WEBVTT - Surveillance: Tight Spreads with Athey 0:00:05.080 --> 0:00:07.200 This is the Bloomberg Surveillance Podcast. 0:00:07.680 --> 0:00:08.280 I'm Lisa A. 0:00:08.320 --> 0:00:11.640 Bromwoid's along with Tom Keen and Jonathan Ferrell. Join us 0:00:11.680 --> 0:00:15.280 each day for insight from the best in economics, geopolitics, 0:00:15.320 --> 0:00:19.520 finance and investment. Subscribe to Bloomberg Surveillance un demand on Apple, 0:00:19.600 --> 0:00:22.840 Spotify and anywhere you get your podcasts, and always on 0:00:22.880 --> 0:00:26.440 Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. 0:00:27.000 --> 0:00:30.440 Let's just get to James Apia in London, investment director 0:00:30.720 --> 0:00:33.040 over at Aberdeen. James, great to catch up with you. 0:00:33.120 --> 0:00:35.680 It's like the question of the week. What's it all about, James? 0:00:35.680 --> 0:00:37.680 What's behind this bond market move? 0:00:38.080 --> 0:00:38.520 Hey? John? 0:00:38.600 --> 0:00:41.239 Yeah, I mean it's a good question. It's been a 0:00:41.360 --> 0:00:44.920 very strange few trading days. We had stronger US data 0:00:45.000 --> 0:00:47.960 and the market seemingly couldn't sell off at all, and 0:00:47.720 --> 0:00:50.560 then we've seemingly got these kind of random sell offs 0:00:50.600 --> 0:00:52.200 out of nowhere with not much behind them. 0:00:52.640 --> 0:00:53.880 I mean, Larry Summer's there. 0:00:53.880 --> 0:00:55.920 I agree with you that it's all a bit spurious, 0:00:55.960 --> 0:00:58.040 some false accuracy in there, but I think that term 0:00:58.160 --> 0:01:01.080 premium element is certainly part of it. But if you 0:01:01.080 --> 0:01:03.440 look at the equity market eleven percent earnings growth price 0:01:03.440 --> 0:01:05.600 for twelve months ahead in the SMP and trading at 0:01:05.640 --> 0:01:08.720 twenty times roughly, that looks like a pretty nice, if 0:01:08.720 --> 0:01:11.240 not soft landing. Yet you've got this massive inversion in 0:01:11.280 --> 0:01:12.240 the bond yield curve. 0:01:12.800 --> 0:01:14.640 One of those is wrong, and it. 0:01:14.560 --> 0:01:17.480 Looks like they're kind of converging from both directions, which 0:01:17.520 --> 0:01:20.160 is probably reasonable given the data we're seen in the US. 0:01:20.240 --> 0:01:22.320 Does it make sense to you, James, that we're seeing 0:01:22.800 --> 0:01:25.920 risk acids hold in there despite some of the moves 0:01:25.920 --> 0:01:28.000 that we're seeing in Birchmark bond yields. 0:01:28.440 --> 0:01:30.240 Is that a loaded question, Lisa, because you and I 0:01:30.280 --> 0:01:33.559 tend to be the only bears that are speaking perfectly. Yeah, Mary, 0:01:33.600 --> 0:01:38.280 I found it difficult to explain or justify really that 0:01:38.680 --> 0:01:41.039 rally in the equity market from a fundamental or from 0:01:41.080 --> 0:01:44.280 a probability weighted, risk adjusted basis. It looked like there 0:01:44.319 --> 0:01:46.600 was a lot of short covering in that in spite 0:01:46.640 --> 0:01:48.600 of the fact that obviously the economic news has been 0:01:48.800 --> 0:01:52.800 has been better than expected. So I am generally surprised 0:01:52.800 --> 0:01:56.520 at how well equities can ignore some of the macro drivers. 0:01:57.040 --> 0:01:59.360 But it's hard to pick holes in for example, retail 0:01:59.400 --> 0:02:03.160 sales data this week. It's hard to try and claim 0:02:03.200 --> 0:02:06.040 that the consumer is on the precipice when the splending 0:02:06.080 --> 0:02:07.920 numbers are strong as that. And so while ever the 0:02:08.000 --> 0:02:11.160 data is okay, I think equities can hang in there. 0:02:11.520 --> 0:02:13.840 What about credit? We were talking about how narrow credit 0:02:13.880 --> 0:02:15.840 spreads were, and we were talking with one of Caesar 0:02:16.200 --> 0:02:20.840 about how much companies have readjusted to prolong some of 0:02:20.880 --> 0:02:25.560 their payment structures and increase their cash or up their 0:02:26.080 --> 0:02:30.560 ability to maintain themselves through this period. Are you getting 0:02:30.639 --> 0:02:33.800 bullish uncredit or do you think that it's over its skis? 0:02:33.840 --> 0:02:35.200 How do you sort of rationalize? 