Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
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Speaker 1: All right, let's break down this inflation print this morning
Speaker 1: a little bit deeper, and along chief youos economists with
Speaker 1: Bloomberg Economics. Anna, you got this one right again? What
Speaker 1: did you take away from today's print?
Speaker 3: You?
Speaker 1: Anaalog, So we want to get your opinion. And then
Speaker 1: number two, what do you think your feeder reserve will
Speaker 1: take away from this print?
Speaker 4: Yeah?
Speaker 5: My takeaway is that this is one of the best
Speaker 5: CPI report, probably in this high inflation two years with
Speaker 5: that we had had. If you look at all the detail,
Speaker 5: the details are pretty encouraging. There's some broader disinflation across
Speaker 5: more goods. There are more goods who are undergoing deflation.
Speaker 5: They're less goods that are growing at more than four
Speaker 5: percent inflation. Shelter inflation is coming down, and that's not
Speaker 5: just rent, but it's also hotels. You know that all
Speaker 5: that Airbnb collapse weil, and I think that's that's translating
Speaker 5: to domestic hotel fares coming down, and energy prices are
Speaker 5: also subdued. So I think it truly is one of
Speaker 5: those reports where you look at the you know, seams,
Speaker 5: and everything looks good in terms of how the FED
Speaker 5: look looks at it. So I always compare the FED
Speaker 5: to like a big cruise ship and when they try
Speaker 5: to turn, they can't turn sharply. And so so today
Speaker 5: we have this pretty pivotal CPI report, right sharp slow down,
Speaker 5: but the FED is not about to make a sharp turn.
Speaker 5: I think they're still on track to hike in July.
Speaker 5: I mean they still have time until the next The
Speaker 5: meeting after July is September, and between July and September
Speaker 5: there's still the Jackson Hole. There's still plenty of data.
Speaker 5: So even though that they indicate it in the dot
Speaker 5: plot in May that in June that they're going to
Speaker 5: do another hike after July, I don't think they're going
Speaker 5: to do it because by by September the evidence is
Speaker 5: going to accumulate that I think we're going to see
Speaker 5: more of this type of CPI reports. We see today
Speaker 5: where the core CPI is growing at a monthly pace.
Speaker 5: That's about where the Fed's inflation target of two percent is.
Speaker 6: So if you had to put a percentage on it,
Speaker 6: and what would you say for the likelihood of another
Speaker 6: hike in September? If we look at the werp function
Speaker 6: markets pricing in about a sixteen percent chance of a
Speaker 6: September hike, what's your calculation on that?
Speaker 5: Yeah, I think I think that's about where. I think
Speaker 5: the bond market got it pretty fair this time around.
Speaker 1: So and if we're economists like yourself, are we taking
Speaker 1: the recession talk off the table?
Speaker 5: No? You know, not for me?
Speaker 7: WHOA no, no, no, So I you know a lot
Speaker 7: of it. And this links to today's report, right. Why
Speaker 7: is this today's cpr I report so beautiful? And I
Speaker 7: think part of it is.
Speaker 5: That the lacks of monetary policy from the five hundred
Speaker 5: bits of rate hikes are starting to bite. And the
Speaker 5: stuff that takes the longest time to show up in
Speaker 5: the economy is unemployment rate rising. So typical economic models
Speaker 5: would show that unemployment rate would only peak eighteen months
Speaker 5: to twenty four months after a monetary policy shock. So
Speaker 5: that means that unemployment rate should be rising and towards
Speaker 5: the second half of this year, too early next year.
Speaker 5: And on top of that, when I look at the
Speaker 5: consumer household balance sheet, it's just it's going to be
Speaker 5: very nasty in the second half, especially when student loan
Speaker 5: payments resumed in October. So I think, just looking at
Speaker 5: how the bills of a typical household, I calculated that
Speaker 5: a person needs to earn at least twenty one dollars
Speaker 5: per hour to be able to stay afloat on all
Speaker 5: the payments. It's supposed that he has a car payment,
Speaker 5: he has student loans, mortgage credit cards. So I think
Speaker 5: a lot of people would be feeling the stress of
Speaker 5: their finances starting in the second half of this year.
Speaker 6: Well, continuing on some of the bad news that you
Speaker 6: bring up, Anna, I wonder to what extent we're seeing
Speaker 6: softness today just because the conditions were so bad a
Speaker 6: year ago that's when we got that nine percent number.
Speaker 6: Is this number that we got today about a genuine
Speaker 6: cooling that we're seeing currently, or is it more about
Speaker 6: less bad news than what we were seeing a year ago.
Speaker 5: Both, So, the headline inflation at headline CPI beans three
Speaker 5: percent is mostly due to the base effects that you
Speaker 5: point out, but also the core CPI growing at zero
Speaker 5: point two percent on a monthly pace that's free of
Speaker 5: any base effects. That's genuine disinflation. And if you annualize
Speaker 5: that zero point two percent, you get a low two
Speaker 5: percent annual pace of inflation. And then I do expect
Speaker 5: that the CPI print in the next couple of months,
Speaker 5: the core CPI print to continue to be around zero
Speaker 5: point two or even zero point three and most which
Speaker 5: means that yeah, that annualized you about between two two
Speaker 5: three percent inflation.
Speaker 1: All right, So I guess then the question will be
Speaker 1: for a lot of people as it relates to the Fed,
Speaker 1: how long do they stay at this higher level of
Speaker 1: rates before they really consider the opportunity to maybe move
Speaker 1: rates down.
Speaker 5: Right, So, you know, it depends on wage growth, and
Speaker 5: Powell seems to be putting a lot of attention on
Speaker 5: UH wage growth. The the inflation metric that the Fed
Speaker 5: pays a lot of attention to is core PCE services
Speaker 5: excluding housing, and half of that is supposed to be
Speaker 5: related to labor intensive industry, which in turn is the
Speaker 5: inflation there is driven by wages. So UH that is
Speaker 5: that I think we're also seeing some progress. We're seeing
Speaker 5: in the jobs market jobs report last Friday, we saw
Speaker 5: that that that that effect private hiring was below two
Speaker 5: hundred k and and so I think I think even
Speaker 5: on that front, it's it's pretty uh, there's progress.
Speaker 8: There, right, Yeah.
Speaker 6: Well, and Paul brings up the great point about labor, which,
Speaker 6: of course, as you've taught us very well, Anna, the
Speaker 6: FED is really looking at when determining their next moves.
Speaker 6: For my friends and folks listening in who are wondering
Speaker 6: whether cooler inflation data is going to make it harder
Speaker 6: for them to argue for a raise this year, talk
Speaker 6: to me about how you can help them pitch their
Speaker 6: bosses for a raise even though we are seeing some
Speaker 6: cooling when it comes to the inflation picture.
Speaker 5: Well, first of all, I think the best reason for
Speaker 5: arguing for pay raise is that the real wage cumulative
Speaker 5: real wage over the last two years has decreased. Many
Speaker 5: people pointed out that real wage growth this year is
Speaker 5: positive again because nominal wage is higher than inflation. But
Speaker 5: on the whole of you added up over the last
Speaker 5: two years, people are still worse off. Like that breakfast
Speaker 5: sandwich in the airport is still costing more relative to
Speaker 5: how much you can make, you know, in terms of level.
Speaker 5: So even if inflation were to be zero percent tomorrow,
Speaker 5: people will still feel worse off just because the level
Speaker 5: of prices is permanently higher than relative to their income.
Speaker 1: All right, and I thank you so much for joining us.
Speaker 1: I always appreciate getting your analysis and insight had along
Speaker 1: chief US economists for Bloomberg Economics and her team have
Speaker 1: been really spot on kind of the inflation call, the
Speaker 1: GDP call, and the most importantly, kind of where the
Speaker 1: FED is going. She was, you know, about a year
Speaker 1: ago she was saying this, you know, I mean, I
Speaker 1: take it.
Speaker 8: More than a year ago.
Speaker 1: She was saying that FED is going to take this
Speaker 1: rate to north of five percent, and that was not
Speaker 1: the consensus call at all. And she's absolutely right.
