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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Lisa A.
Speaker 3: Bramwods, along with Tom Keane and Jonathan Ferrow join us
Speaker 3: each day for insight from the best in economics, geopolitics,
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Speaker 3: On demand on Apple, Spotify and anywhere you get your podcasts,
Speaker 3: and always on Bloomberg dot Com, the Bloomberg Terminal, and
Speaker 3: the Bloomberg Business App. There is quite of whether this
Speaker 3: is enough of a disinflationary effect to really give people
Speaker 3: confidence that inflation and the disinflation that we're seeing now
Speaker 3: is more than just transitory. J. Brice and Over at
Speaker 3: Wells Fargo chief economists there joining us. Now, what's your
Speaker 3: thought just now to start with Jay on what we
Speaker 3: just saw in the CPI print that did come in
Speaker 3: just a bit hotter than expected.
Speaker 4: Yeah, Lisa, I mean, I'll use a phrase here, and
Speaker 4: I think John is probably familiar with it. You know,
Speaker 4: this was kind of a damp squib. It's kind of right.
Speaker 4: I mean, I don't think it's going to change anybody's
Speaker 4: view of what's going on in the economy. I don't
Speaker 4: think it changes anyone's view, you know, at the Federal
Speaker 4: Reserve about this. I think it you know, maybe in general,
Speaker 4: it kind of keeps them in play. It keeps the
Speaker 4: possibility of another rate hike, probably not at November, maybe
Speaker 4: December live, but in general, it's it's kind of what
Speaker 4: I think most of us kind of assumed was going
Speaker 4: to happen.
Speaker 2: Damn squid. I actually had to look it up.
Speaker 3: It means an event that is not as exciting or
Speaker 3: popular as people thought it would be. I'm curious, though, Jay,
Speaker 3: the fact that we got an upside surprise PPI yesterday
Speaker 3: and the smallest of upside surprises on CPI. Now, are
Speaker 3: you surprised we're not seeing more of a reaction in markets?
Speaker 3: That if I'm responding to winds blowing in another room
Speaker 3: over the past couple of days.
Speaker 4: Well, you know, as you know, and we had just
Speaker 4: a tremendous backup in yields over the last few weeks here,
Speaker 4: and so you know, I think the market is just
Speaker 4: trying to find this sequilibrium right now. And you know, again,
Speaker 4: I don't think this was big enough to really change
Speaker 4: sentiment all that much. If we would have printed you know,
Speaker 4: another point six on the headline and a point four
Speaker 4: on the core, then I could see much more of
Speaker 4: a market reaction here. But just given all the price
Speaker 4: action we've seen over the last two weeks, in some sense,
Speaker 4: it's not all that surprising to me. We haven't seen
Speaker 4: a bigger reaction this morning to this data.
Speaker 3: What it does highlight, though, is something that you and
Speaker 3: Sarah House have been speaking about for quite a while,
Speaker 3: which is the final mile and how difficult it is
Speaker 3: to get inflation back down to two percent. How much
Speaker 3: does this edify just how difficult that battle is, given
Speaker 3: the fact that we're seeing signs that goods inflation is
Speaker 3: starting to reignite.
Speaker 4: Yeah, So, I mean, you know, for us, it's you know,
Speaker 4: it boils down to services. Right, services represent more than
Speaker 4: sixty percent of the overall CPI. I mean, I don't
Speaker 4: know what, you know, the so called super core was
Speaker 4: this is services x housing. But that's been running, you know,
Speaker 4: we've been getting point four sort of numbers on that,
Speaker 4: and so that last mile to get us back down
Speaker 4: to two percent on a sustained basis, you know, that's
Speaker 4: that's tough, and that's why the FED is probably going
Speaker 4: to remain restrictive, you know, for quite some time to
Speaker 4: make sure that that does come down. And so what
Speaker 4: you have to do is you have to have and
Speaker 4: they said this in the minutes of the FMC minutes
Speaker 4: the other day, you have to have subtrend growth for
Speaker 4: a while to bring that down to two percent. And
Speaker 4: I'm afraid that's what we're going to be looking at
Speaker 4: over the next few quarters, is kind of subtrend economic growth.
Speaker 5: The report also talks about the increase in the gasoline
Speaker 5: index as a major contributor to the rise. How difficult
Speaker 5: does the current geopolitical environment make the fact that this
Speaker 5: gasoline index potentially has potential to continue to rise to
Speaker 5: make this two percent even that much harder?
