Speaker 1: Thank you so much for joining us for this President's
Speaker 1: Day edition of Bloomberg Daybreak. I'm Nathan Hagar. Coming up
Speaker 1: this hour. We'll look at what's ahead for the economy
Speaker 1: and the Federal Reserve with PIMCA Chief US Economist Tiffany Wilding.
Speaker 1: Plus we'll turn the focus to retail. Both Walmart and
Speaker 1: Home Depot report their earnings. Tomorrow we'll preview with Bloomberg
Speaker 1: Intelligence Senior analyst Jennifer Bartashes. But first we want to
Speaker 1: start with the stock market has gotten off to a
Speaker 1: pretty good start if you're a bull, so is the
Speaker 1: worst behind us? For equities, Let's bring in Lorie Calvacina
Speaker 1: for some analysis, head of US Equity Strategy at RBC
Speaker 1: Capital Markets. It has been quite the rally, and it
Speaker 1: seems like stocks are holding onto it in the month
Speaker 1: of February. How do you see equities position, Lorie as
Speaker 1: we moved through the rest of this quarter. Well, thanks
Speaker 1: for having me, and look, I think that you know,
Speaker 1: we're sort of an interesting spot. I've got a target
Speaker 1: for year end and I still very much like that number.
Speaker 1: I think of it as a December thirty one number,
Speaker 1: but at times earlier this year we've traded above that, UM,
Speaker 1: and so I find myself feeling quite neutral. I do
Speaker 1: think that the barish case for equities has been overstated. Um.
Speaker 1: You know, I've been accused of being a bull. Um.
Speaker 1: You know. Again, I feel more neutral, but I do
Speaker 1: have certain models that tell us we could hit forty
Speaker 1: fred by the end of the year. So perhaps I
Speaker 1: guess that that puts me in the bullish camp. UM.
Speaker 1: But I will say this, I think that we are
Speaker 1: still in a period of messy normalization post the COVID crisis,
Speaker 1: very similar to very similar to two thousand to two
Speaker 1: thousand three, and so I do think things are going
Speaker 1: to continue to be choppy this year. And I think
Speaker 1: October was probably the low UM for kind of this
Speaker 1: three period of economic challenge, recession weakness, whatever we end
Speaker 1: up calling it. UM. And I do think that equities
Speaker 1: perhaps do need to sort of exhale, right and or
Speaker 1: maybe a little bit over do for a breather in
Speaker 1: the short term. UM. So I think, you know, things
Speaker 1: are going to continue to be choppy for a while,
Speaker 1: But that doesn't mean I'm feeling terrible about things. Well,
Speaker 1: let's breakdown a little bit of your view here. You
Speaker 1: said that the bear case may be overstated. Talk a
Speaker 1: little bit more about that. Why do you think that is? So?
Speaker 1: You know, I think there's been this view right that
Speaker 1: earnings forecast still have to come down. We're in the
Speaker 1: middle of doing that right now. UM, and that that's
Speaker 1: got a pummel stocks. And you know, I think even
Speaker 1: we were worried about the onset of more challenging economic conditions, UM,
Speaker 1: kind of taking some of the window out of sales
Speaker 1: of stocks. But I will tell you, Nathan, you know,
Speaker 1: as I think back to kind of my December and
Speaker 1: early January meeting, UM, I found that, you know, every
Speaker 1: strategist was sort of making the same kind of call.
Speaker 1: And if you look back at the December weakness, I
Speaker 1: think a lot of that was getting filtered into stock
Speaker 1: prices already. So maybe that weakness that we deserve to see, UM,
Speaker 1: I think just simply got pulled forward. So we have
Speaker 1: gotten through the bulk of this current earning season. How
Speaker 1: do you view what companies have told us so far
Speaker 1: and how does that position us as we head through
Speaker 1: the better part of the first half of this year.
Speaker 1: So I think it's been very muddled messaging. If you
Speaker 1: read through the artiens called transcripts, which my team and
Speaker 1: I are trying our best to read as money as
Speaker 1: we can UM, and what we have found is that,
Speaker 1: you know, there's some good and there's some bad. From
Speaker 1: a macro perspective, I think that one of the things
Speaker 1: we noticed that and one of the sectors I'm reading
Speaker 1: is tech UM is that you know, we have started
Speaker 1: to see the onset of slowing start to show up
Speaker 1: in a lot of the company commentary, and that perhaps
Speaker 1: it's most no more noteworthy in the tech sector than
Speaker 1: other areas. At the same time, a lot of the
Speaker 1: consumer companies are still talking about resiliency, so you know,
Speaker 1: there's good news and that whatever this is is starting,
Speaker 1: there's also you know, kind of good news in that UM.