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Speaker 1: The futsy this year up about about eight percent this
Speaker 1: I'm sorry, the footsy is flat. The stocks index, the
Speaker 1: European indext stock six hundreds up about eight percent, so
Speaker 1: lagging they outperformed last year. But let's get an overview
Speaker 1: what's happening in the European markets. We can do that
Speaker 1: because we got that kind of person here. Tim Craig
Speaker 1: had director research for Bloomberg Intelligence. He's a senior European strategist.
Speaker 1: He's based in London. We got him here in New
Speaker 1: York this week. A couple of you guys are here
Speaker 1: in New York this week. I mean, everybody's traveling, all right,
Speaker 1: So Tim, thanks for coming in here today. Give us
Speaker 1: an overview of kind of year to date, how are
Speaker 1: the markets in Europe and kind of what's the outlook.
Speaker 10: So there's been a tuggle war going on in Europe
Speaker 10: between earnings and valuation depending on the mood of the
Speaker 10: market as it relates to what's going on with inflation
Speaker 10: and interest rates. So it is not dissimilar here from
Speaker 10: the standpoint of some of the drivers. With one big
Speaker 10: exception we can get to tech. But in Europe, essentially
Speaker 10: we've had, as you said, a pretty decent market, and
Speaker 10: you talked about the eurostocks being up eight percent or
Speaker 10: I should say the stock six hundred. That's the broader
Speaker 10: market that include D's a big chunk of the UK, which,
Speaker 10: as you said, was flat. If you take out that,
Speaker 10: you look at say the eurostocks fifty, whichould be sort
Speaker 10: of the Dow Jones equivalent, that's now up fourteen percent.
Speaker 10: I mean, it's been a decent year. The key has
Speaker 10: been positive earnings revisions that started as we got out
Speaker 10: or we got into one Q earnings off setting and
Speaker 10: overwhelming valuation contraction that's occurred with the idea that interest
Speaker 10: rates are going to be elevated for longer because inflation
Speaker 10: is still very sticky in Europe, in particular services and wages.
Speaker 10: So I just threw a lot of stuff at you,
Speaker 10: but markets are behaving. Key now as we look into
Speaker 10: second quarter earnings that are getting ready to hit the tape,
Speaker 10: is can margins really maintain where they are, which are
Speaker 10: record levels. They've been very sticky in Europe, unlike here
Speaker 10: where they had rolled over. So it's a very very
Speaker 10: interesting dynamics as we go into mid year earnings.
Speaker 6: So things are good, but it's still relatively cheap when
Speaker 6: it comes to an American investor to get in on
Speaker 6: the UK. Right, So is it an argument of the
Speaker 6: UK is so cheap that you have to own.
Speaker 11: It at this point.
Speaker 10: Quick answer on that is absolutely no.
Speaker 6: Ye tell me why, Tell me why?
Speaker 10: And you could you could look at that more broadly
Speaker 10: within Europe. I mean, our work in terms of global
Speaker 10: equity strategy within Bloomberg Intelligence leans towards emerging markets, then Europe,
Speaker 10: then US. So you know, we do like Europe in concept.
Speaker 10: And within Europe itself, the market overall is trading it
Speaker 10: about thirteen times forward earnings. You know clearly that's very
Speaker 10: low relative to the US, where you're at eighteen and
Speaker 10: a half nineteen times takeout tech if you look at
Speaker 10: the equal weighted S and P several multiple points lower,
Speaker 10: so it's not such a start contrast. And Europe just
Speaker 10: doesn't have technology. You know, we don't have the Internet element.
Speaker 10: We do have some semiconductors, but we don't have the
Speaker 10: rest of it, and that's a big difference. So you
Speaker 10: can't just say it's cheap you should buy it. It's
Speaker 10: cheap because of composition and the UK specifically not to
Speaker 10: overegg this, but big on some big consumer staples, but
Speaker 10: a chunk of that's tobacco. Tobacco trades at a lower multiple.
Speaker 10: It's big on financials, but a chunk of that is
Speaker 10: commercial banks, which trade on lower multiples. And it's big
Speaker 10: on energy and materials. And given that we're still close
Speaker 10: to cyclical peak commodity earnings, they're trading in a low multiples.
Speaker 10: So it's not cheap in a comparable basis because of
Speaker 10: composition China.
Speaker 1: It feels like to me when I think about some
Speaker 1: of these European companies as semens just for example, but
Speaker 1: some of the big manufacturing companies in Europe, they depend
Speaker 1: more or they do more business with China. What does
Speaker 1: the China reopening mean? What does the China I don't know,
Speaker 1: a little bit of a cold war building between China
Speaker 1: and the West.
Speaker 12: What is that?
Speaker 1: What are the companies in Europe saying about China as
Speaker 1: a I guess as a supply chain issue and as
Speaker 1: obviously an end market.
Speaker 10: And I think China is a more relevant opportunity for
Speaker 10: the average European company than it is for the average
Speaker 10: US company. The US market itself has a lot more
Speaker 10: of a domestic focus than the European market, which has
Speaker 10: both US and Asia. You know, if you look out
Speaker 10: on a revenue exposure basis, you know, Europe is more
Speaker 10: globalized and from that perspective, part of the hope early
Speaker 10: this year January was a good month specifically for the
Speaker 10: European markets, as was December was the China reopening trade right,
Speaker 10: and you know the issue with that has been as
Speaker 10: of late, I'm sure you're aware, you know, the more
Speaker 10: recent statistics have faltered and it seems like that's sputtering.
Speaker 10: That's not great for the second half outlook, all else
Speaker 10: being equal, for the European markets, our China's strategist is
Speaker 10: still relatively sanguine that more stimulus is coming, more policy
Speaker 10: measures will come, and there are opportunities and as said said,
Speaker 10: you know, the emerging markets are an area all else
Speaker 10: being equal, that we do find intriguing. But China is
Speaker 10: a big deal.
Speaker 6: Yeah, well, of course, and hopefully this earning season we're
Speaker 6: going to get a little bit more of an indication
Speaker 6: as to how the strength of the Chinese consumer is
Speaker 6: going to potentially impact some of these profit margins. Having
Speaker 6: said that, we are hitting seeing that the dollar is
Speaker 6: hitting near fifteen month, Now, how does that play into
Speaker 6: your county?
Speaker 10: This is another one of those elements for the second
Speaker 10: half outlook in Europe. And by the way, if I
Speaker 10: were to use a word technical as it is, it
Speaker 10: would be sloppy. You know, that's kind of what we
Speaker 10: going to steal that from you.
Speaker 6: When I'm trying to sound really smart there.
Speaker 10: Exactly, currency is a big deal. If you look at
Speaker 10: the third quarter specifically, by the time we get into
Speaker 10: that as a reporting period in a few months, whether
Speaker 10: you're British, whether you're Euro based, or whether you're Swiss
Speaker 10: Frank based, currency is going to be somewhere between a
Speaker 10: ten and fourteen percent headwind for you on a year
Speaker 10: over year basis. It's a huge hit. And you know,
Speaker 10: some companies will hedge that away. Some companies are producing
Speaker 10: in the local market, and so there's you know, different accounting,
Speaker 10: you know, sort of opportunity needs to minimize the impact.
Speaker 10: But just overtly, if I'm a Swedish company and I
Speaker 10: generate one hundred percent, you know, the Swedish industrials are
Speaker 10: a big deal. I generate all of my sales abroad,
Speaker 10: it's you know, it's it'll be an interesting element from
Speaker 10: the standpoint of currency impact.
Speaker 6: But maybe a tailwind for some of the consumer stables
Speaker 6: that you mentioned.
Speaker 10: Well, but again, if I'm if I'm Unilever, if I'm Diagio,
Speaker 10: I'm based in what is a strong currency, right, And
Speaker 10: so you know it may be you know, it's more
Speaker 10: a combination of what's going on from the local economic
Speaker 10: the local consumer spending perspective for those consumer based companies.
Speaker 10: But the issue with the defensives in ways they've got
Speaker 10: more currency exposure for a euro of revenue because they
Speaker 10: don't have a cyclical element to offset. You know, it
Speaker 10: makes it more dependent on the currency being a swing factor.
