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 Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app. Stephanie Roth of Wolf
Speaker 2: for Research anticipated one hundred and seventy five thousand jobs
Speaker 2: were added last month and for unemployment to come in
Speaker 2: line at four point two percent. Definitely, I'm pleased to
Speaker 2: say is back with u. Stephanie. First of all, welcome back.
Speaker 2: Second of all, congratulations on your little baby girl. We're
Speaker 2: looking forward to more conversations with you in the future.
Speaker 2: So thanks for racing back for payrolls Friday. We appreciate it.
Speaker 2: Let's talk about payrolls first, Stephanie, Let's get to it.
Speaker 2: On Friday, the matin estimate our survey around one hundred
Speaker 2: and sixty five thousand. We've already heard from the feed
Speaker 2: Share chairman poull In Jackson Hole that he does not
Speaker 2: welcome any further deterioration in this job's market. What is
Speaker 2: further calling further deterioration in this job's market?
Speaker 3: How would we define that? On Friday?
Speaker 4: I think that.
Speaker 5: Would be another payrolls print that's sub one hundred and
Speaker 5: fifty thousand. I think that would be the unemployment rate
Speaker 5: potentially rising up to four.
Speaker 4: Point four percent.
Speaker 5: Again, not our call, but if we continue to just
Speaker 5: see more signs of softness, our base case is that
Speaker 5: a lot of the softness that we saw in the
Speaker 5: month of July was driven by Hurricane Barrel, and we'll
Speaker 5: see a thirty seven thousand rebound from the month from
Speaker 5: the state of Texas, in which case our payrolls print
Speaker 5: will be above one hundred fifty thousand, which we kind
Speaker 5: of view as trend. So if we see a number
Speaker 5: closer to one hundred thousand this month, and we'll have
Speaker 5: to reassess our view on the labor market. But our
Speaker 5: base case is the print should come in pretty solid.
Speaker 2: Even if we get one fifty given the revisions we
Speaker 2: saw over the previous year. Why shouldn't I just chop
Speaker 2: off sixty seventy thousand of that number on Friday?
Speaker 5: Well, I think the revisions might be a little bit overstated, right,
Speaker 5: So we initially had the numbers that came in and
Speaker 5: then it was revised down because of unemployment insurance records,
Speaker 5: and it's actually possible the revisions won't be quite as
Speaker 5: large ones we get the final numbers because immigration has
Speaker 5: been playing a role here and it's possible that's not
Speaker 5: necessarily getting counted in the unemployment insurance So basically it's
Speaker 5: a lot of noise to say I wouldn't necessarily chop
Speaker 5: off sixty to seventy thousand.
Speaker 4: Maybe you can chop off thirty to forty thousand.
Speaker 5: But then you're still looking at a label market that's
Speaker 5: still growing jobs and an economy that's doing okay. And
Speaker 5: by the way, consumer spending is growing about three percent
Speaker 5: in reil.
Speaker 6: Chirvice slowing, so not slow. I'd also love to get
Speaker 6: your take on what happened yesterday with the ism manufacturing.
Speaker 6: We just had Andrew Hollandhorse published and report saying a
Speaker 6: fifth consecutive sub fifty ISM reading shows the manufacturing sector
Speaker 6: is in a sustained contraction. Do you foresee that through
Speaker 6: the end of the year.
Speaker 4: The ism has.
Speaker 5: Been weak for a long time. It hasn't been a
Speaker 5: great measure of what's happening in terms of the broad economy.
Speaker 5: And by the way, measures of sentiment, which is effectively
Speaker 5: what a PMI is, it's asking you, purchasing managers, how
Speaker 5: are conditions this month versus last month? Same as consumer confidence,
Speaker 5: that would have told you we were in a recession
Speaker 5: for all of last year. So I wouldn't necessarily take
Speaker 5: that as an indication of where actual broad growth is
Speaker 5: for the economy.
Speaker 4: That said, the manufacturing sector has.
Speaker 5: Been hurt by elevated rates, and we've seen a cyclical
Speaker 5: slowdown in a lot of parts of rate sensitive aspects
Speaker 5: of the economy. We might see that for the next
Speaker 5: quarter or so, but now that rates have come down,
Speaker 5: we should start to see a rebound in the manufacturing sector.
