Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa A.
Speaker 2: Bromoids, along with Tom Keen and Jonathan Ferrell, join us
Speaker 2: each day for insight from the best in economics, geopolitics,
Speaker 2: finance and investment.
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Speaker 3: Joining us around a table here in the studio, Stuart
Speaker 3: Kayes at ahead of US Secrety trading strategy over a city.
Speaker 3: Good morning, Stewart, Good morning. How long can Goldilocks last?
Speaker 3: Hsb's question, not mine, HSBC just asking that question seconds ago.
Speaker 3: They say, continued disinflation and stronger than expected growth in
Speaker 3: many DMS argues for a continued risk on stance, does it?
Speaker 4: I think in general with those I think, you know,
Speaker 4: a big picture. If the labor market in the US
Speaker 4: remains strong and course CPI continues to ease, I think
Speaker 4: that's a good backdrop, you know, for risk assets. I
Speaker 4: think the issue we're having now is frankly, expectations. You know,
Speaker 4: if you look at what's happened over the last month,
Speaker 4: you had a reasonably solid earning season, but the average
Speaker 4: stock that b EPs was unchanged on the day. You had,
Speaker 4: you know, a solid payrolls report, the market traded off.
Speaker 4: You had an easy inflation print, and the market was flat.
Speaker 4: So yeah, I mean, there's a lot of good news
Speaker 4: out there, but the market I think has become a
Speaker 4: little callous to it, which is kind of not good
Speaker 4: for risk reward.
Speaker 3: In review, Michael harn had talked about this Lisa over
Speaker 3: at BFVA and the fund manager survey. Their line was
Speaker 3: basically bear positioning was strong tail went for risk assets
Speaker 3: in the first half, not the case in the second half.
Speaker 3: Their fund manager survey. You mentioned it yesterday at least
Speaker 3: bearish since February of last year.
Speaker 2: Yeah, cash allocations coming down, and we heard that to
Speaker 2: start the show.
Speaker 1: Basically, take the cash.
Speaker 2: You might as well put it into risk, because why not,
Speaker 2: you might as well get the upside surprise if the
Speaker 2: economy is strong.
Speaker 3: You put it into tech. At the start of the year,
Speaker 3: you did do it, and the other people didn't. There
Speaker 3: was that pool of negativity to feed on to drive
Speaker 3: tech higher. After a brutal year in twenty twenty two,
Speaker 3: are you sticking with that trade.
Speaker 4: You know, it's a tough call right here. I think yes,
Speaker 4: as a base case, we still like tech and growth.
Speaker 4: We still think that can work because we do ultimately
Speaker 4: expect you know, the labor market data to begin to weekend,
Speaker 4: and I think in that environment, that's kind of where
Speaker 4: you want to sit. Obviously, the last month has been
Speaker 4: pretty tough for that trade, particularly because yields have risen,
Speaker 4: you know, pretty sharply, and that's impacted tech I think
Speaker 4: more than other sectors. And also this expectation story. If
Speaker 4: you're worried about high expectations, you know, that's clearly very
Speaker 4: acute in the tech space. So I think you are
Speaker 4: fighting expectations, you're fighting performance, and right now you're fighting
Speaker 4: higher yields. But if you do think economy can weaken
Speaker 4: and that should hopefully put a cap on yields, that
Speaker 4: I think tech is a place that you want to
Speaker 4: be in that case. But certainly the past month has
Speaker 4: been been a tough ride for us.
Speaker 2: Can we just talk about quickly just pause cash on
Speaker 2: the sidelines. This is sort of the misnomer that everyone
Speaker 2: keeps talking about, Oh, there's so much cash in the sidelines.
Speaker 2: All these people who aren't invested. Cash is great for
Speaker 2: some people if they're earning five percent. So at what
Speaker 2: point can we say the cash in the sidelines has
Speaker 2: been used up?
Speaker 4: I think it's a great question. If you look at
Speaker 4: retail money market balances, those are up six hundred billion
Speaker 4: dollars since April of last year. Six hundred billion is
Speaker 4: a big number, right, you know, But to your point,
Speaker 4: you're you're equipping a five percent coupon on that, and
Speaker 4: clearly not all of that six hundred will go into cash.
Speaker 4: A lot of that's probably come out of traditional bank
Speaker 4: accounts and got into money market funds to get that yield.
Speaker 4: So I think the question is to release that money.
Speaker 4: What has to happen, right, Either you need to get
Speaker 4: yields lower so that five percent isn't as attractive, or
Speaker 4: you need to have equities continue to perform the way
Speaker 4: they are and you get sort of a fomo you
Speaker 4: know situation on the equity side. It does feel like
Speaker 4: equities are topping out a little bit, so I think
Speaker 4: I think it's going to be hard to dislodge that money.
Speaker 2: To the sentiment point, at what point do losses become
Speaker 2: self fulfilling? At what point do losses spur a question
Speaker 2: to this whole goldilocks to John's point and FOMO feel
Speaker 2: that we were hearing about for the past couple of months.
