Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Terminal and the Bloomberg Business app. We begin with our
Speaker 2: top story and kicking off the week with all eyes
Speaker 2: on Nvidio the City. Stuart Kais are writing this markets
Speaker 2: will be captivated by Nvidia earnings, but after that event
Speaker 2: there are about two weeks without clear catalysts. Last quarter,
Speaker 2: Russell two thousand and s and P five hundred equal
Speaker 2: weight both outperformed the SMP by about two hundred basis
Speaker 2: points between Nvidia earnings and the March CPI report. We
Speaker 2: like positioning for a similar patent. Steve judges for more
Speaker 2: good on it.
Speaker 3: Ste Good Morning to.
Speaker 2: Find good is two weeks of no dates or a
Speaker 2: good thing.
Speaker 4: I Honestly, it's going to be a really big test.
Speaker 4: Because last week when you had kind of no data,
Speaker 4: the market was able to or two weeks ago when
Speaker 4: you had no date to the market just sort of
Speaker 4: trended hire you had a nice clean week. I think
Speaker 4: this time you have a two week window. It's right
Speaker 4: around month end.
Speaker 5: You know.
Speaker 4: The question I think is with the market at all
Speaker 4: time high, did people kind of trim some risk and
Speaker 4: do you get a little chop or is it everything's
Speaker 4: fine and dandy. I see, if you had dandy, it
Speaker 4: makes it much more enjoyable. If it's fine and dandy, I.
Speaker 3: Think you can kind kind of drift higher.
Speaker 4: So our view is strong earning season the same way
Speaker 4: you had a strong earning season last time. That tends
Speaker 4: to favor large cap because they're generating the bulk of
Speaker 4: the earnings. Once you get out of that kind of
Speaker 4: earnings event, we do think you can get a little
Speaker 4: little episode of broadening into that big June twelfth day.
Speaker 2: With the emphasis on a little episode and not maybe
Speaker 2: a durable boarder think why is that?
Speaker 4: Ye think I think there's still, as as you all
Speaker 4: have highlighted, there's still some anxiety, you know, kind of
Speaker 4: in the system.
Speaker 3: I think a lot of it to be revolved around
Speaker 3: the labor market.
Speaker 4: I think that's the area that is by by far
Speaker 4: the biggest risk to equity markets. And if you look
Speaker 4: at the case fed labor tracker or other metrics, there
Speaker 4: are some some sort of cracks or a little weeds
Speaker 4: kind of in the garden that you need to deal
Speaker 4: with them. It's going to kind of keep people a
Speaker 4: little bit conservative.
Speaker 6: And you point into the idea that momentum has not
Speaker 6: recovered alongside the broader market. I was talking about that,
Speaker 6: we were talking about that earlier. I thought that was
Speaker 6: a really interesting point that this isn't necessarily the game
Speaker 6: stop frenzy, that it's going to fuel the everything up
Speaker 6: kind of moment, and yet you're still constructive. What do
Speaker 6: you take from that the idea that momentum is not
Speaker 6: really driving this.
Speaker 4: It might be a little bit of kind of by
Speaker 4: the rumor sell of effect type issue. You know, you
Speaker 4: have very strong earnings from TMT companies. I think that's
Speaker 4: really what stabilized the market that week of kind of
Speaker 4: April twenty six or so, right, And I think now
Speaker 4: that you've gotten through that period, you know, people are
Speaker 4: probably taking a little bit of profits and maybe taking
Speaker 4: a little bit of risk off the table. And we
Speaker 4: were back at all time hues. Again we were below
Speaker 4: five thousand pre TMPT earnings. Who are fifty three hundred dows.
Speaker 4: So I do think you're just seeing some people kind
Speaker 4: of adjusting positioning and maybe it's seven million the lake
Speaker 4: type situation here.
Speaker 6: Is that what you're recommending? Do you feel fine?
Speaker 3: I feel pretty good.
Speaker 5: Actually, okay, that's different than fine.
Speaker 6: I just want to say that one thing that you
Speaker 6: pointed to was initial job was claims, and I thought
Speaker 6: that was interesting because I remember when people used to
Speaker 6: care about those and then they started to flat line
Speaker 6: and then everybody ignored them. Is that going to be
Speaker 6: first here data this week?
Speaker 5: Yeah? I mean claims are important.
Speaker 4: If you think back to last summer, last June, we
Speaker 4: printed one oh five in non FORIGM payrolls and you
Speaker 4: got claims, you know, kind of above two fifty. If
Speaker 4: we got a repeat it that obviously the mark is
Speaker 4: not going to light that combination to data.
Speaker 3: So claims matter.
Speaker 4: It's just tough when you're at such a you know,
Speaker 4: such a low level, you would need a significant step
Speaker 4: up in claims. I think to get people's you know,
Speaker 4: people's attention kind of ticking up ten k here or
Speaker 4: there is not going to do it. You know, you're
Speaker 4: going to need a I think a significant step higher
Speaker 4: claims to be disruptive.
Speaker 7: Stuart, how do you read the inflation data? Because we
Speaker 7: saw the bumps earlier in the year, it was just
Speaker 7: that this is bumps, not a trend. Then we get
Speaker 7: one print that's basically in line, and everyone's all excited, saying, Okay,
Speaker 7: we're back to the disinflationary trend off of one report.
Speaker 5: Is that fair?
Speaker 4: I mean, it's a good question. The reason people are
Speaker 4: taking it so well because I think they interpret the
Speaker 4: FED is taking it very well. Right This is a
Speaker 4: FED that has sort of a cutting bias to it,
Speaker 4: and I think the market is saying, if you're printing
Speaker 4: thirty basis points of of course CPI, that gives the
Speaker 4: FED kind of leeway to cut later this year. If
Speaker 4: you keep printing thirty basis points a core, you're almost
Speaker 4: back to four percent by the end of the year.
