Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each
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Speaker 2: Bloomberg Terminal and the Bloomberg Business app. Tawson's slock of Apollo,
Speaker 2: writing the consensus expects inflation to rise in the US
Speaker 2: but fall in the Eurozone. Tawson joins us. Now for more, Towson,
Speaker 2: Let's focus on the US side of things, and then
Speaker 2: we can get to a more global dimension. Let's focus
Speaker 2: on the US with the tariffs in mind. Is it
Speaker 2: too early, Tawson to expect those tariffs to show up
Speaker 2: in the day of this morning?
Speaker 3: No, it's not.
Speaker 4: What really is the key is you hear is that
Speaker 4: there is indeed going to view some upside pressure on inflation.
Speaker 3: And what's most critical.
Speaker 4: About this is that it's all about the behavior among companies.
Speaker 3: How do they respond to teriffs.
Speaker 4: Do they pass on one hundred percent, will they pass
Speaker 4: on fifty percent, or will they pass on nothing.
Speaker 3: If they pass on nothing, of course.
Speaker 4: Then terraffs have to be absorbed by the E and
Speaker 4: the PE ratio and amy by earnings. So it becomes
Speaker 4: very important the data prints today and for the coming months,
Speaker 4: and we should expect to see some upside pressure on
Speaker 4: inflation coming from terrorists. But it's also the upside pressure
Speaker 4: we're watching that's coming from what's going on with the dollar.
Speaker 4: The dollar is down quite significant since the beginning of
Speaker 4: the year. This is also beginning to creep in as
Speaker 4: a risk to the upside for inflation. And finally, the
Speaker 4: other thing that's also beginning to become risk is that
Speaker 4: the restrictions and immigration we saw last Friday some upweight
Speaker 4: pressure on wage inflation. This is also something that's an
Speaker 4: upside risk to inflation over the coming months. So the
Speaker 4: bottom line to a question Jonathan, is that we should
Speaker 4: expect to see from a number of different forces upside
Speaker 4: pressure on inflation for the next several months, including in
Speaker 4: the data today.
Speaker 2: Will it be sustained beyond the next several months, tossing
Speaker 2: as you alluded to. As you indicated, that is the
Speaker 2: key question right now, the central question for a lot
Speaker 2: of people in financial markets. What is on your dashboard
Speaker 2: that guides that view.
Speaker 4: Well, my dashboard is to type ECFC, go on Bloomberg
Speaker 4: and look at what the consensus is expecting, and that
Speaker 4: will tell you that CPI is expected to go up
Speaker 4: from two point six to three point three by the
Speaker 4: end of the year. So that's roughly a half a
Speaker 4: percentage point increase in inflation. And that's the same for
Speaker 4: core PCE and for headline PCE. So the issue there
Speaker 4: is that we should expect to see this take quite
Speaker 4: some time because it all depends on the company's behavior
Speaker 4: in terms of when do they begin to implement higher
Speaker 4: prices on the back of inflation going up. And that
Speaker 4: is something that in the profile of inflation onambiguously pushes
Speaker 4: us up above three percent. And this is very important
Speaker 4: because the starting point if we had started with inflation
Speaker 4: today at one and a half and we had half
Speaker 4: of percent, then we're going to get much closer to
Speaker 4: the feeds target. But the problem is that the levels
Speaker 4: we're at two point eight of inflation today is already
Speaker 4: at a level that is.
Speaker 3: Significant above the FED target. Too.
Speaker 4: If you add a shock of lifting another half of
Speaker 4: a percentage point to inflation, that really complicates the FED
Speaker 4: job and therefore makes it very difficult for them to
Speaker 4: cut breaks in the environment whether there's so much upweight
Speaker 4: pressure on inflation.
Speaker 5: So turstin in all other things being equal, world, right,
Speaker 5: when you slap a tariff on the price of those
Speaker 5: goods move up.
Speaker 6: I think that's clear.
Speaker 5: There are some offsets though, potentially, and I'm interested in
Speaker 5: your thoughts there. One, right, energy prices have been lower
Speaker 5: now for a kind of sustained period of time, so
Speaker 5: there's some disinflationary potential there. Also, the ISM service number
Speaker 5: last week came in below fifty, and so there's some
Speaker 5: signs of slowing in the service economy. So how do
Speaker 5: you think about some of those potential offsets and do
Speaker 5: you think they're enough to maybe stunt the impact of
Speaker 5: what you're expecting from a tariff perspective.
Speaker 4: No, you're right, from a growth perspective, lower energy prices
Speaker 4: is certainly helpful. But coll PCE and co CPI of
Speaker 4: course excludes food and energy. So from the fests perspective,
Speaker 4: they would likely focus on that there is general upweight
Speaker 4: pressure in the broader measures of inflation excluding food and
Speaker 4: energy and to your services. It's right, and if I
Speaker 4: B has been showing some upside pressure also on the
Speaker 4: expectations to inflation. There's also some measures of course of
Speaker 4: inflation expectations, both for the University of Michigan and the
Speaker 4: Conference Board that is also telling you that infaced expectations
Speaker 4: are way too high red to where the FED would
Speaker 4: like them to be. So you're right, there are some
Speaker 4: nuances in terms of yes, that different things going on
Speaker 4: in some of them, especially survey based data of what's
Speaker 4: going on with inflation, especially when it comes to household
Speaker 4: expectations being very very high.