0:02:36.320 --> 0:02:38.040 Well, so, I think spreads are too tight. 0:02:38.160 --> 0:02:41.440 Broadly speaking, I don't think you're really being accurately compensated 0:02:41.480 --> 0:02:43.720 for the likely default risk. You can see that realize, 0:02:43.720 --> 0:02:46.360 defaults in most countries and regions have been ticking up 0:02:46.360 --> 0:02:48.800 to a far greater degree than we've been used to. 0:02:48.880 --> 0:02:52.160 So I don't think the spread component is necessarily attractive. 0:02:52.200 --> 0:02:54.200 But what the balls and a lot of credit guys 0:02:54.200 --> 0:02:56.200 will tell you is that the all in yield is 0:02:56.280 --> 0:02:59.120 very attractive, obviously because of the cheapness of underlying government 0:02:59.120 --> 0:02:59.680 bond shields. 0:03:00.080 --> 0:03:01.160 I think that's reasonable. 0:03:01.160 --> 0:03:03.040 So I think if you're being selective and choosing high 0:03:03.120 --> 0:03:07.160 quality corporate credits, you've probably got some nice investment opportunities there. 0:03:07.280 --> 0:03:09.639 One of the really interesting charts that I've seen recently 0:03:09.919 --> 0:03:12.480 has been that a lot of companies have actually benefited 0:03:12.520 --> 0:03:13.280 from higher rates. 0:03:13.320 --> 0:03:14.320 You know, they engaged in. 0:03:14.320 --> 0:03:19.160 Precautionary borrowing sort for five or seven years when rates 0:03:19.160 --> 0:03:21.240 were low, and now they get to part that cash 0:03:21.440 --> 0:03:23.440 at the deposit rate or at cash rates which are 0:03:23.520 --> 0:03:25.880 five five and a half percent, and so in spite 0:03:25.880 --> 0:03:29.400 of this monetary tightening, it's actually generating positive cash flow 0:03:29.440 --> 0:03:31.360 for a lot of these cash rich corporates. 0:03:31.400 --> 0:03:33.240 Hey, James, we've talked about this kind of stuff before, 0:03:33.280 --> 0:03:36.400 but there's often a geographic regional bias on certain issues. 0:03:36.440 --> 0:03:38.200 If you ask someone in New York on Wall Street 0:03:38.200 --> 0:03:41.640 about China, shrugger the shoulders, and the stereotype would be 0:03:41.640 --> 0:03:43.200 for the boomers at least tell me where the Dow 0:03:43.320 --> 0:03:45.800 is and move on with life. In London, there's a 0:03:45.840 --> 0:03:49.520 much more nuanced view about Macro and China specifically. James, 0:03:49.560 --> 0:03:51.800 what's the view on China right now in the city. 0:03:53.440 --> 0:03:56.800 Yeah, I mean, I think people are nervous slash cautious, 0:03:57.000 --> 0:04:00.280 but to be honest, as is often the case, you know, 0:04:00.400 --> 0:04:04.040 most folks are biased to believe that we will see 0:04:04.040 --> 0:04:06.000 what we have seen, and that is when China has 0:04:06.000 --> 0:04:08.160 a bit of a wobble, we should just expect quote 0:04:08.240 --> 0:04:11.560 unquote stimulus and that'll lead to a positive reaction from markets. 0:04:11.560 --> 0:04:13.840 So it's not something that people are really kind of 0:04:13.880 --> 0:04:17.480 looking to play as a macro theme. And the door 0:04:17.520 --> 0:04:19.800 doesn't swing both ways. When the US sneezes, the world 0:04:19.800 --> 0:04:22.080 catches a cold. The US is a massive consumer with 0:04:22.120 --> 0:04:26.280 a huge current account deficit. China really is consuming domestically 0:04:26.440 --> 0:04:29.360 and exporting a lot, and so it's not the same linkage. 0:04:29.600 --> 0:04:32.080 But you are seeing I think places like Australia and 0:04:32.120 --> 0:04:35.479 Germany likely to struggle going forward, But most people I 0:04:35.480 --> 0:04:37.240 think want to buy dollar see and h as an 0:04:37.240 --> 0:04:38.600 expression of China concerns. 