Speaker 4: So you know, thirty basis points is probably not going
Speaker 4: to do it medium term, but right now I think
Speaker 4: it gives people confidence that the FED is kind of
Speaker 4: willing to cut in that environment. You know, we've said
Speaker 4: at the beginning of the year, you're sort of uber
Speaker 4: bowl case for markets, is you soft land or you
Speaker 4: don't go under the recession, and the FED does a
Speaker 4: couple insurance cuts behind that because that gives you a
Speaker 4: strong EPs outlook and potentially you get a little bit
Speaker 4: of juice on.
Speaker 3: The valuation side.
Speaker 4: So that was kind of what can get you up
Speaker 4: to those fifty five hundred type levels. That's what the
Speaker 4: market wants, ultimately, it's what we all want. So you know,
Speaker 4: when you get data that allows you to confirm that
Speaker 4: a little bit, I think the market tries to run
Speaker 4: with it.
Speaker 2: You've said for a while that when the labor market
Speaker 2: starts to waken, you're going to get nervous. Your team
Speaker 2: is predicting that on the economic side of the research division.
Speaker 2: What does that mean for your call? Does it just
Speaker 2: to come increased in these short term and much more tactical.
Speaker 2: Is it much more difficult to have a longer term
Speaker 2: view of where the secretary market is going.
Speaker 3: To be one hundred percent?
Speaker 4: I mean we'd recommended hedging a little bit, you know,
Speaker 4: the last month, just to kind of manage that risk.
Speaker 4: The risk reward of the market is not what it
Speaker 4: was two months ago.
Speaker 3: In our view.
Speaker 4: You've had your US economic surprises has gotten quite negative.
Speaker 3: You've got some hiccups going on in the labor market.
Speaker 4: Earnings are strong, but it's starting to get priced in.
Speaker 4: So yeah, we're we're keeping it much much more tactical.
Speaker 4: When you get volatility down to these levels, I think
Speaker 4: it makes a whole lot of sense either to hedge
Speaker 4: or to use options for your upside. When you're paying
Speaker 4: sub ten implied volatility for upside on the S and P.
Speaker 4: That feels like a very responsible way to have your
Speaker 4: kind of long exposure around. So yeah, we're much more tactical,
Speaker 4: much more careful, And I think the market is showing
Speaker 4: you that it's going to be a responsive to bad news.
Speaker 4: Unfortunately or fortunately we just haven't had.
Speaker 3: That bad news.
Speaker 2: How high is the bar for Wednesday? Frinvidia got another
Speaker 2: call right now in front of me, this time from
Speaker 2: Stefhul on Nvidia price target race to ten eighty five
Speaker 2: from nine to ten. The quote beaten rays widely anticipated.
Speaker 2: Same thing came from Berkley's early this morning. Oh sign
Speaker 2: still points to another revision higher. How high is that
Speaker 2: bar Wednesday afternoon.
Speaker 3: It's a pretty high bar, man.
Speaker 4: The market's got used to them basically beating by two billion,
Speaker 4: you know, every quarter for a number of quarters in
Speaker 4: a row.
Speaker 3: Two billion used to be a big number.
Speaker 4: So I think I think it's the bar is pretty high,
Speaker 4: you know for a video here, perhaps a little less
Speaker 4: high than it was a couple of weeks ago, when
Speaker 4: you know, the market was sub five thousand and there
Speaker 4: was a little bit of stress in the system. But
Speaker 4: the issue with a video is it's been a huge
Speaker 4: part of revenue on Ernie's growth. It's also a huge
Speaker 4: part of market cap, which is why if you take
Speaker 4: the Nvidia implied move and you know, kind of multiply
Speaker 4: it by its market cap, it could move the S
Speaker 4: and P forty to fifty basis points that day by itself.
Speaker 3: So you know, the bar is definitely high.
Speaker 4: The way we track sort of sentiment, it's not quite
Speaker 4: as aggressively high as it was last quarter. Last quarter
Speaker 4: you had inverted skew, which means your calls cost more
Speaker 4: than your puts. That's highly unusual at the single stock level.
Speaker 4: Some of that has started to come out of the
Speaker 4: system so bullish.
Speaker 3: Definitely, bar is high.
Speaker 4: But it does feel maybe I think people are starting
Speaker 4: to just accept the fact that you can't continually beat
Speaker 4: by two million every quarter, right, So I think people
Speaker 4: have kind of prepared themselves for a little bit.
Speaker 3: It'll be fine.
Speaker 5: I think you think it's going to be fine. You
Speaker 5: feel fine.
Speaker 3: I think it will be fine.
Speaker 6: Yeah, fine and dandy, which is actually better than that.
Speaker 6: I will just say one thing that I find interesting
Speaker 6: is that we used to have companies that were bell
Speaker 6: Weather companies. Whether it was the banks, which no longer
Speaker 6: serves that, whether it was Walmart, which maybe no longer
Speaker 6: serves is that either it's sort of a Walmart story,
Speaker 6: not necessarily a macro story. Is in Vidia serving more
Speaker 6: as a macro story in terms of AI adoption. Will
Speaker 6: we get a sort of broader read through to the
Speaker 6: market and sort of the sentiment behind it from Nvidia
Speaker 6: than just an Nvidia story.
Speaker 3: I think definitely. So.
Speaker 4: I think if video has become a macro store, you
Speaker 4: see how aggressively it's even probably sitto the S and
Speaker 4: P five hundred viece events or like our market based events.
Speaker 6: You know.
Speaker 4: I think we've talked in the past there's a view
Speaker 4: that AI increases productivity and can potentially lift GDP growth
Speaker 4: on a go forward basis. It has massive impacts on
Speaker 4: the labor market. So you know, AI at large is
Speaker 4: a macro story, and VIDIA is right now the cleanest,
Speaker 4: most direct way to trade that. So it's made that,
Speaker 4: you know, a macro story, Ei William. Those with the
Speaker 4: GLP ones I think would fall into that category as well.
Speaker 4: Those are probably the two sort of single stocks or
Speaker 4: themes that would become macro over the years.
