WEBVTT - A Hot Start For Stocks and A Retail Earnings Preview 0:00:01.520 --> 0:00:03.880 Thank you so much for joining us for this President's 0:00:03.920 --> 0:00:07.840 Day edition of Bloomberg Daybreak. I'm Nathan Hagar. Coming up 0:00:07.880 --> 0:00:10.160 this hour. We'll look at what's ahead for the economy 0:00:10.200 --> 0:00:14.120 and the Federal Reserve with PIMCA Chief US Economist Tiffany Wilding. 0:00:14.440 --> 0:00:17.360 Plus we'll turn the focus to retail. Both Walmart and 0:00:17.520 --> 0:00:21.400 Home Depot report their earnings. Tomorrow we'll preview with Bloomberg 0:00:21.400 --> 0:00:24.919 Intelligence Senior analyst Jennifer Bartashes. But first we want to 0:00:24.960 --> 0:00:28.680 start with the stock market has gotten off to a 0:00:28.840 --> 0:00:31.840 pretty good start if you're a bull, so is the 0:00:31.840 --> 0:00:35.159 worst behind us? For equities, Let's bring in Lorie Calvacina 0:00:35.280 --> 0:00:38.560 for some analysis, head of US Equity Strategy at RBC 0:00:38.760 --> 0:00:41.760 Capital Markets. It has been quite the rally, and it 0:00:41.840 --> 0:00:44.640 seems like stocks are holding onto it in the month 0:00:44.640 --> 0:00:47.720 of February. How do you see equities position, Lorie as 0:00:47.760 --> 0:00:49.960 we moved through the rest of this quarter. Well, thanks 0:00:50.000 --> 0:00:52.000 for having me, and look, I think that you know, 0:00:52.000 --> 0:00:55.760 we're sort of an interesting spot. I've got a target 0:00:55.840 --> 0:00:58.320 for year end and I still very much like that number. 0:00:58.360 --> 0:01:00.320 I think of it as a December thirty one number, 0:01:00.320 --> 0:01:03.600 but at times earlier this year we've traded above that, UM, 0:01:03.640 --> 0:01:06.720 and so I find myself feeling quite neutral. I do 0:01:06.840 --> 0:01:11.280 think that the barish case for equities has been overstated. Um. 0:01:11.560 --> 0:01:13.680 You know, I've been accused of being a bull. Um. 0:01:13.800 --> 0:01:15.640 You know. Again, I feel more neutral, but I do 0:01:15.760 --> 0:01:17.759 have certain models that tell us we could hit forty 0:01:17.800 --> 0:01:19.720 fred by the end of the year. So perhaps I 0:01:19.720 --> 0:01:22.119 guess that that puts me in the bullish camp. UM. 0:01:22.200 --> 0:01:24.119 But I will say this, I think that we are 0:01:24.160 --> 0:01:28.720 still in a period of messy normalization post the COVID crisis, 0:01:28.920 --> 0:01:33.319 very similar to very similar to two thousand to two 0:01:33.319 --> 0:01:35.640 thousand three, and so I do think things are going 0:01:35.680 --> 0:01:37.840 to continue to be choppy this year. And I think 0:01:37.840 --> 0:01:41.040 October was probably the low UM for kind of this 0:01:42.000 --> 0:01:45.320 three period of economic challenge, recession weakness, whatever we end 0:01:45.360 --> 0:01:48.240 up calling it. UM. And I do think that equities 0:01:48.280 --> 0:01:50.920 perhaps do need to sort of exhale, right and or 0:01:50.960 --> 0:01:52.760 maybe a little bit over do for a breather in 0:01:52.760 --> 0:01:55.559 the short term. UM. So I think, you know, things 0:01:55.560 --> 0:01:57.360 are going to continue to be choppy for a while, 0:01:57.360 --> 0:01:59.680 But that doesn't mean I'm feeling terrible about things. Well, 0:01:59.760 --> 0:02:02.480 let's breakdown a little bit of your view here. You 0:02:02.600 --> 0:02:06.440 said that the bear case may be overstated. Talk a 0:02:06.440 --> 0:02:08.600 little bit more about that. Why do you think that is? So? 0:02:08.880 --> 0:02:10.760 You know, I think there's been this view right that 0:02:10.919 --> 0:02:13.560 earnings forecast still have to come down. We're in the 0:02:13.600 --> 0:02:16.079 middle of doing that right now. UM, and that that's 0:02:16.120 --> 0:02:18.320 got a pummel stocks. And you know, I think even 0:02:18.400 --> 0:02:22.359 we were worried about the onset of more challenging economic conditions, UM, 0:02:22.440 --> 0:02:24.160 kind of taking some of the window out of sales 0:02:24.200 --> 0:02:26.200 of stocks. But I will tell you, Nathan, you