Speaker 5: I wouldn't necessarily anticipate that in Q three, I think
Speaker 5: Q four, and heading into next year, especially as we
Speaker 5: get certainty from a political perspective, I think there might
Speaker 5: be and they mentioned this in the report yesterday, there
Speaker 5: might be some hesitation to invest just because we don't
Speaker 5: know what the political landscape will be, especially from a
Speaker 5: tax perspective, but our base.
Speaker 4: Case is Q four and to Q one you'll start to.
Speaker 5: See a rebound in the manufacturing sector and the cyclical
Speaker 5: parts of the economy won will start to pick up.
Speaker 6: So basically our parts of the economy just on hold
Speaker 6: until after November fifth.
Speaker 4: I think that's fair well, at least on the cycle
Speaker 4: go side.
Speaker 5: On the business investment side, there have been some questions
Speaker 5: about whether the consumers are.
Speaker 4: Waiting to see the results of the election. I don't
Speaker 4: think so.
Speaker 5: I think the consumer and we certainly saw that with
Speaker 5: Q two GDP consumer is continuing to spend in real terms. Certainly,
Speaker 5: good spending has picked up a little bit. Services spending
Speaker 5: has been fairly solid, albeit a little slower, but it's yeah,
Speaker 5: I think it's fair to say. On the capital spending side,
Speaker 5: there are a lot of companies that are just in
Speaker 5: hold mode, and then once they see the results of
Speaker 5: the election realistically, probably either way, they'll be able to
Speaker 5: start investing in investing again and they'll have a greater
Speaker 5: sense in terms of what the investing lines gap will
Speaker 5: be next year.
Speaker 2: Stephanie, we've gott to leave it that it's going to
Speaker 2: have you back. The Brittian and Stephanie Roth of Wolf
Speaker 2: Research on the light system the jumps market looking ahead
Speaker 2: to Friday. But this is around a table amount of
Speaker 2: a line of flack oral command in mornings.
Speaker 3: It's going to thank you for having me.
Speaker 2: Let's get to this credit market. How sensitive has this
Speaker 2: credit market been to the growth scare of the last
Speaker 2: four weeks.
Speaker 7: It's been incredibly sensitive, and I think you can see
Speaker 7: it both in the widening that happened in the during
Speaker 7: the early part of August and the very swift snap back.
Speaker 7: And I think what that shows you is that the
Speaker 7: credit market is sensitive to the growth backdrop, especially high
Speaker 7: heeled and leverage loan issuers in the credit market, not
Speaker 7: just the cost of capital and the interest rate environment.
Speaker 7: Starting trading yesterday morning, we had retraced the entirety of
Speaker 7: the early August widening. We saw almost a record day
Speaker 7: of new issues supply yesterday in the corporate credit market.
Speaker 7: So spreads have gapped out a little bit wider than that,
Speaker 7: but we're still in this kind of narrow range. We're
Speaker 7: seeing widening get bought by investors. I think the key
Speaker 7: for credit investors, is that one, yes, the forward path
Speaker 7: of monetary policy matters, but the reasons behind that rate
Speaker 7: cut really matter. And then two, we don't need really
Speaker 7: strong growth in credit to remain resilient. We just kind
Speaker 7: of just need trend or slightly above trend. And I
Speaker 7: think there's really a wide chasm between a recessionary outcome
Speaker 7: and the current pace of above trend or slightly above
Speaker 7: trend growth, and that we live in that space in between.
Speaker 2: United the recent round trip, how symmetrical was the widening
Speaker 2: versus the tightening beneath the surface?
Speaker 3: What led and what lacks?
Speaker 7: So actually a kind of higher beta cyclical sectors led
Speaker 7: the tightening, but it wasn't uniform. For example, triple c's
Speaker 7: are still underperforming the overall broader index tightening. But this
Speaker 7: has been almost a low quality rally in that high
Speaker 7: yield and leverage loans have been outperforming their investment grade
Speaker 7: peers over the past few months. That's continued the year
Speaker 7: to date trend. And so for all of them talk
Speaker 7: about concerns about downside risks, I think investors are making
Speaker 7: the calculus that are saying, Okay, I'm entering at pretty
Speaker 7: attractive all in yields. Growth is slowing, but it's not slow,
Speaker 7: and therefore the outcome for corporate credit investors can be
Speaker 7: quite resilient in.