Speaker 1: Some of that resiliency on the consumer side of the
Speaker 1: economy is still being seen by the corpus, which should
Speaker 1: limit some of the economic carnage that we have to
Speaker 1: endure this year. I've also been hardened to see that
Speaker 1: when companies are talking about guidance, that a lot of
Speaker 1: them are referring to a mild or short recessions. So
Speaker 1: even if the numbers may still feel a little bit
Speaker 1: too high, I do think a lot of companies are
Speaker 1: baking in that software economic scenario into their thinking. Um,
Speaker 1: they're just telling us that, you know, they think that
Speaker 1: they can get through it pretty well. Um. And I've
Speaker 1: also been intrigued with me that a lot of companies
Speaker 1: when they're talking about the forward look are talking about recovery,
Speaker 1: whether it's later this year on certain metrics or whether
Speaker 1: it's four on earnings. And I think that's very important
Speaker 1: because I think that markets have just been pricing everything
Speaker 1: in very very early. I think the economic challenges of
Speaker 1: got price then back in um. And so I think
Speaker 1: investors themselves are ready to start looking ahead too and recovery,
Speaker 1: and the companies are giving the client an excuse to
Speaker 1: do that. Speaking with Lori calvacin ahead of US Equity
Speaker 1: strategy at RBC Capital Markets, of course it's a long
Speaker 1: way before we get to Lori. So in the meantime,
Speaker 1: given what you're telling me, are you sticking with value
Speaker 1: as a strategy as opposed to growth at least in
Speaker 1: the medium term. So we've got our our feet in
Speaker 1: in both pools, so to speak. Um, you know, I
Speaker 1: do think that growth is appealing in the context of
Speaker 1: after we get through this period of economic challenge. I
Speaker 1: think there's sluggish growth economically waiting us. On the other side,
Speaker 1: I think that's the price we pay for a short,
Speaker 1: shallow recession, is not having much in the way of
Speaker 1: exciting GP GDP growth for a while, And traditionally that's
Speaker 1: an environment which you want to be in growth stocks.
Speaker 1: So we like areas like technology. We think it's sort
Speaker 1: of the best of the bunch. If you're kind of
Speaker 1: looking at the growth sectors, I think you've evaluations never
Speaker 1: looked great there, but you've got high quality. A lot
Speaker 1: of the industries and you know, sort of within that
Speaker 1: space look like they're pretty washed out in terms of
Speaker 1: earning sentiment and are starting to recover. Um, So we
Speaker 1: want to keep some exposure there. Um. I do think
Speaker 1: on the value side, they'll um. You do want to
Speaker 1: have some exposure there as well, because one of the
Speaker 1: things that we see about, you know, big kind of
Speaker 1: challenging periods, whether it's the financial crisis, the tech bubble,
Speaker 1: these are all things that esure in big changes in leadership,
Speaker 1: and I think kind of this pandemic era should be
Speaker 1: thought of in that regard as well. So that would
Speaker 1: suggest moving away from growth and back of value. UM.
Speaker 1: I think that on the value side, we continue to
Speaker 1: see the best valuations in financials and energy. I do
Speaker 1: think that they have a short term problem in that
Speaker 1: they were resilient on earnings expectations last year, so they've
Speaker 1: got to take their lumps right now in terms of
Speaker 1: getting some earnings down grades in. But I think the
Speaker 1: good news is the valuations are pretty appealing. We think
Speaker 1: energy is a more investible sector, and financials is an
Speaker 1: area that typically does well once markets are convinced a
Speaker 1: recession low has been put in place, so it's a
Speaker 1: good rebound area to be in. UM. So I think
Speaker 1: you want to maintain exposure to both buckets, but really
Speaker 1: be selective within each of those. Yeah, it's interesting to
Speaker 1: think as well about financials potentially doing well in this
Speaker 1: kind of Federal Reserve central bank policy environment where we're
Speaker 1: seeing rates moving higher, the potential for that as well.
Speaker 1: It's interesting as well to think about tech potentially outperforming
Speaker 1: given that tighter policy environment. How much could the Fed
Speaker 1: have an impact on where stocks go from here? I
Speaker 1: think that we need to get to the pause. UM.
Speaker 1: You know, I've become less convinced that we need the
Speaker 1: actual cuts. But I think if you look at how
Speaker 1: sectors performed to start the year, they're really starting to
Speaker 1: bake in that idea the FED pause um historically, and
Speaker 1: we did a study where we look at what sectors
Speaker 1: tend to do well after your final FED hikes going
Speaker 1: back to the mid nineties, and it was interesting because
Speaker 1: you do tend to see the growth sectors like technology,
Speaker 1: like communication, services like consumer discretionary do quite well. So
Speaker 1: the fact that those three sectors had such a nice
Speaker 1: start to the year in January, it was really telling
Speaker 1: us markets were starting to try to price in that pause.
Speaker 1: Financials is another area for you know that act interestingly
Speaker 1: does well after the final hikes, not as well as
Speaker 1: the growth sectors um, but does tend to do pretty
Speaker 1: well afterwards. UM. I think that you know, the market
Speaker 1: needs to know and needs to remain convinced that we're
Speaker 1: closer to the end than the beginning. I think that
Speaker 1: you know, where the FED ends up at the end
Speaker 1: of the year is going to have a big determinant
Speaker 1: on the pe multiple um that we pay for this market.
Speaker 1: And you know, when I sort of talk of out
Speaker 1: potential upside to undred, that's baking in kind of a
Speaker 1: twenty two plus trailing PE multiple on my earnings number,
Speaker 1: and I'll share you all the details that that's based
Speaker 1: on a model that has a couple FED cut baked
Speaker 1: into the end of the year. I think FED around
Speaker 1: four seven five ten year treasury yield at three four.
