Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. What's important here is,
Speaker 1: as you mentioned bomb cyclone and what they did with
Speaker 1: Grand Funk RaRo, that takes us back to seventy seventy
Speaker 1: five and the equity gloom back then. Someone who's studied
Speaker 1: that he's way too young to remember. Jonathan Gollub joins
Speaker 1: US chief US equity optimist at Credit SUITEES. We're thrilled
Speaker 1: he could join swarning. I'm gonna get to your revisions,
Speaker 1: your mark down and earnings in that. But the answers
Speaker 1: after seventy four, I believe it was we went up
Speaker 1: thirty eight percent the next year and critically that the
Speaker 1: year after that we went up another eight percent. Is
Speaker 1: that the great surprise out there is an equity liftoff
Speaker 1: out there somewhere, Well, you know, I think it gets
Speaker 1: to something that that Lisa was saying, is what's good news.
Speaker 1: I mean right now, the backdrop is just becoming much
Speaker 1: more positive with respect to this idea that there's no
Speaker 1: recession coming in the next two or three quarters, and
Speaker 1: the market getting their head around that, which is why
Speaker 1: the vix has fallen and why stocks are racing ahead. Now.
Speaker 1: The problem is, eventually this does bite us in terms
Speaker 1: of two things. First of all, um companies are as
Speaker 1: inflation is falling, companies are losing pricing power, and that's
Speaker 1: not good for margins. So resilient consumer is actually a
Speaker 1: little bit of a headwind for profit margins, which is strange.
Speaker 1: And ultimately, this inflation doesn't magically go away, which is
Speaker 1: also a problem. You mark down earnings, Okay, you're doing
Speaker 1: tweaks here in the outlook. You got a page outlook.
Speaker 1: I didn't read it all. I read part of it.
Speaker 1: Do you know you know that you know the watermark
Speaker 1: that they have for us so that we don't steal
Speaker 1: their research. Do you know what this water mark said?
Speaker 1: I if this research gets out, we take away my
Speaker 1: egg nog. I couldn't believe Credit Suis did that. The
Speaker 1: compliance department in Credit Suez did that. I want to
Speaker 1: know if profits a place to hide. You were way
Speaker 1: out front in the bull call of selecting certain sectors
Speaker 1: certain stocks. Does profits save me if I have to
Speaker 1: own stocks? I don't think that's the way you should
Speaker 1: be looking at. And you're talking about, you know Gina's
Speaker 1: comment that what happens in the economy doesn't necessarily happen
Speaker 1: in the stock market. What happens last year corporate profits
Speaker 1: the outlook improved throughout the year, and the stock market
Speaker 1: had a terrible year because um, you know, interest rates
Speaker 1: rose and you know other factors like that. I think
Speaker 1: this year is gonna be a little bit different. I
Speaker 1: think that you actually have margins. I'm sorry, margins are
Speaker 1: going to get squeezed, and I think it's gonna be
Speaker 1: tougher on profits. But I think the stock market is
Speaker 1: going to be a little bit better on it. Like
Speaker 1: how much better double digit or weeks? A slow day,
Speaker 1: I need to make some news, let's go. No. I
Speaker 1: think it's gonna be a more modern returning year because
Speaker 1: I think that you're looking at something like down four
Speaker 1: or five profit growth, even if you don't have a
Speaker 1: recession because of a margin squeeze, it's coming. Have the
Speaker 1: companies that have already done the layoffs, and I'm thinking
Speaker 1: of tech, I'm thinking of certain industries. Even the banking
Speaker 1: industry is starting to do some bigger rounds of layoffs.
Speaker 1: And of course the semiconductor industry. Are they going to
Speaker 1: be in a better position or are they just a
Speaker 1: tea leaf for what's to come first? All when you
Speaker 1: look at and a lot of guys on Wall Street
Speaker 1: talk about all these layoffs because they're looking at tech
Speaker 1: and financial financials, but but in reality that the job
Speaker 1: market is just swimming in an unfilled you know, jobs
Speaker 1: and demand is incredibly i but what the story is
Speaker 1: is on tech in particular, is that and you know
Speaker 1: Thomas talking about profits, it's not one profit picture the
Speaker 1: tech universe. If you include the Amazons and the Googles
Speaker 1: and the facebooks and like, it's been a horrific environment.