Speaker 3: That BACKDROPD what are you personally advocating for?
Speaker 7: Yeah, so, I think there have been a couple act
Speaker 7: allocation shifts that have been super relevant. The first and
Speaker 7: foremost has been the trade off between high ode and
Speaker 7: leverage loans. For most of this year, that equation was
Speaker 7: very clearly in favor of leverage loans because of the
Speaker 7: rate backdrop. I think it's now shifted more neutral between
Speaker 7: hyold and leverage zones. That's one. Two, the recent volatility
Speaker 7: has showed us how quickly the market can change. That's
Speaker 7: especially true for the barrowers that may have found that
Speaker 7: they were locked out of the market, even just for
Speaker 7: a short period of time. So I think we've seen
Speaker 7: more interest from investors on kind of private capital, something
Speaker 7: that's not at the whim of the public market volatility.
Speaker 7: And Then three, I still like moving down in quality
Speaker 7: within the investment grade spectrum. I think one of the
Speaker 7: key developments since the pandemic is that that cliff between
Speaker 7: downgraded from IG to high yield isn't as severe as
Speaker 7: maybe we would have thought several months ago. And so
Speaker 7: if you can own triple B rated firms that have
Speaker 7: a strong incentive to stay investment grade, and even if
Speaker 7: they do fall to highyield, will likely be supported and bought.
Speaker 3: I actually like that, So.
Speaker 7: I think within IG moving down in quality makes a
Speaker 7: lot of sense. Within high yield, I would not go
Speaker 7: all the way down in quality to that triple C
Speaker 7: cohort because they've likegged when you say the corporate credit
Speaker 7: reaction to the cuts is more important aka normalization or easiness, they're.
Speaker 6: Actually seeing the deterioration in the economy. That scenario is
Speaker 6: not reflected right now in valuations. What would it take
Speaker 6: for that scenario.
Speaker 3: To be reflected? You're exactly right.
Speaker 7: I think three sixteen is where we're on the Hyaled index.
Speaker 7: That's nowhere near even the post financial crisis average. So
Speaker 7: what we are baking in at the moment is truly
Speaker 7: a pretty benign outcome for credit. I think, as Stephanie mentioned,
Speaker 7: you would need to see deterioration in the labor market,
Speaker 7: the growth backdrop that is consistent with the weakness that
Speaker 7: we saw in July, such that it kind of spooks
Speaker 7: credit investors that growth is not even at trend, but
Speaker 7: actually meaningfully below. That's really the critical factor. But again,
Speaker 7: so long as we have trend growth, companies have shown
Speaker 7: that they've had an ability to navigate this cost of
Speaker 7: capital environment, and so really it's an extreme downside risk
Speaker 7: to growth now. I think the important thing for investors, though,
Speaker 7: is there is a lot of room for spreads to
Speaker 7: widen in such a scenario where we're kind of nearing
Speaker 7: kind of not recessionary levels, but a sharp slowdown. I
Speaker 7: think you could see spreads five fifty six hundred from
Speaker 7: three to sixteen. So there's a lot of room to wipe.
Speaker 2: You've got your finger in the pulse of this market.
Speaker 2: I think an interesting question for Friday would be how
Speaker 2: sensitive this market would be too stronger than expected dates
Speaker 2: versus weaker than expected dates. What would generate the launcher move.
Speaker 7: I think weaker than expected data because it feels to
Speaker 7: me like stronger than expected data is almost priced in
Speaker 7: at the moment I realized that GDP can be revised
Speaker 7: in third quarters tracking at two percent, so I would
Speaker 7: say that's not extremely above trend. But we've had resilient
Speaker 7: growth all year, and I think the consumer has surprised
Speaker 7: to the upside in terms of spending, albeit bifurcated.
Speaker 3: Just quickly on supplying.