Speaker 10: So if you look at a correlation analysis of who
Speaker 10: has the most negative correlation with currency, it's healthcare and
Speaker 10: its staples.
Speaker 1: Real quick, twenty seconds. A pint in bell sized favorite,
Speaker 1: well sized park. It's a suburb of London. What's not
Speaker 1: going to run me today?
Speaker 10: Seven pounds?
Speaker 8: Really?
Speaker 10: Yeah, but that's inflation. But that's a big beer.
Speaker 8: Is a big relation.
Speaker 10: That said, dude, I had breakfast this morning. Yea, yeah,
Speaker 10: you're talking ridiculous. My wife is over here. Had a
Speaker 10: pizza yesterday for lunch. Twenty six pounds for a pizza
Speaker 10: that was the size of a plate, I mean dollars.
Speaker 8: All right, Tim, Thanks so much for that.
Speaker 1: Tim Craig had Director Research, Senior European strategist, Bloomberg Intelligence.
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Speaker 1: Looking at the fields space here, big move into two
Speaker 1: year treasury down fourteen basis points four point seventy three percent.
Speaker 1: That kind of gets your attention here and looking at
Speaker 1: the Bloomberg Index browser, I go on the terminal the
Speaker 1: Bloomberg aggregate total return unheedged return here for the bond
Speaker 1: market up one point three percent a year to date.
Speaker 1: It's that's a lot better than last year. Let's do
Speaker 1: some more work on the investment grade business out there
Speaker 1: in a fixed income space. Natalie Trevortik joins us, head
Speaker 1: of investment grade credit Strategy. It paid in rego. Natalie,
Speaker 1: thanks so much for joining us here. What's your takeaway
Speaker 1: from this inflation print that we saw this morning.
Speaker 3: Well, it was a very good print, but being a
Speaker 3: bond person, I always have to look for the bear
Speaker 3: scenario and like, maybe it's too good. Why can't we
Speaker 3: just get that point three percent month over month encore
Speaker 3: that we were hoping for, Because now you see the
Speaker 3: stock markets up again. We got really good news in
Speaker 3: terms of airfares and hotels moderating. But maybe it makes
Speaker 3: corporate America think that, hey, we can go about raising
Speaker 3: prices again. And because the economy is doing so well,
Speaker 3: we still have that strong wage growth and the employment
Speaker 3: picture is still very strong. So it seems like the
Speaker 3: economy is firing on all cylinders. Are we in the
Speaker 3: Schooldilock scenario and avoid the recession altogether?
Speaker 6: Okay, so you think that the CPI print from today
Speaker 6: could lead to price increases, because why not. The economy's
Speaker 6: cooling a little bit, so let's just try it out.
Speaker 3: Yeah, Like, maybe not right away, but it also shows
Speaker 3: that there's still strong underlying growth in the economy, from
Speaker 3: the employment picture, the spending that we're seeing in services.
Speaker 3: It was great to see that moderation and goods and
Speaker 3: that's definitely come down, but there's parts of the economy
Speaker 3: which are still running a little bit hot. So maybe
Speaker 3: companies don't have to do the layoffs they were possibly
Speaker 3: thinking they had to do earlier in the year, and
Speaker 3: it is a very nice scenario. Doesn't mean the Fed's
Speaker 3: probably going to have to cut anytime soon, even if
Speaker 3: the second right hike for this year is maybe more
Speaker 3: in doubt at this time.
Speaker 1: So Natalie, of you and the good folks have paid
Speaker 1: in regal, have you taken the recession risk off the table?
Speaker 5: Here?
Speaker 3: Not off the table, but we've definitely pushed it out
Speaker 3: further down the road, So it's not a time to
Speaker 3: be cautious. Yield, even though they've come off the peaks
Speaker 3: from last week, they're still pretty high. So as you
Speaker 3: were saying, you know, the ad return one point three
Speaker 3: percent year to date, ID corps are above two percent,
Speaker 3: but Hi, you bonder have returned five percent year to date,
Speaker 3: so we still think it's a nice cupon clipping year
Speaker 3: for credit and so you can still expect some good
Speaker 3: returns in the second half of the year, and we
Speaker 3: don't want to be too defensive and lose out on those.
Speaker 6: And what about corporate spreads in particular looking a little
Speaker 6: bit tighter in the month of June. What do you
Speaker 6: anticipate that looking like in the second half of the year.
Speaker 3: Yeah, they really rallied after the debt ceiling resolution, and
Speaker 3: they're continuing to do pretty well in July through the
Speaker 3: types of where they started the year at the beginning
Speaker 3: of the year, despite the banking crisis. So we think
Speaker 3: there may be a little bit on the hot side
Speaker 3: right now, but we don't really see a case for
Speaker 3: them to blow out if the recession is pushed out
Speaker 3: to say late twenty twenty four or twenty twenty five.
Speaker 3: So we think you have to definitely pick your spots now.
Speaker 3: We saw a little bit of a beta rally in
Speaker 3: June and maybe that went too far, But there's a
Speaker 3: lot of good names out there which we think can
Speaker 3: perform well. But we wouldn't expect too much further spread
Speaker 3: tightening from here, So the bulk of your return is
Speaker 3: going to come from that carry and coupon clipping.
Speaker 1: Natalie hels the credit quality out there in the mark
Speaker 1: as you look across your portfolio, we've heard people say, boy,
Speaker 1: it's pretty darn good. We don't really have any big
Speaker 1: issues here at the moment.
Speaker 3: We really don't, because companies that are on the cusps
Speaker 3: maybe of low triple B going to high yield have
Speaker 3: already taken steps to either reduce cap X or cut dividends,
Speaker 3: so they're really focused on maintaining their ID ratings. And
Speaker 3: if anything, we're seeing more upgrades, particularly out of the
Speaker 3: energy space. So if anything, we're expecting more rising stars
Speaker 3: than fallen angels in the coming year.
Speaker 6: And when you look at the second half of the
Speaker 6: year two, I'm curious if you think that we're maybe
Speaker 6: underpricing the idea that the market will always give us
Speaker 6: the most painful possible scenario. Do you think that there's
Speaker 6: a potential outcome here of you know, big tech dropping
Speaker 6: and volatility going to the upside in the second half
Speaker 6: of the year.
Speaker 3: I think there's potential. I feel like we're going to
Speaker 3: cruise through the summer, but there's definitely potential in the
Speaker 3: second half of the year. It seems like tech is
Speaker 3: you know, really celebrating the CPI print today, but it
Speaker 3: does seem like it may have gotten a little bit
Speaker 3: ahead of itself. But still the magic words AI just
Speaker 3: propels them for.
Speaker 1: All right, Natalie, Given where we are here in this cycle,
Speaker 1: given where we are with kind of I think most
Speaker 1: people feel like that where the FED is going to
Speaker 1: go over the next meeting or two, if not the
Speaker 1: next six months. What are some of the sectors that
Speaker 1: you guys are finding attractive right now.
Speaker 3: Yeah, we like some of the defensive sectors like consumer,
Speaker 3: non cyclical and utilities because we think they're well positioned
Speaker 3: to do well if we do get that volatility. We
Speaker 3: become a little bit more cautious on the banking sector,
Speaker 3: even though we think we're out of the crisis. We
Speaker 3: think banks have a lot of funding to do, especially
Speaker 3: if there's increased regulation and capital requirements. So just a
Speaker 3: little bit more cautious here from more of a relative
Speaker 3: value perspective, and then it really comes down to individual
Speaker 3: name selection where we think, you know, we rely on
Speaker 3: our credit analysts team to find value there.
Speaker 6: And longer dated bonds, would you say that they're becoming
Speaker 6: more attractive given some of the potential FED moves we're anticipating.
Speaker 3: Yeah, they've kind of been the sweet spot all year,
Speaker 3: ten and thirty year. Demand in the new issue market
Speaker 3: is always the strongest, and at these higher all and
Speaker 3: yields closer to six percent or above six percent in
Speaker 3: some names, it's attracting a lot of buyer interest, even
Speaker 3: though you can get higher yields in the front end
Speaker 3: of the curve, but people want to lock in these
Speaker 3: rates for longer.