Speaker 1: They've substantially lagged the market. Their their estimates are being
Speaker 1: revised lower and lower, and they're missing the lowered estimates
Speaker 1: as a group. And their outlook for growth, you know,
Speaker 1: it was weak. This is since the iPhone came out
Speaker 1: in two thousand eight. This is the worst year for
Speaker 1: tech related companies um that we've seen. The expectation is
Speaker 1: that next year we're gonna get this big bounce in
Speaker 1: tech earnings as we get for you know, we had
Speaker 1: this big pull forward. We're all staying at home. We're
Speaker 1: buying you know, stuff that in a lull afterwards, is
Speaker 1: gonna last longer than we think. Are you telling me
Speaker 1: to sell Apple? I mean, I don't know me. I'm
Speaker 1: in the triple leverage all cash fune. We know that.
Speaker 1: But are you telling people to sell Apple along with
Speaker 1: all the other challenges, Cathy? Is what what I'm saying
Speaker 1: is I think that this problem that we've had in
Speaker 1: tech is not a sentiment problem. It's an earnings problem.
Speaker 1: And it doesn't last for three or four quarters. It
Speaker 1: last for six or eight quarters. And a lot of
Speaker 1: these big tech companies that two or three years ago
Speaker 1: we said they have modest, they're impenetrable, and we talked
Speaker 1: in those terms. Um, a lot of those companies are
Speaker 1: are getting closer to totally addressable market, whether that's in
Speaker 1: hand sets or advertising or other things like that. So
Speaker 1: how do we get to forty fifty by the end
Speaker 1: of next year, given that you're expecting perhaps a bit
Speaker 1: more softness and techno leading. Well, there's other areas. So
Speaker 1: I think that energy where this this expectation that you're
Speaker 1: going to have a weakness in energy profits, I think
Speaker 1: is going to be totally um wrong. I mean we're
Speaker 1: seeing this right now that in the in the last
Speaker 1: six months, the earnings estimates for the energy sector are
Speaker 1: keep getting revised higher and higher, even though oil prices
Speaker 1: are falling. So like, where's the magic there? And it's
Speaker 1: a lack of refining capacity. And if we do end
Speaker 1: up with oil prices rising, you know a bit, because
Speaker 1: the economy is a little bit stronger and China reopens,
Speaker 1: then these companies source. So I think that's an area
Speaker 1: of strength that's probably underestimated. Tech on the other hand
Speaker 1: of the down I didn't know this. I mean, folks,
Speaker 1: years ago, Credit Suite was absolutely definitive on energy infrastructure
Speaker 1: in the United States. His name was Mark Flannery. He's
Speaker 1: over with Steve cohen By in New York mets bodies
Speaker 1: at point seven. To you guys on the high ground,
Speaker 1: I don't think a lot of people know this. What
Speaker 1: does the subsets you have of energy tell you about
Speaker 1: the great energy vet in the stock market? Well, I mean,
Speaker 1: and we're talking, you know, it's interesting if you look
Speaker 1: at US Energy company in North American UM Energy, that
Speaker 1: you have each of the pieces separately. So you have
Speaker 1: companies that do refining, a companies who do distribution and MP.
Speaker 1: If you're looking at the big majors in Europe, they're
Speaker 1: just big, fat, all companies and you have less of
Speaker 1: that granularity that you see, you know, that thing in
Speaker 1: the US with with with our big integrations. But but
Speaker 1: we have a lot of and you can see that
Speaker 1: those you know, those refining businesses are just levitating on
Speaker 1: lack of refining capacity and nobody is putting it in.