know, 0:02:26.480 --> 0:02:28.239 as I think back to kind of my December and 0:02:28.280 --> 0:02:32.120 early January meeting, UM, I found that, you know, every 0:02:32.160 --> 0:02:34.640 strategist was sort of making the same kind of call. 0:02:34.760 --> 0:02:36.920 And if you look back at the December weakness, I 0:02:36.919 --> 0:02:39.440 think a lot of that was getting filtered into stock 0:02:39.480 --> 0:02:43.320 prices already. So maybe that weakness that we deserve to see, UM, 0:02:43.360 --> 0:02:46.080 I think just simply got pulled forward. So we have 0:02:46.240 --> 0:02:50.320 gotten through the bulk of this current earning season. How 0:02:50.360 --> 0:02:53.840 do you view what companies have told us so far 0:02:54.080 --> 0:02:56.760 and how does that position us as we head through 0:02:56.800 --> 0:02:59.040 the better part of the first half of this year. 0:02:59.440 --> 0:03:02.320 So I think it's been very muddled messaging. If you 0:03:02.320 --> 0:03:04.880 read through the artiens called transcripts, which my team and 0:03:04.919 --> 0:03:06.799 I are trying our best to read as money as 0:03:06.800 --> 0:03:09.720 we can UM, and what we have found is that, 0:03:09.919 --> 0:03:11.520 you know, there's some good and there's some bad. From 0:03:11.560 --> 0:03:13.919 a macro perspective, I think that one of the things 0:03:13.919 --> 0:03:16.280 we noticed that and one of the sectors I'm reading 0:03:16.360 --> 0:03:19.440 is tech UM is that you know, we have started 0:03:19.440 --> 0:03:21.960 to see the onset of slowing start to show up 0:03:21.960 --> 0:03:23.959 in a lot of the company commentary, and that perhaps 0:03:24.000 --> 0:03:26.520 it's most no more noteworthy in the tech sector than 0:03:26.560 --> 0:03:28.920 other areas. At the same time, a lot of the 0:03:28.960 --> 0:03:32.240 consumer companies are still talking about resiliency, so you know, 0:03:32.280 --> 0:03:34.639 there's good news and that whatever this is is starting, 0:03:34.920 --> 0:03:38.480 there's also you know, kind of good news in that UM. 0:03:38.600 --> 0:03:40.680 Some of that resiliency on the consumer side of the 0:03:40.720 --> 0:03:43.560 economy is still being seen by the corpus, which should 0:03:43.560 --> 0:03:45.640 limit some of the economic carnage that we have to 0:03:45.800 --> 0:03:48.600 endure this year. I've also been hardened to see that 0:03:48.640 --> 0:03:51.080 when companies are talking about guidance, that a lot of 0:03:51.080 --> 0:03:53.800 them are referring to a mild or short recessions. So 0:03:53.880 --> 0:03:55.680 even if the numbers may still feel a little bit 0:03:55.680 --> 0:03:57.560 too high, I do think a lot of companies are 0:03:57.640 --> 0:04:01.560 baking in that software economic scenario into their thinking. Um, 0:04:01.560 --> 0:04:03.280 they're just telling us that, you know, they think that 0:04:03.320 --> 0:04:05.520 they can get through it pretty well. Um. And I've 0:04:05.520 --> 0:04:07.320 also been intrigued with me that a lot of companies 0:04:07.360 --> 0:04:10.800 when they're talking about the forward look are talking about recovery, 0:04:10.880 --> 0:04:13.720 whether it's later this year on certain metrics or whether 0:04:13.720 --> 0:04:17.160 it's four on earnings. And I think that's very important 0:04:17.160 --> 0:04:20.200 because I think that markets have just been pricing everything 0:04:20.320 --> 0:04:24.159 in very very early. I think the economic challenges of 0:04:25.040 --> 0:04:28.159 got price then back in um. And so I think 0:04:28.200 --> 0:04:32.160 investors themselves are ready to start looking ahead too and recovery, 0:04:32.160 --> 0:04:35.000 and the companies are giving the client an excuse to 0:04:35.040 --> 0:04:38.320 do that. Speaking with Lori calvacin ahead of US Equity 0:04:38.360 --> 0:04:41.880 strategy at RBC Capital Markets, of course it's a long 0:04:41.920 --> 0:04:45.920 way before we get to Lori. So in the meantime, 0:04:45.960 --> 0:04:49.680 given what you're telling me, are you sticking with value 0:04:50.080 --> 0:04:53.680 as a strategy as opposed to growth