Speaker 2: Take your point of the week, right date, a point
Speaker 2: of the week.
Speaker 7: Goldman Sachs last week said eleven hundred dollars per share
Speaker 7: that they uplifted for Navidia. This is the data point
Speaker 7: I think whether or not the markets will be fine
Speaker 7: or maybe less than.
Speaker 2: Fine Wednesday after the close, You've got a word on
Speaker 2: Man City, a couple of words sad. Are they the
Speaker 2: Mets not fine?
Speaker 3: No, they're not the best.
Speaker 4: Unfortunately they're not the Mets high root for the Mets
Speaker 4: of the EPL, which is the unfortunate that the unfortunate situation.
Speaker 2: Stuve, it's going to see you. It's fine, It's going
Speaker 2: to be all right. Stuart Kaiser city. Thank you, sir.
Speaker 2: Let's turn to travel shares of Rhyan Air love this
Speaker 2: morning with the adlines saying some affairs may be flat
Speaker 2: despite low capacity. Ryanair planning to offer discounts to stimulate demand,
Speaker 2: and the the friend of our side, but he yes,
Speaker 2: Michael Leary joins us some more. Michael, good morning to
Speaker 2: you and welcome to New York.
Speaker 5: More and John, great pleasure to be here again.
Speaker 2: Grace to cant shat with you said, So, let's talk
Speaker 2: about pricingw You're right, cfive said it was cantering Shiwit's
Speaker 2: if helped me understand deck capacities down, prices are flat,
Speaker 2: what's going on?
Speaker 5: Difficult to understand it ourselves.
Speaker 8: Like, we've come off two summers and twenty percent plus
Speaker 8: pricing increases. So we thought pricing this year would be softer.
Speaker 8: We thought up five to ten. At the moment, it
Speaker 8: looks like it's flat to five percent through the summer peak.
Speaker 8: I think there's just a bit of consumer resistance out there.
Speaker 8: Capacity is constrained in Europe. We thought that would lead
Speaker 8: to stronger pricing each of us early. That means that
Speaker 8: April May June is a little bit softer. We still
Speaker 8: see pricing up through the peak July August September. We're
Speaker 8: constrained because of boy delivery delays, but I think pricing
Speaker 8: is going to be softer than we had originally expected
Speaker 8: this summer. Good for consumers, not necessarily quite so good
Speaker 8: for shareholders. But then we've launched a seven hundred million
Speaker 8: share by back today, so that will keep shareholders quiet
Speaker 8: while we look after consumers all summer long.
Speaker 2: It's just to be clear there strength of summer then
Speaker 2: soft right now, but you do expect five to increase,
Speaker 2: fest to increase as the summer progresses.
Speaker 8: Yeah, there's no doubt. Indeed, the April May June quarter
Speaker 8: pricing is down on the prior year. Now we had
Speaker 8: a full easter in April. This year we only half
Speaker 8: at easter. Their pricing still looks but it's up, but
Speaker 8: it's up small. It's very weak and zero to five
Speaker 8: percent through July August September. We've only sold about forty
Speaker 8: percent of the seats in that quarter, so it could
Speaker 8: still be up slightly higher, it could be lower. We're
Speaker 8: reasonably relaxed. We have costs well under control. We've hedged
Speaker 8: our fuel form for the next year. We've saved four
Speaker 8: hundred and fifty million dollars on fuel for the next
Speaker 8: twelve months, so we can use that to stimulate pricing.
Speaker 8: And when we've done some price stimulation in reason weeks,
Speaker 8: we've seen very strong responses from consumers. So I think
Speaker 8: consumers are they're a little bit nervous spending this week,
Speaker 8: but when you give them a price incentive, volumes the
Speaker 8: volumes are very strong.
Speaker 6: Does this take some of the pressure off the twenty
Speaker 6: three deliveries of Boeing jets that you're waiting for that
Speaker 6: could be delayed because ultimately capacity is less of an issue.
Speaker 5: Yeah, I mean I don't think so least.
Speaker 8: I mean I would prefer to take the aircraft. We
Speaker 8: could fill those aircraft through the peak through July, August September.
Speaker 8: We think travel will be strong, pricing will be strong.
Speaker 8: We regret the fact that we'll be twenty aircraft short.
Speaker 8: We've crewed up so we have all the pilots and
Speaker 8: the cabin crew. Our label will be a little bit
Speaker 8: higher in that second quarter, but volumes lower. We've had
Speaker 8: to pair back our full year traffic forecast this year
Speaker 8: from two hundred and five million to about two hundred
Speaker 8: million passengers. So it doesn't really help because everything we're
Speaker 8: geared up for the growth and we're just going to
Speaker 8: be let Boeing go leave us twenty aircraft short.
Speaker 6: You've always been known for being incredibly cost conscious, trying
Speaker 6: to bring a lower cost to the consumer. Are you
Speaker 6: trying to get a deal on some of these Boeing jets?
Speaker 6: You're looking to maybe buy some from others, or you know, say,
Speaker 6: if you want to shift to Airbus, that's fine, I'll
Speaker 6: take your Max seven thirty seven jets.
Speaker 8: Well, we've already said when United came out with those
Speaker 8: stupid comments there in the year, you know, we're not
Speaker 8: going to take those Max tens. Max Aircraft will take
Speaker 8: them if you don't want them, will take them? Of course,
Speaker 8: Yeah no, they kind of they mumbled and then decide
Speaker 8: they were going to take him anywhere. Aircraft and deliveries
Speaker 8: are incredibly tight. Airbus and Boeing are running way behind
Speaker 8: in their deliveries. There's a real capacity constrained story in Europe.
Speaker 8: For the next couple of summers, manufacturers are delayed. Airbus
Speaker 8: fleet is twenty percent of the airbus fleet is grounded
Speaker 8: because the pattern with me engine issue and Europe is
Speaker 8: an airbus market, so capacity is constrained. Why it's a
Speaker 8: little bit surprising pricing is soft this summer. We thought
Speaker 8: pricing would be a little bit stronger because of those
Speaker 8: capacity constraints. But hey, if the consumers are a little
Speaker 8: bit more price conscious, if they're a little bit more
Speaker 8: price sensitive, we'll stimulate.