Speaker 1: So if you do have oil lift off and then
Speaker 1: you actually get some upside in the more commodity sensitive
Speaker 1: stuff like the MP name and the service name, the
Speaker 1: sector is going to be a really big surprise. It's
Speaker 1: absolutely a topic. The second area at least we're talking
Speaker 1: about is is the consumer um just thinking about what's
Speaker 1: going on. Their wages are staying higher, and the inflation
Speaker 1: on the things they're buying is falling, and there's an
Speaker 1: abundance of jobs. Consumer confidence. We've seen this now since
Speaker 1: June and July. The consumer confidence data is ripping and
Speaker 1: people aren't appreciating that the consumer is going to spend
Speaker 1: a lot more money. It's going to keep us out
Speaker 1: of recession. And that's another area optimism. Yeah, but that's
Speaker 1: exactly it, right, I mean, even with optimism, the case
Speaker 1: is converging on some of the bearish sentiment that we're
Speaker 1: seeing from elsewhere. I will say America is gonna shop.
Speaker 1: That's basically the takeaway that I had heard. They've got money,
Speaker 1: they're going to spend it. Good John, thank you so
Speaker 1: much right now. And this is really import And as
Speaker 1: we talked to John Gobub earlier, there are two nine
Speaker 1: thousand people at the Bank of America and Mr moynihan
Speaker 1: called in this morning. Only Mark Command is working today
Speaker 1: for the Bank of America. He's global ahead of US
Speaker 1: short rate strategy at Bank of America. Thrilled he could
Speaker 1: find time creeping into the holiday. Let me go to
Speaker 1: short rates first, Mark, what is the efficacious way to
Speaker 1: play the fixed income market into next year? If I'm
Speaker 1: scared stiff? How do you do it? If you're a
Speaker 1: feared Yeah, well, we think that the path of least
Speaker 1: resistance is still going to be for the market to
Speaker 1: try and nudge up the terminal rate at the front end.
Speaker 1: The market right now is about twenty five basis points
Speaker 1: below where the Feds thought for the end of twenty
Speaker 1: three will be. And if you're a little worried about
Speaker 1: the outlook, we think that you want to be leaning
Speaker 1: along in the back end. We think that that is
Speaker 1: going to be a way to protect yourself against the
Speaker 1: slowing economy uh likely uh the funds in employment likely
Speaker 1: higher unemployment rate, moderating economy, and that's going to give
Speaker 1: the curve still a bit of a flattening bias, at
Speaker 1: least in the near term. We do think that go ahead,
Speaker 1: well your charm as you speak in English, there's a
Speaker 1: lot of people in fixed income where you can't understand
Speaker 1: it lining up behind uh brmo. Here. The number one
Speaker 1: question I get from people on the street is how
Speaker 1: long is it gonna take to make up a fifteen
Speaker 1: or eighteen percent loss in fixed income? And you've got
Speaker 1: an encyclopedic knowledge on this, is this a twelve month exercise?
Speaker 1: In eighteen month exercise? How do I get to back
Speaker 1: to break even on fixed income? How long will it take? Well,
Speaker 1: it depends on what your benchmark is. Um but look,
Speaker 1: we do think that fixed income is going to have
Speaker 1: increased value for investors over the course of the next
Speaker 1: twelve maybe twenty four months, and that simply because again
Speaker 1: you're gonna be seeing yields that are probably going to
Speaker 1: be moving lower. You're gonna be seeing yields that have
Speaker 1: value in portfolio and portfolio again as they serve as
Speaker 1: a hedge to risk off moves where it yields. When
Speaker 1: we see risk off will go down as opposed to up,
Speaker 1: some prices will increase, not decreases we saw over the
Speaker 1: course of two and that is going to mean that
Speaker 1: investors should be thinking more constructively about fixed income broadly,
Speaker 1: simply because you're gonna see that risk off of value
Speaker 1: return to fixed income, which it really lost over the
Speaker 1: course of two with very very elevated inflation. As inflation moderates,
Speaker 1: we do think that increases the attractiveness of fixed income
Speaker 1: and portfolios. And the way that we've been recommending clients
Speaker 1: play that is by being long towards the long end
Speaker 1: of the curve, viewing the long end more constructively. You
Speaker 1: could still see yields rise at the front end to
Speaker 1: some extent if the FED has to keep hiking over
Speaker 1: the course of next year, but we do think that
Speaker 1: the long end you're going to be somewhat protected because
Speaker 1: we expect that most yield increases are going to be
Speaker 1: bought by investors who see long end yields is increasingly attractive.
