker 6: You know, we started to see through the summer some
Speaker 6: early signs that you might be seeing a little bit
Speaker 6: of a shift from the services back towards goods. And
Speaker 6: we're hopeful that that will continue into the fall, and
Speaker 6: you know, holiday will come, Christmas will come, kids will
Speaker 6: get gifts, you know, so that spending will happen. We're
Speaker 6: hoping that that shift is a little bit more aggressive
Speaker 6: back towards the goods on the retail side of the sector.
Speaker 6: But it seems again that there are some initial green
Speaker 6: green shoots there that the good spending might start to
Speaker 6: come back.
Speaker 2: I thought you're going to break canto a Christmas soft.
Speaker 2: Kids will get gifts. I hope they get gif well,
Speaker 2: maybe get some of the tree jock. Thank you, Jeff Faudman,
Speaker 2: a Tassi Advisory.
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