Speaker 5: It's good for our business because we're the lowest price provider.
Speaker 7: Michael, what are you hearing from Boeing at the moments
Speaker 7: in the past you said you thought the deliveries could
Speaker 7: slip further.
Speaker 3: How much further are we talking well?
Speaker 5: And we re good question? I think two things. One,
Speaker 5: we're twenty aircraft behind.
Speaker 8: We're supposed to get fifty nine aircraft for this summer
Speaker 8: running and get thirty nine at best. But we do
Speaker 8: see signs of improvement in recent weeks. I think Stephanie
Speaker 8: Pope and the new team in see After doing a
Speaker 8: good job. They're taking fuselages that are not being taken
Speaker 8: from which to unless.
Speaker 5: They're completely defect free. But we're not yet seeing a
Speaker 5: speed up in the turnaround time.
Speaker 8: In Seattle, they're still taking twelve to fourteen weeks to
Speaker 8: produce an aircraft whereas it should really be eight to ten.
Speaker 5: Now. Two weeks ago they sent us an update. We
Speaker 5: were expecting two deliveries in June, three in July. We're
Speaker 5: getting two in June. It looks like seven in July.
Speaker 8: So we're beginning to see the situation improve, but it's
Speaker 8: very small baby steps. We're still going to take aircraft
Speaker 8: through August, September and October, even though we can't fly
Speaker 8: them during those months. We think we get all fifty
Speaker 8: nine aircraft in this calendar year, and then the big
Speaker 8: issue with US at going is will we get the
Speaker 8: twenty nine aircraft deliveries we are contracted to deliver us
Speaker 8: between January and April twenty twenty five. So I think
Speaker 8: they're making small, small steps, little progress, but we don't
Speaker 8: want to see any further bad news.
Speaker 7: If that's your big question going into next year, then
Speaker 7: how do you weigh the impact on What does that
Speaker 7: mean for your business for twenty twenty five?
Speaker 8: I figur at the moment it means that for twenty
Speaker 8: twenty four, for FY twenty March twenty five, we're going
Speaker 8: to be doing two hundred million passes instead of two
Speaker 8: hundred and five million for March twenty six or summer
Speaker 8: twenty five, we think we can step that up.
Speaker 5: I think we'll get most.
Speaker 8: Of those aircraft are Boeing, and then we'd like to
Speaker 8: see ourselves grow to probably about two hundred and fifteen
Speaker 8: million passengers through summer twenty five into March twenty six.
Speaker 5: We think there'll be a strong rebound.
Speaker 8: We still think pricing would be reasonably robust across Europe
Speaker 8: because capacity is going to be constrained. Airbus and Boeing
Speaker 8: can't deliver any additional aircraft. The engine manuf issue is
Speaker 8: a huge problem for the airbus fleet. You know, they've
Speaker 8: been talking about three hundred and fifty days to repair
Speaker 8: these engines. We think it's going to be for five
Speaker 8: hundred days, so a lot of Airbus aircraft are going
Speaker 8: to be grounded for the next two or three years.
Speaker 6: How much do you see just going back to this
Speaker 6: idea of pricing power and that we're surprised that there's
Speaker 6: not greater degree of pricing power given some of the
Speaker 6: constraints with deliveries. How much is it sort of the
Speaker 6: end of the boom that we saw in the travel
Speaker 6: and that people are constrained by the fact that you know,
Speaker 6: hotel prices have tripled. You can see that any restaurant
Speaker 6: you go to is that which works, but it's ready
Speaker 6: to be travel. I mean it's incredibly expensive. So how
Speaker 6: much have we sort of reached the tipping point or
Speaker 6: we're going back to something that's pre pandemic and not
Speaker 6: this you can work anywhere and travel all the time
Speaker 6: time kind of mentality.
Speaker 5: I mean, I don't think we've reached.
Speaker 8: I think Europe is a fundamentally different market to the
Speaker 8: US North America. You've seen a lot of travel price
Speaker 8: inflation in the last couple of years. You know, the
Speaker 8: average Fair Southwest charge last two week last year was
Speaker 8: one hundred and seventy dollars. The average Fair and Ryan
Speaker 8: air across Europe is forty eight euros. So there's still
Speaker 8: a bit to go in Europe. But there's no doubt
Speaker 8: in my mind that the European consumer is cutting spend
Speaker 8: is careful.
Speaker 5: They're cautious. They want price stimulation.
Speaker 8: We go out with seat sales, we sell out straight away,
Speaker 8: but you know, we have higher interest rates in government's
Speaker 8: cutting back on inflation. I think consumers are just a
Speaker 8: little bit nervous there at the moment. I don't think
Speaker 8: that's a longer term trend. I think, you know, interest
Speaker 8: rates will fall, if not this year through into next year.
Speaker 8: I think we will see some rebound and consumer spending,
Speaker 8: but I think you know they will protect travel. The
Speaker 8: experiential spend will continue. It'll just trend down to the
Speaker 8: lowest cost provider, which in Europe is Ryanair.
Speaker 2: Is this a time to get more aggressive and go
Speaker 2: off the market share and ser giogra face.
Speaker 5: I would love to.
Speaker 8: If I could get more aircraft out of Bowing, I'd
Speaker 8: be on it like a rash. You know, we are
Speaker 8: taking more market share though at the moment in Central
Speaker 8: Eastern Europe, Whiz have grounded forty five aircraft, nobody else
Speaker 8: six banding in Europe, so we are winning huge amounts
Speaker 8: of market share despite the fact that our own capacity
Speaker 8: growth is constrained by Boeing delivery delays.
Speaker 5: So we're taking market share. I think that will continue.
Speaker 8: But if I could get more aircraft, I would I
Speaker 8: would try and grow faster at the moment, albeit at
Speaker 8: the cost.