Speaker 1: If I take those assumptions up a little bit and
Speaker 1: raise those interest rate levels, I come out there's something
Speaker 1: that's a little closer to my target of forty one DRED,
Speaker 1: which implies something more like a twenty times PE multiple.
Speaker 1: Um So I think that you know the short answer,
Speaker 1: here's those interest rate levels. What happens with inflation is
Speaker 1: going to dictate the PE multiple, But a higher for
Speaker 1: longer FED may not be as disastrous for the PE
Speaker 1: multiple as a lot of the bears on the street
Speaker 1: have been trying to imply. Since it is President stay, Laura,
Speaker 1: I want to ask you about something I know you've
Speaker 1: been keeping your eye on that the president President Biden
Speaker 1: is going to be embroiled in over the next few months,
Speaker 1: and that's the debt ceiling debate. Is this something investors
Speaker 1: should be concerned about at this point? A potential default
Speaker 1: in the last the next couple of months, you know,
Speaker 1: it's you hear varying opinions on this, and you know,
Speaker 1: from my from my state of mind, you know, I
Speaker 1: think that the risks are starting to a morge more
Speaker 1: in the back half of the year. And I think
Speaker 1: that markets never like uncertainty, um and particularly don't like
Speaker 1: uncertainty with some of these throning political issues. And I
Speaker 1: think one of the impacts of the mid terms and
Speaker 1: having that you know, sort of very precarious balance of
Speaker 1: power for Republicans in the House, um, you know, and
Speaker 1: and the split Congress, I think the implications for the
Speaker 1: depth seeling negotiations, you know, are probably one of the
Speaker 1: most meaningful things we have coming out of that. In
Speaker 1: the short term, I just think it's going to be
Speaker 1: very difficult, um you know, based on that that that
Speaker 1: balance of power for a deal to get struck. And
Speaker 1: so if we assume that, you know, everyone down in
Speaker 1: DC has uh the economy's best interests at heart, and
Speaker 1: we'll find a way to get it done, you know,
Speaker 1: I hope that's true, but it feels like it's going
Speaker 1: to be more difficult to get to that point than
Speaker 1: it has in the past. And if we look at
Speaker 1: markets and we're sort of you know, kind of done
Speaker 1: a year's worth, um, you know, of what I think
Speaker 1: is a deserved move in the first month plus of
Speaker 1: the year, a month and a half of the year. Um,
Speaker 1: you know, sentiment is rebounding very very quickly. We could
Speaker 1: get to a point by midyear when those negotiations are
Speaker 1: really coming into the forefront where it doesn't take a
Speaker 1: lot to knock the market down. So, you know, I
Speaker 1: am worried about. It's something we're keeping an eye on.
Speaker 1: We're not seeing a ton of chatter of it about
Speaker 1: it from companies yet, but we expect to see it
Speaker 1: pick up. Yeah with Meg and so since the time
Speaker 1: for it to run out potentially could be early this summer.
Speaker 1: Thanks for this as always, Lorie, great speaking with you.
Speaker 1: Thanks for having me our Thanks to Lorie Calvacina, head
Speaker 1: of US Equity Strategy at RBC Capital Markets. Welcome back
Speaker 1: to this special edition of Bloomberg Daybreak. I'm Nathan Hager.
Speaker 1: The US stock market is closed on this President's Day holiday.
Speaker 1: We now want to turn our focus to the economy.
Speaker 1: Inflation and interest rates continue to be top of mind
Speaker 1: for investors in so what's in store for the rest
Speaker 1: of this year. Let's bring in Tiffany Wilding for some insights,
Speaker 1: the chief US economist at Pimcope. Tiffany, it's great to
Speaker 1: speak with you on this holiday, and I guess it's
Speaker 1: great to keep seeing signs of resilience in this economy.
Speaker 1: What does that tell you about the path ahead for
Speaker 1: the Fed? Yeah, well, first, thanks for having me, Nathan,
Speaker 1: It's great to be on the show. UM. I think
Speaker 1: it's a little bit of good news, UM, but also
Speaker 1: a little bit of bad news in the sense that, yes,
Speaker 1: the U. S economy has been much more resilient, you know,
Speaker 1: than we and many forecasters were expecting. Um. But but nevertheless,
Speaker 1: as a result of that, um, you know, inflationary pressures
Speaker 1: could remain high for longer than expected, and that ultimately
Speaker 1: requires the Federal Reserve to to raise rates more UM.
Speaker 1: And so that um you obviously will will continue to
Speaker 1: put downward pressure on economic activity to get inflation down.