at least in 0:04:53.680 --> 0:04:56.560 the medium term. So we've got our our feet in 0:04:56.560 --> 0:04:59.000 in both pools, so to speak. Um, you know, I 0:04:59.080 --> 0:05:02.440 do think that growth is appealing in the context of 0:05:03.120 --> 0:05:05.960 after we get through this period of economic challenge. I 0:05:06.000 --> 0:05:09.200 think there's sluggish growth economically waiting us. On the other side, 0:05:09.200 --> 0:05:10.880 I think that's the price we pay for a short, 0:05:10.920 --> 0:05:13.120 shallow recession, is not having much in the way of 0:05:13.160 --> 0:05:16.440 exciting GP GDP growth for a while, And traditionally that's 0:05:16.440 --> 0:05:18.560 an environment which you want to be in growth stocks. 0:05:18.600 --> 0:05:20.960 So we like areas like technology. We think it's sort 0:05:21.000 --> 0:05:22.400 of the best of the bunch. If you're kind of 0:05:22.400 --> 0:05:25.800 looking at the growth sectors, I think you've evaluations never 0:05:25.839 --> 0:05:28.240 looked great there, but you've got high quality. A lot 0:05:28.279 --> 0:05:30.359 of the industries and you know, sort of within that 0:05:30.400 --> 0:05:32.400 space look like they're pretty washed out in terms of 0:05:32.440 --> 0:05:35.599 earning sentiment and are starting to recover. Um, So we 0:05:35.640 --> 0:05:38.720 want to keep some exposure there. Um. I do think 0:05:38.760 --> 0:05:41.359 on the value side, they'll um. You do want to 0:05:41.360 --> 0:05:43.800 have some exposure there as well, because one of the 0:05:43.839 --> 0:05:46.200 things that we see about, you know, big kind of 0:05:46.279 --> 0:05:49.640 challenging periods, whether it's the financial crisis, the tech bubble, 0:05:50.120 --> 0:05:53.960 these are all things that esure in big changes in leadership, 0:05:53.960 --> 0:05:56.240 and I think kind of this pandemic era should be 0:05:56.279 --> 0:05:58.320 thought of in that regard as well. So that would 0:05:58.360 --> 0:06:01.440 suggest moving away from growth and back of value. UM. 0:06:01.480 --> 0:06:03.600 I think that on the value side, we continue to 0:06:03.640 --> 0:06:06.839 see the best valuations in financials and energy. I do 0:06:06.920 --> 0:06:09.200 think that they have a short term problem in that 0:06:09.520 --> 0:06:12.440 they were resilient on earnings expectations last year, so they've 0:06:12.480 --> 0:06:14.200 got to take their lumps right now in terms of 0:06:14.200 --> 0:06:16.880 getting some earnings down grades in. But I think the 0:06:16.880 --> 0:06:19.640 good news is the valuations are pretty appealing. We think 0:06:19.720 --> 0:06:22.240 energy is a more investible sector, and financials is an 0:06:22.279 --> 0:06:24.880 area that typically does well once markets are convinced a 0:06:24.960 --> 0:06:26.960 recession low has been put in place, so it's a 0:06:27.000 --> 0:06:29.560 good rebound area to be in. UM. So I think 0:06:29.560 --> 0:06:32.240 you want to maintain exposure to both buckets, but really 0:06:32.240 --> 0:06:35.080 be selective within each of those. Yeah, it's interesting to 0:06:35.120 --> 0:06:39.760 think as well about financials potentially doing well in this 0:06:39.960 --> 0:06:44.400 kind of Federal Reserve central bank policy environment where we're 0:06:44.440 --> 0:06:47.880 seeing rates moving higher, the potential for that as well. 0:06:47.920 --> 0:06:52.480 It's interesting as well to think about tech potentially outperforming 0:06:52.640 --> 0:06:56.359 given that tighter policy environment. How much could the Fed 0:06:56.600 --> 0:06:59.400 have an impact on where stocks go from here? I 0:06:59.440 --> 0:07:01.560 think that we need to get to the pause. UM. 0:07:01.800 --> 0:07:03.839 You know, I've become less convinced that we need the 0:07:03.920 --> 0:07:06.120 actual cuts. But I think if you look at how 0:07:06.240 --> 0:07:08.919 sectors performed to start the year, they're really starting to 0:07:08.960 --> 0:07:12.320 bake in that idea the FED pause um historically, and 0:07:12.360 --> 0:07:14.720 we did a study where we look at what sectors 0:07:14.760 --> 0:07:17.280 tend to do well after your final FED hikes going 0:07:17.320 --> 0:07:19.760 back to the mid nineties, and it was interesting because 0:07:19.800 --> 0:07:22.480 you do tend to see the growth sectors like technology, 0:07:22.520 --> 0:07:26.160 like communication, services like consumer discretionary do quite well. So 0:07:26.240 --> 0:07:28.360 the fact that those three sectors had such a nice 0:07:28.360 --> 0:07:30.400 start to the year in January, it was really telling 0:07:30.440 --> 0:07:32.960 us markets were starting to try to price in that pause. 