Speaker 2: Of lower airfas you've got a good rate on the consumer.
Speaker 2: Do they care what plane they fly on?
Speaker 5: No, I mean most of them don't know what plane
Speaker 5: they're flying on. I don't know what plane I'm flying on.
Speaker 5: Most of the time you're not check no.
Speaker 8: I mean if you look at you whether it's the
Speaker 8: Boeing ENNGS, the Boi Max. I mean I prefer to
Speaker 8: find a Boi Max aircraft only because A it's materially quieter,
Speaker 8: and I know that plane is burning about sixteen percent
Speaker 8: less fuel than those the older fuel Guzzi seven three
Speaker 8: seven energis BOYL are making great aircraft. They are getting
Speaker 8: a lot of unfair publicity in the last twelve months.
Speaker 8: You think, so even nose field falls off and it's
Speaker 8: been unfair about it. A nose field falls off an
Speaker 8: air cound of aircraft for an engine Cottle comes off
Speaker 8: as Southwest and it's a Boeing aircraft.
Speaker 2: Slightly slightly concerning, Yeah, but it's a it's a maintenance
Speaker 2: issue for those airlines.
Speaker 8: It's not fundamentally a seven three seven issue. The seven
Speaker 8: three seven is a great airplane. They're making phenomenal new engines.
Speaker 8: I mean the engine technology is being transformed. We can't
Speaker 8: wait to get the Max ten's for du to get
Speaker 8: the firstman twenty seventeen. They are carried twenty percent more
Speaker 8: patches but burn twenty percent less fuel. So not longly
Speaker 8: to transform our economics, but will make us a much better,
Speaker 8: more greener, cleaner airline to fly on.
Speaker 2: Michael, it's going to say it. John, good to see
Speaker 2: you and thank you very much, Michael O. Larry there
Speaker 2: the ran A CEO. Another busy way of FED spake
Speaker 2: on deck, Boss Stick, bab Waller, Jefferson Mester kicking things
Speaker 2: off lights on today investors also looking ahead to the
Speaker 2: minutes from the last FED mating jobless claims and you
Speaker 2: mitched consumer sentiment. Joining us now to discuss RANA tables
Speaker 2: definitely brought them three search together with mar McCormick of
Speaker 2: TD Securities, definitely first to you. We heard from the
Speaker 2: Atlanta FED president about an hour ago. He said things
Speaker 2: were softer in the labor market. They weren't soft.
Speaker 9: Would you agree, absolutely, we've seen a softening. The latest
Speaker 9: payrolls print was arguably a Goldilocks type of print where
Speaker 9: you had a one seventy five payrolls number, which is
Speaker 9: good by historical measures, and an avagelarly running to print
Speaker 9: that was on the softer side. We're starting to see
Speaker 9: some signs of softening. I have to say, there are
Speaker 9: some concerns in the market out there that all of
Speaker 9: a sudden, the labor market's going to start to crack,
Speaker 9: and there are no signs of that, and people are
Speaker 9: just taking the narrative and running and taking the opposite
Speaker 9: of what we saw on Q one and flipping it
Speaker 9: upside down. So that's not a fair characterization either. Realistically,
Speaker 9: we're just seeing or rebalancing in the labor market that's
Speaker 9: actually working out fairly well.
Speaker 2: On part driven immigration, Marx, I bring you into the conversation,
Speaker 2: should we flip Q one upside down? Is that what
Speaker 2: Q two, Q three, Q four has in store for us?
Speaker 1: No, I would agree. I think a big part of
Speaker 1: it is the market's kind of taking what's a positioning
Speaker 1: and a technical narrative and they're overlaying into fundamentals and
Speaker 1: you're seeing maybe some reversal. But if you look at
Speaker 1: one of the more important princes as well, like employment
Speaker 1: cost index, if you look at some of the other
Speaker 1: indicators that we track on inflation, there's no sign here
Speaker 1: that inflation's cracking. To me, if you look into details,
Speaker 1: it's still pretty robust and it's relatively strong so I
Speaker 1: think also if you put in line where the fed's
Speaker 1: supposed to be, FED is basically looking for fifteen basis
Speaker 1: points a month over month to basically get their two
Speaker 1: point six percent year over year, and it looks like
Speaker 1: even PCE core PCE is tracking about twenty five basis
Speaker 1: points right now. So it still feels like there's a
Speaker 1: very big disconnect.
Speaker 6: Stephanie, do you agree with that that there's this idea
Speaker 6: that reflation are sort of a resurgence of an inflationary
Speaker 6: wave is the biggest risk right now and looks more
Speaker 6: and more feasible given the backdrop.
Speaker 9: It's definitely the biggest risk. Is it one that I'm
Speaker 9: particularly concerned about? No, because the inflation data are starting
Speaker 9: to look a lot better. Q one was certainly driven
Speaker 9: by seasonals, in my opinion. Powell seems to believe that
Speaker 9: as well, although in the latest press conference it probably couldn't.
Speaker 3: Lean on that.
Speaker 9: But what we're starting to see is a real normalization
Speaker 9: in inflation, and the latest print told us that. And
Speaker 9: I think this was the most important clean read of
Speaker 9: inflation that we've gotten this year, because seasonals were really
Speaker 9: driven up, driving up QQ one inflation and April was
Speaker 9: a lot better. So now we're tracking core pc of
Speaker 9: the twenty five basis points. If we just get oere
Speaker 9: coming back down a little bit and financial services and
Speaker 9: it'll be back down towards point two percent point two
Speaker 9: percent month one month, And that's exactly what the FED
Speaker 9: is looking for. So it's very easy come the summer
Speaker 9: months to actually be tracking along those lines, and then
Speaker 9: the FED should be able to be comfortable cutting in
Speaker 9: say September.