Speaker 3: So combined, I would.
Speaker 4: Still come to the conclusion that I worry more about
Speaker 4: the upside risk. This is also what the FED has
Speaker 4: in their own forecast, That's what the consensus is forecasting.
Speaker 4: That's also what we're forecasting. So for what is word,
Speaker 4: I still think that the overall risks. Yes, surveys may
Speaker 4: show that ism was a little bit weaker when it
Speaker 4: came to prices paid, but the bottom line is that
Speaker 4: the tailwinds coming from tariffs coming from a lower dollar,
Speaker 4: coming from restrictions and immigration are just pretty strong. And
Speaker 4: that's combined with at the same time a slowdown in growth,
Speaker 4: partly because of teriffs of course also weighing on sales
Speaker 4: for companies, but also slow down in growth because of the.
Speaker 3: New factor that's emerging.
Speaker 4: Nearly consumers are beginning to take a hit now because
Speaker 4: student loan payments are restarting, and people are beginning to
Speaker 4: take a hit on their credit scores if they don't
Speaker 4: pay their student loans.
Speaker 3: So the New York Fad is estimating that's.
Speaker 4: A much as six seven eight million households that now
Speaker 4: are at risk of no longer being able to get credit.
Speaker 4: So that's a hitlint to growth, while we at the
Speaker 4: same time have some upward push on inflation. So that's
Speaker 4: taflation in a nutshell. As the baseline scenario that we
Speaker 4: view as the most likely case at the moment.
Speaker 2: A Tellston that final point is so important. Our consumers
Speaker 2: in a position to eat tap and it's the labor
Speaker 2: market tight enough for them to demand the higher way
Speaker 2: just to fund it. What's your assessment of that situation now?
Speaker 4: So one way to assess that is once again to
Speaker 4: go to you a Bloomberg sho need to look at
Speaker 4: the red Book same store retail sales that went up
Speaker 4: a lot just immediately during the Liberation Day weeks when
Speaker 4: we had, of course a lot of people that were
Speaker 4: front loading their purchases. But in the last several weeks,
Speaker 4: the same store retail sales date up on Redbook has
Speaker 4: started a show and seeping lower. We're now below five
Speaker 4: percent in numbers growth for same store retail sales.
Speaker 3: We are watching that trend very very carefully.
Speaker 4: And this is weekly data that comes out every Tuesday
Speaker 4: at nine am that will tell us something about is
Speaker 4: the consumer really in such great shape as the balance
Speaker 4: sheet would be saying, or are these headwinds, especially headwinds
Speaker 4: coming from terres headwinds coming across the border, especially from
Speaker 4: the student owned problems that are beginning to emerge, And
Speaker 4: they only really.
Speaker 3: Started emerging here in ME.
Speaker 4: And we are worried that the US consumer could begin
Speaker 4: to slow down, and we're beginning to see some signs
Speaker 4: of that trend downwards in the red Book same store
Speaker 4: retail sales data.
Speaker 2: What you're describing is potentially a nightmare for the Federal Reserve.
Speaker 2: You talked about the dynamics planing out in Europe. The
Speaker 2: ECP has been reducing interest rates now for a number
Speaker 2: of months, Tolson, where do you think it leaves the
Speaker 2: federal reserve at a time when I hear a lot
Speaker 2: of people saying they should just sit this out, sit
Speaker 2: this out for the summer, and maybe sit this out
Speaker 2: for the rest of the year.
Speaker 4: That's extremely important because this issue is, of course exactly that.
Speaker 4: If you have higher infletion, the FITCH would be hiking.
Speaker 4: If you have lower growth, the FITCH would be cutting.
Speaker 4: So which one is it? Does the fit like apple's
Speaker 4: like oranges? How much weight do they put on inflation
Speaker 4: growing up? How much weight do they put on growth
Speaker 4: slowing down? And the dual mandate is torn in two
Speaker 4: completely opposite directions. That's why the easy answers to that
Speaker 4: for their I from SEAM members is to say we're
Speaker 4: not doing anything but executory. Your point, Jonathan, what if
Speaker 4: the inflation data does start to move up much more?
Speaker 4: Or on the other hand, what if growth starts slowing
Speaker 4: down more. It's a really difficult spot for the vetter
Speaker 4: to be in because monetary policy works with a lack
Speaker 4: If I'm sea members will say that's as much as
Speaker 4: well to eighteen months. So it's almost impossible for them
Speaker 4: to catch this falling knife because we just don't know
Speaker 4: at this stage whether the growth slow down will dominate
Speaker 4: or whether the rise inflation will be dominating it.