0:04:38.640 --> 0:04:40.440 Maybe sell the Aussie dollar, but not much else. 0:04:40.520 --> 0:04:42.120 So James, with that in mind, are we thinking about 0:04:42.120 --> 0:04:44.839 it the wrong way round? Not how China influences the US, 0:04:45.040 --> 0:04:47.720 but how the US influences China, given what's happened with 0:04:47.800 --> 0:04:49.880 real rates and what could happen with a dollar going 0:04:49.880 --> 0:04:50.560 forward from here? 0:04:51.960 --> 0:04:54.320 Yeah, to a very great degree, and you can see 0:04:54.160 --> 0:04:57.640 the Chinese policymakers, the PBOC really trying to offset this 0:04:57.720 --> 0:05:00.320 weakness in the UN. I guess they're worried about a 0:05:00.360 --> 0:05:04.080 similar situation to twenty fifteen, emerging and capital flight and 0:05:04.120 --> 0:05:08.839 creating bigger stability problems for themselves. But they are fighting 0:05:08.880 --> 0:05:11.960 what looks to be a pretty losing battle because the 0:05:12.120 --> 0:05:14.320 US data is just holding up that much better than 0:05:14.360 --> 0:05:17.760 everywhere else. And so in spite of the market desperate 0:05:17.880 --> 0:05:21.039 to trade carry to trade risk on the US dollar 0:05:21.080 --> 0:05:23.599 really is just starting to generate a bit of upward 0:05:23.680 --> 0:05:26.600 momentum because we are I think we are in a 0:05:26.720 --> 0:05:29.240 US exceptionalism world, at least for now, and that does 0:05:29.320 --> 0:05:30.400 create problems globally. 0:05:30.400 --> 0:05:32.400 It does create problems for dollar borrowers. 0:05:32.440 --> 0:05:32.760 We know that. 0:05:33.080 --> 0:05:35.360 So what are you doing right now, given the fact 0:05:35.400 --> 0:05:37.680 that some people are saying we're at an inflection point? 0:05:37.839 --> 0:05:38.680 Do you believe that? 0:05:38.839 --> 0:05:41.400 Are you shifting some of your allocations in response? 0:05:43.720 --> 0:05:45.920 I mean, I've been saying that we're on the precipice 0:05:45.920 --> 0:05:48.479 of an inflection for quite some time. And sometimes you 0:05:48.480 --> 0:05:50.640 look really clever and sometimes you look really stupid. It's 0:05:50.680 --> 0:05:53.880 been that kind of environment. Bare ball flatter steepner. We've 0:05:53.880 --> 0:05:55.840 had it all over the last eight weeks. I do 0:05:55.880 --> 0:05:58.760 think Europe is starting to show its true colors. They've 0:05:58.800 --> 0:06:02.560 got structural weakness and cyclical headwinds now because of policy 0:06:02.600 --> 0:06:06.080 and the pandemic effects subsiding, So increase a bit ofituation there. 0:06:06.160 --> 0:06:07.880 And I think the USUL curve, I think there's a 0:06:07.920 --> 0:06:10.080 good chance it can steep in both ways. I think 0:06:10.120 --> 0:06:12.400 it can bear steepen in a soft landing, it can 0:06:12.440 --> 0:06:14.760 ball steep and if the data disappoints, you know, I 0:06:14.800 --> 0:06:17.800 love an asymmetric position, so adding to steepening risk and 0:06:17.839 --> 0:06:19.880 actually been paying US five year five year because that 0:06:19.880 --> 0:06:21.880 looks really low. And if we get a bear steepener 0:06:22.160 --> 0:06:25.480 that should rock it higher. But beyond that, it's quite difficult, 0:06:25.680 --> 0:06:28.760 still trying to cling on to the more medium term positions, 0:06:29.040 --> 0:06:33.240 generally being defensive and hoping that the forward looking indicators 0:06:33.279 --> 0:06:34.760 will give us an accurate indication. 0:06:35.120 --> 0:06:37.040 And that suggests things will get worse from here. 0:06:37.240 --> 0:06:39.600 You mentioned a short squeeze. How much have the shorts 0:06:39.600 --> 0:06:42.640 been squeezed out? How much are people really long this 0:06:42.720 --> 0:06:45.599 equity market at a time or where there are some 0:06:45.680 --> 0:06:46.360 real questions. 