Speaker 2: You mentioned it the amount of supply we've had in
Speaker 2: the last twenty four hours, the announcement of companies bringing
Speaker 2: debt to market. Are they operating from a position of
Speaker 2: strength or weakness or stress?
Speaker 7: A position of proactivity and strength. And Stephanie had mentioned
Speaker 7: kind of capital spending slowing, but capital management has not slowed,
Speaker 7: and so if companies I think are being proactive in
Speaker 7: terms of capital management in the balance sheet as they
Speaker 7: moved towards later in the year.
Speaker 3: And the event risk a clinic as always, it's got
Speaker 3: to see it.
Speaker 2: Thank you, AMOUDA line a black croc with the lysis
Speaker 2: in the credit market use where the Barclay's Energy Investor
Speaker 2: Conference kicking off today in New York. Baker Hugh CEO
Speaker 2: Lorenzo similarly attending, following a better than expected earnings report
Speaker 2: earlier this summer, the company seeing high demand for its
Speaker 2: drilling services and equipment in international markets and place to
Speaker 2: say that. Joining us around the table is Lorenzo. Good morning, sir,
Speaker 2: great to be with you. Let's talk about the outlook.
Speaker 2: You raised the midpoint of that outlook, competitors did not
Speaker 2: a similar story with competitors, though, was this better international
Speaker 2: bankdrop compared to say, what's happening domestically? What explains that
Speaker 2: divide does emergent right now?
Speaker 8: I think, first of all, as you look at Baker Hughes,
Speaker 8: the strength of our portfolio is much broader than just
Speaker 8: oil field services, and so as you look at the
Speaker 8: results that we posted in second quarter and also the
Speaker 8: increase in guidance, it's really based on that total portfolio
Speaker 8: capability that we have that extends into rotating equipment, compression
Speaker 8: and industrial sectors as well. As you look at the
Speaker 8: international markets, again, they are going to continue to grow,
Speaker 8: and again we said at the beginning of the year
Speaker 8: we would see high single digit growth in the international markets.
Speaker 8: We retain that view as we go into the second half,
Speaker 8: and as we go into twenty twenty five, the growth
Speaker 8: will still be there, it will decelerate, and it's really
Speaker 8: driven by the demand that you're seeing internationally. When you
Speaker 8: look at the exports, for example, from Saudi Arabia, a
Speaker 8: lot of that goes to other countries, very little comes
Speaker 8: into North America or goes into the developed marketplace. It
Speaker 8: really is a developing market aspect, and the growing population
Speaker 8: and demand for energy globally is increasing.
Speaker 2: Can you talk to us about the headwinds domestically and
Speaker 2: where they're coming from? Is it off the back of
Speaker 2: the consolidation we've seen, we see more careful spending. Is
Speaker 2: it off the back and lower prices? What's driving it?
Speaker 8: There's definitely a lot of the aspects of consolidation that
Speaker 8: have taken place. There's efficiency also that you're seeing within
Speaker 8: the production which has enabled production to stay relatively flat
Speaker 8: and increasing in some cases. And so domestically, I think
Speaker 8: again we continue to see weakness as we look at
Speaker 8: the second half of twenty twenty four and then also
Speaker 8: in twenty twenty five, really looking at North America to
Speaker 8: be flatish. The gas market may be increasing somewhat, but
Speaker 8: North America is really the operators are being very pragmatic
Speaker 8: with their balance sheet, and again, capital discipline is the
Speaker 8: name of the game.
Speaker 6: Yeah, you need a lot less capital now to produce
Speaker 6: even more oil than you had in the past. But
Speaker 6: you think it's going to be flat. Some of the
Speaker 6: numbers we've run actually see thirteen point nine million barrels
Speaker 6: a day coming from North America and then fourteen in
Speaker 6: twenty twenty five. Do you think that's an accurate trajectory.
Speaker 8: Again, if you look at between thirteen point nine and fourteen,
Speaker 8: you're looking at a very slight difference, and again it's
Speaker 8: driven by the efficiency. It's very transactional in North America.