Speaker 2: Tolston provocative stuff. Appreciate the catch up. Tolston slocktair of Apollo.
Speaker 2: If we can build on the conversation with a perfect guest,
Speaker 2: Bob Diamond, the founding partner of Atlas Merchant Capital and
Speaker 2: the former Barclay's CEO. Come on, I got to see you,
Speaker 2: Marrin Jonathan. I'm good, it's going to see you, sir.
Speaker 2: Let's just recap things. Where are we right now, big
Speaker 2: sety thousand foot view of the bank in sector in America?
Speaker 2: How are thing's shapen up?
Speaker 5: You know?
Speaker 7: I think I think just kind of the back and
Speaker 7: forth and on the one hand and on the other
Speaker 7: hand from Herman suggests pretty much my view, which is
Speaker 7: kind of a balance, you know. I think we'll see
Speaker 7: a turnaround in deal making in advisory in the second
Speaker 7: half of the year that was a bit slower than
Speaker 7: people expected in the first half. I don't think Wall
Speaker 7: Street will repeat the kind of trading performance they had,
Speaker 7: which was it was kind of like Christmas in the
Speaker 7: first quarter for trading desks with all the volatility. But
Speaker 7: I think, you know, I think it's it's a good environment,
Speaker 7: so no big warning signs. I think the as you said,
Speaker 7: the report from City that at long lost provisions are
Speaker 7: a bit higher is not surprising. I would be very
Speaker 7: surprised if they're more than a bit higher.
Speaker 2: An okay environment for the big banks or for the
Speaker 2: smaller banks as well.
Speaker 7: Well, it's a great environment and for the smaller banks.
Speaker 7: And as you know, we're very focused on regional and
Speaker 7: community banks. We've done our first clothes in an investment
Speaker 7: strategy for that sector. We think that the four and
Speaker 7: a half thousand regional and community banks one, they're incredibly
Speaker 7: important to the economy. They do over half of the
Speaker 7: lending to small businesses and family owned businesses. But four
Speaker 7: and a half thousands probably the wrong number. In many
Speaker 7: of the smaller, more private community banks that are so
Speaker 7: important to their communities are frankly just too small to
Speaker 7: succeed with higher technology costs, higher regulatory costs, higher compliance costs.
Speaker 7: And Jonathan, what we're seeing is with a focus of
Speaker 7: our banking expertise, our integration expertise. The CEOs of these
Speaker 7: banks want to take part in consolidation. The opportunity to
Speaker 7: increase ROE through cost synergies, particularly on in state transaction,
Speaker 7: is terrific. So I think in addition to that, as
Speaker 7: you look at the go forward business opportunity, we have
Speaker 7: higher rates, they're probably trending somewhat lower but not too aggressively,
Speaker 7: and very high demand for credit. So the environment could
Speaker 7: not be better for a strong regional bank today.
Speaker 8: We often hear that in tariffs and rates act as
Speaker 8: overhangs on potential m and A and consolidation. But stepping back,
Speaker 8: there's also a tremendous amount of disruption going on at
Speaker 8: an industry level. AI is disrupting many industries. You still
Speaker 8: have this transition in terms of office in real estate
Speaker 8: post COVID, you have the energy transition, and we'll see
Speaker 8: what happens with reshoring.
Speaker 6: So would you argue that.
Speaker 8: Disruption in above itself is going to lead to more
Speaker 8: industry consolidation and M and A across various sectors.
Speaker 7: Yeah, I don't think that's a bad hypothesis, particularly with AI.
Speaker 7: I think looking at financial services again, which is kind
Speaker 7: of our expertise and our focus. It's nothing but positive
Speaker 7: in terms of in the first stage, greater efficiency and
Speaker 7: even where there's been that disruption in the US kind
Speaker 7: of the US economy around uncertainty and tariffs. We have
Speaker 7: a couple of broker dealers that were invested in overseas
Speaker 7: Panmore Gordon in the UK and Kepler Chevro and Peraspace,
Speaker 7: but really focused on Europe for equity sales, trading and research.
Speaker 7: They both had record earnings in the first quarter for
Speaker 7: flows from US investors into the UK equity market and
Speaker 7: into the European equity market. It's incredible to me every
Speaker 7: time we see these disruptions, it's like the markets are
Speaker 7: reacting almost before we're ready to do the analysis. So
Speaker 7: those are first quarter numbers at Paranmore Gordon and Kepler
Speaker 7: Chevro and their records for the firms in terms of
Speaker 7: flows from US investors into the UK and into Europe.
Speaker 7: So it's amazing how agile the investors are.
Speaker 8: I was going to follow up and ask you about
Speaker 8: that because I know you have a very global experience
Speaker 8: throughout your banking career, and it's also just stunning to
Speaker 8: think about how soon the January American exceptionalism thesis turned
Speaker 8: into sell America after Liberation Day. Do you see those
Speaker 8: trends in terms of flows and sentiment moving away from
Speaker 8: US markets continuing or is it more of a kind
Speaker 8: of a near term LIP.