0:06:48.160 --> 0:06:50.080 I mean It's always difficult to say with any degree 0:06:50.080 --> 0:06:52.040 of accuracy, but if you look at surveys, if you 0:06:52.080 --> 0:06:54.919 look at sort of FMS, Heartnet's flow Show type stuff 0:06:54.920 --> 0:06:57.120 from Bamel, and you look at various other indicators and 0:06:57.160 --> 0:06:59.560 surveys that we would look at, it does suggest that 0:06:59.600 --> 0:07:03.080 there has been a shift. Sentiment has shifted away from 0:07:03.080 --> 0:07:05.640 expecting a recession actually to the majority of people, not 0:07:06.120 --> 0:07:09.039 from people being underweight or short equities and decent size, 0:07:09.080 --> 0:07:11.440 to people being neutral to long. I think from a 0:07:11.520 --> 0:07:14.640 quantitative perspective that the CTA is the vole control of 0:07:14.680 --> 0:07:17.880 the risk parity. These guys have not only been buying 0:07:17.880 --> 0:07:20.760 on rising prices, but they've been adding gross risk because 0:07:20.760 --> 0:07:24.280 of falling implied volatility. So I do think we're getting 0:07:24.320 --> 0:07:26.720 to that stage where most folk are now on the 0:07:26.760 --> 0:07:27.720 other side of the boat. 0:07:27.920 --> 0:07:30.040 That suggests it should take less to tip us over. 0:07:30.400 --> 0:07:33.440 I love the Flow Show note Michael Hartnett. It's one 0:07:33.440 --> 0:07:36.560 of my favorites. And on Friday, James, thank you love 0:07:36.640 --> 0:07:38.720 the new dress code over at Aberdeen as well, James 0:07:38.720 --> 0:07:52.760 athey there of Aberdeen. Let's get the conversation started on China. 0:07:52.800 --> 0:07:55.360 We can do that with Susan Thorden from Yale University 0:07:55.520 --> 0:07:57.360 Law School. Susan, wonderful to have you with us on 0:07:57.360 --> 0:08:01.280 the program. I think we've always given the Chinese policymaker 0:08:01.400 --> 0:08:03.680 the benefit of doubt that they can resolve these issues 0:08:03.760 --> 0:08:06.520 in an orderly way. Is there any reason to believe 0:08:06.520 --> 0:08:07.840 it is different this time? 0:08:09.280 --> 0:08:11.280 Well, I think there are a couple of things going 0:08:11.320 --> 0:08:16.560 on here. One is they're running into structural economic problems. 0:08:16.600 --> 0:08:16.760 Right. 0:08:16.760 --> 0:08:18.920 We've seen them trying to reform over the years, and 0:08:18.960 --> 0:08:21.600 they've obviously run into a lot of difficulty with that. 0:08:22.200 --> 0:08:25.200 And then you see the lack of confidence and the 0:08:25.280 --> 0:08:28.800 faltering and trust in the economic officials and the Chinese 0:08:28.880 --> 0:08:33.120 leadership after the COVID lockdowns and then the unwinding of 0:08:33.160 --> 0:08:35.959 COVID in China, and so I think we're really looking 0:08:36.000 --> 0:08:39.520 at a kind of a loss of confidence on the 0:08:39.559 --> 0:08:42.720 part of both Chinese participants in the Chinese economy and 0:08:42.760 --> 0:08:44.480 also foreign participants. 0:08:44.600 --> 0:08:46.560 We heard from the State Council today they promised to 0:08:46.559 --> 0:08:52.640 meet annual economic targets through quote targeted and forceful macroeconomic adjustments. Susan, 0:08:52.640 --> 0:08:54.800 what does that actually mean? What leavers do they have 0:08:54.880 --> 0:08:57.840 to restore confidence? As you say, there's been absolutely hammered 0:08:58.000 --> 0:08:59.000 over the last few years. 0:09:00.080 --> 0:09:02.840 Yeah, well, they've been struggling to try to find policy 0:09:02.920 --> 0:09:05.840 responses that are going to actually bring about what they need, 0:09:05.920 --> 0:09:09.920 which is they need households to start spending. And this 0:09:10.000 --> 0:09:12.559 has been a problem in the Chinese economy going way back. 0:09:12.840 --> 0:09:17.280 They've got the highest level of sort of savings in 0:09:17.360 --> 0:09:21.040 China and they can't seem to unlock that from households, 0:09:21.080 --> 0:09:23.959 and so I think what we've seen is they've tried 0:09:23.960 --> 0:09:27.839 to kind of lower interest rates, They've tried to push out, 0:09:27.880 --> 0:09:30.640 you know, tiny