Speaker 8: So I think it's early to call right now and
Speaker 8: will continue to monitor it. Baker Hughes is much more
Speaker 8: focused on the production side and also the chemical side,
Speaker 8: and I think what we are seeing is really a
Speaker 8: focus on existing wells and also improving recovery rates from
Speaker 8: existing wells, and that's where the mature assets solutions that
Speaker 8: we provide actually have a huge opportunity. And it's actually
Speaker 8: important to remember seventy percent of the world's production comes
Speaker 8: from mature wells, and that's a well that's been in
Speaker 8: operation for over twenty five years or has fifty percent
Speaker 8: of its reserve depleted. If you're able to increase the
Speaker 8: reserve recovery by one percent, you're going to add two
Speaker 8: to three years of the production required globally. So there's
Speaker 8: a big focus on capital discipline and maximizing the recovery
Speaker 8: rates from the mature assets that are available.
Speaker 6: You also mentioned gas. Can we talk about liquefied natural gas?
Speaker 6: Because yesterday we actually saw the Energy Department go ahead
Speaker 6: with an export license. Because the Biden mormonitorium on the
Speaker 6: export license, the courts have pushed back. Is that a
Speaker 6: sign that potentially we could see more LERG come online.
Speaker 8: First of all, very pleased that the license was given
Speaker 8: and congratulations to the team there. I think as you
Speaker 8: look at the global expectations, it's that the monitorium actually
Speaker 8: ceases in twenty twenty five. As you look at the LNG,
Speaker 8: demand is expected to increase. We've predicted that by twenty
Speaker 8: thirty we need an installed based capacity of eight hundred
Speaker 8: million tons per annum and the US can contribute to that.
Speaker 8: That being said, you know, you're never sure until it's done.
Speaker 8: And international projects are continuing to go forward as well,
Speaker 8: so the LNG will be available, and hopefully the United
Speaker 8: States also participates as it's got plenty of gas that
Speaker 8: it can explore.
Speaker 2: A big focus on this program over the last I
Speaker 2: would say six months or so, it has been the
Speaker 2: burden that's going to emerge on the energy grid in
Speaker 2: this country in the next several years. Every single day
Speaker 2: we talk about Nvidia and Capex spend coming from some
Speaker 2: major tech players, spend money throwing money at data centers.
Speaker 2: Can you walk us through just the scale of demand
Speaker 2: you're expecting to see and what you're hearing from some
Speaker 2: of these utility providers and some of these companies, these
Speaker 2: tech firms and the need for off grid solutions that
Speaker 2: you can provide. How big is that growth opportunity for you?
Speaker 8: It is a significant growth opportunity. And I think you
Speaker 8: said earlier this isn't just about today. It is a
Speaker 8: long term trend. If you look at some of the
Speaker 8: statistics out there Generative AI, the consumption of electricity by
Speaker 8: data centers, it's expected to double by twenty twenty six.
Speaker 8: That's going from two percent to four percent of the
Speaker 8: electricity usage. Think about that. That's the same amount of
Speaker 8: electricity that Japan uses on an annual basis. So from
Speaker 8: an installed capacity perspective, it's a significant increase. What do
Speaker 8: we have as a challenge grid stability? And also I
Speaker 8: live in Houston today, I have power outages on a
Speaker 8: continuous basis, and we need off grid solutions and that's
Speaker 8: where distributed power comes in. That's where opportunities for modular
Speaker 8: capabilities of gas turbans that are packaged, smaller off grid,
Speaker 8: and they provide the stability to the data centers for
Speaker 8: ongoing operations, because the other important aspect is intermittency is
Speaker 8: important because a data center can't go down, so you
Speaker 8: need to have that consistency of power generation.
Speaker 2: What does growth look like in this area currently and
Speaker 2: what will growth look like in the years to come
Speaker 2: for you exclusively specifically for us.
Speaker 8: If you look at the industrial gas turbans that we
Speaker 8: provide significant opportunity. Just look at the ratio of the
Speaker 8: increase on the electricity utilization from two to four percent.
Speaker 8: So we're looking and working with the hyperscalers, looking at
Speaker 8: the ecosystem, and we're looking at the opportunity of mini
Speaker 8: gas turbans being sold into this market.
Speaker 2: What's the overall contribution to your revenue mixed do you
Speaker 2: expect to come from that in the next.