Speaker 6: I think there are reasons to continue.
Speaker 7: So one of the reasons is it's been a big,
Speaker 7: big divergence almost since two thousand and eight in the
Speaker 7: Great Financial Crisis, certainly in banks, but really in equities
Speaker 7: in general. The outperformance of US equity markets has been very,
Speaker 7: very clear relative to the UK in Europe, so you
Speaker 7: had a bounce coming. And I think one of the
Speaker 7: catalysts for that is this administration's kind of gave a
Speaker 7: boot in the butt for the European to say, we
Speaker 7: really have to focus on spending, we really have to
Speaker 7: focus on private sector, we really have to focus on
Speaker 7: the economy growing. And I think the attitude change across
Speaker 7: Europe and the attitude change in the UK toward private
Speaker 7: sector's success business profitability has been positive for them. So
Speaker 7: I think the US is still like the leading economy.
Speaker 7: It's so you know, the financial services industry is so deep,
Speaker 7: it's just such an impressive machine It's not a negative
Speaker 7: on the US necessarily. I think once we work through
Speaker 7: the uncertainty around tariffs, we'll see the strength. But a
Speaker 7: bounce in Europe and a bounce in the UK was coming.
Speaker 2: Do you still see the policy makes from this White
Speaker 2: House's pro risk, pro growth?
Speaker 7: I think I think, to me, Jonathan, the single thing
Speaker 7: that investors are looking for right now, well is that
Speaker 7: one thing. But if I if I picked one out
Speaker 7: at certainty and I think, you know, calming down the
Speaker 7: situation with US and China would be a very big
Speaker 7: part of that. So I think think the announcement today,
Speaker 7: if if we move forward with solving some of those situations.
Speaker 7: I mean, keep in mind, if you go back like
Speaker 7: ten decades then you know, tariffs were like two and
Speaker 7: a half percent on average, they got up to twenty
Speaker 7: five or thirty percent with all of the all of
Speaker 7: the noise. If they settle around five or six percent,
Speaker 7: you know, I think we have you know, we have
Speaker 7: confidence again, and we have certainty again. I think we'll
Speaker 7: bring we'll have deal making comeback. So I think this
Speaker 7: is a big moment, and I think what's been recognized
Speaker 7: is that China actually has some pretty strong.
Speaker 6: Cards rare earths is one of them.
Speaker 7: But you know, as you look at the latest numbers,
Speaker 7: China still had a increase in exports. Exports to the
Speaker 7: US were down thirty percent, but exports to the rest
Speaker 7: of the world were up eleven percent, So overall their exports.
Speaker 2: Were up more than twenty percent.
Speaker 7: Of the Internet right, so less than ten percent of
Speaker 7: their exports are to the US down.
Speaker 2: This is something you talked about. The last few months
Speaker 2: have revealed the leverage that the Chinese have this time around,
Speaker 2: maybe in a way that wasn't really enforced several years
Speaker 2: ago in the president's first term.
Speaker 6: Yeah.
Speaker 8: Absolutely, and I think there might be some positives that
Speaker 8: redirect and re order some critical security based industries, technology, pharma,
Speaker 8: medical supplies, etc. But I think the theme that I'm
Speaker 8: just hearing from Bob is one we just talked about
Speaker 8: with Ed earlier, which is.
Speaker 6: This unintended consequences.
Speaker 8: We've given a kick to Europe to start spending and
Speaker 8: maybe in many ways created better growth opportunities for them
Speaker 8: that they wouldn't have taken on earlier, much like the
Speaker 8: deepseak analog.
Speaker 2: Bop, does that mean that you're more focused on the
Speaker 2: US as everyone starts to look, how swear, But maybe
Speaker 2: the better opportunities here now.
Speaker 6: Relative to the last three or four years.
Speaker 7: I think the opportunities in the UK and Europe are there.
Speaker 7: But Jonathan, one of the things we felt in Atlas
Speaker 7: Merchant Capital was one of our real competitive advantages in
Speaker 7: financial services is we are focused on the UK and
Speaker 7: Europe in the USA US. Prior to COVID, we had
Speaker 7: done just as many investments in the UK and Europe
Speaker 7: as we've done in the US since COVID has been
Speaker 7: US US US, because that's where the opportunities are.
Speaker 6: So I would say it differently.
Speaker 7: I hope we continue to see opportunities here and US
Speaker 7: regional and community banks writ large, that's a phenomenal opportunity
Speaker 7: in the US.
Speaker 6: But if you give us more opportunities.
Speaker 7: For growth in the UK and Europe than Atlas Merchant
Speaker 7: Capital is going to be very, very busy, And then
Speaker 7: that's the direction that looks like we're going on.