0:07:33.280 --> 0:07:35.920 Financials is another area for you know that act interestingly 0:07:35.960 --> 0:07:37.960 does well after the final hikes, not as well as 0:07:37.960 --> 0:07:40.400 the growth sectors um, but does tend to do pretty 0:07:40.400 --> 0:07:44.200 well afterwards. UM. I think that you know, the market 0:07:44.520 --> 0:07:47.240 needs to know and needs to remain convinced that we're 0:07:47.280 --> 0:07:50.160 closer to the end than the beginning. I think that 0:07:50.680 --> 0:07:52.520 you know, where the FED ends up at the end 0:07:52.560 --> 0:07:54.400 of the year is going to have a big determinant 0:07:54.440 --> 0:07:57.680 on the pe multiple um that we pay for this market. 0:07:58.200 --> 0:08:00.160 And you know, when I sort of talk of out 0:08:00.400 --> 0:08:03.120 potential upside to undred, that's baking in kind of a 0:08:03.160 --> 0:08:06.400 twenty two plus trailing PE multiple on my earnings number, 0:08:07.080 --> 0:08:08.920 and I'll share you all the details that that's based 0:08:08.920 --> 0:08:11.920 on a model that has a couple FED cut baked 0:08:11.920 --> 0:08:14.200 into the end of the year. I think FED around 0:08:14.200 --> 0:08:17.160 four seven five ten year treasury yield at three four. 0:08:17.480 --> 0:08:19.640 If I take those assumptions up a little bit and 0:08:19.720 --> 0:08:22.120 raise those interest rate levels, I come out there's something 0:08:22.160 --> 0:08:24.560 that's a little closer to my target of forty one DRED, 0:08:24.600 --> 0:08:27.880 which implies something more like a twenty times PE multiple. 0:08:28.360 --> 0:08:31.160 Um So I think that you know the short answer, 0:08:31.200 --> 0:08:33.800 here's those interest rate levels. What happens with inflation is 0:08:33.800 --> 0:08:36.640 going to dictate the PE multiple, But a higher for 0:08:36.760 --> 0:08:39.840 longer FED may not be as disastrous for the PE 0:08:39.920 --> 0:08:41.600 multiple as a lot of the bears on the street 0:08:41.640 --> 0:08:44.760 have been trying to imply. Since it is President stay, Laura, 0:08:44.760 --> 0:08:46.400 I want to ask you about something I know you've 0:08:46.400 --> 0:08:50.320 been keeping your eye on that the president President Biden 0:08:50.520 --> 0:08:52.360 is going to be embroiled in over the next few months, 0:08:52.400 --> 0:08:56.000 and that's the debt ceiling debate. Is this something investors 0:08:56.240 --> 0:08:59.640 should be concerned about at this point? A potential default 0:08:59.679 --> 0:09:01.680 in the last the next couple of months, you know, 0:09:01.840 --> 0:09:04.720 it's you hear varying opinions on this, and you know, 0:09:04.880 --> 0:09:07.960 from my from my state of mind, you know, I 0:09:08.000 --> 0:09:09.960 think that the risks are starting to a morge more 0:09:10.000 --> 0:09:11.680 in the back half of the year. And I think 0:09:11.679 --> 0:09:15.240 that markets never like uncertainty, um and particularly don't like 0:09:15.440 --> 0:09:18.240 uncertainty with some of these throning political issues. And I 0:09:18.280 --> 0:09:21.160 think one of the impacts of the mid terms and 0:09:21.240 --> 0:09:23.839 having that you know, sort of very precarious balance of 0:09:23.880 --> 0:09:27.040 power for Republicans in the House, um, you know, and 0:09:27.200 --> 0:09:30.560 and the split Congress, I think the implications for the 0:09:30.600 --> 0:09:33.319 depth seeling negotiations, you know, are probably one of the 0:09:33.360 --> 0:09:35.680 most meaningful things we have coming out of