Speaker 4: Yeah, I mean, it's interesting and if you look at
Speaker 4: you know, if you look what's happened since let's call
Speaker 4: it late September, so gasoline prices have actually come down
Speaker 4: pretty significantly, like in the you know, fifteen twenty cents
Speaker 4: a gallon or something like that. You know, what's going
Speaker 4: on right now in the Middle East will probably stop
Speaker 4: that decline right there. And if things obviously heat up
Speaker 4: over in the Middle East and you start talking about
Speaker 4: you know, potentially a ran going offline in terms of
Speaker 4: you know, pumping three million or so barrels a day,
Speaker 4: then that's obviously going to put upward pressure on oil prices,
Speaker 4: and that would arrest that downward trend that we've seen
Speaker 4: at least in the last two weeks in terms of
Speaker 4: gasoline prices.
Speaker 5: Do you start to consider that and put that into
Speaker 5: how you were thinking about the next year or so.
Speaker 4: So, I guess what I would the way I would
Speaker 4: characterize that to our inflation forecast is it's an upside risk.
Speaker 4: I mean, at this point, just given out how fluid
Speaker 4: that situation in the Middle East is, I don't know
Speaker 4: if we would necessarily try to factor that in right now,
Speaker 4: and so you know, we would come up with some
Speaker 4: sort of point estimate in terms of our view in
Speaker 4: terms of inflation over the coming year or so, and
Speaker 4: we would say, well, maybe the risk are a little
Speaker 4: bit skewed to the upside here, and so we'll just
Speaker 4: have to keep an eye on what's going on over there.
Speaker 4: But keep in mind that gasoline itself represents a pretty
Speaker 4: small part of the CPI. I think it's only like
Speaker 4: six percent or something like that. It's pretty small, and
Speaker 4: so you'd have to have see, you know, pretty significantly
Speaker 4: increase in gasoline prices that were sustained to have you know,
Speaker 4: a lasting impact on the overall rate of inflation.
Speaker 2: Jay Bryce And and Wells Fargo, thank you so much for
Speaker 2: being with us.
Speaker 4: If we.
Speaker 3: Do want to parse through what the response has been
Speaker 3: to the CPI report, joining us now, David Kelly, chief
Speaker 3: Global strategist at JPMorgan Asset Management.
Speaker 2: I just would love to get your.
Speaker 3: Thoughts, David, on whether the CPI, the PPI coming in
Speaker 3: hotter than expected, moves the needle anywhere on your radar,
Speaker 3: even just a touch.
Speaker 4: Not really.
Speaker 6: First of all, on the CPI, I think it was
Speaker 6: close to being exactly on expectations. The one thing that
Speaker 6: seemed to be stronger than people that expected was hotels.
Speaker 6: Hotel rates had fallen a very sharp three point six
Speaker 6: percent in the prior month, they jumped four point two
Speaker 6: percent this month, and that was one of the things
Speaker 6: to push up shelter costs, And if you take that out,
Speaker 6: there's really not much else going on here. Meanwhile, we're
Speaker 6: looking very closely at the price of gasoline, because what's
Speaker 6: happening is, even though crude oil prices are holding in
Speaker 6: at fairly high levels, we've seen refiner margins come crashing down.
Speaker 6: And so the price of a gallon of gasoline is
Speaker 6: now nineteen cents lower than it was a month ago,
Speaker 6: and so I think that bodes well for a better
Speaker 6: reading for October CPI. So right now, I think we're
Speaker 6: still on track. I think we're on track for CPFF
Speaker 6: year of a year headline CPI being at two percent
Speaker 6: or less in the fourth quart of next year, and
Speaker 6: the consumption to fasier also being a two percent or
Speaker 6: less by the four court of next year, and that's
Speaker 6: one year ahead of the FEDCE target, and that's you know,
Speaker 6: so overall, this report makes me really, you know, I'm
Speaker 6: still very optimistic that inflation is coming down and meanwhile,
Speaker 6: we do have these other issues. We do we have
Speaker 6: this expanding UAW strike. I think the continued sort of
Speaker 6: chaos in Washington makes it quite possible that we'll have
Speaker 6: a government shutdown in November. So I think there are
Speaker 6: you know, there's still plenty of weights on the economy here,
Speaker 6: and certainly when I look at inflation, I still think
Speaker 6: it's coming down.
Speaker 5: When you look at this report, though very much so
Speaker 5: feels like status quo. How much harder is it going
Speaker 5: to be to get to that two percent?
Speaker 6: Well, I don't think it's going to be that hard.