Speaker 1: Around three seventy five or should we push back close
Speaker 1: to four percent, we think that there's gonna be a
Speaker 1: lot of in risk from fixed income investors around those levels.
Speaker 1: If the word of the year one was transitory, the
Speaker 1: word of the year in two probably was pivot or
Speaker 1: step down or whatever you want to call it. When
Speaker 1: everybody groaned, you could argue there a couple other words
Speaker 1: in there. What's the word of the year in that
Speaker 1: everyone's going to kind of hang onto is the holy Grail? Yeah?
Speaker 1: I mean, I think the market is looking for a
Speaker 1: pause from the Fed. Um. That's going to be at
Speaker 1: least what the market is looking for from the Fed. Uh.
Speaker 1: The word of the year will probably be recession or
Speaker 1: maybe not a recession. Uh. Certainly, it's quite consensus that
Speaker 1: we're going to see the US economy and like that
Speaker 1: the global economy slowed down over the course of next year.
Speaker 1: And how quickly or slowly that happens is going to
Speaker 1: really be the focus in markets right now. The market
Speaker 1: is looking for a turn from the Fed, looking for
Speaker 1: a turn in the economy, it seems around the middle
Speaker 1: of next year UM. And whether or not the labor
Speaker 1: market cooperates, we think, is really the question of three.
Speaker 1: So Michael Harton at your colleague over a Bank America
Speaker 1: put out a note day where he was talking about
Speaker 1: the sixty portfolio hanging in there, how he likes small
Speaker 1: cap stocks, and he talked about how bonds should do
Speaker 1: well in the first half and not so well in
Speaker 1: the second half. And it sort of coheres with this
Speaker 1: idea that stocks will do badly in the first half
Speaker 1: and better in the second half. What happens to that
Speaker 1: call if the recession is pushed out, if there is
Speaker 1: this momentum driven by consumer sentiment that has come in
Speaker 1: much stronger than expected, Yeah, then the value of fixed
Speaker 1: income is going to be deferred for a time. UM. Certainly,
Speaker 1: if we see the economy that continues to do reasonably
Speaker 1: well again, you're going to see the front end continue
Speaker 1: to sell off. Is to fet is bias to keep hiking,
Speaker 1: keep moving, terminal more elevated, and with that you'll probably
Speaker 1: see the back end nudge up a little bit. The
Speaker 1: curve will become more inverted in that type of environment,
Speaker 1: and you'll have to wait a little while to really
Speaker 1: see that performance and fixed income that we anticipate. Um
Speaker 1: look at the market believes that the FED is going
Speaker 1: to be successful in engineering a slowdown. It's just a
Speaker 1: matter of how high does the terminal rate and have
Speaker 1: to go how long does it take to achieve that outcome.
Speaker 1: But we all they think they will be successful, and
Speaker 1: that's why we continue to have a constructive view on
Speaker 1: long end duration. Continue to think that tens are going
Speaker 1: to be rallying to about or so by the end
Speaker 1: of next year, and it may take more time for
Speaker 1: long end fixed income to really perform well, but we
Speaker 1: do think that you're going to see that performance over
Speaker 1: the course of three We certainly saw it in the
Speaker 1: last few weeks of two. Mark. One more question, if
Speaker 1: I can buried in your note, is really the tone
Speaker 1: of the moment. I'm really taken back by this from
Speaker 1: fixed income strategists. You guys are recoming closet economists. You're
Speaker 1: looking for quote labor cracking. Have we ever done this before?
Speaker 1: Have we ever modeled our fixed income space off the
Speaker 1: dynamics of the American labor economy. UM. You know, I
Speaker 1: think that probably implicitly we have in the past. But
Speaker 1: what's different about today in three is that we're all
Speaker 1: anticipating a recession. We're all anticipating a slowdown in the
Speaker 1: economy and the labor market. And in order to really
Speaker 1: see the front end of the curve start to perform,
Speaker 1: in order to see FED rate cuts that are going
Speaker 1: to be pulled forward and justified, you really need to
Speaker 1: see the labor market moderate, and that's not happening yet.