Speaker 6: Even though you do still see this surgeence underneath the
Speaker 6: hood of just some sort of stickier inflation. Commodity price
Speaker 6: is getting a little hotter marked. From your perspective, you're
Speaker 6: talking about how that's your fear. At what point is
Speaker 6: this driving flows internationally into the US at a time
Speaker 6: when some people are saying, well a week or dollar
Speaker 6: can actually make sense, and the other people say, well,
Speaker 6: just hold on a second, because on a relative basis
Speaker 6: rates are so much higher in the US. Strength is there,
Speaker 6: and the FED won't be able to cut as much
Speaker 6: as say the ECB.
Speaker 1: Yeah, it's very interesting because there's a clear focus on
Speaker 1: growth and inflation, and towards the end of last year
Speaker 1: and we were embarrassed the dollar there was a convergence
Speaker 1: with the rest of the world coming into the US,
Speaker 1: and US exceptionalism basically peaked last year. Everyone now seems
Speaker 1: to be overlaying this like fading US exceptionalism now, which
Speaker 1: I think is quite interesting because this is more about positioning,
Speaker 1: and this is more about valuations that were extremely stretched
Speaker 1: in favor of the dollar and then a couple good
Speaker 1: data prints. But what we're seeing if you start back
Speaker 1: testing and trading FX strategies, the FX market basically just
Speaker 1: change its focus entirely in March on inflation. So I
Speaker 1: think the one thing that's very interesting about the FED
Speaker 1: is it's very asymmetric from a risk perspective. Right now,
Speaker 1: there is an election, it's the big elephant in the room,
Speaker 1: and there is no room for error for one inflation
Speaker 1: print to come in through the summer above expectations and
Speaker 1: still be able to reliably expect September to actually be live.
Speaker 1: And if you take out September, then you have November
Speaker 1: and December. So how is the FED going to cut
Speaker 1: in November around the election? And given the result of
Speaker 1: the election, how could the FED cut in December. So
Speaker 1: the way that we're thinking about it from like a
Speaker 1: trading perspective is that you could have inflation kind of
Speaker 1: go back to the levels that people are comfortable with.
Speaker 1: But do you price in three hikes? Do you get
Speaker 1: more confident that you just get two? But you get
Speaker 1: one bad number? And that basically makes September a very tricky,
Speaker 1: tricky indicator, especially to trade it into the election. So
Speaker 1: I think a big part of this is we know
Speaker 1: that other G ten central banks are about to cut,
Speaker 1: but we're not very clear on whether the FED can
Speaker 1: and whether they will. And I think the big driver
Speaker 1: here for the currency markets and for markets in general
Speaker 1: is inflation divergence, and that's what our models and our
Speaker 1: signals are telling us that we should be focused on.
Speaker 2: Among there's tons to impact, there is the politics. The
Speaker 2: stands out for me what convinces you the politics and
Speaker 2: the election is so important. When we go back to
Speaker 2: twenty twelve September, then that'ns QE three. What does it
Speaker 2: matter so much more this time?
Speaker 1: I think a big part of it rights of inflation.
Speaker 1: So it's we can see that you get policy actions
Speaker 1: and it's usually not a problem, but inflation is way
Speaker 1: above target and so it's like this would be the
Speaker 1: first cut with very elevated inflation and a very tricky
Speaker 1: election where the polls are neck and neck and there's
Speaker 1: just a lot on the line. It's a very contentious
Speaker 1: election just to even start. And I think the policy
Speaker 1: implications from one side or the other are so massive
Speaker 1: that the market is placing so much emphasis, especially for
Speaker 1: the FX market, because it is the most actionable way
Speaker 1: to look at the presidential implications in terms of terrorists,
Speaker 1: in terms of tax cuts, those are two big things
Speaker 1: that are sitting on the table for next year. The
Speaker 1: corporate tax cuts will expire and the discussions around terras
Speaker 1: will remake the entire currency market. And this also fits
Speaker 1: into the story around the geopolitics around capital flows, where again,
Speaker 1: if you look at what's happening with the remed to be,
Speaker 1: if you look at what's happening with currency, markets like
Speaker 1: China and Russia and emerging markets are aligned where they
Speaker 1: are basically settling currency and remedy be they're finding ways
Speaker 1: to kind of nudge themselves away from the dollar, and
Speaker 1: this is why gold is trading at the levels that
Speaker 1: it's at. There are so many implications for this, and
Speaker 1: so I think, with this in mind, the easiest thing
Speaker 1: to think about is how much can the FED cut
Speaker 1: into the election if inflation is still well above target.
Speaker 2: It's Deephanie to see election matter.
Speaker 9: I mean, I think the Fed's in a tough spot
Speaker 9: and they've been in a tough spot all year, and
Speaker 9: Powell has indicated they're planning on cutting if the conditions
Speaker 9: are right. So it's purely on the last part of
Speaker 9: that same If the conditions are right, which means the
Speaker 9: CORPUC needs to be trending at about point two percent
Speaker 9: month on month, and it's, as Mark mentioned, it has
Speaker 9: to go exactly right in order for the FED to cut.
Speaker 9: If they have a couple of misprints in the next
Speaker 9: couple of months, then yeah, of course the Fed can't
Speaker 9: be cutting. But our base case is that you have
Speaker 9: a lot of conditions that should be continuously disinflationary between
Speaker 9: now and September and then they'll be able to move.
Speaker 9: But at this point they're kind of caught in a
Speaker 9: box and they have to just just go on what
Speaker 9: they've indicated is key benchmark indicators, and if those things
Speaker 9: are consistent.
Speaker 3: With the FED cutting, then they're going to be cutting.
Speaker 9: Regardless of what they do, they're going to be painted
Speaker 9: as politicize, so tough. It's a really tough one. So
Speaker 9: our base cases they can still cut in September and
Speaker 9: November is probably out, and then December is the next one.
Speaker 7: But Cephanie, that's if inflation is on the trajectory lower.
Speaker 7: But if there's a move and a bigger softness in
Speaker 7: the labor market, that would give them this impetus and
Speaker 7: maybe some cover to cut into an election.