Speaker 6: I mean, it's a lot of this has to do
Speaker 6: with year over year changes and basis. So if you
Speaker 6: look at the core CPI, it came down from four
Speaker 6: point four percent year over year to four point one percent,
Speaker 6: and actually Core is going to keep on coming down
Speaker 6: over the next next few months. And then you know,
Speaker 6: as I said, I think the energy story is gradually
Speaker 6: getting better. I think the economy will grow more slowly
Speaker 6: in the fourth quarter and next year. So and then
Speaker 6: the last thing is shelter. We know that that owners
Speaker 6: equivalent to rent actual rents. As the government reports some
Speaker 6: lag reality on the ground when it comes to negotiated rents,
Speaker 6: and we're not seeing any increase going on in the
Speaker 6: actual rental market. We're not seeing any increase going on
Speaker 6: in actual new car prices since the start of this year.
Speaker 6: So we think that that will all tend to push
Speaker 6: away at transportation or cutaway at transportation services and at
Speaker 6: shelter costs. And that's really where our forecast of two
Speaker 6: percent inflation by the end of next year is coming from.
Speaker 2: Does that make you bullish or bearish?
Speaker 6: Siting BULLETSH I think I think you have to pick
Speaker 6: and choose here. The overall US equity market's not cheap,
Speaker 6: but it's very bifurcated between those top ten stocks, a
Speaker 6: top seven stocks, and everything else. The rest of the
Speaker 6: market is looking like pretty good value here. I would
Speaker 6: also say the bond market's pretty good value here. I mean,
Speaker 6: if I'm right, then inflation gets down to two percent,
Speaker 6: then a ten your treasury at about four and a
Speaker 6: half percent sounds about right, and we actually could get
Speaker 6: a little bit of a capital gain when inevitably we
Speaker 6: trip into recession at some stage in the next year
Speaker 6: or two.
Speaker 3: We've been trying to wrapperhead around some of the whipsaw
Speaker 3: action that we've seen in ten year treasure yields and
Speaker 3: thirty year treasure yields. We've had softer than expected auctions
Speaker 3: yesterday the ten year, today we have one of the
Speaker 3: thirty year. There's been a question of how much is
Speaker 3: technical and how much is a larger lack of certainty
Speaker 3: about what the ultimate inflation paradigm is going to look like.
Speaker 3: Not to mention fiscal from your vantage point, does this
Speaker 3: volatility make this market less investible or more investible?
Speaker 6: Well, it's disconcerting, of course for investors, But if you're
Speaker 6: a long term investor, just look at the prices and
Speaker 6: don't worry about the day to day action because a
Speaker 6: lot of this is whipsaw, as you say, but over
Speaker 6: the course of a year, or two years or ten years,
Speaker 6: it'll diminish. I do think that there is something important
Speaker 6: going on the fiscal side, and we just got the
Speaker 6: Congressional Budget Office numbers on their estimates on the budget
Speaker 6: deficit on Monday even and it looks like this fiscal
Speaker 6: year or last fiscal year came in at one point
Speaker 6: seven trillion dollars. This fiscal year probably about two trillion dollars.
Speaker 6: You add in the fact that the FED is returning
Speaker 6: bonds to the market, and the federal government is having
Speaker 6: to borrow about two and a half to three trillion
Speaker 6: dollars every year from global public capital markets, and that
Speaker 6: is an enormous lift. And that does suggest that when
Speaker 6: long term deals come down, they're not going to come
Speaker 6: down to you know, one percent or two percent. So
Speaker 6: there is a floor to how low long term bonds
Speaker 6: can come down. So what I'd say is, you know,
Speaker 6: buy bonds for income, buy them far to diversify your portfolio,
Speaker 6: but don't expect a big capital gain from bonds, because
Speaker 6: I think there is a limit to how far rates
Speaker 6: could fall given how much the government has to borrow.
Speaker 5: When you look at the fiscal trajectory though of the
Speaker 5: United States, you see a lot of the dysfunction that
Speaker 5: goes on in Washington. The fighting is about a very
Speaker 5: small sliver of the US budget. Is can we ever
Speaker 5: really deal with the fiscal health of the United States
Speaker 5: until we start looking at the defense budget or things
Speaker 5: like entitlements, these mandatory spending measures.
Speaker 6: Well, it's not just on the spending side, it's also
Speaker 6: on the tax side. I mean, the reason we have
Speaker 6: big budget deficits today is because we had two huge
Speaker 6: wars over a very long period. We had two major
Speaker 6: tax cuts, one of them which was extended, and we've
Speaker 6: had and we've had a pandemic and a global financial
Speaker 6: crisis in which the government has poured money at the
Speaker 6: problem and we didn't pay for any of it. The
Speaker 6: reason of the big budget deficits is because politicians treat
Speaker 6: us like children, and we accept it. So I completely
Speaker 6: agree with you that what they're talking about today is
Speaker 6: just complete sideshow. You can't deal with the budget deficit
Speaker 6: without either raising taxes or cutting defense, Medicare and Medicaid
Speaker 6: and social security or both. You simply can't. And we
Speaker 6: need to have these tough discussions, but I don't expect
Speaker 6: that anytime soon. So I think we will be looking
Speaker 6: at rising deficits or rising debt and very high deficits
Speaker 6: for many years to come.