Speaker 1: All right, Nattie, I can tell from your accent that
Speaker 1: you're Canadian. Yeah, and I see you went to Queen's University,
Speaker 1: So I have to ask, how did you find yourself
Speaker 1: all the way down in Austin, Texas for your MBA.
Speaker 3: Yeah, Austin. I just wanted to go somewhere hot, and
Speaker 3: it was in two thousand during the energy boom, so
Speaker 3: I thought I was going to go work for Enron,
Speaker 3: and I interviewed with them. Fortunately I made the right
Speaker 3: decision and ended up at Barkley's Capital and Wall Street
Speaker 3: and from there down to Pimpco and now at Peydon.
Speaker 8: Yeah, exactly. See dodged a bullet there with Enrons.
Speaker 3: Yeah, definitely.
Speaker 13: Yeah.
Speaker 8: I bet your Texas sent a lot of kids to
Speaker 8: Ron back in the day. Oh, they sure did.
Speaker 1: Yeah, all right, Natalie, thanks so much for joining us there.
Speaker 1: Natalie Trevor Thick, head of investment grade credit strategy at
Speaker 1: Peydon and Reid talking to us about what's happening in
Speaker 1: a credit space.
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Speaker 1: All right, let's go to Ira Jersey. You're talking old school,
Speaker 1: I talk Iri Jersey. I mean this guy, he's got
Speaker 1: a little sport. Cody keeps down a prince in case
Speaker 1: he needs to get on TV because he becomes super casual.
Speaker 8: But he joins us from Princeton, Ira Jersey.
Speaker 1: Chief, you wish to interest rate strategist Ira heck of
Speaker 1: a good print there for people that are like guest
Speaker 1: calling for FED to kind of hold off a little bit.
Speaker 1: What did you take away from the inflation data we
Speaker 1: saw this morning.
Speaker 12: Well, first, let me say Paul that I'm with you.
Speaker 11: Let's go out and get our food and if we
Speaker 11: want to bring it back for the family.
Speaker 6: Because you guys don't live in walk ups. Okay, this
Speaker 6: is this is the key indicator.
Speaker 12: Gotcha. I guess that's true.
Speaker 11: Ahead, So yeah, yeah, so the inflation print was obviously good.
Speaker 11: Like members of the Federal Reserve are going to like it.
Speaker 11: They're going to say, Okay, we're we're heading toward our goal.
Speaker 11: We're not there yet. I think that's some of the
Speaker 11: Fed speak that you'll that you'll hear is that we're
Speaker 11: not out.
Speaker 12: Of the woods.
Speaker 11: But these this is a certainly decent data and the
Speaker 11: market reaction to it, I think is pretty appropriate. You know,
Speaker 11: very significant, very significant rallies in the front under the
Speaker 11: yield curve. So you're looking at two year, three or
Speaker 11: five year rates of you know, fifteen eighteen basis points
Speaker 11: lower at some points during the morning, and that's basically
Speaker 11: pricing out a second twenty five basis point hike late
Speaker 11: after after July.
Speaker 6: So what is the single most important data point for
Speaker 6: the FED to make that September decision.
Speaker 11: Based off of Yeah, there's not one, right, So, you know,
Speaker 11: the Federal Reserve, like most of us, we look at
Speaker 11: a mosaic of data that's coming in. But it certainly
Speaker 11: is the different inflation prints and those things that affect
Speaker 11: the inflation print. So last week's job's number obviously was
Speaker 11: one of them. Because even though, like when you look
Speaker 11: at the whole pantheon and of the data that we
Speaker 11: receive today in terms of the CPI report, services growth,
Speaker 11: even though it's slowing, is still reasonably high. And you
Speaker 11: look at core services, so that's services excluding say shelter costs,
Speaker 11: and you see that that actually is still growing at
Speaker 11: a reasonably decent pace, and that's very impacted by how
Speaker 11: many jobs there are, what wages are doing in.
Speaker 12: Those services sectors.
Speaker 11: So I think that there'll be a very meaningful, you know,
Speaker 11: view of that when you get when we get both
Speaker 11: the July and the August data, because remember before the
Speaker 11: September meeting, we'll get both CPI and the Jobs Report
Speaker 11: for two more months for both July and August, so
Speaker 11: it's not any one of those prints's I think the
Speaker 11: continuation and do we see a continuation of this moderation
Speaker 11: in some of these data.
Speaker 1: And of course I wrote looking at the world indust
Speaker 1: rate probability function on the Bloomberg terminal, the work the
Speaker 1: market is kind of taking down its expectations pretty dramatically
Speaker 1: for a second rate hike after this potentially one in July.
Speaker 1: Does that job with kind of what you're thinking.
Speaker 11: Yeah, it is and it has been you know, one
Speaker 11: of the things that Annawang and I had talked about
Speaker 11: right after the Federal Reserve meeting in June was whether
Speaker 11: or not the dot plot, which was suggesting that they
Speaker 11: were going to be two more twenty five basis point
Speaker 11: interest rate increases this year, whether or not that's second one,
Speaker 11: in particular, was this jaw boning trying to get rid
Speaker 11: of some of the cuts that were priced into the market.
Speaker 11: And I think that that's I don't think it's clear
Speaker 11: that that's what they were trying to do, but I
Speaker 11: think that that certainly is what happened in the markets.
Speaker 11: Was you not only priced in one more interest rate hike,
Speaker 11: but you priced out the potential for cuts anytime this year.
Speaker 11: And I think that that's really one of the policy
Speaker 11: decisions at the FED needed to do.
Speaker 14: Now.
Speaker 11: I think there's other ways the Fed could have communicated that,
Speaker 11: other than saying that they were going to hike more.
Speaker 11: They could have just said, look, we're not going to
Speaker 11: cut interest rates until the unemployment rate is above five
Speaker 11: percent or something like that, and give some kind of
Speaker 11: target for what the minimum what the minimum is for
Speaker 11: the for different economic indicators for the Fed Reserve to
Speaker 11: make a downward move in rates. And I think we're
Speaker 11: nowhere near any of those trigger points at the.
Speaker 6: Moment when we got the FED minutes, it became clear
Speaker 6: that there was definitely some division months to the voting
Speaker 6: members when it came to the last rate call there.
Speaker 6: And we get the FED page book later this afternoon,
Speaker 6: which might give us some more details on that. But
Speaker 6: IIRA talk to me about whether a print like the
Speaker 6: one we got today leads to more division amongst the
Speaker 6: voting members or less.
Speaker 11: Well, So I think if the FED does increase rates
Speaker 11: twenty five basis points, that it's possible after this kind
Speaker 11: of print, maybe you get one or two more dubvish
Speaker 11: members say that, hey, we should be done.
Speaker 12: But I suspect that July is basically a done deal.
Speaker 11: You won't get any descents for July, at least based
Speaker 11: on the data we have right now. I think it
Speaker 11: can and can become more contentious going forward. So when
Speaker 11: we reach September and November, if the inflation data comes
Speaker 11: in closer to say, on a month a month basis
Speaker 11: point three percent, do we end up with some members saying, well,
Speaker 11: we still have to hike more because inflation is still
Speaker 11: not near our target. It's still running at three and
Speaker 11: a half or four percent year on year, So so you know,
Speaker 11: do we need to we should be hiking more, whereas
Speaker 11: you have other members saying, look, we've done a lot,
Speaker 11: we have to give it some time, let's see, let's
Speaker 11: wait and see for a little while. I think ultimately
Speaker 11: those wait and see people will win out.
Speaker 12: That's that's our call right now.
Speaker 11: But obviously, like you mentioned, there is a lot of
Speaker 11: data that we're going to get between now and September
Speaker 11: and then certainly the November meetings.
Speaker 1: So Ira, if the data stays roughly the same as
Speaker 1: kind of what we're seeing right now, is a rate
Speaker 1: cut a not to a twenty twenty four? Is that
Speaker 1: the kind of an event we should be thinking better
Speaker 1: timeframe we should be thinking about.
Speaker 12: Yeah, And I even think late twenty four.