bits of stimulus, but they're loath to 0:09:30.760 --> 0:09:34.040 kind of push out a lot of stimulus because they've 0:09:34.160 --> 0:09:36.320 got a problem in the housing sector, in the real 0:09:36.480 --> 0:09:40.960 estate sector, and so I think they're really limited. I 0:09:41.000 --> 0:09:43.840 think what they probably need to do is to try 0:09:43.880 --> 0:09:46.360 to give some confidence back to the private sector, which 0:09:46.360 --> 0:09:49.199 is really sitting on the sidelines at this point looking 0:09:49.240 --> 0:09:51.680 to see what's going to happen and lost confidence. 0:09:52.040 --> 0:09:54.360 Part of this is international as well, because there was 0:09:54.400 --> 0:09:57.520 a lot of international investment from US, from European companies. 0:09:57.800 --> 0:10:00.400 We've seen an increasing number of US companies pull back 0:10:01.120 --> 0:10:04.280 just a bit or significantly. How much do the Chinese 0:10:04.280 --> 0:10:07.360 authorities want to see some of those international businesses come 0:10:07.400 --> 0:10:11.280 back versus embrace the isolation, the sort of domestic focus 0:10:11.679 --> 0:10:13.560 that seems to be a more front and center. 0:10:14.720 --> 0:10:16.880 Yeah, I think you really see them trying to do 0:10:16.960 --> 0:10:20.520 everything they can to encourage foreign businesses and foreign direct 0:10:20.559 --> 0:10:24.560 investments to come back into China. You know, it's been 0:10:24.800 --> 0:10:27.920 a tough five years for foreign businesses trying to work 0:10:27.920 --> 0:10:30.880 in China. I mean not just not just COVID, but 0:10:31.000 --> 0:10:33.600 all of this slew of regulations that have come out 0:10:34.040 --> 0:10:37.680 a lot of kind of chilling rules and laws that 0:10:37.720 --> 0:10:41.559 have been passed, especially on cross border data flows. It's 0:10:41.600 --> 0:10:44.360 been very hard for companies to deal with trying to 0:10:44.400 --> 0:10:47.160 get the data that they depend on to do their businesses, 0:10:47.200 --> 0:10:50.040 in many cases back and forth across the border. And 0:10:50.080 --> 0:10:52.600 so there's just been a whole slew of problems that 0:10:52.679 --> 0:10:56.080 have kept people kind of wondering what they should be 0:10:56.080 --> 0:10:58.320 doing about their China business and how they should be 0:10:58.320 --> 0:10:59.960 looking at this market long term. 0:11:00.360 --> 0:11:03.040 With all your years experience as a diplomat for the 0:11:03.160 --> 0:11:06.000 US to a host of Asian nations, I'm wondering if 0:11:06.080 --> 0:11:09.640 the economic difficulties that China is facing makes it more 0:11:09.840 --> 0:11:13.080 or less difficult for the US to negotiate. In other words, 0:11:13.160 --> 0:11:15.719 does the US have more leverage or less leverage as 0:11:15.720 --> 0:11:16.199 a result. 0:11:17.200 --> 0:11:20.680 Well, I think what I've seen since the Chinese have 0:11:20.760 --> 0:11:23.200 really started to face up to the fact that the 0:11:23.280 --> 0:11:25.800 economy is not going to bounce back after COVID the 0:11:25.840 --> 0:11:29.720 way they were talking about initially. There's really been a 0:11:29.760 --> 0:11:32.560 big change, and I think sort of mindset about the 0:11:32.679 --> 0:11:37.400 need to maintain connectedness with the rest of the world economy. 0:11:37.440 --> 0:11:40.079 And I think there was a question about that at 0:11:40.080 --> 0:11:42.640 one point earlier, and there may still be a division 0:11:42.679 --> 0:11:46.160 inside the Chinese leadership on this, but certainly the technocrat 0:11:46.360 --> 0:11:49.880 economic experts in the Chinese government understand that the Chinese 0:11:50.480 --> 0:11:53.640 economy needs to maintain those connections Susan. 