Speaker 3: David Kelly of JP Morgan Asse Management, thank you so much.
Speaker 3: There is this question of whether this is enough of
Speaker 3: a disinflationary effect to really give people confidence that inflation
Speaker 3: and the disinflation that we're seeing now is more than
Speaker 3: just transitory. J. Brice and over at Wells Fargo chief
Speaker 3: economists there joining us. Now, what's your thought just now
Speaker 3: to start with Jay on what we just saw in
Speaker 3: the CPI print that did come in just a bit
Speaker 3: hotter than expected.
Speaker 4: Yeah, Lisa, I mean, I'll use a phrase here, and
Speaker 4: I think John is probably familiar with it. You know,
Speaker 4: this was kind of a damp squib. It's kind of right.
Speaker 4: I mean, I don't think it's going to change anybody's
Speaker 4: view of what's going on in the economy. I don't
Speaker 4: think it changes anyone's view, you know, at the Federal
Speaker 4: Reserve about this. I think it you know, maybe in general,
Speaker 4: it kind of keeps them in play. It keeps the
Speaker 4: possibility of another rate hike, probably not at November, maybe
Speaker 4: December alive. But in general, it's it's kind of what
Speaker 4: I think most of us kind of assumed was going
Speaker 4: to happen.
Speaker 2: Damn squid. I actually had to look it up.
Speaker 3: It means an event that is not as exciting or
Speaker 3: popular as people thought it would be. I'm curious, though, Jay,
Speaker 3: the fact that we got an upside surprise with PPI
Speaker 3: yesterday and the smallest of upside surprises on CPI, now,
Speaker 3: are you surprised we're not seeing more of a reaction
Speaker 3: in markets that if I'm responding to winds blowing in
Speaker 3: another room over the past couple.
Speaker 4: Of days, well, you know, as you know, and we
Speaker 4: had just a tremendous backup in yields so over the
Speaker 4: last few weeks here, and so you know, I think
Speaker 4: the market is just trying to find a sequilibrium right now.
Speaker 4: And you know, again, I don't think this was big
Speaker 4: enough to really change sentiment all that much. You know,
Speaker 4: if we would have printed you know, another point six
Speaker 4: on the headline and a point four on the core,
Speaker 4: then I could see much more of a market reaction here.
Speaker 4: But just given all the price action we've seen over
Speaker 4: the last two weeks, in some sense, it's not all
Speaker 4: that surprising to me. We haven't seen a bigger reaction
Speaker 4: this morning to this data.
Speaker 3: What it does highlight, though, is something that you and
Speaker 3: Sarah House have been speaking about for quite a while,
Speaker 3: which is the final mile and how difficult it is
Speaker 3: to get inflation back down to two percent. How much
Speaker 3: does this edify just how difficult that battle is, given
Speaker 3: the fact that we're seeing signs that goods inflation is
Speaker 3: starting to reignite.
Speaker 4: Yeah, So, I mean, you know, for us, it's you know,
Speaker 4: it boils down to services, right, services represent more than
Speaker 4: sixty percent of the overall CPI. I mean, I don't
Speaker 4: know what, you know, the so called super core was
Speaker 4: this is service's x housing. But that's been running, you know,
Speaker 4: we've been getting point four sort of numbers on that.
Speaker 4: And so that last mile to get us back down
Speaker 4: to two percent on a sustained basis, you know, that's
Speaker 4: that's tough, and that's why the FED is probably going
Speaker 4: to remain restrictive, you know, for quite some time to
Speaker 4: make sure that that does come down. And so what
Speaker 4: you have to do is you have to have and
Speaker 4: they said this in the minutes of the FMC minutes
Speaker 4: the other day, you have to have subtrend growth for
Speaker 4: a while to bring that down to two percent. And
Speaker 4: I'm afraid that's what we're going to be looking at
Speaker 4: over the next few quarters is kind of subtrend and
Speaker 4: economic growth.
Speaker 5: The report also talks about the increase in the gasoline
Speaker 5: index as a major contributor to the rise. How difficult
Speaker 5: does the current geopolitical environment make the fact that this
Speaker 5: gasoline index potentially has potential to continue to rise to
Speaker 5: make this two percent even that much harder?