that. In 0:09:35.720 --> 0:09:37.880 the short term, I just think it's going to be 0:09:38.000 --> 0:09:40.600 very difficult, um you know, based on that that that 0:09:40.640 --> 0:09:42.959 balance of power for a deal to get struck. And 0:09:43.040 --> 0:09:45.679 so if we assume that, you know, everyone down in 0:09:45.760 --> 0:09:48.760 DC has uh the economy's best interests at heart, and 0:09:48.840 --> 0:09:50.280 we'll find a way to get it done, you know, 0:09:50.440 --> 0:09:52.440 I hope that's true, but it feels like it's going 0:09:52.520 --> 0:09:54.679 to be more difficult to get to that point than 0:09:54.720 --> 0:09:57.160 it has in the past. And if we look at 0:09:57.200 --> 0:09:58.880 markets and we're sort of you know, kind of done 0:09:58.880 --> 0:10:01.240 a year's worth, um, you know, of what I think 0:10:01.280 --> 0:10:03.360 is a deserved move in the first month plus of 0:10:03.400 --> 0:10:06.560 the year, a month and a half of the year. Um, 0:10:06.600 --> 0:10:09.760 you know, sentiment is rebounding very very quickly. We could 0:10:09.840 --> 0:10:12.760 get to a point by midyear when those negotiations are 0:10:12.760 --> 0:10:15.880 really coming into the forefront where it doesn't take a 0:10:15.960 --> 0:10:18.520 lot to knock the market down. So, you know, I 0:10:18.559 --> 0:10:21.080 am worried about. It's something we're keeping an eye on. 0:10:21.160 --> 0:10:22.959 We're not seeing a ton of chatter of it about 0:10:23.000 --> 0:10:25.599 it from companies yet, but we expect to see it 0:10:25.640 --> 0:10:28.720 pick up. Yeah with Meg and so since the time 0:10:28.760 --> 0:10:32.319 for it to run out potentially could be early this summer. 0:10:32.360 --> 0:10:35.080 Thanks for this as always, Lorie, great speaking with you. 0:10:35.480 --> 0:10:38.800 Thanks for having me our Thanks to Lorie Calvacina, head 0:10:38.800 --> 0:10:44.440 of US Equity Strategy at RBC Capital Markets. Welcome back 0:10:44.440 --> 0:10:47.640 to this special edition of Bloomberg Daybreak. I'm Nathan Hager. 0:10:47.679 --> 0:10:51.120 The US stock market is closed on this President's Day holiday. 0:10:51.280 --> 0:10:53.479 We now want to turn our focus to the economy. 0:10:53.679 --> 0:10:56.920 Inflation and interest rates continue to be top of mind 0:10:56.960 --> 0:11:00.240 for investors in so what's in store for the rest 0:11:00.320 --> 0:11:03.640 of this year. Let's bring in Tiffany Wilding for some insights, 0:11:03.679 --> 0:11:07.000 the chief US economist at Pimcope. Tiffany, it's great to 0:11:07.000 --> 0:11:09.280 speak with you on this holiday, and I guess it's 0:11:09.320 --> 0:11:13.199 great to keep seeing signs of resilience in this economy. 0:11:13.240 --> 0:11:16.240 What does that tell you about the path ahead for 0:11:16.320 --> 0:11:19.320 the Fed? Yeah, well, first, thanks for having me, Nathan, 0:11:19.360 --> 0:11:21.160 It's great to be on the show. UM. I think 0:11:21.160 --> 0:11:23.880 it's a little bit of good news, UM, but also 0:11:24.280 --> 0:11:27.240 a little bit of bad news in the sense that, yes, 0:11:27.320 --> 0:11:30.200 the U. S economy has been much more resilient, you know, 0:11:30.240 --> 0:11:34.520 than we and many forecasters were expecting. Um. But but nevertheless, 0:11:34.520 --> 0:11:37.960 as a result of that, um, you know, inflationary pressures 0:11:38.000 --> 0:11:42.079 could remain high for longer than expected, and that ultimately 0:11:42.160 --> 0:11:46.079 requires the Federal Reserve to to raise rates more UM. 0:11:46.160 --> 0:11:49.040 And so that um you obviously will will continue to 0:11:49.160 --> 0:11:52.560 put downward pressure on economic activity to get inflation down. 0:11:52.840 --> 0:11:54.599 You know. So even though the the economy is a 0:11:54.640 --> 0:11:57.400 little bit more resilient now, you know, that doesn't really 0:11:57.520 --> 0:11:59.839 change the outlook, because that just means the Fed has 0:11:59.880 --> 0:12:02.400 to do a little bit more work. That sounds a 0:12:02.440 --> 0:12:05.880 lot like the message we keep hearing from a parade 0:12:06.000 --> 