Speaker 11: I think that I think the Federal Reserve might not,
Speaker 11: you know, be thinking about really cutting until the third
Speaker 11: or fourth quarter of next year unless something significantly changes.
Speaker 12: In the job market.
Speaker 11: Remember, the Federal Reserve, unlike some other central banks, is
Speaker 11: really only concerned right now, is only concerned about inflation.
Speaker 12: But it would would be concerned.
Speaker 11: About the job market if you saw the unemployment rate
Speaker 11: go up significantly and if you saw certainly job losses
Speaker 11: and we still don't have job losses right, So until
Speaker 11: you start to see nonfarm payroll be negative, I don't
Speaker 11: see a reason why the Federal Reserve would necessarily be
Speaker 11: thinking about cutting at this point. Because in a situation
Speaker 11: where interest rates are at five percent, in the FED
Speaker 11: funds rate inflations two and a half percent, and the
Speaker 11: unemployment rate is right where it is now, that's a
Speaker 11: great situation for the Fed. I think the Fed would
Speaker 11: be very happy with that situation quite frankly.
Speaker 8: All right, important stuff.
Speaker 1: When and where can I see Lionel Messi play for
Speaker 1: inter Miami.
Speaker 11: You know that's a good question. I have not kept track.
Speaker 11: I'm not a messy tracker like that. We're in the middle.
Speaker 11: We're just at the very end of our USL League
Speaker 11: two season here at Real Central and Jay So.
Speaker 12: We have our last home match tonight. So that's been my.
Speaker 10: Oh really okay us playing.
Speaker 11: We play Westchester United from Westchester, Pennsylvania. We had a
Speaker 11: game against Philadelphia lone Star on Monday which ended up
Speaker 11: pretty well for US. With an Olympico and you can
Speaker 11: look that up and you're interested in Seawoydal Olympico is.
Speaker 1: Real Central, New Jersey. Good stuff there. That is minor
Speaker 1: league soccer. Ira Jerseys all over that he's our soccer guru,
Speaker 1: and he also does this interest rate thing on the
Speaker 1: side as well. Ira Jersey, Chief US interest rate strategist
Speaker 1: for Bloomberg Intelligence, joining us from the bi HQ down
Speaker 1: there in Princeton.
Speaker 9: You're listening to the tape cats are Live program Bloomberg
Speaker 9: Markets weekdays at ten am Eastern on Bloomberg Radio, the
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Speaker 1: Greg Friedman joins us. He's to see of Peachtree Group.
Speaker 1: They own a lot of commercial real estate, including a
Speaker 1: lot of hotels. Greg, so put me my place here.
Speaker 1: Talk to us about the health of the commercial or
Speaker 1: the status of the commercial real estate business today, because
Speaker 1: it just seems like every commercial building I go in
Speaker 1: around the country, I see the sign out front saying,
Speaker 1: you know, three thousand, ten thousand.
Speaker 8: Square feet available. Talk to us about the state of
Speaker 8: the market.
Speaker 13: Yeah.
Speaker 4: Sure, it's a great question. And there's definitely a bifurcation
Speaker 4: across commercial real estate today. So you know, not all assets,
Speaker 4: you know, asset classes within commercial real state are equal.
Speaker 4: So you have office that's going through a lot of
Speaker 4: secular distress. You know, the return of office has been
Speaker 4: slower on the recovery. And then you look at the
Speaker 4: hospitality industry. You're going through the pandemic. You know, had
Speaker 4: its worse, you know, from an occurancy perspective, it was
Speaker 4: at the worst level of all time, and now it's
Speaker 4: recovered extremely well. So, I mean there's been a robust
Speaker 4: recovery across the hospitality space. And then you look at
Speaker 4: you know, multifamily, industrial, self storage, those asset classes continue
Speaker 4: to do really well across commercial real estate at the
Speaker 4: asset level. Now, with that said, there's a lot of
Speaker 4: balance sheet to stress that's you know, taking place across
Speaker 4: all commercial real state assets. That's today just given how
Speaker 4: fast the FED has increased interest rates, so you've seen
Speaker 4: you know, rates have gone up a good five hundred
Speaker 4: basis points and that's putting a lot of pressure on
Speaker 4: the underlying you know, valuations across commercial real estate assets
Speaker 4: because ultimately typically you know, about two hundred and seventy
Speaker 4: ten or eighty basis points above the risk free rate
Speaker 4: is where cap rates for traditional commercial real state assets,
Speaker 4: that's where they trade. And right now, you know, the
Speaker 4: risk free rates around the ten yere treasure rate, which
Speaker 4: is four percent, So when you look at you know,
Speaker 4: I think it came down a little bit with with
Speaker 4: inflation moderating today, but still it's around four percent. So
Speaker 4: ultimately a lot of commercial real estate assets had experienced
Speaker 4: this just robust increase in valuations during the pandemic when
Speaker 4: interest rates went to zero. Now we're on the other
Speaker 4: side of that trade, and so I would argue that
Speaker 4: there's more balance sheet distress right now across commercial real
Speaker 4: estate with loans that are maturing, because there's a huge
Speaker 4: wall of debt maturities that are taking place, and that's
Speaker 4: a bigger impact than just what's happening just across you know, again,
Speaker 4: you have some secular distress in office, but outside of that,
Speaker 4: most of the other asset classes are doing well.
Speaker 6: So, Greg, you mentioned that there's some opportunities still in
Speaker 6: the hotel space, and I have to talk to you
Speaker 6: then about a story that Paul and I love so much,
Speaker 6: which is the bankruptcy filing of Jimmy Buffett's Margeritaville hotel.
Speaker 6: In Times Square. Okay, they had a refinance about three
Speaker 6: hundred million dollars of debt that was tied to the project.
Speaker 6: If a hotel like Margaritaville in Times Square can't make
Speaker 6: it these days, who can, right?
Speaker 4: And I think that's you know, that's a classic case
Speaker 4: where there's a lot of debt on that property that's
Speaker 4: facing that balance sheet distress with loan maturities, higher interest
Speaker 4: costs at floating rate debt, and so you know, that's
Speaker 4: more of a balance sheet issue per se. I don't
Speaker 4: think it necessarily represents what's happening at the asset level
Speaker 4: and the performance. And that's a I would say it's
Speaker 4: more of a one off, you know, scenario than what's
Speaker 4: happening across on a macro scale, what's happening across the
Speaker 4: hospitality space. So there's you know, there's definitely that balance
Speaker 4: sheet distress. But ultimately, the way I look at the
Speaker 4: real estate space today, to me, the better place to
Speaker 4: be investing is in the credit side of the business
Speaker 4: because there's a huge trade there where you can go
Speaker 4: out and directly lend to groups. Because you know, the
Speaker 4: banking market's pulled back and a lot of cases you
Speaker 4: can lend and be getting equity like returns where you're
Speaker 4: you know, leveraging, you know, closer to you know, call
Speaker 4: it fifty to seventy percent of the acquisition costs.
Speaker 1: Talk to us about your hotel holdings, your businesses there.
Speaker 1: What kind of hotels do you own, where are they
Speaker 1: and how are they performing?
Speaker 5: Yeah?
Speaker 4: Sure, so you know our assets. You know, we own
Speaker 4: a lot of hotels across the US, so it's pretty diversified.
Speaker 4: We do have a heavy presence in the Southeast. We
Speaker 4: have a lot of you know, hotels across the you know,
Speaker 4: the Midwest, the you know, in Texas as well as
Speaker 4: out in the West coast in Arizona and so forth.
Speaker 4: But you know, most of our assets are in the Southeast,
Speaker 4: as well as some in the mid Atlantic. But we
Speaker 4: own a bunch of hotels on.
Speaker 12: The equity side.
Speaker 4: But we also have a huge portfolio of assets that
Speaker 4: we have invested on the debt side, where we have
Speaker 4: first mortgage loans where we've originated most of these loans,
Speaker 4: where we bought loans during the pandemic. You know, we
Speaker 4: were one of the biggest buyers of debt during the pandemic,
Speaker 4: where we bought over one hundred and eighty loans from
Speaker 4: different financial institutions, primarily banks, and we also did a
Speaker 4: lot of direct lending obviously throughout the pandemic as well
Speaker 4: as even today on hotels, and we also finance other
Speaker 4: commercial real state assets on the debt side too today.