Speaker 4: Yeah, I mean it's interesting and if you look at
Speaker 4: you know, if you look what's happened since let's call
Speaker 4: it late September, so gasoline prices have actually come down
Speaker 4: pretty significantly, like in you know, fifteen twenty cents a
Speaker 4: gallon or something like that. You know, what's going on
Speaker 4: right now in the Middle East will probably stop that
Speaker 4: decline right there. And if things obviously heat up over
Speaker 4: in the Middle East and you start talking about you know,
Speaker 4: potentially a ran going offline in terms of you know,
Speaker 4: pumping three million or so barrels a day, then that's
Speaker 4: obviously going to put upward pressure on oil prices, and
Speaker 4: that would arrest that downward trend that we've seen at
Speaker 4: least in the last two weeks in terms of gasoline prices.
Speaker 5: Do you start to consider that and put that into
Speaker 5: how you were thinking about out the next year or so.
Speaker 4: So I guess what I would the way I would
Speaker 4: characterize that to our inflation forecast is it's an upside risk.
Speaker 4: I mean at this point, just given out how fluid
Speaker 4: that situation in the Middle East is, I don't know
Speaker 4: if we would necessarily try to factor that in right now.
Speaker 4: And so you know, we would come up with some
Speaker 4: sort of point estimate in terms of our view in
Speaker 4: terms of inflation over the coming you know, year or so,
Speaker 4: and we would say, well, maybe the risk are a
Speaker 4: little bit skewed to the upside here, and so we'll
Speaker 4: just have to keep an eye on what's going on
Speaker 4: over there. But keep in mind that gasoline itself represents
Speaker 4: a pretty small part of the of the CPI. I
Speaker 4: think it's only like six percent or something like that.
Speaker 4: It's pretty small, and so you'd have to have see,
Speaker 4: you know, pretty significant increase in gasoline prices that were
Speaker 4: sustained to have you know, a lasting impact on the
Speaker 4: overall rate of inflation.
Speaker 2: Jay Bryce and Wells Fargo, thank you so much for
Speaker 2: being with us.
Speaker 7: With this around the table. And please to say Michael Shaw,
Speaker 7: CEO of market Field Asset Management. Morning, Michael, morning. And
Speaker 7: to go back to this Gympianco question I asked in
Speaker 7: the last Now, I think it's worth asking a view
Speaker 7: because I know your answer to it, so we can
Speaker 7: have a broader conversation about it.
Speaker 8: That's someone knows the answer.
Speaker 7: The disinflation we've seen over the last few months is
Speaker 7: that transitory?
Speaker 8: I think so? Yes, Why well, because I think you
Speaker 8: had this big, shocking COVID of excess demand and cons
Speaker 8: constricted supply, and that created a lot of took a
Speaker 8: long time, but it was transitory inflation. And now you
Speaker 8: have a sort of transitory deflation. And what you see
Speaker 8: is that end demand is still there for physical goods,
Speaker 8: and you've seen PPI start to spin around back into
Speaker 8: positive territory, and I think CPI will follow course. Now,
Speaker 8: I would stress it's not going to be a wave
Speaker 8: anything like as powerful as what we saw in twenty
Speaker 8: one twenty two, but I think it is going to
Speaker 8: stop CPI getting back into the twos and staying there.
Speaker 8: CPI is going to be sticky.
Speaker 7: Is it a mistake to sound like you might be
Speaker 7: done then at a further reserve?
Speaker 8: Well, I mean my view, I said it last time
Speaker 8: I was on it's really about the long end of
Speaker 8: the curve, not the short end of the curve. Now,
Speaker 8: the Father's sort of box itself into a corner. I
Speaker 8: don't really care if it stops at five fifty or
Speaker 8: five seventy five, because if you look at the range
Speaker 8: of long term yields, I mean, the tenure was at
Speaker 8: three point fifty in May and was knocking on five
Speaker 8: percent a couple of weeks ago, And you know, I
Speaker 8: think that that's really the question. I think the Feder's
Speaker 8: done what it's going to do in this monetary cycle.
Speaker 8: I think it's going to step away. I'm of a
Speaker 8: view that at some point in time we're not there yet,
Speaker 8: that you're going to see some form of yield curve
Speaker 8: control brought in to stabilize the bond market. But that's
Speaker 8: you know, that's not this week, that's not this.
Speaker 3: Weak hold on a second yield curve control in the
Speaker 3: United States? Does that mean that essentially they're going to
Speaker 3: hold rates high, but that they're going to accelerate quantitative
Speaker 3: easing like they're going to quit accelerate purchases.
Speaker 8: I think at the end of the day, financial stability
Speaker 8: is the unspoken mandate of the Federal Reserve. And they
Speaker 8: talk a lot about unemployment and inflation, but when when
Speaker 8: things really come to a head, financial stability is number one.