Speaker 3: Say several years.
Speaker 2: The reason I asked that question is we've seen a
Speaker 2: big rally in utility companies in line with the rally
Speaker 2: we've seen in AI firms. And if we're to sit
Speaker 2: here today and think about the changing characteristics of your stock,
Speaker 2: I need to know what the contribution from that area
Speaker 2: would be to the overall top bottom line.
Speaker 3: What's that going to look like in years.
Speaker 8: To come as we look at it, and again, this
Speaker 8: could be from five hundred megawatts to one point five
Speaker 8: gig watts, and that's what we're looking at from a
Speaker 8: scaling perspective, and again from a dollar perspective, it's going
Speaker 8: to range based on five hundred million to potentially larger,
Speaker 8: and it's going to come over a series of years.
Speaker 3: As we go forward.
Speaker 8: We look at it as a major new area that
Speaker 8: we can focus on. We've participated before and we've played
Speaker 8: in distributed power generation, and we look at this as
Speaker 8: a growth factor for Baker Hues.
Speaker 6: A big concern to the US energy industry has always
Speaker 6: been these cyber attacks, whether it's colonial, what'sly recently happened
Speaker 6: with Halliburton. Have you seen any impact.
Speaker 8: So we haven't seen any impact. Again, though we're very vigilant. Obviously,
Speaker 8: cybersecurity is a big concern for everybody and we're all
Speaker 8: taking the measures accordingly to put the controls in place
Speaker 8: and very much vigilant on a daily basis.
Speaker 6: What does that look like meaning being vigilant, is that
Speaker 6: having the proper systems in place. Is there a lot
Speaker 6: of communication with the US government.
Speaker 8: There's definitely a communication that takes place across the sector,
Speaker 8: and there's also trade associations that discuss it. From a
Speaker 8: standpoint of vigilance, it means making sure that we're doing
Speaker 8: our own testing on our own systems, making sure that
Speaker 8: we're putting in the controls, we're patching with the new
Speaker 8: security that's available, and also doing our own fishing exercises.
Speaker 8: And so we've got a team that continuously Red team,
Speaker 8: Blue team, and we test our own systems. But I
Speaker 8: also say, you can never be too careful, and you've
Speaker 8: got to stay vigilant, and you've got to be prepared.
Speaker 2: You've got a really busy day ahead of you before
Speaker 2: we let you go. This conversation's got to time arise
Speaker 2: in multiple decades, the time horizing of this market. The moment,
Speaker 2: about five minutes, can we just reflect on yesterday's price action?
Speaker 2: What's going on include energy markets at the moment. It's
Speaker 2: a real tangible concern from your side around demand in China.
Speaker 2: What's it all about.
Speaker 8: I think you're always going to have volatility on a
Speaker 8: daily basis, and it's something we deal with in the
Speaker 8: business world. At the same time, leading a company, you've
Speaker 8: got to focus on the fundamentals and the fundamentals of
Speaker 8: the long term trajectory and make the right investment decisions.
Speaker 8: That's what we're doing at Baker Hughes. And if you
Speaker 8: look at the macro tailwinds, I think it's undeniable that
Speaker 8: energy demand is continuing to increase. As you look at
Speaker 8: the population and you look at the development of nations.
Speaker 8: You also look at developed nations that are now seeing
Speaker 8: that they don't have enough energy as well, such as
Speaker 8: here in the United States. So we look at the
Speaker 8: macro aspect and we're definitely seeing positive tailwinds.
Speaker 2: Do you feel like the attitude of fossil fuels has
Speaker 2: shifted in the last twelve months. Do you think governments,
Speaker 2: particularly in the West, have had a bit of a
Speaker 2: reality check.
Speaker 8: I think there is an understanding that it's not just
Speaker 8: about an energy ambition. It's also about an energy expansion,
Speaker 8: and it's not about the fuel type. It's about reducing emissions.
Speaker 8: And that's where gas plays a key role because it
Speaker 8: is abundant, it's available, and you need affordable, secure, reliable energy.
Speaker 2: Lorenzo appreciate it. You got a long down ahead of you.