Speaker 1: You know. So even though the the economy is a
Speaker 1: little bit more resilient now, you know, that doesn't really
Speaker 1: change the outlook, because that just means the Fed has
Speaker 1: to do a little bit more work. That sounds a
Speaker 1: lot like the message we keep hearing from a parade
Speaker 1: of FED speakers, including Federal Reserve Chairman Jerome Powell. In fact,
Speaker 1: earlier this month, he was talking about just that with
Speaker 1: David Rubinstein at the Economic Club of Washington. Let's play
Speaker 1: a little bit of what he had to say. We
Speaker 1: have a significant road ahead to get inflation down to
Speaker 1: two percent, and I think there's been an expectation that
Speaker 1: it will that will go away quickly and painlessly, and
Speaker 1: I don't think that's it all guaranteed. That's not the
Speaker 1: base case. The base cases it will t for me
Speaker 1: is that it will take some time, and we will
Speaker 1: have to do more rate increases, and then we'll have
Speaker 1: to look around to see whether we've done enough. It's
Speaker 1: a pretty broad base case, isn't it. Tiffany, how much
Speaker 1: time do you think is some time for this FED
Speaker 1: to get inflation back to target? Well, I mean, that's
Speaker 1: clearly the key question here, As Powell noted, you know,
Speaker 1: ultimately our forecast for for core CPI inflation, for example,
Speaker 1: is that it will get down to three percent by
Speaker 1: the end of this year. You know, so that's down
Speaker 1: from six Obviously that is not in line with the
Speaker 1: fence target. We have said, you know, from a headline
Speaker 1: inflation perspective that getting from eight to four will be
Speaker 1: relatively easy because there is still some pandemic related effects
Speaker 1: that are impacting the year of your rate of headline inflation.
Speaker 1: But getting from four to two, that'll take a little
Speaker 1: bit more time, um, you know. And again, as you suggested,
Speaker 1: exactly how much time is, there's a lot of uncertainty
Speaker 1: around that, and I would say incrementally, we've actually recently
Speaker 1: gotten some not so great news on that. Um you know,
Speaker 1: this is maybe a little bit wonky, but the statistical agencies,
Speaker 1: the cp I, the BLS that releases the CPI recently, um,
Speaker 1: you know, revised their their measure and it suggests that
Speaker 1: actually some of the disinflation that we thought we were
Speaker 1: seeing at your end actually didn't happen. It was revised away. Um,
Speaker 1: And so that suggests that maybe inflation could come down
Speaker 1: even a little bit more slowly than many were expecting.
Speaker 1: So that's obviously not very good news. Is it making
Speaker 1: it more difficult than to see the impact that the
Speaker 1: tightening that we've gotten from this Federal Reserve over the
Speaker 1: last few months of like four hundred basis points in
Speaker 1: rate increases whether that's actually having an effect on the
Speaker 1: inflationary re pressures that are in this economy. Yeah, So
Speaker 1: I think that the reaction to the pandemic as well
Speaker 1: from the fiscal authority, you know, from the government's UH
Speaker 1: as well as UM, the supply chain bottlenecks actually are creating,
Speaker 1: you know, somewhat different relationships with how monetary policy affects
Speaker 1: the economy these days. In other words, it's actually making
Speaker 1: monetary policy impact the economy with a little bit longer
Speaker 1: of a lag potentially than what we're normally used to.
Speaker 1: And that's because you know, the post you know, the
Speaker 1: pandemic related government spending, increased consumer UH you know, increased
Speaker 1: consumer savings, and they have a buffer, and then the
Speaker 1: supply chain bottlenecks resulted in major backlaw hugs for for
Speaker 1: various companies, which they're still working through. So as a
Speaker 1: result of these buffers, we are still having very resilient
Speaker 1: and very strong activity UM you know. But of course,
Speaker 1: as we work through them, you know, the story will
Speaker 1: be a bit different, you know. And I think that's
Speaker 1: why we're seeing some greater lag and the monetary policy
Speaker 1: transmission mechanism because we still have those buffers. So does
Speaker 1: that raise the possibility then that we could get an
Speaker 1: overshoot from the Federal Reserve if they haven't given themselves
Speaker 1: the time to see whether the lag is allowing the
Speaker 1: policy that's already been put out to have that effect. Yeah,
Speaker 1: I mean certainly, And I think that the obviously the
Speaker 1: Photo Reserve and with monetary policy, they have to balance
Speaker 1: the various risks that are out there. You know. Not
Speaker 1: there's an obvious one of the fact they maybe are
Speaker 1: doing too much um and and then they will send
Speaker 1: the economy sort of needlessly into a weaker state. UM.
Speaker 1: But obviously the other risk that they're trying to balance
Speaker 1: is is that, you know, as we discussed, inflation may
Speaker 1: prove to be a bit sticky than expected. It may
Speaker 1: need more work from them in order to bring it down.
Speaker 1: So I think, you know, currently their balancing act has
Speaker 1: basically led them to slow down the pace of rate hikes.
Speaker 1: For example, we're now at a more you know, at
Speaker 1: least kind of more historically somewhat more normal rate of
Speaker 1: twenty five basis point rate hikes per meeting UM, and
Speaker 1: the Photo Reserve has has said, you know, we're going
Speaker 1: to continue at that pace basically until we see more
Speaker 1: progress on inflation, you know. So I think that's the
Speaker 1: kind of balance that they've reached right now. So where
Speaker 1: do you think the FED needs to get when it
Speaker 1: comes to restrictive territory? Have they gotten there at this point?