Speaker 8: And we saw a taste of it exactly this time
Speaker 8: last year in the UK when the guilt's market three
Speaker 8: briefly dislocated. You know, I'm of a view that the
Speaker 8: Fed doesn't really have things under control. It's certainly not
Speaker 8: in control of the fiscal policy of this country. The
Speaker 8: fiscal policy of this country is reckless in the extreme.
Speaker 8: And you know, I think at some point in the
Speaker 8: foreseeable future you're going to have disorder at the long
Speaker 8: end of the curve, and I think that's going to
Speaker 8: be important enough that it becomes something the Federals of
Speaker 8: gets involved in.
Speaker 3: So is that kind of what equity buyers are banking
Speaker 3: on that essentially when they say when they come out
Speaker 3: and they say stocks can handle bonds where they are,
Speaker 3: yields where they are, are they basically saying because if
Speaker 3: they get out of control, the Fed's going to step in,
Speaker 3: regardless of what's going on with inflation.
Speaker 8: No, I think they're just not thinking about it. I
Speaker 8: think I think that that people spend an awful lot
Speaker 8: of time worrying about monetary policy over the short term,
Speaker 8: and the FED feeds into this. They're constantly out there
Speaker 8: talking and like sort of hinting, maybe we'll do this,
Speaker 8: maybe maybe we'll do that. And the sort of general
Speaker 8: sense for Federals of wants to get out of those
Speaker 8: that it is somehow in control the things that it's
Speaker 8: palpably not in control of I mean, I'd argue it's
Speaker 8: had no effect on inflation. It's it's totally lucky that
Speaker 8: inflation went away. It didn't go away because of what
Speaker 8: the FED did. It went away in spite of what
Speaker 8: the FED did.
Speaker 7: Supply side rebalancing, is that absolutely?
Speaker 4: Yes?
Speaker 7: Do you think that won't be sufficient then to get
Speaker 7: inflation down anymore? Have we seen the bulk of that?
Speaker 8: I think we've seen. I think we've seen the bulk
Speaker 8: of it. Now the long end of the curve may
Speaker 8: have its own form of discipline. You know, I've said
Speaker 8: before that the you know, effectively nothing that happened from
Speaker 8: last October to last to this August really got transmitted
Speaker 8: to the long end of the curve. You know that's
Speaker 8: no longer true. We've now transmitted another seventy five to
Speaker 8: one hundred basis points of tightening to the long end
Speaker 8: of the curve. A question is is really what happens next?
Speaker 7: Typically those sell offs can become self limiting because ultimately
Speaker 7: you start to worry about a slow down and people
Speaker 7: by treasures. Again, what I hear from you is that
Speaker 7: you think the bunch of deaf as a financial stability risk,
Speaker 7: that this thing is going to have to respond to. Now,
Speaker 7: if that's the case, let's run with that. Where does
Speaker 7: that leave the dollar?
Speaker 8: The question is whether this is unique to the United States,
Speaker 8: or whether it's or whether it's something of a global
Speaker 8: something of a global malais. It's If it's unique to
Speaker 8: the United States, the dollar gets significantly weaker. If there's
Speaker 8: a host of G seven countries which are running similar
Speaker 8: deficits and have forced down similar paths, then it's a
Speaker 8: hard asset story.
Speaker 2: If this is the case, then do you foresee a
Speaker 2: certain level, a certain trigger for the FED to step
Speaker 2: in and be able to justify additional purchases at a
Speaker 2: time where inflation is still expected to be hot.
Speaker 8: I don't think it's as a magical yield number. I
Speaker 8: don't think five percent or five twenty five and the
Speaker 8: tenure suddenly gets a FED jumping up and down. It's
Speaker 8: more the orderly functioning of markets. You can have a
Speaker 8: very orderly market with a tenure at five percent. You
Speaker 8: could have a very disorderly market with the tenure at
Speaker 8: five percent. I mean, I think the quality of auctions,
Speaker 8: I think the amount of bids for viget, I think
Speaker 8: the off the market response post auctions matters a great deal.
Speaker 8: You know, it wasn't that the yield in the UK
Speaker 8: was so high this time last year, but it was
Speaker 8: clearly a disorderly market. There was clearly massive force selling
Speaker 8: in the institutional community, and that's when a central bank
Speaker 8: wakes up extremely quickly, and.
Speaker 7: Fiscal policy risk was at the epicenter of that as well.
Speaker 7: Let's finish here. I can hear people screaming at home,
Speaker 7: listen to this. Do I buy stocks? Are Salem?