0:11:53.760 --> 0:11:56.240 Last week, the President of the United States referred to 0:11:56.320 --> 0:11:59.040 the Chinese economy as a taking time bomb. He referred 0:11:59.040 --> 0:12:01.800 to some government ofs is bad folks, and he said, 0:12:02.120 --> 0:12:06.280 when bad things start to happen, bad folks do bad things. Susan, 0:12:06.480 --> 0:12:09.240 what do you reckon he meant by that just last week. 0:12:10.280 --> 0:12:12.240 Well, it's very hard for me to get inside the 0:12:12.280 --> 0:12:15.600 head of leaders when they say things Hi Jinpang or 0:12:15.720 --> 0:12:18.760 Joe Biden, But My sense is that what he means 0:12:19.120 --> 0:12:22.800 is that the Chinese economy is not as impregnable as 0:12:22.800 --> 0:12:26.439 we've been thinking, that there could be real risks here, 0:12:26.960 --> 0:12:30.839 and that you know, the Chinese economy is really important 0:12:30.880 --> 0:12:36.200 to the sort of stability and psychology and internal kind 0:12:36.200 --> 0:12:41.119 of predictability of the Chinese state and the Chinese leadership. 0:12:41.120 --> 0:12:43.600 And so I think what he meant is that, you know, 0:12:43.600 --> 0:12:46.200 if the Chinese economy isn't going to be doing well, 0:12:46.600 --> 0:12:49.560 then the whole Chinese government is going to be getting 0:12:49.720 --> 0:12:54.200 more desperate, and we may see things that we know 0:12:54.280 --> 0:12:57.400 might not otherwise see. And I think he's worried about 0:12:57.440 --> 0:13:01.000 some kind of incident or accident. It might cause some 0:13:01.080 --> 0:13:05.120 kind of conflict or crisis that we wouldn't normally see 0:13:05.160 --> 0:13:07.920 if the Chinese were more confident than they are now. 0:13:08.080 --> 0:13:10.040 Susan, I have a failum. We'll be talking again soon. 0:13:10.200 --> 0:13:13.120 Susan's thoughts in there of the University law. 0:13:12.960 --> 0:13:20.839 School, we've been asking a lot of questions around how 0:13:20.880 --> 0:13:24.280 long the retailer can keep going, how long the consumer 0:13:24.320 --> 0:13:27.280 can keep spending, whether they're running out of cash, whether 0:13:27.320 --> 0:13:28.880 they're going to be challenged by some of their student 0:13:28.880 --> 0:13:33.520 loan payments, Matt Lazetti has been upgrading his expectation for 0:13:33.679 --> 0:13:36.280 growth in the US. He has been spot on pushing 0:13:36.280 --> 0:13:38.800 out his Recession call. Chief you as economist at Deutsche Bank, 0:13:39.240 --> 0:13:41.200 joining us here in the studio. 0:13:41.600 --> 0:13:42.839 Matt just first. 0:13:42.600 --> 0:13:45.520 Read and what we've seen in terms of retailers, the 0:13:45.559 --> 0:13:48.880 strength the labor market not cracking. Is this an economy 0:13:49.040 --> 0:13:51.520 that can subsist with rates where they are for a 0:13:51.640 --> 0:13:52.320 very long time? 0:13:52.720 --> 0:13:55.600 Look, I think right now it looks like the answers yes, 0:13:55.880 --> 0:13:58.760 in the near term. We just upgraded our Q three 0:13:58.800 --> 0:14:02.080 growth forecast to above three percent. You know, everybody was anticipating, 0:14:02.360 --> 0:14:03.920 I think including the Fed, as we saw in the 0:14:03.920 --> 0:14:06.240 minutes yesterday, that you would see this second half of 0:14:06.280 --> 0:14:08.200 the year growth slow down, that you're beginning to see 0:14:08.280 --> 0:14:11.000 rates bite, that the tightening of financial conditions and bank 0:14:11.040 --> 0:14:13.560 lining conditions was going to be impact in the economy. 0:14:13.600 --> 0:14:15.440 What it looks like we've seen with the data so 0:14:15.520 --> 0:14:17.920 far now it's only a very little bit of data 0:14:17.920 --> 0:14:21.440 for Q three is an acceleration for the consumer, for 0:14:21.480 --> 0:14:25.000 industrial production. It goes against certainly what we were anticipating 0:14:25.040 --> 0:14:26.920 at this point in time and raises really important questions 0:14:26.960 --> 0:14:28.120 I think for the FED one. 0:14:27.960 --> 0:14:30.440 Of the questions, and John asked it earlier. Are rates 0:14:30.480 --> 0:14:33.280 restrictive currently? How do we even know if they are restrictive? 