Speaker 1: Do they have further to go? What's your view? Yeah? Well, well, so, um,
Speaker 1: you know, the a tailor rule would would suggest that
Speaker 1: they need to get the FED funds rate above wherever
Speaker 1: they think the underlying trended inflation is. So I mentioned before,
Speaker 1: there's still pandemic related effects that will go away that
Speaker 1: are impacting inflation. So really the tricky thing right now,
Speaker 1: so try to figure out, excluding those effects, where is
Speaker 1: the underlying trend and inflation, and you know, to us
Speaker 1: it kind of looks like it's between three and a
Speaker 1: half and four, you know, so they need to at
Speaker 1: a minimum get the Fed funds rate above that level, um,
Speaker 1: And their recent projections from the SEP and December suggested
Speaker 1: they would get up to around five percent a little
Speaker 1: bit above that. So that's obviously above that kind of
Speaker 1: you know, three to four three and a half to
Speaker 1: four percent trend that we mentioned, you know, but more recently,
Speaker 1: the communications that we've gotten from from them maybe suggest
Speaker 1: that they maybe even will go a little bit above that,
Speaker 1: so maybe closer to three and a half excuse me,
Speaker 1: five and a half percent. But but ultimately, you know,
Speaker 1: where they ultimately end up the terminal rate of this
Speaker 1: hiking cycle. You know, obviously it's very uncertain. They're going
Speaker 1: to be probing for that, you know, trying to understand
Speaker 1: how much is too much, um, you know, and ultimately
Speaker 1: they will will sort of continue to assess the data
Speaker 1: to try to figure that out, um and continue to
Speaker 1: balance those risks that I mentioned before. You also mentioned
Speaker 1: before that you're projecting that inflation is going to get
Speaker 1: down to three percent by the end of this year.
Speaker 1: Obviously that's just a little bit higher than the FEDS
Speaker 1: target of two Does a two percent inflation target still
Speaker 1: makes sense? Is it realistic? Yeah? I think that's a
Speaker 1: really great question, you know, And obviously right now, when
Speaker 1: inflation is elevated, you know, Chair Pal has to be
Speaker 1: very resolute in his communication to you know, I'm bringing
Speaker 1: inflation down. So I think recently he's suggested that they're
Speaker 1: not revisiting the two percent inflation target. Um. You know,
Speaker 1: that's completely off the table right now. Nevertheless, though, you know,
Speaker 1: when inflation has come down, um, you know, to three percent,
Speaker 1: you know that I think, you know, is reason for
Speaker 1: a little bit of victory, uh, you know, a bit
Speaker 1: of a victory lab from Federal Reserve officials, um, and
Speaker 1: three percent, you know, even though they say their inflation
Speaker 1: target is at to three percent, might be you know, okay,
Speaker 1: at least for for a time. Um, you know. Now,
Speaker 1: there's really no magic around on that two percent level. Um.
Speaker 1: That two percent level you know, kind of came from
Speaker 1: uh you know, the Central Bank of New Zealand, you know,
Speaker 1: several several decades ago, and it sounded like a level
Speaker 1: that was was pretty good. Um, you know, but there's
Speaker 1: no real magic around that level. It could be three percent,
Speaker 1: it could be one percent, you know. And so I
Speaker 1: think that you know, given that, you know, there probably
Speaker 1: will be some room once inflation comes down it's getting
Speaker 1: close to target, there will be a little bit of
Speaker 1: wiggle room there that the Federal Reserve will say, Okay,
Speaker 1: maybe it's not exactly a target yet, but that's okay.
Speaker 1: Thanks for this, Tiffany, great having you on with us,
Speaker 1: Thanks for having me. That's PIMCA Chief US economist Tiffany Wilding.
Speaker 1: Welcome back to this special President's Day edition of Bloomberg Daybreak.
Speaker 1: I'm Nathan Hagar. Let's turn our focus now to earnings
Speaker 1: because we're gonna hear from a couple of giants in
Speaker 1: the retail sector tomorrow. Walmart and Home Depot report their
Speaker 1: latest quarterly results before the opening bell of the holiday
Speaker 1: short and trading week. For more policed welcome Bloomberg Intelligence
Speaker 1: in your analyst, Jennifer Bartash is great to have you
Speaker 1: on with us, jen Thanks for being here. So for Walmart,
Speaker 1: this is going to be our first look at the
Speaker 1: holiday quarter for them, right, what's the expectation That's correct, Nathan, Um.
Speaker 1: When we're looking at Walmart, what we're really expecting to
Speaker 1: see is that they had a very solid holiday quarter
Speaker 1: UM in terms of the top line. So we're expecting
Speaker 1: same store sales to be up. We expect top line
Speaker 1: growth to be up. UM. We do think that traffic
Speaker 1: into stores maybe have maybe contracted just a little bit UM.
Speaker 1: But the real issue with Walmart for this quarter is
Speaker 1: margins UM. They really struggled lest during the course of
Speaker 1: the entire year on right sizing their inventory UM and
Speaker 1: we're really looking at what kind of signal if they
Speaker 1: are sending about the markdowns and the impact that will
Speaker 1: have on margins after the holiday season. Yeah, it's something
Speaker 1: we've been hearing a lot about from many of these retailers.