Speaker 9: Do you think absolutely, if you started to see softness
Speaker 9: in the labor market, they would.
Speaker 2: Have every indication to cut.
Speaker 9: And this is different from where we were a year ago.
Speaker 9: At the beginning of twenty twenty three, they were in
Speaker 9: a position where inflation was so high that if we
Speaker 9: saw weakness in the labor market, they couldn't cut immediately.
Speaker 9: But now we're talking about two and a half to
Speaker 9: three percent inflation. That's a much different backdrop than when
Speaker 9: inflation was trending significantly higher.
Speaker 3: So they're now able to be a.
Speaker 9: Lot more nimble and even be able to cut interest
Speaker 9: rates even if inflation is still a little bit sticky
Speaker 9: and lean on the employment side of our.
Speaker 6: Mandate mark, you see that there's very little room for
Speaker 6: the Fed to be cutting rates or it could you
Speaker 6: could see them not end up cutting at all this year,
Speaker 6: just simply because it's inconvenient timing. At the same time,
Speaker 6: you see a resurgent inflation as one of the biggest risks.
Speaker 6: So put that together in terms of what's going to
Speaker 6: be the main driver of either dollar strength or weakness.
Speaker 1: So yeah, I'd say the last couple of months we flipped.
Speaker 1: We're quite bullish to dollar, especially against G ten currencies.
Speaker 1: I think that is the backdrop that it's asymmetric, right.
Speaker 1: It's like from a risk trading perspective, like our view
Speaker 1: is that the FED is going can cut. That's our
Speaker 1: economist spaceline call. But I think when you think about
Speaker 1: the markets on how people have to deal with the
Speaker 1: risks around it. To me, the risks is if there's
Speaker 1: no room for air and data is extremely volatile and
Speaker 1: we constantly have to look at revisions and these kind
Speaker 1: of things to understand the trend. The trend in US
Speaker 1: inflation is quite different from all the other countries that
Speaker 1: you track in the currency market. So I think the
Speaker 1: other implication is that the asymmetric kind of outcome is
Speaker 1: one where if you think about again, the market was
Speaker 1: very excited to fed the Powell said that there's no hikes,
Speaker 1: that's fine, But we were like, you know, starting this year,
Speaker 1: the market was talking about five or six cuts, and
Speaker 1: now we're saying it's okay that we don't get any
Speaker 1: hikes at all, or we don't have to have that
Speaker 1: narrative discussion around it. But I think if you think
Speaker 1: about it this way, if we do have a more
Speaker 1: volatile fall and inflation is generally sticky, and the polls
Speaker 1: are kind of leaning towards kind of a change in
Speaker 1: leadership for the dollar, it has to price in the
Speaker 1: risk of terriffs. It has to price in the risk
Speaker 1: that corporate tax cuts will be extended. So in a
Speaker 1: very strong economy that's dealing with elevated inflation, you now
Speaker 1: have macro policy that's moving more inflationary. So the market
Speaker 1: will have to reprice the expectations whether or not it
Speaker 1: evolves in that way, but it will have to basically
Speaker 1: reprice a narrative next year that is, you know, the
Speaker 1: rest of the world is cutting, the US economy looks
Speaker 1: like it gets stronger, and the fact that you're adding
Speaker 1: terriffts makes it much more inflationary, So you kind of
Speaker 1: have to rethink the way that you look at the
Speaker 1: entire markets, particularly from the FX side. So for US,
Speaker 1: we are looking for a strong dollar against G ten currencies,
Speaker 1: but we also like the commodity story. So it's still
Speaker 1: a buffer for some emerging markets that are generally seen
Speaker 1: as exporters, but it is again kind of moving back
Speaker 1: into that terms of trade. It's also a world where
Speaker 1: it kind of creates conditions where we were expecting financial
Speaker 1: conditions to ease this year to see the economy evolve
Speaker 1: in a better state. And if what we see is
Speaker 1: US inflation and the FED and the dollar creating a
Speaker 1: little bit of a tension around that, then we can't
Speaker 1: realize those financial conditions and we can't realize the growth
Speaker 1: expectations that we're priced in this year for next year.
Speaker 1: So that's what starts to see the volatility increase, that's
Speaker 1: what starts to see carry trades online. This is kind
Speaker 1: of what a just market sentiment, and I think these
Speaker 1: are the risks that we have to be really focused on,
Speaker 1: and that's why we're more bullish the dollar in the
Speaker 1: back af of the year.
Speaker 6: Sephanie just to tease out one part that he was
Speaker 6: talking about this idea that tariffs would mean that the
Speaker 6: dollar would essentially be stronger that some of the protectionist
Speaker 6: policies that some people are talking about being implemented, especially
Speaker 6: if there is a change in leadership, would cause more
Speaker 6: inflationary pressures and would cause a stronger dollar because the
Speaker 6: FED would have to remain higher for longer. Is that
Speaker 6: kind of an outcome that you agree with? I?
Speaker 9: I mean, it's certainly a difficult one, and that might
Speaker 9: be how the market prices the election initially. But face case,
Speaker 9: First of all, the teriffs wouldn't go into place into
Speaker 9: twenty twenty six because that's when the TCJA expires. Second
Speaker 9: of all, it's possible that the labor market is actually
Speaker 9: in better balance by the time the election comes, so
Speaker 9: the Trump administration turning off some of the immigration flows
Speaker 9: might not actually be as inflationary as many fear. And
Speaker 9: by the way, the Biden administration has done a lot
Speaker 9: of spending themselves, so it it's not actually I in
Speaker 9: in t in in entirely clear that if we do
Speaker 9: get a change in the administration, you'll start to get
Speaker 9: a u a real pick up and spending. Either way,
Speaker 9: we're gonna be getting tax cuts extended the Trump or
Speaker 9: Biden administration in the next in the next cycle would
Speaker 9: be extending the tax cuts. It just depends if you
Speaker 9: carve out the the upper income people, which is what
Speaker 9: the Biden administration would do. It's not gonna be a
Speaker 9: boost to the economy certainly when you're thinking about tax cuts,
Speaker 9: because it's it's actually just extending what we have today.