Speaker 1: So in many ways, this is the most expected, most
Speaker 1: anticipated recession ever, um, And really you need to see
Speaker 1: the labor market begin to moderate in order to think
Speaker 1: that the FED will be able to pause and eventually
Speaker 1: then move towards rate cuts. Markabata, thank you so much.
Speaker 1: With Bank of America. Right now, we continue on Washington,
Speaker 1: but digress from where Ane Marie Harden was on this
Speaker 1: historic moment yesterday, and we look forward to the domestic,
Speaker 1: ugly politics of which Henrietta Treys is truly expertus director
Speaker 1: of Policy Research at VEDA Partners. Henrietta Senator Schumer out
Speaker 1: with headlines here off the morning shows, and they've got
Speaker 1: to get business done. What actually happens in those ms
Speaker 1: on December three? What is the horse trading that actually
Speaker 1: goes on? Yeah, absolutely great question. They're working with the
Speaker 1: parliamentarian right now and trying to coordinate with Senator Mike Lee,
Speaker 1: Republican out of Utah to get an agreement on something
Speaker 1: called Title forty two, which is a controversial immigration component
Speaker 1: that President Trump put into effect back during the height
Speaker 1: of the COVID crisis and which expires. So they're trying
Speaker 1: to horse trade a vote on that amendment and exchange
Speaker 1: for passage of a one point seven trillion dollar omnibus
Speaker 1: spending bill. And every Senator and every House member what's that?
Speaker 1: And they're stocking this year. I expect they'll get it,
Speaker 1: but these fights take until the bitter end. Um. I'm
Speaker 1: hoping that votes. So to the imagery that we see
Speaker 1: in the South and state, folks, I'm as guilty of
Speaker 1: this as anyone removed from my life. But the imagery
Speaker 1: that we're seeing down south is shocked Washington and frankly
Speaker 1: shocked the nation of all political persuasion. How does that
Speaker 1: story change once this agreement is made? What is the
Speaker 1: new immigration policy? Dare I say? Of December. That's a
Speaker 1: great question. I mean, honestly, speaking with staff on both
Speaker 1: sides of the aisle, Democrats and Republicans, there are a
Speaker 1: handful of bills out there, and all of the business
Speaker 1: and community and every economist is looking at the labor
Speaker 1: shortage and saying we need everything from seasonal workers too
Speaker 1: high skilled workers, and there are bills out there to
Speaker 1: accomplish all of those things while simultaneously addressing the border.
Speaker 1: But we are too far into unfortunately presidential election cycle
Speaker 1: to even get close to having an immigration bill passed
Speaker 1: in the next three days, let alone the next two years.
Speaker 1: So quite frankly, I don't think there's gonna be a
Speaker 1: material change at the border. UM. I imagine they'll find
Speaker 1: some sort of convenient off ramp to get around Senator
Speaker 1: Lee's amendment. UM, but it probably will not change a
Speaker 1: whole lot. And I am not anticipating anything material to
Speaker 1: come out of reform, whither at the executive level or
Speaker 1: the allegious lation on immigration before this year is out,
Speaker 1: and then again, as I mentioned, probably not for the
Speaker 1: next two years either. Henrietta. After them internal elections, people
Speaker 1: were talking about a move to the center, that there
Speaker 1: would be more of a collaborative kind of feel, more
Speaker 1: of a rejection of the truly hyperpartisanship of Washington d
Speaker 1: C over the past decade or two or three. How
Speaker 1: much does that actually fly in the face of what's
Speaker 1: actually happening as we count down to a deadline and
Speaker 1: are getting grid luck. I mean, right now we're gonna
Speaker 1: get bipartisan deal on the surface, but you're going to
Speaker 1: see this bell passed with almost exclusively Democratic support in
Speaker 1: the House and hopefully something in the range of about
Speaker 1: seventy votes in the Senate. So the Senate will be bipartisan,
Speaker 1: the House will not be. And you know, if you
Speaker 1: want to tie it into the speech yesterday, UM from
Speaker 1: President Zelinski, it is notable that there were only eighty
Speaker 1: five Republicans members of the House. There there are two
Speaker 1: d and thirteen of them at least. That incredible event,
Speaker 1: coupled with partisanship at its most extreme, I think was
Speaker 1: really well illustrated. And that's what next year is gonna
Speaker 1: look like as well. Um, they're trying to tie in
Speaker 1: Department of Homeland Security funding. Um, they're going to be
Speaker 1: impeachment trials. I'm not expecting any legislation will pass. It's
Speaker 1: remotely material until we get to the Farm Bill, which
Speaker 1: will have material implications for snap benefits UM, and then
Speaker 1: the debt ceiling, which will have to deal with around
Speaker 1: September and will probably be a very ugly fight. UM.