Speaker 1: The glut of inventory and the idea that they're being
Speaker 1: forced to put in deep discounts to unload all this
Speaker 1: extra stuff they've got. Is that something that could potentially
Speaker 1: eat into the margins that we get from Walmart. We
Speaker 1: think that there is a possibility of that. Early in
Speaker 1: the year, Walmart had a huge inventory problem. They sort
Speaker 1: of cleared that out, but because of all the supply
Speaker 1: chain issues that we saw over the course of the year,
Speaker 1: they brought inventory in early, and they brought an inventory
Speaker 1: in terms of extra to make sure that they would
Speaker 1: have enough fun hand for holiday. UM. And with the
Speaker 1: holiday season, it was a good season, but it wasn't
Speaker 1: a fabulous season UM, which means that they likely didn't
Speaker 1: sell through all of that inventory that they had, and
Speaker 1: so that creates the necessity from markdowns UM and the
Speaker 1: steeper the markdown to tempt people to to spend, which
Speaker 1: is hard in this environment, UM is what could drive
Speaker 1: the margin margin issues that we're expecting. Yeah, something else
Speaker 1: we've been hearing for a lot of these companies going
Speaker 1: into this earning season is the need to cut costs
Speaker 1: against the tough economic headwinds that we've been seeing signs of.
Speaker 1: Is that something you're expecting to get from Walmart as
Speaker 1: well in terms of perhaps having to get rid of
Speaker 1: some of the overhead for the company. Well, generally Walmart
Speaker 1: is is pretty efficient I meant, containing costs and are
Speaker 1: pretty systematic at being a low cost operator. Um. But
Speaker 1: we you know, there are certainly going to be opportunities
Speaker 1: to to sort of, you know, be strategic in ways
Speaker 1: to cut costs. And whether that isn't closing a couple
Speaker 1: of stores, or whether that's in using automation to help
Speaker 1: improve efficiency. Um. Those are the types of actions that
Speaker 1: we would expect. Um. But we're not expecting any huge
Speaker 1: announcements in terms of layoffs. You know that that has
Speaker 1: already sort of happened during the course of the year earlier. Yeah.
Speaker 1: What about the possibility of continued wage pressures from Walmart?
Speaker 1: I think I recalled them making some kind of announcement
Speaker 1: that they were at least raising some of the minimum
Speaker 1: wage for many of the workers as well. Is that
Speaker 1: something that could play into the results? Well, it could, Um,
Speaker 1: We're at a point now that where all of the
Speaker 1: retailers are sort of systematically gradually raising UM wages, kind
Speaker 1: of in competition with each other in that bid for
Speaker 1: talent um. And so I don't expect that we'll see
Speaker 1: a big wave of increases UM. It's sort of become
Speaker 1: more of a normal course of business that that wage
Speaker 1: pressure is going to remain persistent over the next few quarters,
Speaker 1: for sure. And how about inflation overall potentially playing into
Speaker 1: Walmart's nominal results. Obviously, we're continuing to see signs that
Speaker 1: price pressures are elevated throughout the economy. Does that factor
Speaker 1: in it all? It does, um, because of the of
Speaker 1: you know, Walmart's merchandise mix and the customer base that
Speaker 1: they have, you know, you know, they are certainly positioned
Speaker 1: to do well in a higher inflation environment because people
Speaker 1: are seeking to stretch their budgets as far as they can.
Speaker 1: But what's happening is that Walmart is seeing a mix
Speaker 1: shift in what they're selling, and they're selling way more
Speaker 1: groceries than they used to sell, in a lot less
Speaker 1: general merchandise than they used to sell UM, and that
Speaker 1: has a big impact on the actual profitability of the
Speaker 1: business because the margins on general merchandise are much much
Speaker 1: higher than they are on grocery. So as long as
Speaker 1: we have inflationary pressure that's sort of affecting the consumer
Speaker 1: UM as well as affecting Walmart's cost of goods. UM
Speaker 1: will continue to see that play out in a in
Speaker 1: a very interesting dynamic. Although I'd imagine that that's something
Speaker 1: that could potentially provide something of a tailwind for Walmart,
Speaker 1: couldn't it. That's just the fact that they have such
Speaker 1: a diversified portfolio of products that they offer to customers
Speaker 1: that that could, you know, put them in a better
Speaker 1: foundation perhaps than some of the competition. That definitely does
Speaker 1: play in their favor. And we often see in times
Speaker 1: where consumers are under pressure that they consolidate trips. They
Speaker 1: prefer stores where they can shop across multiple categories UM.
Speaker 1: So for Walmart, the only thing is making sure that
Speaker 1: they have the right items for customers UM and that
Speaker 1: then there's demand for them and that they sell through them.
Speaker 1: I'm curious as well to get your view on how
Speaker 1: Walmart stacks up against some of them it's major competitors.
Speaker 1: I'm thinking particular early of Amazon in the e commerce
Speaker 1: space and Costco in the sort of wholesale retail space.