0:14:33.920 --> 0:14:36.240 Yeah, I think the way that we typically view that is, 0:14:36.400 --> 0:14:38.360 you know, either through real rates. The FED leans very 0:14:38.360 --> 0:14:41.680 heavily on real rates, and there we are seeing very 0:14:41.720 --> 0:14:44.320 significant increases in that. You know, ten year reel yields 0:14:44.400 --> 0:14:46.560 at many year highs. I look at if you look 0:14:46.600 --> 0:14:49.320 five for or five year real ois, so some a 0:14:49.400 --> 0:14:53.080 measure of what our star type estimates are. All of 0:14:53.120 --> 0:14:55.600 these things have been rising pretty substantially. But then when 0:14:55.600 --> 0:14:58.160 you translated into financial conditions, it's not obviously that things 0:14:58.160 --> 0:15:01.640 are too tight. Most financial conditions into these are loose, 0:15:01.720 --> 0:15:04.080 have been loosening. The one area where there's tightness is 0:15:04.120 --> 0:15:06.600 bank lending conditions, but we haven't seen that impact the 0:15:06.600 --> 0:15:07.520 economy as of yet. 0:15:07.640 --> 0:15:09.440 So just taking a step back for a second before 0:15:09.440 --> 0:15:10.840 we get to the nitty gritty and I ask you 0:15:10.880 --> 0:15:13.120 best student loan repayments and all sorts of other issues 0:15:13.160 --> 0:15:14.920 that are capturing people's attentions. 0:15:15.560 --> 0:15:16.720 There is a question of. 0:15:16.680 --> 0:15:19.080 Whether this is long and variable lags, or if this 0:15:19.360 --> 0:15:22.760 is companies that have pushed out the maturities consumers that 0:15:22.800 --> 0:15:26.119 have pushed out their maturities, and a lot of resilience 0:15:26.160 --> 0:15:28.400 at a time where consumers keep spending. Is this an 0:15:28.400 --> 0:15:31.320 economy that can keep humming along even if the ten 0:15:31.360 --> 0:15:33.760 year rate continues to go up, even if we see 0:15:33.840 --> 0:15:36.000 four point three percent on a sustainable basis. 0:15:36.280 --> 0:15:38.520 Yeah, So our baseline is no, you know, we still 0:15:38.560 --> 0:15:41.480 have this mild recession in the forecast, that we still 0:15:41.520 --> 0:15:44.160 think the bank lending condition tightening, that we've seen the 0:15:44.200 --> 0:15:46.120 real rates that we've seen, some of the headwinds for 0:15:46.160 --> 0:15:48.280 the consumers that are coming up, the student debt payments, 0:15:48.320 --> 0:15:51.880 a slowing labor market, you're seeing rising delinquencies within the 0:15:51.920 --> 0:15:54.520 consumer for both credit cards and autos, And so our 0:15:54.520 --> 0:15:57.880 baseline is no, that you know, this is an acceleration, 0:15:57.960 --> 0:16:01.200 but it'll be short term. Eventually you'll see monetary policy 0:16:01.240 --> 0:16:03.840 tightening take hold. But on the other side, you know, 0:16:04.120 --> 0:16:06.560 we're being surprised by the data here, and when you 0:16:06.600 --> 0:16:08.920 look at the incoming data for the labor market, obviously 0:16:08.960 --> 0:16:12.440 initial jobless claims not showing any uptick, any softening there. 0:16:12.640 --> 0:16:14.960 Where you're seeing in the retail sales report is broad based. 0:16:14.960 --> 0:16:17.000 Consumer confidence is picking up a little bit, so there 0:16:17.000 --> 0:16:19.400 are you know, some elements there which make you a 0:16:19.400 --> 0:16:22.640 little bit more cautious or in terms of thinking about 0:16:22.640 --> 0:16:24.120 that slow down in the economy. 0:16:23.800 --> 0:16:25.200 What do you have to see to change your view? 0:16:26.200 --> 0:16:28.360 So I think you know to go fully towards the 0:16:28.360 --> 0:16:30.600 soft landing, and I think we've been noting the prospects 0:16:30.640 --> 0:16:31.440 that have been rising. 