Speaker 2: Thanks for your time, Thank you, Thank you, Sir Lorenzo. Similarly,
Speaker 2: there the Baker Hughes c EO Kate McShane of Goldman
Speaker 2: Sachs saying the following. We have seen growing concerns around
Speaker 2: the health of the US consumer and more value seeking
Speaker 2: spending behavior. However, our economists continue to see a resilient
Speaker 2: consumer and belief the concerns around weakness and consumer spending
Speaker 2: are likely overdone. I'm pleased to say that alongside Kate,
Speaker 2: It's Bloomberg's very own Lisa Bramb.
Speaker 3: It's Lisa.
Speaker 1: Good morning, Good morning, John, good morning Age. Thank you
Speaker 1: so much much for having me and Frankly, this is
Speaker 1: really the key question for so many on Wall Street
Speaker 1: and Main Street. Basically how resilient is the consumer and
Speaker 1: we talk about weakness. At what point are we talking
Speaker 1: about actual weakness versus just it's getting competitive out there.
Speaker 1: Kate McShane joining us here. Kate, thank you so much
Speaker 1: for being with us. I am curious you know how
Speaker 1: much weakness is there?
Speaker 3: Do you give credence to.
Speaker 1: This story that the consumer is fragile?
Speaker 9: Yes?
Speaker 4: So, good morning. Thanks for having us.
Speaker 9: I think when it comes to the consumer, what we
Speaker 9: continue see as a somewhat steady consumer. I think what
Speaker 9: we've heard from most of the companies that we cover
Speaker 9: is that not much has changed with the consumer over
Speaker 9: the last six months. They're employed, wages are growing, but
Speaker 9: they are being choiceful. And part of the reason why
Speaker 9: they're being choiceful is because there has been a lot
Speaker 9: of inflation over the last couple of years. Their money
Speaker 9: doesn't go quite as far. So you are seeing choices
Speaker 9: between consumables and discretionary. You're seeing choices between services and goods,
Speaker 9: and I think that's what's differentiating maybe some of the
Speaker 9: different performances that you're seeing out of Free Tael coming
Speaker 9: out of the second.
Speaker 1: Sadi Square, this idea that we keep hearing this and
Speaker 1: yet margins are expanding.
Speaker 9: Yes, well, there is some growth, so there is some
Speaker 9: leverage in some of these retailers models. But at the
Speaker 9: same time, you've seen costs dissipate, especially on the freight
Speaker 9: side of things, and so there has been some improvement
Speaker 9: in margins as costs have come down on freight.
Speaker 1: Okay, so it's more of that story and not so
Speaker 1: much that AI is creating this incredible efficiency that's overwhelming
Speaker 1: any potential price losses in pricing power that they're losing.
Speaker 4: Not yet.
Speaker 9: I mean, we are starting to hear more, of course
Speaker 9: about AI, just like we are across all the other industries,
Speaker 9: but it's much more nacent and more about efficiencies with
Speaker 9: regards to getting more efficient with how they catalog online,
Speaker 9: with their e commerce and maybe freeing up some tasking
Speaker 9: for their labor. But there isn't anything of scale yet
Speaker 9: that we've seen that is revolutionizing what's happening with margins
Speaker 9: in retail.
Speaker 1: So just to be clear, when people say maybe some
Speaker 1: of the increased productivity that we're seeing that's leading to
Speaker 1: these higher margins stems from the idea of AI making inroads,
Speaker 1: not really seeing that quite yet.
Speaker 3: I don't believe.
Speaker 4: I don't believe.
Speaker 9: So again, it's being talked about, but I don't think
Speaker 9: it's being touted necessarily as one of the bigger drivers
Speaker 9: of my margins are better year over year.
Speaker 1: When people talk about a more choiceful consumer or more
Speaker 1: discretionary how much are they talking about just a sort
Speaker 1: of stagnant pool and greater competition to get that pool.
Speaker 1: And I'm thinking about higher income individuals, and increasingly the
Speaker 1: holy Grail has been just to get a chunk of that.