Speaker 2: Just give us the number quickly again, what are we
Speaker 2: at now regional banks in this country? Four four and
Speaker 2: a half.
Speaker 7: Four and a half thousand, and it's probably the wrong number.
Speaker 2: And you've got just come a down to wall I.
Speaker 7: Think three years from today market down will be at
Speaker 7: one to two thousand.
Speaker 2: It's a punchy go, that's for sure. You could be
Speaker 2: a big part of it. So you've boways got to
Speaker 2: see it.
Speaker 6: Good to see it.
Speaker 2: Thanks for and I appreciate your time. Pup time in
Speaker 2: there of Atlans merchis merchant capital. It's with me around
Speaker 2: the table. Greg Peters a PHM. Seth competer of Morkan
Speaker 2: Stanley Seth. Just your first take off the back of
Speaker 2: that data not in line with what you were expecting.
Speaker 9: Now, that's exactly right. We were expecting roughly with consensustead
Speaker 9: of be up, you know, two or three tenths on core.
Speaker 9: I think one thing that's important to remember though, is
Speaker 9: there are lots of moving parts here. We had already
Speaker 9: seen lots of swings and things like used cars before.
Speaker 9: We are coming into this year on a deflationary trend
Speaker 9: or disinflationary trend, and so you know, I think we
Speaker 9: got to just take this as one month's worth of noise.
Speaker 9: The other thing though, is it's still early game. So
Speaker 9: when we look at what happened before with tariffs, it
Speaker 9: did take two or three months before you saw any
Speaker 9: sign of the tariffs and the inflation data, and so
Speaker 9: I think this is still the beginning of the game,
Speaker 9: not the end.
Speaker 2: Of timing and sequencing is really important. I know you've
Speaker 2: done a research because I've read it. The data this
Speaker 2: morning you called it noise and not signal. What was
Speaker 2: the experience of the tariffs in the first term under
Speaker 2: this president and the timing of the sequencing of things,
Speaker 2: the hits inflation then the hits of growth, and why
Speaker 2: should we think it's going to be the same this
Speaker 2: time around.
Speaker 9: Yeah, I mean, I think that's what that was. What's
Speaker 9: really tricky is it does seem like the inflation comes
Speaker 9: from the tariffs after two or three months, the hit
Speaker 9: to growth comes after two or three quarters, and so
Speaker 9: that mismatch in timing I think makes it hard for markets,
Speaker 9: but very hard in particular for the FED. I think
Speaker 9: in twenty eighteen, one of the big changes then versus
Speaker 9: now is that it was mostly focused on China. If
Speaker 9: you look hard in the core consumer goods data, you
Speaker 9: can see the effect of inflation, but it was transitory.
Speaker 9: Then we have every reason to suspect it'll be temporary
Speaker 9: this time. But the numbers are bigger now. All around
Speaker 9: the world tariffs, bigger tariffs on China, Modlo, whatever sort
Speaker 9: of deal comes out from London, and so we think
Speaker 9: there's a big difference there also mudding the waters though
Speaker 9: we know how much front running there was before the
Speaker 9: tariffs coming in, So is that going to change a
Speaker 9: little bit the pricing dynamic easily could do?
Speaker 2: Greg, would you fight any excitement this morning around this
Speaker 2: pro And.
Speaker 6: I would agree with Seth.
Speaker 10: I mean, it's way too early to make any kind
Speaker 10: of determination around this particular number. You know, the one
Speaker 10: question I have for Seth though, is, you know, how
Speaker 10: do you think about two components, a housing component, which
Speaker 10: is key because that also feeds into growth, and then
Speaker 10: the service sector, which is basically a measure of wages
Speaker 10: and labor health. So, you know a lot of investors
Speaker 10: are excited around services disinflating, but that's actually kind of
Speaker 10: very much a double headed sword. How do you kind
Speaker 10: of think about that?
Speaker 9: Completely agree, it's a double edged sword, and I think
Speaker 9: it's complicated. I think from the housing it's a national
Speaker 9: phenomenon and it really will reflect the tightness in the
Speaker 9: labor market there. We've been expecting that to continue to
Speaker 9: drift down close to pre COVID rates, you know, month
Speaker 9: on month, maybe not going below it, but getting close
Speaker 9: to where it was before. For the rest of services, though,
Speaker 9: I think we have a counter vailing force that needs
Speaker 9: to be more on people's radars when it comes to
Speaker 9: policy effect on the economy, on markets. Everyone's been focused
Speaker 9: on tariff's, tariffs, tariffs, tariffs, tariffs. Don't forget we've got
Speaker 9: immigration restriction. Immigration restriction matters a lot. We think prior
Speaker 9: to COVID, the run rate sort of break even rate
Speaker 9: for non farm perils was probably one hundred and ten
Speaker 9: hundred and twenty k. Twenty twenty four, twenty twenty three,
Speaker 9: that run rate went up to two hundred and forty
Speaker 9: two hundred and fifty k. It's going to drop to
Speaker 9: something closer to seventy five. That's a meaningful restriction and
Speaker 9: a growth rate of the labor supply. And people here
Speaker 9: should remember what it was like coming out of COVID
Speaker 9: when it was hard to find workers. You saw hotel buildings,
Speaker 9: for example, where like the top ten floors, for example,
Speaker 9: were just left vacant because they didn't have staff. I
Speaker 9: think those sorts of staffing shortages are very plausible and
Speaker 9: that could be putting upward pressure over the second half
Speaker 9: of the year for the services outside of housing.