Speaker 8: What do I think in the short term? You know,
Speaker 8: for I think there's an investable market rebound here, and
Speaker 8: I still think there's portions of the equity market that
Speaker 8: are that are doing Okay.
Speaker 7: It's Washington listening amh to this.
Speaker 5: Well, a lot of people are, but doesn't mean they're
Speaker 5: going to react on it.
Speaker 7: The privilege of acting recklessly just seems to have been lost.
Speaker 5: This is the whole thing Moody's is talking about. It's
Speaker 5: the idea of governance that is not going the direction
Speaker 5: that it should that is concerning them.
Speaker 3: Yeah, but if any of these officials are looking to
Speaker 3: the stock market for any validation of their concern, we
Speaker 3: hear all of these incredibly dooomy and gloomy prognostications and
Speaker 3: then investor after investors has but actually this makes Stucks
Speaker 3: a pretty good bye for now.
Speaker 7: Just process that budget deficit is a financial stability risk
Speaker 7: that this FED has to respond to and commence yield
Speaker 7: curve control. And if it's unique to America, can you
Speaker 7: imagine the dollar weakness we're going to see off the
Speaker 7: back of that if we remember what happened to Sterling
Speaker 7: Right off the back of that story, what happens to
Speaker 7: the US dollar if that starts to materialize?
Speaker 3: The key thing you said if right, But it's a
Speaker 3: global issue. And what did we hear from Tony Dwyer
Speaker 3: that basically battery higher rates are bad because this is
Speaker 3: an entire world leveraged that it to low rates and
Speaker 3: it is not just a US centric.
Speaker 7: Issue joining us now? Is Shila Kayalu, the senior equity
Speaker 7: research analyst over a Jeffreys, Shila, let's start with this story,
Speaker 7: just how disruptive is this for the airlines?
Speaker 4: Currently?
Speaker 9: It's disruptive, but it's manageable.
Speaker 10: What we've seen from Delta Airlines is the cut capacity
Speaker 10: to Israel through October. But I'm sure we'll see that
Speaker 10: change and schedules be trimmed into the rest of the
Speaker 10: Q four and potentially into January, depending on how long
Speaker 10: the conflict lasts. But it's manageable from a risk pro
Speaker 10: cloud perspective that it's one point five percent of capacity
Speaker 10: for Delta, so not a needle mover, and that traffic
Speaker 10: might get rerouted to other European cities. So obviously a
Speaker 10: very sad situation what's going on there. And LLLL is
Speaker 10: the carrier that is flying because they do have some
Speaker 10: ISR equipment on their aircraft. So for Delta, it's a
Speaker 10: financially manageable situation.
Speaker 3: There's a question though about larger risk aversion to travel.
Speaker 3: There have been other conferences that have been canceled or
Speaker 3: postponed in Qatar and other places in response to potential
Speaker 3: violence and just disruption in the region. Is there a
Speaker 3: sense that this could make any kind of dent in
Speaker 3: some of the revenues or just the appetite to travel
Speaker 3: at a time of incredible n ease.
Speaker 10: I think it might pull back international traffic a little bit,
Speaker 10: but we you know, we seasonally expect that Q two
Speaker 10: and Q three are the biggest transatlantic mid East travel season,
Speaker 10: so we'll see it pulled back into that in Q four,
Speaker 10: So the airlines already have that built into their capacity plans,
Speaker 10: and again that travel might get rerouted to that holiday
Speaker 10: travel and leisure travel might get rerouted to other cities.
Speaker 10: In terms of corporate, more US focused, Delta did see
Speaker 10: a ten point improvement this quarter. That was the first
Speaker 10: time they noted that corporate's kind of been stuck at
Speaker 10: eighty percent recovered. That's mostly in the US and talking,
Speaker 10: but you know, we did see some improvement to going.
Speaker 9: Back to work.
Speaker 10: So not sure how much corporate international travel to the
Speaker 10: Mid East and that region DELTA has specifically, but we
Speaker 10: do think it'll be a manageable risk for US network
Speaker 10: carriers in general.
Speaker 3: The Delta results actually put to rest some of the
Speaker 3: biggest fears, at least for now, that higher oil prices
Speaker 3: would seriously impede profits.
Speaker 2: It also raises questions.
Speaker 3: About how much they are unable to pass along some
Speaker 3: of those price increases to the consumers. What did you
Speaker 3: learn in terms of the reality on the ground of
Speaker 3: how airlines are managing some of their fixed costs and
Speaker 3: their ability to actually keep airfares elevated.
Speaker 10: So I think, you know, My thought into today was
Speaker 10: Delta's print was going to be online and it's inline,
Speaker 10: and that they were going to narrow to cut the
Speaker 10: guidance slightly, and they did.