Speaker 9: Yes, well, they are speaking about the higher income individuals
Speaker 9: too with the choiceful consumer, and I think it's maybe
Speaker 9: less about consumables versus goods or consumables versus discretionary, but
Speaker 9: it's that services versus goods. Part of what we saw
Speaker 9: during the pandemic was a really heightened demand for goods
Speaker 9: things apparel, home goods, things like that, consumer electronics, and
Speaker 9: then as soon as the world opened up, you went.
Speaker 3: Back to services.
Speaker 9: We haven't white seen that pivot back to discretionary goods.
Speaker 9: It was only on Target and Walmart's conference calls that
Speaker 9: they have just seen some stabilization in goods. So it's
Speaker 9: that choicefulness that's happening at the higher end as well,
Speaker 9: because they're choosing between.
Speaker 3: Services and goods.
Speaker 1: So you've been doing this a very long time.
Speaker 3: You've been all the sasts.
Speaker 1: Six years before that, you were at City Group and
Speaker 1: Credit Suite, and this has been a conference, it's been
Speaker 1: going on for thirty one years. How is this time
Speaker 1: different in terms of just the tenor of certainty or
Speaker 1: lack thereof in terms of the economic cycle as well?
Speaker 1: As the interest rate cycle as well as some of
Speaker 1: the technological overlays that you're seeing.
Speaker 3: Yes, so the cyclicality is.
Speaker 9: Always the name of the game. Right year to year,
Speaker 9: we're going to be in different cycles, and so certainly
Speaker 9: right now we're discussing about the health of the consumer
Speaker 9: because of the interest rate environment we're in, because of
Speaker 9: what's happened over the last five years. But I think
Speaker 9: what's so different about the conference this year and what
Speaker 9: companies are going to be talking about, is we are
Speaker 9: entering year five post COVID. Most of the companies here
Speaker 9: had benefited in a significant way during COVID when everyone
Speaker 9: was shut in and needed to be entertained or needed
Speaker 9: to buy food, and now we should be entering a
Speaker 9: period in twenty twenty five where it's more normal for
Speaker 9: consumer behavior. And so we're going to be focused on asking,
Speaker 9: in addition to the macro and what the expectation is
Speaker 9: for the health of the consumer, what their behavior looks
Speaker 9: like in twenty twenty five.
Speaker 1: What are you seeing?
Speaker 3: What's the answer to that.
Speaker 9: So we're still seeing that choiceful consumer, but as I
Speaker 9: mentioned with Walmart and Target, they are starting to see
Speaker 9: some stabilization indiscretionary goods, and so our thought is that
Speaker 9: you will see more normalization of the consumer balancing the
Speaker 9: choices between goods and consumables and services.
Speaker 1: How much do you see the most powerful companies consolidating
Speaker 1: their market share in a way that we haven't really
Speaker 1: seen in the past. And I'm thinking of Walmart, I'm
Speaker 1: thinking of Amazon, I'm thinking of some of the behemoths.
Speaker 9: Yes, we do think that that is an element that's
Speaker 9: happening across retail to the haves and.
Speaker 4: Almost the have nots.
Speaker 9: And part of the phenomenon is that the scale and
Speaker 9: the one stops shopping is really appealing to the consumer.
Speaker 9: So if we take Walmart as an example, it's not
Speaker 9: just the value that they're offering the consumer, the discounted prices,
Speaker 9: the rollbacks, but it's the convenience. It's the fulfillment optionality
Speaker 9: that you can get with delivery or click and collect
Speaker 9: or buy online.
Speaker 3: And pick up in store.
Speaker 1: What do you think is the biggest anxiety at this
Speaker 1: conference for the eighty sum companies and executives that are here.
Speaker 9: I do think it's figuring out the consumer. That's probably one.
Speaker 9: I would say tariffs is another. That's a big question
Speaker 9: mark as to what that looks like post the election,
Speaker 9: and it could be very costly and retailers are going
Speaker 9: to have to figure out what they do with their
Speaker 9: pricing as a result of that.
Speaker 1: Kate McShane, thank you so much for being with us,
Speaker 1: Thank you for having us here. That was Kate McShane,
Speaker 1: us retailing analyst at Goldman Sax here at the Goldman
Speaker 1: Sax Retailing Conference.
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