0:16:31.480 --> 0:16:31.760 Here. 0:16:32.400 --> 0:16:34.120 You need a few things. I think you actually do 0:16:34.200 --> 0:16:36.360 need to see the economy slow. And the reason that 0:16:36.400 --> 0:16:38.360 you need to see the economy slow is because the 0:16:38.400 --> 0:16:40.320 Fed has been very adamant that if it doesn't, they 0:16:40.360 --> 0:16:41.760 think that they have more work to do and that 0:16:41.800 --> 0:16:43.840 they can't have confidence that inflation is going to come 0:16:43.880 --> 0:16:46.160 down to target. We heard that from pal at the 0:16:46.240 --> 0:16:48.160 July fome C, meaning I thought we heard it, and 0:16:48.160 --> 0:16:50.400 that was the big takeaway from yesterday that they need 0:16:50.440 --> 0:16:53.200 to see a slowing economy in order to get confidence 0:16:53.200 --> 0:16:55.480 that inflation is coming down. So I think you need that. 0:16:55.520 --> 0:16:57.200 You need to see wage and price pressures coming off. 0:16:57.360 --> 0:16:59.160 We're seeing some evidence of that the last you know, 0:16:59.200 --> 0:17:02.680 two inflation or some CPI have been very supportive. The 0:17:02.720 --> 0:17:04.760 PC report next week will be a little bit less so, 0:17:05.359 --> 0:17:07.679 but I think that's what you need. We're not getting 0:17:07.720 --> 0:17:09.920 that evidence on the growth front as of yet, and 0:17:10.000 --> 0:17:15.040 so I would anticipate from PAL probably next week. Jackson 0:17:15.080 --> 0:17:18.000 Hole from the FED that they lean into a hawkish 0:17:18.040 --> 0:17:22.520 bias still, that the September SCP probably still shows some 0:17:23.080 --> 0:17:26.280 idea of rate hikes in the profile, and then more 0:17:26.320 --> 0:17:28.280 importantly that they will probably hold that for even longer 0:17:28.280 --> 0:17:28.960 than anticipating. 0:17:29.119 --> 0:17:32.119 Let's talk about some of the potential drivers for weakness 0:17:32.520 --> 0:17:35.560 that might take hold next year. It's what everyone's been expecting, 0:17:35.600 --> 0:17:37.199 and they've been saying this for quite a while, so 0:17:37.400 --> 0:17:40.520 we'll put that as a Caveat student loan repayments, this 0:17:40.560 --> 0:17:43.480 has been a hotly debated topic, with some people coming 0:17:43.560 --> 0:17:45.800 out and saying, well, you know, if students don't want 0:17:45.840 --> 0:17:47.760 to pay, or former students don't want to pay, they 0:17:47.760 --> 0:17:49.439 don't have to. They're not going to be penalized for 0:17:49.480 --> 0:17:52.400 twelve months, and other people saying, well, you know they're 0:17:52.400 --> 0:17:53.760 going to try and they're going to have to pay 0:17:53.760 --> 0:17:56.399 back eventually. It'll crimp their discretionary spending. Where do you 0:17:56.480 --> 0:17:56.840 fall on. 0:17:56.800 --> 0:17:59.159 This, Yeah, so we think we've thought that it's going 0:17:59.200 --> 0:18:01.159 to be this meaningful head winto the consumer. If you 0:18:01.200 --> 0:18:05.080 look at student debt payments in the daily Treasury account, 0:18:06.280 --> 0:18:08.800 they're down about seventy billion dollars relatives where we thought 0:18:08.800 --> 0:18:10.600 they would have been, So that's a meaningful hit to 0:18:10.600 --> 0:18:13.800 consumer income if it gets paid in full. There's been 0:18:13.880 --> 0:18:17.359 certainly programs there that are trying to alleviate some of 0:18:17.359 --> 0:18:19.640 the pressure on consumers in terms of paying that over 0:18:19.640 --> 0:18:21.760 the next year or so. But we can track it 0:18:21.800 --> 0:18:23.040 on a daily basis, and if you look at the 0:18:23.040 --> 0:18:25.480 Treasury daily account, you are seeing a meaningful uptick in 0:18:25.480 --> 0:18:28.399 payments taking place. So people are paying down their student 0:18:28.440 --> 0:18:31.440 debt that we're not doing so previously. But my guess 0:18:31.480 --> 0:18:32.800 is that the impact is going to be less than 0:18:32.840 --> 0:18:36.159 anticipated or less than it was previously, simply because there 0:18:36.160 --> 0:18:38.040 are these programs that are trying to take away some 0:18:38.080 --> 0:18:38.520 of the pain. 0:18:38.600 --> 0:18:41.000 We speaking with Matt Zeti, chief US economist over at 0:18:41.080 --> 0:18:43.800