Speaker 1: And the reason we're getting this omnibus now is so
Speaker 1: Kevin McCarthy can wait to deal with the debt ceiling
Speaker 1: until September instead of having to fight that fight right
Speaker 1: out of the gate. Inwree. I'm glad you mentioned the
Speaker 1: debt ceiling debate. It has particular poignancy as you see
Speaker 1: borrowing costs rise to the degree that they have. How
Speaker 1: much do you think that that will actually get a
Speaker 1: growing number of Congress members on board to reduce the deficit,
Speaker 1: to really pull back on some of the issuance. None. Uh, there,
Speaker 1: There's no way you're gonna see any physical austerity actually
Speaker 1: come to pass. There will be no spending cuts. There
Speaker 1: will be a lot of job owning about it. They'll
Speaker 1: talk about it extensively, I imagine, there will be headline
Speaker 1: skin will probably get down to the wire. But when
Speaker 1: you talk with staff, it's pretty clear they already know
Speaker 1: the path forward and it's not even gonna be via
Speaker 1: finding a new number to replace the thirty one point
Speaker 1: four trillion dollars in debt ceiling authority Treasury currently has.
Speaker 1: We already know it's going to be a suspension, which
Speaker 1: was a Banner era development that would um suspend the
Speaker 1: debt ceiling, give Treasury blank check to operate through X
Speaker 1: date because it's a lot easier to vote for a
Speaker 1: date than it is to vote for a thirty two
Speaker 1: trillion dollar debt ceiling. And they don't want those optics.
Speaker 1: So I'm not inspecting any of start from this, Henry.
Speaker 1: I think you said the presidential race has already started
Speaker 1: for two years from now. You're a grizzled veteran at this.
Speaker 1: When do we hear from President Biden? When do we
Speaker 1: hear from President Trump? And when do we hear from
Speaker 1: another ten worthies? Or is that really what January awaits?
Speaker 1: I think so my latest conversations with administrative staff, excuse me,
Speaker 1: administration staff, we're suggesting that right after the holidays, President
Speaker 1: Biden is geared up and read to announce. Um. That's
Speaker 1: contrary to what my original expectation was. I thought President
Speaker 1: former President Trump would not announce on that President Biden
Speaker 1: would therefore also not announced. But the incredible showing that
Speaker 1: Democrats had in the midterm elections has materially changed that
Speaker 1: trajectory um and from everything I see Democrats and President
Speaker 1: Biden in particular or geared up to to launch right
Speaker 1: after we get back from the holidays, Henrietta, thank you
Speaker 1: so much. Henria Trey's Vada partners here as Congress staggers
Speaker 1: is typical, I should say to a year end closes.
Speaker 1: It has been an interesting two thousand twenty two for
Speaker 1: Andrew hollen Worst and Veronica Clark economists. It's City Group.
Speaker 1: They were way out front on a terminal rate above
Speaker 1: five percent. I give them credit with Anna Wong of
Speaker 1: Bloomberg Economics as well, and they reaffirmed that this morning.
Speaker 1: Veronica Clark, I don't know if you've seen this data.