Speaker 6: What is the customer demographic looking like for most of
Speaker 6: your hotels? Would you say more middle to low income?
Speaker 12: What's the range?
Speaker 4: Yes, So most of our hotels, you know, are really
Speaker 4: catering towards you know, a balance of corporate travelers as
Speaker 4: well as you know where we have a fair amount
Speaker 4: of leisure travelers as well. It's mostly mid scale hotels,
Speaker 4: so it's really, you know, really catering towards the I
Speaker 4: would say more the you know, mid scale traveler that's
Speaker 4: traveling across the US.
Speaker 6: So, then, are you feeling any impact of the decline
Speaker 6: and popularity of Airbnb in terms of occupancy or is
Speaker 6: that something that you're not anticipating feeling just yet.
Speaker 4: Yeah, it's a great question. So we've seen, you know,
Speaker 4: just across because Airbnb has been a discussion over the
Speaker 4: last you know, six seven years. Yeah, and it really
Speaker 4: hasn't impacted our hotels as much, there's been an impact
Speaker 4: on the ability to drive rates on these on these
Speaker 4: sellout nights. So when there's you know, say there's the
Speaker 4: super Bowl or there's some type of one time event
Speaker 4: in a market, there's this phantom amount of supply that
Speaker 4: comes in the market through Airbnb that ends up impacting
Speaker 4: our ability to drive rates. But given the type of
Speaker 4: hotels in our customer mix, you know, most of our
Speaker 4: customers like staying at our hotels because they have you know,
Speaker 4: they have a consistency of service, they know exactly the
Speaker 4: products as well as you know, we own a lot
Speaker 4: of Marriotte Hilton branded hotels and they like to get.
Speaker 1: Their points all right, So what do you think or
Speaker 1: how bad do you think the credit side.
Speaker 8: Of commercial real estate is going to be?
Speaker 1: We've heard a lot about it from It's going to
Speaker 1: be a real problem for a lot of banks at
Speaker 1: some point in time. You tend there be a bunch
Speaker 1: of this debt coming do and sure it's gonna be
Speaker 1: tough to refinance it at these higher rates, and and
Speaker 1: the value of your underlying property is much lower than
Speaker 1: it was. You have loan to value issues. How bad
Speaker 1: is that going to and when do you think that's
Speaker 1: going to really hit the system.
Speaker 4: Yeah, I think it's it's going to be personally, I
Speaker 4: think there's going to be this wave of you know,
Speaker 4: debt maturities that are going to create a lot of challenges. So,
Speaker 4: I mean, I think, you know how bad it's going
Speaker 4: to be, It's hard to tell at this point. I
Speaker 4: think there's there's no question forty percent of the liquidity
Speaker 4: in the market for debt typically comes from you know,
Speaker 4: national banks, the regional and the community banks. They're just
Speaker 4: not able to lend because a lot of them are
Speaker 4: trying to shore up their balance sheets. And so ultimately,
Speaker 4: I think, you know, there is going to be you know,
Speaker 4: I think there's a lot of opportunities for private lenders
Speaker 4: like us to fill that void. I think that's gonna
Speaker 4: put a lot of pressure on different real estate owners
Speaker 4: because they're gonna have to pay higher spreads. They're gonna
Speaker 4: have to pay higher there, you know, ultimate interest rate
Speaker 4: costs because interest rates, you know, the index rates have
Speaker 4: moved up so much, they're going to have to pay
Speaker 4: higher expenses there as well. And so, you know, I
Speaker 4: do think there's gonna be a lot of challenges. And
Speaker 4: today you look at the market. There's like one point
Speaker 4: five trillion dollars of loans that are maturing between now
Speaker 4: and the end of twenty twenty five. And so I
Speaker 4: think you're going to see you know, the you know,
Speaker 4: over the next twelve months, you're going to start seeing
Speaker 4: a lot, you know, a lot more situations like the
Speaker 4: Margueritaville situation in Times Square.
Speaker 1: All right, thirty seconds, how because you're lending business versus
Speaker 1: your portfolio of really.
Speaker 4: Sure, so right now our lending business, you know, so
Speaker 4: our debt investments make up about sixty percent of our
Speaker 4: au M, and so that's a big part of our
Speaker 4: investment book today.
Speaker 8: And you guys are private, right We are a private
Speaker 8: when you go in public.
Speaker 4: We have no desire to go public anytime soon. So
Speaker 4: we are very much focused on staying a private, privately
Speaker 4: held company.
Speaker 8: How do you get funded? Where do you get your
Speaker 8: funding from?
Speaker 4: So we you know, we sponsor you know, different investment
Speaker 4: vehicles and we typically have you know, just internal capital
Speaker 4: along with a lot of you know capital that just
Speaker 4: comes in from you know, different investors that invest in
Speaker 4: these vehicles, which is.
Speaker 1: Hard to go public. And I would have taken a
Speaker 1: public all right, So appreciate it. Greg, really really helpful
Speaker 1: to us today. We really appreciate getting your perspective here,
Speaker 1: Greg Freeman. He's the CEO of peach Tree. It was
Speaker 1: Peachtree Hotel Group, now it's Peachtree Peachtre Group.
Speaker 8: We're just going Peachtree Group.
Speaker 9: You're listening to the tape. Cat's are live program Bloomberg
Speaker 9: Markets weekdays at ten am Eastern on Bloomberg Radio, the
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Speaker 13: The Bloomberg Business App.
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Speaker 8: All right, we had what the market's interpreting.
Speaker 1: It's a pretty good inflation print today came in a
Speaker 1: little bit tamer than expected, I guess as a way
Speaker 1: to say, and we're seeing some risk assets kind of
Speaker 1: move on the news, although stock market off.
Speaker 8: It's high of the day. But what does it mean
Speaker 8: going forward?
Speaker 1: John Authors has got an opinion because we pay him
Speaker 1: to have opinions. John Authurs is our senior editor for
Speaker 1: Bloomberg Opinion. Joining us here in our Bloomberg Interactive Brokers studio.
Speaker 8: What do you make of this John, I mean it
Speaker 8: seemed pretty good to me.
Speaker 15: Well, I would be stronger than that, so I feel
Speaker 15: it was very good. And I say that having gone
Speaker 15: on record or predicting that expectations for a low print
Speaker 15: were dangerously strong and that people were running for a
Speaker 15: hawkish surprise. So you know, I can only say that
Speaker 15: I am very startled and impressed by how strong the
Speaker 15: numbers are. As the morning has gone on. The more
Speaker 15: you look at the numbers, the better from the point
Speaker 15: of view of the Fed they get. So if you
Speaker 15: look at if you break it down month by month,
Speaker 15: energy prices actually contributed positively to inflation again. Last month,
Speaker 15: food inflation and goods disappeared literally zero, and services.
Speaker 14: Inflation came down a lot.
Speaker 15: I mean, that's really fantastically exactly what the FED wanted
Speaker 15: to see. If you look at the Cleveland Fed trim
Speaker 15: to me all these cunning measures of inflation we all
Speaker 15: now learned to to use. Over the last three months,
Speaker 15: it's been running at less than two percent when you
Speaker 15: trim out the outliers on either side. So there are
Speaker 15: very few flies on this number. That it's a genuinely
Speaker 15: very encouraging number. And I guess the other thing I
Speaker 15: would I would say which personally surprises me a little.
Speaker 15: I mean, you've seen the dollar seems to have taken
Speaker 15: the decisive which is absolutely what you'd expect from a
Speaker 15: really surprisingly good inflation report. Actual expectations for the fair
Speaker 15: really haven't moved very much at all. Nobody seriously still
Speaker 15: doubts that they're going to hike in July, and people
Speaker 15: are still reckoning. I mean, if you look at contracts
Speaker 15: going through to the beginning of twenty twenty five, yes
Speaker 15: they've come down, but not even by twenty five basis
Speaker 15: points from the spike last week, So it doesn't basically change.