Speaker 2: Not much pressure right now if you are just joining us.
Speaker 2: A downside surprise on headline and core CPI month over month,
Speaker 2: it came and at zero point one percent the meat
Speaker 2: and estimate, our serve at zero point two on call
Speaker 2: taking out food, taking out energy. It came and at
Speaker 2: zero point one against the meat and estimate zero point three.
Speaker 2: The case standing bhyd Mike, I want to come back
Speaker 2: to you. You've been digging through the details. What's the
Speaker 2: sourceit this downside surprise. Where's the surprise coming from?
Speaker 6: Well?
Speaker 1: Overall, John, it looks like goods prices did not rise.
Speaker 1: They were flat during the month, which is not what
Speaker 1: was expected. Services prices were down. Gasoline prices fell two
Speaker 1: point seven percent, so that had a big weight. The
Speaker 1: thing that did prop up inflation was as you've guys
Speaker 1: been talking about housing, but a couple of other areas
Speaker 1: that did surprise. We saw a slight rise in home
Speaker 1: furnishings about a two tenths of eight percent, but apparel
Speaker 1: is down by four tenths That was expected to rise.
Speaker 1: And here's the real surprise in these numbers. Used cars
Speaker 1: and new cars both fell in price by half a
Speaker 1: percentage point. The expectation was tariffs would drive those higher.
Speaker 1: Airfares were down, as people kind of expected given the
Speaker 1: travel fall off that we've seen, down two point seven percent.
Speaker 1: So there are some surprises some non surprises in here.
Speaker 6: Oh.
Speaker 1: I was going to mention John, you were talking before
Speaker 1: the number came out about the cost of Hulu and
Speaker 1: all those other subscription services. They were up six tens
Speaker 1: of percent, one of the larger rises in the CPI
Speaker 1: this time. I think maybe what we're seeing is companies
Speaker 1: selling out of the inventories that they pulled in. That
Speaker 1: could be one of the explanations for not seeing kind
Speaker 1: of the tariff effect that we thought of.
Speaker 2: Ami McKay, Thank you, sir. We're all faiting that price
Speaker 2: pressure on the hoarly side of things, that's for sure.
Speaker 2: I'll talk about that another time. Note down Seth. What
Speaker 2: did you make of that explanation?
Speaker 9: Yeah, I mean, I think what Mike said was there
Speaker 9: are a lot of different components that are going in
Speaker 9: lots of different directions, and I think that's exactly where
Speaker 9: we've been for the past call a year, where the
Speaker 9: underlying trend before the tariffs hit was a downward trend,
Speaker 9: but boy was it not. Uniform is all over the place.
Speaker 9: I think the car prices point is a really important one.
Speaker 9: If you look at the month on month changes of
Speaker 9: both new autos and used autos over the past call
Speaker 9: it twelve months, you'll see some big swings in both directions,
Speaker 9: and so again the noise versus signal. The noise is
Speaker 9: very high right now.
Speaker 2: See some swings right now in the equity market and
Speaker 2: in bonds to equity futures ness session highs going into
Speaker 2: the up and bow about fifty minutes away. The equity
Speaker 2: market is positive by four tenths of one percent. Just
Speaker 2: move to the bond market. Though, this interesting move here
Speaker 2: compared the two years to what their thirty years doing
Speaker 2: this morning, people like Greg would call this a bull
Speaker 2: steepner running at the front end of the curve. You're
Speaker 2: dropped by six basis points and a thirty year basically
Speaker 2: doing nothing. What does that speak to?
Speaker 10: This speaks to everything we were talking about, which is,
Speaker 10: you know, all the concerns manifest in the thirty year
Speaker 10: right So the front end is driven by fed polsing
Speaker 10: and the back end is driven by a lot of
Speaker 10: other factors, and there is this pesky auction later this week,
Speaker 10: and so I don't really see a skill for that
Speaker 10: to rally into that auction. It normally cheapened up beforehand,
Speaker 10: so I expected to continue to cheapen up beforehand.
Speaker 2: A thirty year supply coming tomorrow afternoon, ten year maturity
Speaker 2: isshumin debt the treasury a little bit later on the
Speaker 2: south of need too, so yield to a lower at
Speaker 2: the front end of the curve. We're down six basis
Speaker 2: points on twos. That unlocks some dollar weakness. You wrote
Speaker 2: dollar right now one fourteen seventy five. Joining us now
Speaker 2: to extend the conversation on places, say it's David Kelly
Speaker 2: of JP Morgan Asset Management. David, it just went your
Speaker 2: initial reaction to the DAYA we got about ten minutes ago.