Speaker 1: With Sam's Club as part of Walmart or a lot
Speaker 1: of Walmart's mix. Yeah, Sam's Club has actually been a
Speaker 1: real bright spot for Walmart. UM. They've had incredibly strong
Speaker 1: sales growth UM, their membership bases growing. UM. If you remember,
Speaker 1: a couple of years ago, they closed a lot of
Speaker 1: Sam's Clubs that were sort of underperforming or were in
Speaker 1: poor locations, And since then they've really adjusted the business
Speaker 1: and it has got a lot of momentum behind it. UM.
Speaker 1: They are competing well against Costco. UM. The customer base
Speaker 1: is still a little bit different between Sam's Club and
Speaker 1: and Costco, so there seems to be enough room for
Speaker 1: both players. UM. But Sam's Club does continue to be
Speaker 1: a real bright spot for Walmart. UM. When it comes
Speaker 1: to Amazon, UM, it's been interesting to watch, especially in
Speaker 1: recent weeks, how Amazon is has sort of backed away
Speaker 1: from their grocery business. UM. You know that I think
Speaker 1: in part is attributable to how much of a powerhouse
Speaker 1: Walmart is in grocery. UM. But on the e commerce side, UM,
Speaker 1: there's still a large gap obviously between the two companies. UM.
Speaker 1: You know, Walmart continues to expand its online offering by
Speaker 1: its marketplace and how many items it has and how
Speaker 1: many different sellers it has. UM. It's it's growing its
Speaker 1: businesses in terms of fulfillment services. So it's it's doing
Speaker 1: the right things. UM, but it's still at a much
Speaker 1: much smaller size than Amazon overall. Speaking with Jennifer Bartasha,
Speaker 1: senior analyst at Bloomberg Intelligence, of course, the other major
Speaker 1: retailer we're looking to hear from tomorrow is in a
Speaker 1: different category than Walmart and the home improvement sector. That's
Speaker 1: Home Depot. What's the team at Bloomberg Intelligence expecting there? Yeah,
Speaker 1: when when when we look at home Depot, UM, it's
Speaker 1: an interesting story because you know, home you know, home
Speaker 1: was such a hot uh segment for such a long time. UM.
Speaker 1: We are expecting same store sales for Home Depot to
Speaker 1: moderate this quarter. UM and And really that's because last
Speaker 1: quarter they sort of outperformed, but the company didn't change
Speaker 1: its full year guidance, and so that really implies that
Speaker 1: the company was expecting a slowdown in the fourth quarter. UM.
Speaker 1: And so we do think that that's gonna that's going
Speaker 1: to play out now. We do think that the Home
Speaker 1: Depot in particular UM will be able to support top
Speaker 1: line growth just because of the relative strength of their
Speaker 1: professional customers UM. And that's they have a much higher
Speaker 1: density of professionals that use Home Depot than say, some
Speaker 1: of their competitors like Lows UM. But it is possible
Speaker 1: that when first quarter is going to be sort of
Speaker 1: the peak of UM, the fourth quarter is going to
Speaker 1: be kind of a peak and it's going to continue
Speaker 1: to moderate from there. Well, it is interesting that we
Speaker 1: have seen so much difficulty of late in the housing market,
Speaker 1: UH in terms of economic data. Could that potentially be
Speaker 1: reflected in what we get from home Depot tomorrow? Yes? Absolutely, UM.
Speaker 1: You know, we we've seen that home improvement spending his
Speaker 1: sort of decouple from existing home sales UM, and so
Speaker 1: the challenges that we're seeing in the housing market are
Speaker 1: likely to wait on that repair and remodeling spending. That
Speaker 1: is a big component of what home Depot is all about, UM.
Speaker 1: And the longer the housing market is challenged UM, the
Speaker 1: more difficult things are going to get for Home Depot
Speaker 1: long term. How do you look at Walmart and Home
Speaker 1: Depot as proxies for the overall economy. What could the
Speaker 1: earnings tell us in that context? Well, I think you know,
Speaker 1: when you look at them together, it gives you a
Speaker 1: really good sense of where the average consumer is today. Um.
Speaker 1: You know, Walmart arguably has more exposure to the widest
Speaker 1: swath of the typical American household than any other retailer. Um,
Speaker 1: So it really is a good indication of where where
Speaker 1: people's heads are and where their pocketbooks are today. UM.