Speaker 15: People are delighted to have this confirmed, but in terms
Speaker 15: of what they're expecting from the Fed, the notion that
Speaker 15: they will have to stay higher for longer to make
Speaker 15: sure this risk of inflation is thoroughly put to bed
Speaker 15: lives on it. It hasn't changed things as much as
Speaker 15: I thought a print like this might have done well.
Speaker 6: Even if we've hit peak inflation. If we're past that
Speaker 6: point and you've written so beautifully about this, John, when
Speaker 6: does the consumers start to feel that and when will companies, restaurants,
Speaker 6: small businesses start to decrease their prices in a way
Speaker 6: that is tangible for customers like us.
Speaker 15: That's interesting if you looked if you looked at the
Speaker 15: NFIBAL Federation of Independent Business numbers earlier this week, the
Speaker 15: proportion that is complaining that they're finding it hard to
Speaker 15: find people. So you know, obviously with restaurants, some of
Speaker 15: the waiting service I remember getting in twenty twenty one
Speaker 15: when they reopened was almost hilariously bad. It's your faulty towers.
Speaker 15: They are much less concerned about the difficulty of hiring
Speaker 15: people than they were, and their complaints about prices paid
Speaker 15: have absolutely you know, shot down in exactly the way
Speaker 15: that you see some of the lines on course CPI.
Speaker 15: It looks to me as though you should expect some
Speaker 15: of that to start to show through in the prices
Speaker 15: that they actually charged people. So, you know, the politically,
Speaker 15: this is a point I've I think some people haven't
Speaker 15: quite taken on board, and which I haven't really taken
Speaker 15: terribly seriously because I've been a hawk thinking inflation is
Speaker 15: worse than people think it is for a while. If
Speaker 15: we're really heading for a soft landing and inflation is
Speaker 15: going to come to heal without any more pain. That
Speaker 15: would probably mean Joe Biden gets back in a landslide
Speaker 15: next year. It's very, very, very difficult to beat an
Speaker 15: incumbent who has a good and economic record, as markets
Speaker 15: implicitly expect. I don't think anybody is actually braced for
Speaker 15: the Democrats to get back in a landslide. It does
Speaker 15: have and I can't quite believe it. I say it
Speaker 15: in the same way I still can't quite believe that
Speaker 15: that the economy is going to work out as positively as.
Speaker 6: Some of these You think November or yeah, let's say
Speaker 6: months leading into November twenty twenty four, the economy is
Speaker 6: going to be total soft landing mode for Biden.
Speaker 15: I find that hard to imagine.
Speaker 6: That's what I'm saying.
Speaker 15: But the implicit market forecasts at the moment are that
Speaker 15: he will get to November twenty twenty four having brought
Speaker 15: down slaid the inflation created by his breed decessor, and
Speaker 15: it created all these jobs.
Speaker 6: I mean, good luck getting Walmart to decrease the prices.
Speaker 8: Well, well, you know what I'm saying.
Speaker 14: Sure, but it's one of the messages they give you
Speaker 14: a business school once you've finished your DCF or what
Speaker 14: if once you've done your spreadsheet, then look at what
Speaker 14: it implies.
Speaker 15: I did an MBA back in two thousand. We valued
Speaker 15: a storage company. We reverse engineered it to try to
Speaker 15: make it worth what the market said at the time
Speaker 15: it was worth. This is two thousands. And then you're
Speaker 15: supposed to work out what does that imply. What does
Speaker 15: your valuation imply about the future. And it implied that
Speaker 15: it was going to make a return on equity of
Speaker 15: one hundred percent in perpetuity. And I think that's that's
Speaker 15: the kind of exercise that people need to do here, Like,
Speaker 15: if the market is right, then j Powell and Joe
Speaker 15: Biden will go down in history for one of the
Speaker 15: most brilliant pieces of economic management ever. All Right, that's
Speaker 15: not if the market is right, which I still obviously
Speaker 15: don't believe, but that's I think that's an important thing
Speaker 15: to start to start thinking now that if it is,
Speaker 15: the economy stupid politics is going to be quite different
Speaker 15: over the next eighteen months than people have been expecting.
Speaker 1: All right, John, you and your colleague Isabelle Lee out
Speaker 1: of the column yesterday and in it you say the
Speaker 1: FED is staying a course on its two percent inflation target.
Speaker 1: Yes but wage earners will pay the price.
Speaker 8: What do you mean there at this point.
Speaker 15: The single biggest contributor to wage inflation. We were just
Speaker 15: discussing it with sorry to inflation overall, so we were
Speaker 15: just discussing his services and services businesses obviously are absolutely
Speaker 15: preponderantly about wage races yep. So I think I mean,
Speaker 15: if you look at what FED governors and mostly controversially
Speaker 15: the Bank of England back home have been saying, They've
Speaker 15: been very careful to say companies need to take tighter
Speaker 15: profit margins and workers need to accept sub inflation pay rises,
Speaker 15: which both of them in isolation will help inflation come down.
Speaker 15: Whether they're sacrifices that are work it or another matter,
Speaker 15: but at this point wage inflation, it's what Another positive
Speaker 15: point if you're if you're a strategist for Biden, is
Speaker 15: that real wages are now increasing very nicely thanks to
Speaker 15: this sudden drop in there in CPI. That is good
Speaker 15: for everybody, apart from those those at the fair who
Speaker 15: are particularly concerned to get inflation down. So that becomes
Speaker 15: a critical issue, and we still need to see whether
Speaker 15: the kind of expectations that have been jol by two
Speaker 15: years of very real inflation that really does affect people's lives.
Speaker 15: Whether that is going to create the kind of extra
Speaker 15: extra motivation to push for higher wages. I expect Bloomberg
Speaker 15: to pay me. Well, I'm not. There's nothing wrong with
Speaker 15: people asking for more money. They've got families to look after, etcetera, etcetera.
Speaker 15: The key point is if our baseline expectations, our psychology
Speaker 15: is now that inflation is something we need to worry about,
Speaker 15: that we need to protect against, does that mean that
Speaker 15: there will be a bigger baseline And if the FED
Speaker 15: is worried about that, which I think they are, that
Speaker 15: implies being nastier than you, I would hope.
Speaker 1: All right, John, thank you so much. We appreciated John Author,
Speaker 1: senior editor for Bloomberg Opinion. And somehow he's a diehard
Speaker 1: Red Sox fan and I don't get it because his
Speaker 1: accent is unique, but it is not a boss and accent.
Speaker 8: We'll have to say that for I have to say
Speaker 8: that for another day.
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Speaker 1: I'm looking at the bankbreak dot com US bloom mortgage
Speaker 1: thirty year fixed national average seven point three two percent.
Speaker 1: It reached a low of sub three percent back in
Speaker 1: early twenty twenty one.
Speaker 8: So what a move.
Speaker 1: I think Matt Miller scored his mortgage then, so good
Speaker 1: for him. He's always targeting this market. So just an amazing,
Speaker 1: amazing move high. What does that mean for the housing market,
Speaker 1: residential housing market? Well, Salma HEP's canna help us there.
Speaker 1: Somea is chief economist for core Logic and she joins
Speaker 1: us here, SOMEA. I see that big leap and mortgage rates.
Speaker 1: What's that doing to the residential real estate market in
Speaker 1: the US.
Speaker 16: Well, it's definitely putting a significant damper on home sales activity.
Speaker 16: Home sales activity start off on a pretty good note
Speaker 16: earlier this year. We talked about that a few months back,
Speaker 16: and since mortgage rates started declining, increasing back to seven percent,
Speaker 16: we've seen slowing, significant slowing, and home sales activities. So
Speaker 16: at this point we're looking at about thirty percent lower
Speaker 16: total year to date a number of home sales than
Speaker 16: we did at this time in totality for twenty twenty two.
Speaker 6: And when you look at the housing market in particular,
Speaker 6: I'm looking at some data from our friends over at
Speaker 6: Bloomberg Intelligence, which Paul knows very well, housing becoming so
Speaker 6: unaffordable that over seventy five percent of homes on the
Speaker 6: market are two expensive for middle income buyers. What do
Speaker 6: you make of that in terms of the impact that's
Speaker 6: going to have over the next the course of the
Speaker 6: rest of the year.