Speaker 2: Was that a surprise to you, sir?
Speaker 11: And not too much of a surprise. As we were
Speaker 11: going into this, into this print, we were looking at
Speaker 11: a lot of the different industries and there's a sogginess
Speaker 11: in the economy which is really preventing prices from going up.
Speaker 11: I mean, one of the things that I was struck
Speaker 11: by was that both airline fares and hotel lodging were down,
Speaker 11: and that really jives at the fact that, you know,
Speaker 11: people flying and people staying at hotels in terms of
Speaker 11: occupants rates have both been very solidly down for weeks,
Speaker 11: if not months here, and then at the retail level,
Speaker 11: I think, you know, I think it's just like businesses
Speaker 11: and consumers are eyeing each other nervously. Consumers, you know,
Speaker 11: feel badly about the economy, not sure, and retail is
Speaker 11: just out of the nerve to raise the prices they
Speaker 11: absolutely have to, but I think the tariffs will mean
Speaker 11: they absolutely have to in the next few months because
Speaker 11: a lot of these retailers work off tight margins. So
Speaker 11: I think it's I think we are going to have
Speaker 11: a further delayed to the delayed reaction to these tariffs.
Speaker 11: But if the current level of tariffs stick, we do
Speaker 11: still expect this inflation pressure to rise over the months ahead,
Speaker 11: and I think by the end of the year we're
Speaker 11: talking about a CPI about three and a half percent
Speaker 11: a year over year, consumption of later north of three
Speaker 11: percent a year over year, even though it's taking some
Speaker 11: time for this to materialize.
Speaker 2: David, here's a counter point. It comes from no data
Speaker 2: of Runmack this morning, who said, if tariff's rates the
Speaker 2: up and core good prices aren't up by as much
Speaker 2: as the consensus thought, it implies more margin squeeze of
Speaker 2: retailers and less price pass through. Why isn't that just
Speaker 2: going to be the sustainable story for the next several months.
Speaker 2: Why does it have to get worse.
Speaker 11: Because the retailers won't be able to do it. I mean,
Speaker 11: these margins are tight, and what they're doing is, you know,
Speaker 11: further existing margin, existing inventory. They paid a person a
Speaker 11: certain price for it, and they're willing to you know,
Speaker 11: even though inventories are going down, they're willing to accept
Speaker 11: current margins. But as they have to pay for the
Speaker 11: new inventory and mark up on that new inventory, I
Speaker 11: expect that we will see those higher prices. So it's
Speaker 11: because margins are tightened the retail businesses, and I think
Speaker 11: it's just it's going to be very very hard for
Speaker 11: retailers and auto dealers and so forth to actually maintain
Speaker 11: low prices at the prices of the stuff that they're
Speaker 11: buying goes.
Speaker 2: Up, David, if they're not in a position to wait it.
Speaker 2: A consumer is in a position to pay the higher prices.
Speaker 2: Do you see a labor market that's tight enough to
Speaker 2: demand higher wages to fund that move.
Speaker 11: Well, we are seeing a site tightening in the labor
Speaker 11: market because you know, as your previous guests, we're talking
Speaker 11: about that this I think this immigration suite is beginning
Speaker 11: to hit and I think it's very very much below
Speaker 11: the radar because a lot of these people don't really
Speaker 11: admit to being working at all. But there's a shortage
Speaker 11: of labor which is getting worse, and I do think
Speaker 11: that's going to put a floor under wages. And now
Speaker 11: for consumers overall, you know, this is a tax on
Speaker 11: lower middle income consumers. I mean that's what tariffs are.
Speaker 11: There are tax and imports of goods, and that hits
Speaker 11: low middle incum consumers. So it depends on the tax
Speaker 11: bill a bit. But if, assuming the effects of the
Speaker 11: tax bill don't kick in ont later, then I think
Speaker 11: the squeeze is going to get worse over over the
Speaker 11: course of the year and you're going to see weak
Speaker 11: consumer demand and so you're gonna have a combination of
Speaker 11: an economy which seems to be pretty sluggish, say the
Speaker 11: third quarter, but also prices which are registering pretty high
Speaker 11: year of year increases.
Speaker 2: Devid, I've got to ask you where on earth does
Speaker 2: that leaf chairman pal and this fighter reserve.
Speaker 11: I think I think they have to wait and see
Speaker 11: what happens with this this tax bill. You've got tariff
Speaker 11: inflation that's going to be followed by stimulus inflation unless
Speaker 11: they water down this this tax bill. And I think
Speaker 11: he's I think he's right to wait and see him.
Speaker 11: I also think that given how high the stock market is,
Speaker 11: you know, he doesn't want to be responsible for causing
Speaker 11: a further party in the equity market and pushing acid
Speaker 11: prices even higher. So I think the FED is going
Speaker 11: to weigh and wait and wait, although they know what
Speaker 11: the tiff story is and what the tax story is.