0:12:11.280 of FED speakers, including Federal Reserve Chairman Jerome Powell. In fact, 0:12:11.360 --> 0:12:14.439 earlier this month, he was talking about just that with 0:12:14.559 --> 0:12:18.440 David Rubinstein at the Economic Club of Washington. Let's play 0:12:18.480 --> 0:12:20.000 a little bit of what he had to say. We 0:12:20.080 --> 0:12:23.680 have a significant road ahead to get inflation down to 0:12:23.679 --> 0:12:27.320 two percent, and I think there's been an expectation that 0:12:27.360 --> 0:12:30.280 it will that will go away quickly and painlessly, and 0:12:30.440 --> 0:12:32.520 I don't think that's it all guaranteed. That's not the 0:12:32.520 --> 0:12:34.320 base case. The base cases it will t for me 0:12:34.440 --> 0:12:37.280 is that it will take some time, and we will 0:12:37.320 --> 0:12:39.080 have to do more rate increases, and then we'll have 0:12:39.080 --> 0:12:41.120 to look around to see whether we've done enough. It's 0:12:41.160 --> 0:12:44.560 a pretty broad base case, isn't it. Tiffany, how much 0:12:44.640 --> 0:12:48.320 time do you think is some time for this FED 0:12:48.400 --> 0:12:51.760 to get inflation back to target? Well, I mean, that's 0:12:51.800 --> 0:12:55.880 clearly the key question here, As Powell noted, you know, 0:12:56.000 --> 0:13:00.439 ultimately our forecast for for core CPI inflation, for example, 0:13:00.520 --> 0:13:02.959 is that it will get down to three percent by 0:13:03.000 --> 0:13:05.480 the end of this year. You know, so that's down 0:13:05.520 --> 0:13:08.679 from six Obviously that is not in line with the 0:13:08.679 --> 0:13:12.040 fence target. We have said, you know, from a headline 0:13:12.040 --> 0:13:15.040 inflation perspective that getting from eight to four will be 0:13:15.080 --> 0:13:19.040 relatively easy because there is still some pandemic related effects 0:13:19.080 --> 0:13:22.199 that are impacting the year of your rate of headline inflation. 0:13:22.240 --> 0:13:25.360 But getting from four to two, that'll take a little 0:13:25.400 --> 0:13:29.119 bit more time, um, you know. And again, as you suggested, 0:13:29.160 --> 0:13:31.640 exactly how much time is, there's a lot of uncertainty 0:13:31.640 --> 0:13:34.720 around that, and I would say incrementally, we've actually recently 0:13:34.760 --> 0:13:37.720 gotten some not so great news on that. Um you know, 0:13:37.760 --> 0:13:41.000 this is maybe a little bit wonky, but the statistical agencies, 0:13:41.040 --> 0:13:45.400 the cp I, the BLS that releases the CPI recently, um, 0:13:45.440 --> 0:13:49.559 you know, revised their their measure and it suggests that 0:13:49.600 --> 0:13:52.760 actually some of the disinflation that we thought we were 0:13:52.800 --> 0:13:56.520 seeing at your end actually didn't happen. It was revised away. Um, 0:13:56.559 --> 0:13:59.000 And so that suggests that maybe inflation could come down 0:13:59.000 --> 0:14:01.240 even a little bit more slowly than many were expecting. 0:14:01.280 --> 0:14:03.880 So that's obviously not very good news. Is it making 0:14:03.920 --> 0:14:07.200 it more difficult than to see the impact that the 0:14:07.520 --> 0:14:10.640 tightening that we've gotten from this Federal Reserve over the 0:14:10.760 --> 0:14:13.880 last few months of like four hundred basis points in 0:14:14.280 --> 0:14:18.440 rate increases whether that's actually having an effect on the 0:14:18.480 --> 0:14:22.000 inflationary re pressures that are in this economy. Yeah, So 0:14:22.080 --> 0:14:26.000 I think that the reaction to the pandemic as well 0:14:26.200 --> 0:14:28.880 from the fiscal authority, you know, from the government's UH 0:14:29.080 --> 0:14:33.880 as well as UM, the supply chain bottlenecks actually are creating, 0:14:34.200 --> 0:14:37.280 you know, somewhat different relationships with how monetary policy affects 0:14:37.280 --> 0:14:39.840 the economy these days. In other words, it's actually making 0:14:39.920 --> 0:14:43.160 monetary policy impact the economy with a little bit longer 0:14:43.200 --> 0:14:45.680 of a lag potentially than what we're normally used to. 