Speaker 16: Well, I think really that is the biggest problem. Affordability
Speaker 16: is a huge, huge problem, and we had this problem
Speaker 16: even going into the pandemic, but now with home prices
Speaker 16: forty percent higher than they were at the onset of
Speaker 16: the pandemic, typical mortgage payment is now at the highest
Speaker 16: level on record, and so a lot of folks are
Speaker 16: spending significant portion of their household income on mortgage payment,
Speaker 16: and it's up to about thirty six percent of households
Speaker 16: median income being spent on a mortgage payment. I mean,
Speaker 16: this is really huge, and this is the in terms
Speaker 16: of historically looking at lowest level affordability, we're at the
Speaker 16: lowest we've been in almost forty years now.
Speaker 1: So how does this historically play out? You just have
Speaker 1: to wait for interest rates to come down. How does
Speaker 1: this work in the housing market?
Speaker 12: Do they do?
Speaker 8: You see home.
Speaker 1: Builders, you know, giving breaks on maybe buying down some
Speaker 1: of the mortgage payment for buyers.
Speaker 10: How does this work?
Speaker 5: Right?
Speaker 16: Yeah, on one hand, you know, home prices are playing
Speaker 16: a role. The other contributor is income growth. So many
Speaker 16: times you need income growth to catch up to that
Speaker 16: home price appreciation. And so at this point, unfortunately, we're
Speaker 16: seeing home prices reigniting again. They're they're gaining speed again.
Speaker 16: And in looking at our most recent home price index
Speaker 16: that was just released a couple of days ago, it
Speaker 16: showed that in the first four months of this year,
Speaker 16: or basically from February to May, home prices are up
Speaker 16: over four percent cumulatively. I mean, that's almost as much
Speaker 16: as we've see in an entire year. So we are
Speaker 16: now seeing home prices just really really gaining speed again,
Speaker 16: meaning that that that affordability is going to be further
Speaker 16: declining and a further constraining people's ability to buy a home. So,
Speaker 16: you know, you mentioned what can we do one again
Speaker 16: is rise in home price in households incomes. The other
Speaker 16: one is adjustment in home prices. And you know, while
Speaker 16: overall I was talking about nationally, we might see in
Speaker 16: some particularly some smaller markets where you don't have a
Speaker 16: lot of folks coming moving in with higher incomes. You know,
Speaker 16: we talk a lot about out migration from more expensive
Speaker 16: coastal areas where people have a lot of income, to
Speaker 16: more affordable areas. That's what's been driving home prices in
Speaker 16: many of those areas. But when you look at smaller markets,
Speaker 16: that level of home price appreciation is not sustainable. So
Speaker 16: we'll definitely see more significant slow down and even potentially
Speaker 16: some declines in those smaller markets.
Speaker 6: All Right, So I got to ask my favorite question,
Speaker 6: how is this playing through to the rental market.
Speaker 12: What is that looking like?
Speaker 16: Yeah, well, rental market is slow in too, in terms
Speaker 16: of home price or in terms of rent prices. We
Speaker 16: do have a single family rent index that we report
Speaker 16: on every month, and the rate of growth has continued
Speaker 16: to slow considerably from where it was last year. I mean,
Speaker 16: it's very very much in line with what's happening with
Speaker 16: home prices, but for both on both home prices and rents.
Speaker 16: What's interesting is that the lower price tiers are actually
Speaker 16: continuing to see stronger gains than higher price theres. It's
Speaker 16: higher price theers that have slowed down more considerably since
Speaker 16: you know, people start started going back to the offices
Speaker 16: and sort of that pressure in these amenities markets has slowed.
Speaker 16: But the lower really the types of homes that are
Speaker 16: in need where people are not doing it out of luxury, right,
Speaker 16: That's those are the prices and rents where we do
Speaker 16: see continued pressure.
Speaker 1: Some how About in terms of new home construction, where
Speaker 1: are we in building new homes and what kind of
Speaker 1: homes are getting built, because it seems like we talk
Speaker 1: about the affordability issue. You know, the average town America
Speaker 1: doesn't need another McMansion. What they need is, you know,
Speaker 1: more affordable.
Speaker 8: Kind of single family homes. Is that being built?
Speaker 16: Well, yeah, we do see. You know, we are seeing
Speaker 16: overall an increase in home building activity. Unfortunately it is
Speaker 16: kewed towards more multifamily type housing, but nevertheless it's adding
Speaker 16: to the housing inventory at this point. I mean, we
Speaker 16: just need overall more inventory, any type of inventory that
Speaker 16: we can get. But we are seeing an increase in
Speaker 16: single family as well, and we are seeing a tilt
Speaker 16: towards smaller sized home which are generally priced more favorably.
Speaker 16: So you know, I think builders are moving in that direction.
Speaker 16: They are responding to market needs at the moment, and
Speaker 16: particularly given how much affordability has been constrained at this
Speaker 16: point with higher mortgage rates.
Speaker 6: So it's more inventory good regardless of what that inventory
Speaker 6: looks like right now, I think so.
Speaker 16: I mean, when you look at the you know CPI,
Speaker 16: when you look at the work FED is thinking about going.
Speaker 16: Housing component is a huge component of our inflation measure,
Speaker 16: right thirty percent is is housing and and a lot
Speaker 16: of that comes from rents, rents and and you know
Speaker 16: household how owners equivalent rents, so the homeownership type component.
Speaker 16: But in both of those we do need less increases
Speaker 16: so in conscious that we we're currently seeing in the
Speaker 16: housing market. So with more inventory out there, whether that's
Speaker 16: a high density multi family housing or single family housing,
Speaker 16: I think all of those will help UH slow inflation
Speaker 16: or UH the lead to the celeration of that inflation,
Speaker 16: which will help with federal reserves action and hopefully bring
Speaker 16: mortgage rates lower, which again that in the end helps
Speaker 16: with affordability.
Speaker 1: All right, So some at core logic, What are you
Speaker 1: guys forecasting for mortgage rates going forward?
Speaker 16: Well, unfortunately, the mortgage rates forecasts have gone up, particularly
Speaker 16: given what we just saw today with mortgage it's going
Speaker 16: over seven percent. So at this point I think we
Speaker 16: are more well this declining, but not declining as much
Speaker 16: as we hoped to less than six percent. I think
Speaker 16: we are now looking at slightly over six percent mortgage
Speaker 16: rates by the end of this year.
Speaker 6: Okay, So what should someone who wants to buy a
Speaker 6: home eventually be thinking right now? Should they be holding
Speaker 6: off for a long time or is it just that
Speaker 6: they always get more expensive? So if you're gonna do it,
Speaker 6: you might as well do it now.
Speaker 16: Well, the truth is, yeah, historically when you look at
Speaker 16: home prices in the US that they have been going
Speaker 16: up pretty steadily, you know, if you take out the
Speaker 16: Great Recession period. But you know, one action that people
Speaker 16: have been relying on is doing locking in a mortgage
Speaker 16: right now, buying a home right now because there's much
Speaker 16: less competition out there, and then hoping to refight down
Speaker 16: the road. So, you know, I think that is not
Speaker 16: a bad way to go about it, especially given that
Speaker 16: inventory is a concern and it's going to remain concerned.
Speaker 16: I mean, it will take a few years, more than
Speaker 16: a handful of years for us to catch up if
Speaker 16: we continue to build at the rate that we're building
Speaker 16: right now for inventory to sort of balance with the demand.
Speaker 16: But so you know, whenever we have mortgage it's coming
Speaker 16: down and all the folks that didn't buy during the pandemic,
Speaker 16: and there is a lot of them, because there is
Speaker 16: this huge millennial group that is coming off for some
Speaker 16: home buying age, competition intensifies and that leads to more
Speaker 16: bidding wars, that leads to home selling over the asking
Speaker 16: price and spedier home price appreciation. So I think now,
Speaker 16: given that it's not as a competitive in the market,
Speaker 16: is not a bad time.
Speaker 1: All right, Sama, thank you so much for joining us
Speaker 1: yet again some a hep chief economists for Core Logic.
Speaker 2: Thanks for listening to the Bloomberg Markets podcast. You can
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