Speaker 11: At that point they can assess the economy. But until
Speaker 11: that point, they've really got no reason to ease.
Speaker 2: David Kelly if JP Morgan Asset Management, David, thank you. Seth.
Speaker 2: You were following that conversation. Do you share that opinion
Speaker 2: that Fed's going to sit this out?
Speaker 3: I do think so.
Speaker 9: I think right now there's no urgency for them to move.
Speaker 9: I mean, you saw the year on year number, even
Speaker 9: with this downside surprise, the year on year number was
Speaker 9: two eight. I haven't seen what my team has sort
Speaker 9: of done for the translation to core PCE, but you're
Speaker 9: still probably talking about something like two and a half percent.
Speaker 9: And so, even though that's well below the peaks we
Speaker 9: saw coming out of COVID, two and a half percent
Speaker 9: still a half a percentage point higher inflation than the
Speaker 9: Fed's target, and to date we haven't seen any deterioration
Speaker 9: in the labor market. So I think it's a very
Speaker 9: difficult proposition to argue the FED needs to cut in June.
Speaker 9: Why not take the optionality, sit and wait. They can
Speaker 9: communicate their inclination to have the next move be a
Speaker 9: cut through their dot plot at the upcoming meeting. That
Speaker 9: seems fine, but I don't think that any urgency on
Speaker 9: their part to move if you've got.
Speaker 2: A clean rate on their reaction function the amount of move,
Speaker 2: but you have a decent understanding of how they would
Speaker 2: move based on incoming information, So I think so.
Speaker 9: I think the simplest version of this, and this isn't
Speaker 9: going to be, you know, groundbreaking, is they've got two mandates.
Speaker 9: They have to worry about growth and employment. On the
Speaker 9: one hand, they have to worry about inflation on the
Speaker 9: other at any point in time based on the current
Speaker 9: side of the data, and then your best guess as
Speaker 9: to where things are going, which one's the bigger problem,
Speaker 9: and react to that one. And so right now, the
Speaker 9: bigger problem is very clearly inflation. It's come down, but
Speaker 9: it's still above target. The labor market to date is fine.
Speaker 9: Where things going well, we start to make forecasts, we
Speaker 9: think inflation's going to go up from here. They probably
Speaker 9: think inflation's going to go up from here, but we
Speaker 9: don't know that yet. But until you get that confirmation,
Speaker 9: there's no reason for them to move. If we're right
Speaker 9: and inflation does go up, like I think is the consensus,
Speaker 9: before the labor market starts to slow, before spending the
Speaker 9: economy starts to slow, well, that just reinforces the idea
Speaker 9: that in fl is the bigger problem of their two mandates.
Speaker 9: And so we've been saying for a while, don't count
Speaker 9: on a rate cut at all this year, because if
Speaker 9: inflation keeps drifting up before the economy cracks, makes it
Speaker 9: easy for them to just sit on their hands at
Speaker 9: the current level of policy rates.
Speaker 2: Correct patter is sitting on your hands through the summery
Speaker 2: is one thing. Through the air is another. You've expected
Speaker 2: them to sit on the hand street twenty five.
Speaker 10: You know, it's data driven, of course, that's my out.
Speaker 10: But we've been kind of penciling, penciling into cuts just
Speaker 10: to get to kind of the top end of neutral.
Speaker 10: But it's a complicating factor. I think it's how you
Speaker 10: position the inflation. Clearly they're going to be hesitant to
Speaker 10: use the word transitory, but there is this belief that
Speaker 10: it's a one time shock and you have to look
Speaker 10: through it.
Speaker 3: But you know, my.
Speaker 10: Read is that they will prioritize growth. You know, if
Speaker 10: you just kind of think about it, you know, in
Speaker 10: a matrix, if growth moves down hard, I think we're
Speaker 10: sure inflation is following, all right, So I think they're
Speaker 10: worrying about and prioritizing growth over inflation. But they can't
Speaker 10: tell you that because they need to be credible on
Speaker 10: the inflation. So you have the kind of actions, yeah,
Speaker 10: look through, you know, and kind of read in between,
Speaker 10: which is difficult to do.
Speaker 2: Is that another way saying Governor Willa has a luxury
Speaker 2: that cham and Pound doesn't have.
Speaker 10: Yes, you know, but but you know, but I think
Speaker 10: it's right. And you know there's some politics there too, right,
Speaker 10: so it's but but you know, our belief is inflation
Speaker 10: rolls over.
Speaker 6: I'm sorry, growth rolls over.
Speaker 10: I think they'll respond to that, even though inflation remains,
Speaker 10: you know, well above target.
Speaker 2: Greg, this was smart, It's going to say, as always,
Speaker 2: greigt pity staff. Page'm alongside set company of Morgan Stanley Set.
Speaker 11: Thank you, sir.
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