Speaker 1: With Home Depot, um, it really starts to give you
Speaker 1: a sense of, you know, where that spending and that
Speaker 1: tends to be more a little more discretionary and terms
Speaker 1: of home is happening for the consumer. But we'll also
Speaker 1: get a sense of how that professional, um, the professional
Speaker 1: side of the business is holding up and what that
Speaker 1: may mean for the housing market. Man, we'll be on
Speaker 1: the lookout for those earnings before the opening bell tomorrow
Speaker 1: from Walmart and Home Depot. Thanks for this, Jen, great
Speaker 1: having on with us. Thank you so much, our thanks
Speaker 1: to Bloomberg Intelligence Senior Analyst Jennifer Bartashes. Welcome back to
Speaker 1: this special edition of Bloomberg Daybreak. I'm Nathan Hagar, the
Speaker 1: u s Stock market is closed for the President's Day holiday,
Speaker 1: and this week will mark a year since Russia's invasion
Speaker 1: of Ukraine, a moment that's set off the most devastating
Speaker 1: ground war for Europe since World War Two. For more,
Speaker 1: we're joined by Rosalind Mathieson, Bloomberg's senior executive editor for Government. Roz,
Speaker 1: thanks for being with us as we get closer to
Speaker 1: that milestone. Where do things stand now, as we get
Speaker 1: closer to year two, well as we go into the
Speaker 1: you Tube. The reality is that Russia is still pretty
Speaker 1: bogged down on the ground in a war that, no
Speaker 1: doubt laddim me a pretty envisage would last, perhaps even
Speaker 1: just days. He saw his troops going into Kire, overtaking
Speaker 1: the capital, perhaps the president Vladimir's Dlinsky fleeing the country,
Speaker 1: and that he would have an easy result. And obviously
Speaker 1: it's been anything but that. Over the past year, we've
Speaker 1: seen Russia's troops pushed back from the north, away from
Speaker 1: the capital, focusing now on the east and the southeastern
Speaker 1: part of Ukraine. But really it's been a grinding war
Speaker 1: the last few months, and as the casualties mount on
Speaker 1: both sides, and as they burned through a lot of
Speaker 1: ammunition and artillery as well. So the question really is
Speaker 1: it can Russia make proper progress on the ground, can
Speaker 1: Ukraine in turn push Russia further back and regain territory,
Speaker 1: or are we really facing many, many months yet of
Speaker 1: this kind of like continued grind on the ground in
Speaker 1: the East. It is an interesting question to ponder as
Speaker 1: we've been hearing these warnings over the last several weeks
Speaker 1: that Russia's planning this new Spring offensive and it really
Speaker 1: does see bras like the Kremlin has ramped up its attacks,
Speaker 1: particularly on infrastructure, in just the last couple of weeks. Well,
Speaker 1: that's right, they continue to fire barrages of rockets attacking
Speaker 1: Ukrainian energy infrastructure. There's an argument perhaps that they're offensive
Speaker 1: has already begun, that it won't be that big bang
Speaker 1: moment when something dramatic happens, but rather will just be
Speaker 1: a continued escalation over time of activity by Russia on
Speaker 1: the ground. The question is, in all of that, will
Speaker 1: they be able to do very much before Ukraine gets
Speaker 1: the weapons that we know are coming its way. And
Speaker 1: it raises the question as well as we wait for
Speaker 1: those weapons to make their way to Ukraine, the bolstering
Speaker 1: with the tanks, and that whether we could see even
Speaker 1: further escalation to this war. Well, that's right and certainly,
Speaker 1: and that's probably what Vladimir Putin is seeking to do,
Speaker 1: is to use that window because he knows, come perhaps
Speaker 1: June or July, Ukraine will be in a much stronger
Speaker 1: position to push back his troops um, And does he
Speaker 1: use the one year mark of the war to try
Speaker 1: and rally not just his troops on the ground, but
Speaker 1: his people at home. Of course, you're probably sort of
Speaker 1: looking at this war with at least a sense of
Speaker 1: dismay over the past year. How does he keep momentum
Speaker 1: going there? That's really another big question for him. Are
Speaker 1: you looking at signs that we could see escalation pointed
Speaker 1: outside Ukraine toward NATO with these weapons coming in and
Speaker 1: with President Zolensky of Ukraine calling for fighter jets to
Speaker 1: be part of the arsenal as well. Well, that's been
Speaker 1: the interesting thing over the past year, because there was
Speaker 1: a lot of concern initially about sending in offensive weapons
Speaker 1: because would Russia see that as a particular escalation by NATO.
Speaker 1: But each time that the Western sent in more advanced weapons,
Speaker 1: that promised retaliation has not come, so that kind of
Speaker 1: concern about possible broader Russia retaliation seems to have faded. Also,
Speaker 1: equally that the retoric around possibly using nuclear weapons has
Speaker 1: also dissipated, And the reality is that Russian troops are
Speaker 1: in no position to when you go further than Ukraine
Speaker 1: at the moment. Really, the idea that any of this
Speaker 1: can come out with really from Ukraine right now seems
Speaker 1: highly unlikely. Finally, rose as we get closer to this
Speaker 1: second year, are we seeing any signs on either side
Speaker 1: that we're getting closer to a negotiated resolution between Russia
Speaker 1: and Ukraine. Certainly not at this point in time. You
Speaker 1: can see that Ukrainians are very dug in. President Zlynsky
Speaker 1: has said that he won't negotiate unless all the territory
Speaker 1: that Russia has taken over the years, including Crimeer which
Speaker 1: had annexed in two thousand and fourteen, is on the table.
Speaker 1: Russia has made clear that it won't agree to those
Speaker 1: sorts of terms um and so there's sort of nowhere
Speaker 1: at all at the moment to create an atmosphere for
Speaker 1: talks to occur, negotiations to happen that we're nowhere near
Speaker 1: that at this point. Thanks for rights. Appreciate you coming
Speaker 1: on with us. That's Rosalind Mathison, Senior Executive editor for
Speaker 1: Government at Bloomberg News.