Speaker 9: But I think as we have other network carriers.
Speaker 10: And especially the low cost carriers report through earning season,
Speaker 10: this Delta print is going to come out looking much better.
Speaker 9: You know, Delta did go to the low end of
Speaker 9: its guidance, but one of.
Speaker 10: The factors to highlight year is they generated two point
Speaker 10: seven billion of free cash flow year to date and
Speaker 10: they narrowed their guidance to two billion of cash from
Speaker 10: three billion prior. That's due to higher maintenance and fuel
Speaker 10: so you know, I think we're seeing the impact of that.
Speaker 10: Delta does have a long term target of uh, you know,
Speaker 10: billions of dollars of cash generation out there, so we
Speaker 10: could see those from because of what's going on with
Speaker 10: higher fuel prices and maintenance expenses also coming in higher too.
Speaker 5: How much more difficult is it going to be for
Speaker 5: these airlines to hedge for potential future spikes in jet
Speaker 5: fuel as they see this tragedy unfold in the Middle East.
Speaker 10: None of the airlines outside of Southwest currently have a
Speaker 10: massive touching program, so they do it through other ways.
Speaker 10: For instance, to Delta, we highlight that fifty five percent
Speaker 10: of their revenues or from other services such as their
Speaker 10: Delta tech Ops network, which is quite a unique feature
Speaker 10: they have that's differentiated and helps lower their maintenance costs.
Speaker 10: They have their lower loyalty program with MX as well,
Speaker 10: so they have other revenue streams.
Speaker 9: They really derive revenues from premium.
Speaker 10: Customers, so they try to hedge it in that way
Speaker 10: rather than a direct edge.
Speaker 7: Can we finish that just on those loyalty programs changes?
Speaker 7: Over at Delta Shielda, how are those changes working out?
Speaker 10: I say, I wish I could use a sky Miles
Speaker 10: club because I never have time.
Speaker 9: I'm constantly running around, you know.
Speaker 10: And at Bastian is kind of taking a step back
Speaker 10: and saying they'll revisit the exact changes because of the
Speaker 10: feedback they've gotten. But it just making it more difficult
Speaker 10: to orn those points given that they have such a
Speaker 10: high loyal customer base, because they do have a very
Speaker 10: reliable on time network and part of that comes from
Speaker 10: their other revenue streams too.
Speaker 7: I'm trying to work out if they're going to lose
Speaker 7: customers because of the changes they've made. Do you think
Speaker 7: they might?
Speaker 10: I don't think so, just because they'll actually get me
Speaker 10: to where I need to go, so it's okay for me.
Speaker 9: But you know, and they have such a loyal customer base.
Speaker 10: I mean, that's what's resulting in these changes to begin with,
Speaker 10: is that they have too many loyal customers. So they're
Speaker 10: just making the tiers slightly more difficult. So I don't
Speaker 10: think they'll lose customers. Perhaps you might, you know, swap
Speaker 10: a Delta and United, but you're not going to move
Speaker 10: to a different tier.
Speaker 7: My colleague Tom King would say, right now, beneath the
Speaker 7: brandum Lisa has views on this shade.
Speaker 2: Well, I just hold on a second.
Speaker 3: First of all, this isn't people necessarily being loyal. It's
Speaker 3: people get an American Express card. So if you get
Speaker 3: an American Express card and then you get into the
Speaker 3: lounge and then the people who actually are flying don't
Speaker 3: access it unless they spend about a million dollars in
Speaker 3: actual ticket costs, then you have to wonder why should
Speaker 3: someone stick with one airline rather than go to any
Speaker 3: airline that offers them the best fare that gets them
Speaker 3: to where they need to go.
Speaker 10: I think also one thing to remember, which we haven't
Speaker 10: talked about because there's been so many fears of airline
Speaker 10: profitability with fuel going higher, is capacity is still tight
Speaker 10: in the market to certain city pairs, right, So it's
Speaker 10: not like you have tons of options.
Speaker 9: You usually have one to two to pick from.
Speaker 10: So that's why airlines have been so successful gaining pricing
Speaker 10: so far. Especially we're seeing that in the international areas.
Speaker 10: So yeah, I think that's where they're stepping back because
Speaker 10: they don't want to lose that customer base to that
Speaker 10: other carrier potentially, But I don't think you're going to
Speaker 10: see a massive shift.
Speaker 7: Basically, then don't have to worry about it. It's in
Speaker 7: that customer Based on what I just heard, Sheila Sheila
Speaker 7: kailelu There, Jeffries, I'm the latest with doubts.
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