Speaker 9: And the tariff one is is a difficult one, and
Speaker 9: I would view that as more certainly could be dollar positive,
Speaker 9: but it would also be an environment where growth would
Speaker 9: likely weaken as well. The policies that Trumps has alluded
Speaker 9: to with a sixty percent China tariff or ten percent
Speaker 9: across the board tariff would be incredibly difficult for growth.
Speaker 9: So realistically it's possible it wouldn't actually be that inflationary.
Speaker 9: The Fed should probably just pause, see what happens, and
Speaker 9: then they would likely react. So it's not as clear
Speaker 9: cut as Trump is inflationary, and the Fed would no
Speaker 9: longer be able to cut in that environment.
Speaker 5: Necessarily, the case mark when it comes.
Speaker 7: To tariffs and it comes to these tax cuts, both
Speaker 7: of these issues coming into play twenty twenty five. Whether
Speaker 7: or not it's Biden or Trump, we're likely going to
Speaker 7: see more of the same. It just depends how aggressive
Speaker 7: they are going to be. So in that case, what
Speaker 7: do you have in terms of the direction of the
Speaker 7: dollar under a Trump twenty twenty five or Biden twenty
Speaker 7: twenty five.
Speaker 1: I think the part of it is that with Trump,
Speaker 1: it just creates more uncertainty, more volatility. And again, the
Speaker 1: way the markets are trading the currency market right now
Speaker 1: is they're actually trading, and I hear it a lot
Speaker 1: from client discussions, and it's really the fact that the
Speaker 1: rest of the world is improving right now is why
Speaker 1: people want to sell the dollar. And we're a bit
Speaker 1: confused about it because a lot of our leading indicators
Speaker 1: are kind of suggesting that the global economy is not accelerating,
Speaker 1: it's kind of losing steam. But there was some obviously
Speaker 1: some anecdotes. Is China's trying to clean up the housing
Speaker 1: market there, you know, the things are improving in the
Speaker 1: right direction there. Commodities are doing quite well across the board,
Speaker 1: so maybe that's again part of the reflation pmis and manufacturing,
Speaker 1: those things are bouncing back. So people are excited about
Speaker 1: the global economy and the slow down in the US,
Speaker 1: and that is so you have to unpack it too
Speaker 1: as well, because laying out like slower growth and those
Speaker 1: type of things that would come from maybe a Trump
Speaker 1: administration is bullish dollar because it's risk off, and then
Speaker 1: you know, the world that the people are trading right
Speaker 1: now is kind of risk on. US is slowing but
Speaker 1: not by enough, and you can get FED cuts and
Speaker 1: this is dollar bear. So I think what people are
Speaker 1: trying to figure out is which matters more, US growth
Speaker 1: outperforming others, US inflation being stronger. Therefore the FED has
Speaker 1: to react to that or whether or not, you know,
Speaker 1: in a Trump administration, does the rest of the world underperform?
Speaker 1: Like do we get the rug kind of pulled out
Speaker 1: from US right now as the rest of the world
Speaker 1: seems like it's doing okay, Europe's leting indicators are improving.
Speaker 1: Does that all go away under a Trump you know,
Speaker 1: kind of a Trump present city which is what we
Speaker 1: saw the first time around, which is the US kind
Speaker 1: of outperformed the rest of the world. US growth look
Speaker 1: good because basically tariffs and the macro policies were administered
Speaker 1: basically slowed down the rest of the world. So I
Speaker 1: think that is kind of what people are trying to
Speaker 1: figure out is a high inflation, kind of weak growth
Speaker 1: environment good for the dollar because we kind of move
Speaker 1: out of this Goldilocks environment. Everyone's moved back to goldilocks,
Speaker 1: and I feel like any state we go through over
Speaker 1: the next six months is not Goldilocks. It's either it's
Speaker 1: something that's more volatile, and the volatility and again there's
Speaker 1: first order and second order effects. The first order effect
Speaker 1: is you basically pricing the risk premium. Second order effect
Speaker 1: is we actually agree like if Trump wins, it's actually
Speaker 1: you could see the dollar week in dramatically after the
Speaker 1: first year. You could see the implementation of a new
Speaker 1: Plaza cord. But those are a result of the fact
Speaker 1: that the dollar strengthens so much to pricen the risk
Speaker 1: around these economic pulses.
Speaker 6: Stephanie, you've been nodding the final word.
Speaker 9: Yeah, I mean, I think it's a complicated backup. For now,
Speaker 9: it's going to be all about Fed policy and whether
Speaker 9: inflation can be consistent with the Fed being able to
Speaker 9: cut The market's not going to be able to fully
Speaker 9: price an election certainly leads through much of the summer
Speaker 9: and probably not until the beginning of next year when
Speaker 9: we start to really understand what those policies mean. So
Speaker 9: for now it's going to be all about whether the
Speaker 9: FED can be a little bit more dubbish, which arguably
Speaker 9: in the first quarter we think we just passed peak hawkishness.
Speaker 9: It was all about the US exceptionalism and inflation overheating.
Speaker 9: But if you just remember back to December, we were
Speaker 9: talking about the opposite, it was immaculate disinflation. We've just
Speaker 9: been swung around by the data and it's really all
Speaker 9: about just looking through a lot of that noise, and
Speaker 9: what we're looking at is inflation running two and a
Speaker 9: half to three percent, a little bit too sticky, but
Speaker 9: nothing that's that dramatic, and an economy that's starting to
Speaker 9: slow down a little bit. So for us, it does
Speaker 9: actually look fairly goldiocked at least for the next couple
Speaker 9: of months.
Speaker 2: Stephanie, this was great. It's got to see you. Stephanie
Speaker 2: Roth there of World for Research, alongside mart McCormick of
Speaker 2: TD Securities. This is the Bloomberg Surveillance Podcast, bringing you
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