0:14:45.880 --> 0:14:48.320 And that's because you know, the post you know, the 0:14:48.320 --> 0:14:54.560 pandemic related government spending, increased consumer UH you know, increased 0:14:54.560 --> 0:14:57.200 consumer savings, and they have a buffer, and then the 0:14:57.240 --> 0:15:00.840 supply chain bottlenecks resulted in major backlaw hugs for for 0:15:00.920 --> 0:15:03.800 various companies, which they're still working through. So as a 0:15:03.840 --> 0:15:07.520 result of these buffers, we are still having very resilient 0:15:07.560 --> 0:15:10.280 and very strong activity UM you know. But of course, 0:15:10.320 --> 0:15:12.400 as we work through them, you know, the story will 0:15:12.440 --> 0:15:14.240 be a bit different, you know. And I think that's 0:15:14.280 --> 0:15:16.960 why we're seeing some greater lag and the monetary policy 0:15:17.000 --> 0:15:20.400 transmission mechanism because we still have those buffers. So does 0:15:20.440 --> 0:15:22.760 that raise the possibility then that we could get an 0:15:22.800 --> 0:15:26.000 overshoot from the Federal Reserve if they haven't given themselves 0:15:26.040 --> 0:15:30.800 the time to see whether the lag is allowing the 0:15:30.880 --> 0:15:34.320 policy that's already been put out to have that effect. Yeah, 0:15:34.360 --> 0:15:37.960 I mean certainly, And I think that the obviously the 0:15:37.960 --> 0:15:41.080 Photo Reserve and with monetary policy, they have to balance 0:15:41.120 --> 0:15:43.600 the various risks that are out there. You know. Not 0:15:43.880 --> 0:15:46.600 there's an obvious one of the fact they maybe are 0:15:46.640 --> 0:15:49.960 doing too much um and and then they will send 0:15:49.960 --> 0:15:54.000 the economy sort of needlessly into a weaker state. UM. 0:15:54.000 --> 0:15:56.200 But obviously the other risk that they're trying to balance 0:15:56.280 --> 0:15:58.640 is is that, you know, as we discussed, inflation may 0:15:58.680 --> 0:16:01.680 prove to be a bit sticky than expected. It may 0:16:01.720 --> 0:16:03.720 need more work from them in order to bring it down. 0:16:03.760 --> 0:16:07.240 So I think, you know, currently their balancing act has 0:16:07.280 --> 0:16:10.240 basically led them to slow down the pace of rate hikes. 0:16:10.280 --> 0:16:12.680 For example, we're now at a more you know, at 0:16:12.760 --> 0:16:16.400 least kind of more historically somewhat more normal rate of 0:16:16.440 --> 0:16:19.720 twenty five basis point rate hikes per meeting UM, and 0:16:19.720 --> 0:16:21.760 the Photo Reserve has has said, you know, we're going 0:16:21.800 --> 0:16:24.160 to continue at that pace basically until we see more 0:16:24.160 --> 0:16:26.320 progress on inflation, you know. So I think that's the 0:16:26.360 --> 0:16:29.240 kind of balance that they've reached right now. So where 0:16:29.240 --> 0:16:32.400 do you think the FED needs to get when it 0:16:32.720 --> 0:16:37.240 comes to restrictive territory? Have they gotten there at this point? 0:16:37.280 --> 0:16:42.280 Do they have further to go? What's your view? Yeah? Well, well, so, um, 0:16:42.320 --> 0:16:46.840 you know, the a tailor rule would would suggest that 0:16:47.000 --> 0:16:50.960 they need to get the FED funds rate above wherever 0:16:51.040 --> 0:16:54.080 they think the underlying trended inflation is. So I mentioned before, 0:16:54.120 --> 0:16:57.480 there's still pandemic related effects that will go away that 0:16:57.600 --> 0:17:00.560 are impacting inflation. So really the tricky thing right now, 0:17:00.680 --> 0:17:03.680 so try to figure out, excluding those effects, where is 0:17:03.720 --> 0:17:06.080 the underlying trend and inflation, and you know, to us 0:17:06.119 --> 0:17:07.639 it kind of looks like it's between three and a 0:17:07.640 --> 0:17:09.760 half and four, you know, so they need to at 0:17:09.800 --> 0:17:13.160 a minimum get the Fed funds rate above that level, um, 0:17:13.160 --> 0:17:17.480 And their recent projections from the SEP and December suggested 0:17:17.480 --> 0:17:19.520 they would get up to around five percent a little 0:17:19.520 --> 