Speaker 1: We've been chatting about it, but to be very or direct,
Speaker 1: this data confirms the Holland Horst rate, doesn't it. Yeah, Yeah,
Speaker 1: it's a bit interesting to see markets move on a
Speaker 1: third release of GDP. You know, we've gotten this data
Speaker 1: a couple of times already. These are revisions, but they
Speaker 1: were pretty big revisions on both headline growth number stronger consumption,
Speaker 1: you know, that's all where you want to see the
Speaker 1: strength and activity is consumption and investment um. And then
Speaker 1: I think especially that core PC number revised higher. Um.
Speaker 1: You know, markets are really hoping to see a softer
Speaker 1: inflation now and we're really not getting it yet. What
Speaker 1: is your interpretation where the chairman desperately needs a lousy
Speaker 1: labor market, he's not getting it. But what is the
Speaker 1: study that you have of the disinflation path forward? Do
Speaker 1: you see a greater disinflation everything considered? Yeah, I mean
Speaker 1: I think we will get you some overall softer inflation
Speaker 1: prints three um, but it will be because initially because
Speaker 1: of things like goods prices that are much weaker. Um.
Speaker 1: We know that shelter prices and inflation measures should be
Speaker 1: softening with housing market that's already softer. Um. But yeah,
Speaker 1: you really do need to see a listening in the
Speaker 1: labor market to be convinced that that that third component,
Speaker 1: that non shelter services you know, will come back down
Speaker 1: to two pc, because we really don't see your path
Speaker 1: for that to happen until the labor market loosens. And
Speaker 1: we were talking about this with leafarage. There's a real
Speaker 1: disconnect here between your outlook for what's going to happen,
Speaker 1: between his outlook for what's going to happen, between the
Speaker 1: Fed's outlook with what's going to happen next year and
Speaker 1: what the market is saying. And I'm almost surprised that
Speaker 1: the market didn't respond more. Albeit this is the third
Speaker 1: read of a GDP for third quarter, and this is
Speaker 1: also initial jobless claims. But still the evidence keeps coming
Speaker 1: in that you are seeing strength, you are seeing resilience,
Speaker 1: and that the Fed will make good on what they're saying.
Speaker 1: What will it take to trigger a reset in terms
Speaker 1: of market expectations? Focused on the last two CPI reports, right,
Speaker 1: you know we've had you know, to software reports. You know,
Speaker 1: if you just listen to the CPI data, it would
Speaker 1: tell you that the FED was going to be more
Speaker 1: hawkish than they thought, than than what most economists we're thinking. Um,
Speaker 1: So maybe that's the right move now, but I would
Speaker 1: really caution against that because you know, we get into
Speaker 1: and you know, we'd still have some upside risks, even
Speaker 1: things like used car prices which wholesale measures are rising
Speaker 1: again there, um, and you do have a lot of
Speaker 1: upside risk to those non shelter services. If you look
Speaker 1: at where wage growth has been, it's telling you that
Speaker 1: those those prices should be higher. Still. I'm glad you
Speaker 1: mentioned used cars. We've been talking about it all morning
Speaker 1: because CarMax came out with their earnings report well below
Speaker 1: what people were expecting. You're seeing those shares plunge. It's
Speaker 1: also raising concerns about it's pure Carvana and other used
Speaker 1: car dealerships and just generally this idea. This is where
Speaker 1: you're getting the disinflation prices for used cars that were
Speaker 1: sky high, where some people were saying, we're a bubble,
Speaker 1: are disinflating, are deflating? How much further does that have
Speaker 1: to go? Is that a twenty two story or will
Speaker 1: that deflation continue next year? Yeah, this is a really
Speaker 1: tricky component because you know, it's not necessarily telling us,
Speaker 1: you know, much about underlying inflation trends. You know, this
Speaker 1: was the supply driven type of inflation that we had
Speaker 1: as early as one UM, and we have had you know,
Speaker 1: pretty big declines for the last two cep I reports.
Speaker 1: That's been a big reason why we've run below you know,
Speaker 1: point forwards or you know that we were running I
Speaker 1: mean you see some of that, I think again in December. Um,
Speaker 1: but the best measures we have of where of where
Speaker 1: these car prices are going or some of these wholesale measures.
Speaker 1: We got data earlier this week from the Mannheim Index
Speaker 1: that showed those actually are starting to increase again. UM.
Speaker 1: So it's not to clear downward trend as we're getting
Speaker 1: into tree. I think the issue there is, you know,
Speaker 1: inventories of cars are just still very short, and that's
Speaker 1: keeping dealers from cutting prices to dramatically. Vernica if we
Speaker 1: get a Hall and Horse rate. There's just this belief
Speaker 1: out there the world ends as we know it now.
Speaker 1: I know City Group Economics doesn't believe that, But what
Speaker 1: does our world look like with a five plus terminal rate?
Speaker 1: I think into the outlooks of next year, there's a
Speaker 1: huge mystery to that. Yeah, I mean, I think our
Speaker 1: our rate of five to five fifty. Um. You know
Speaker 1: it's not necessarily the most dire situation. You know, we
Speaker 1: do have the unemployment rate rising. Um. You know that
Speaker 1: is enough of as a high enough rate to cause
Speaker 1: a mild recession. Um, but we're not talking you know,
Speaker 1: seven eight percent unemployment. We've got it getting too bit
Speaker 1: about do you see an evidence of a labor market troubled?
Speaker 1: I just don't. I don't see the evidence other than
Speaker 1: the flash of tech and maybe the flash of every
Speaker 1: financial institution except City Group. UM. Yeah, I just don't
Speaker 1: see the evidence. No. We we wouldn't yet either. Um.
Speaker 1: But I think you know, if you start with the
Speaker 1: assumption that the FED will do what it takes to
Speaker 1: control inflation. Um, in our view, that's getting rates at
Speaker 1: least to five fifty potential upset. Still, that means that
Speaker 1: they need to see a loosening in the labor market,
Speaker 1: and we're not seeing it yet, you know for sure,
Speaker 1: But as we're getting into the middle of next year,
Speaker 1: we would expect that you're seeing starting to rise in
Speaker 1: the Unflowers, Veronica, stay with US radio and television. Good
Speaker 1: morning to you. An economic set of data at a
Speaker 1: thirty here that moved the markets, no question about that. Yes,
Speaker 1: it's a Thursday before the holiday. Yes it's boring. No,
Speaker 1: it's not futures to tier eight negative twenty futures less
Speaker 1: or so I'm gonna call it down nastic on seven
Speaker 1: tests percent. Excuse me there? Twenty point three six on
Speaker 1: the VIX and Lisa, you earmarked now at three basis
Speaker 1: points a two year yield higher yield four point too.
Speaker 1: I guess it's a Jerome Powell. He is going to
Speaker 1: raise rates. Feel. It's a feel that perhaps we can't
Speaker 1: be complacent in this bet that we're just going to
Speaker 1: continue with a disinflationary impulse in Veronica, and we start
Speaker 1: going into the granularity underneath it, it becomes very interesting
Speaker 1: because we can see that some of the disinflation and
Speaker 1: goods changes course next year. Are there other areas like
Speaker 1: that where some of the the aspects of the inflationary
Speaker 1: that have brought down inflation this year will reverse and
Speaker 1: go the other way next year. I think about oil prices,
Speaker 1: gasoline costs, I think about what you're talking about with
Speaker 1: used cars. Are there other components as well to cause
Speaker 1: more goods inflation next year than people are currently accounting for? Yeah?
Speaker 1: I think there There definitely are still some underappreciated maybe
Speaker 1: upside risk to goods prices. I think most people expect that,
Speaker 1: you know, supply chains have been correcting goods demand as
Speaker 1: much softer. Yes, commodity prices are lower too, um, and
Speaker 1: that means you know, softer core goods prices. But there
Speaker 1: are some upside risks, you know, if we're you know,
Speaker 1: getting into a cold winter, you know, higher energy costs,
Speaker 1: um China reopening. You know, if there's you know a
Speaker 1: lot of people who are are falling ill and not
Speaker 1: being able to work, and that creates new supply issues.
Speaker 1: You know that there's definitely some upside risk to goods broadly,
Speaker 1: not just cars. Veronica, thank you so much, greatly appreciated,
Speaker 1: Veronica Clark wus A City Group. This is the Bloomberg
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