0:17:23.080 bit above that. So that's obviously above that kind of 0:17:23.160 --> 0:17:24.480 you know, three to four three and a half to 0:17:24.520 --> 0:17:27.359 four percent trend that we mentioned, you know, but more recently, 0:17:28.600 --> 0:17:32.479 the communications that we've gotten from from them maybe suggest 0:17:32.520 --> 0:17:34.720 that they maybe even will go a little bit above that, 0:17:34.880 --> 0:17:36.960 so maybe closer to three and a half excuse me, 0:17:37.000 --> 0:17:39.720 five and a half percent. But but ultimately, you know, 0:17:39.880 --> 0:17:42.480 where they ultimately end up the terminal rate of this 0:17:42.560 --> 0:17:45.080 hiking cycle. You know, obviously it's very uncertain. They're going 0:17:45.119 --> 0:17:47.680 to be probing for that, you know, trying to understand 0:17:47.680 --> 0:17:50.639 how much is too much, um, you know, and ultimately 0:17:50.720 --> 0:17:53.280 they will will sort of continue to assess the data 0:17:53.560 --> 0:17:55.920 to try to figure that out, um and continue to 0:17:55.920 --> 0:17:59.000 balance those risks that I mentioned before. You also mentioned 0:17:59.040 --> 0:18:02.960 before that you're projecting that inflation is going to get 0:18:02.960 --> 0:18:05.160 down to three percent by the end of this year. 0:18:05.200 --> 0:18:08.080 Obviously that's just a little bit higher than the FEDS 0:18:08.160 --> 0:18:11.760 target of two Does a two percent inflation target still 0:18:11.800 --> 0:18:15.000 makes sense? Is it realistic? Yeah? I think that's a 0:18:15.080 --> 0:18:18.440 really great question, you know, And obviously right now, when 0:18:18.440 --> 0:18:22.560 inflation is elevated, you know, Chair Pal has to be 0:18:22.720 --> 0:18:27.800 very resolute in his communication to you know, I'm bringing 0:18:27.800 --> 0:18:30.560 inflation down. So I think recently he's suggested that they're 0:18:30.560 --> 0:18:34.560 not revisiting the two percent inflation target. Um. You know, 0:18:34.600 --> 0:18:37.480 that's completely off the table right now. Nevertheless, though, you know, 0:18:37.480 --> 0:18:41.119 when inflation has come down, um, you know, to three percent, 0:18:41.520 --> 0:18:43.760 you know that I think, you know, is reason for 0:18:43.800 --> 0:18:46.160 a little bit of victory, uh, you know, a bit 0:18:46.160 --> 0:18:48.840 of a victory lab from Federal Reserve officials, um, and 0:18:48.920 --> 0:18:51.840 three percent, you know, even though they say their inflation 0:18:51.880 --> 0:18:55.040 target is at to three percent, might be you know, okay, 0:18:55.080 --> 0:18:57.960 at least for for a time. Um, you know. Now, 0:18:58.080 --> 0:19:02.280 there's really no magic around on that two percent level. Um. 0:19:02.320 --> 0:19:05.040 That two percent level you know, kind of came from 0:19:05.359 --> 0:19:07.919 uh you know, the Central Bank of New Zealand, you know, 0:19:08.080 --> 0:19:10.879 several several decades ago, and it sounded like a level 0:19:10.920 --> 0:19:13.600 that was was pretty good. Um, you know, but there's 0:19:13.680 --> 0:19:16.840 no real magic around that level. It could be three percent, 0:19:16.920 --> 0:19:18.560 it could be one percent, you know. And so I 0:19:18.600 --> 0:19:20.680 think that you know, given that, you know, there probably 0:19:20.680 --> 0:19:23.480 will be some room once inflation comes down it's getting 0:19:23.480 --> 0:19:25.560 close to target, there will be a little bit of 0:19:25.600 --> 0:19:28.120 wiggle room there that the Federal Reserve will say, Okay, 0:19:28.160 --> 0:19:31.440 maybe it's not exactly a target yet, but that's okay. 0:19:31.440 --> 0:19:33.600 Thanks for this, Tiffany, great having you on with us, 0:19:33.760 --> 0:19:38.200 Thanks for having me. That's PIMCA Chief US economist Tiffany Wilding. 0:19:40.040 --> 0:19:43.320 Welcome back to this special President's Day edition of Bloomberg Daybreak. 0:19:43.400 --> 0:19:46.320 I'm Nathan Hagar. Let's turn our focus now to earnings 0:19:46.359 --> 0:19:48.320 because we're gonna hear from a couple of giants in 0:19:48.359 --> 0:19:52.879