Speaker 4: Look, I mean, if equities start to move a little
Speaker 4: bit lower, yeah, that's going to a dense sentiment. I
Speaker 4: don't think there's any way around that. You know, tech
Speaker 4: has performed Polard, but frankly, the SMP isn't that far
Speaker 4: off off its high. So, you know, it's interesting last year,
Speaker 4: in a high volatility environment, the moves we've seen recently
Speaker 4: would have not you know, not really registered, right. But
Speaker 4: July was the lowest realized volatility months that we've seen
Speaker 4: since December of twenty nineteen. So you get into August,
Speaker 4: you get at a little bit of a blip and
Speaker 4: it feels I think a little more painful. But yeah,
Speaker 4: I think you know, one of the things we were
Speaker 4: a little bit worried about is, you know, a lot
Speaker 4: of folks were very defensive and hedging earlier in the year.
Speaker 4: That hedging did not work out. It cost a lot
Speaker 4: of money in terms of premium paid. The market is
Speaker 4: probably less well hedged today, you know, than it was
Speaker 4: probably three months ago. So to your point, there if
Speaker 4: we do get some losses, the market is going to
Speaker 4: be a little more surprised by it, or probably a
Speaker 4: little more disrupted by it than it might have been
Speaker 4: earlier this year.
Speaker 3: Let's finish on where the negativity is now. It's in China.
Speaker 3: Everybody that comes on this show is so downbeat on
Speaker 3: what's happening in the country at the moment. The dates
Speaker 3: is bad. The date that you can see, you're not
Speaker 3: going to see much more of it on the youth
Speaker 3: unemployment side. I've got no idea when that changes. The
Speaker 3: data this week basically led to a policy response by
Speaker 3: the Chinese central banks cut rates by the most I
Speaker 3: think since twenty twenty. This is typically the time to
Speaker 3: lean in, to lean into Chinese equities. When people are
Speaker 3: so down beat on what's happening, there is this that
Speaker 3: time you.
Speaker 4: Know, we're not there yet, you know, I think I think,
Speaker 4: at least me personally, you know, we're pretty co on China.
Speaker 4: But like I think, there's three aspects of the China story.
Speaker 4: There's two weeks ago, everybody was celebrating China's exporting deflation.
Speaker 4: This is going to help the FED, right, But that
Speaker 4: sort of ignored the flip side of it, which is
Speaker 4: you're losing a global growth impulse. This week, the discussion
Speaker 4: is much more about the growth side and to what
Speaker 4: you were discussing earlier, which is a sentiment issue. And
Speaker 4: I think the sentiment issue, frankly, is what's going to
Speaker 4: keep people out a little bit. You know, foreign investors.
Speaker 4: I think we're we're not happy with how they were
Speaker 4: treated by China over the last couple of years, and
Speaker 4: I think it's going to make money, you know, kind
Speaker 4: of slow to re engage in that space. So I think,
Speaker 4: to me, the sentiment is very hard to predict. The
Speaker 4: growth versus inflation trade off, I think really just has
Speaker 4: to do with what the market narrative is at any
Speaker 4: given point in time.
Speaker 5: Right, you know, if.
Speaker 4: Two weeks ago was an inflation narrative, it's good. Now
Speaker 4: it's a growth narrative, it's a little bit bad. But
Speaker 4: I think we're we're generally, you know, being fairly cautious
Speaker 4: about about putting money into China. The flows that we've
Speaker 4: seen are much more options based, high payout type stuff,
Speaker 4: you know, limited risk, you know, you know type flow
Speaker 4: is going into China. We've discussed this in the past.
Speaker 4: If the evolution to that Chinese trade this year is
Speaker 4: and you know, or over the last twelve months have
Speaker 4: been very, very fascinating, and right now I think people
Speaker 4: are a a little bit cautious to put under to work.
Speaker 2: There's a question about whether or not put money to
Speaker 2: work in Chinese equities. There's another about the read through
Speaker 2: effect in the United States for companies that are leveraged
Speaker 2: to China. And then just more broadly, I think about
Speaker 2: the fact that this wealth manager mispayments on several of
Speaker 2: its products, that you're dealing with a housing market that
Speaker 2: doesn't see a light at the end of the tunnel.
Speaker 2: At what point does that have contagion that percolates outside
Speaker 2: of China.
Speaker 4: It's a good question because you know, I think initially
Speaker 4: or stage two or three of the China trade was
Speaker 4: I'm going to own Europe and I'm going to own
Speaker 4: luxury goods that sell into the China consumer. Right So
Speaker 4: you know, certainly those type of stocks would be under
Speaker 4: a little bit of pressure given the lack of spending
Speaker 4: growth that we're seeing in China. So yeah, it gets
Speaker 4: an impact. If you look at the foreign direct investment
Speaker 4: in China, it's come off a little bit us companies
Speaker 4: are clearly not putting money, you know, directly in there
Speaker 4: for luxury goods, and you'd probably throw Apple on into
Speaker 4: that category.
Speaker 6: In Tesla as well.
Speaker 4: You know, the domestic demand has been ahead wind, so yeah,
Speaker 4: it's it is a risk, and I think that just
Speaker 4: gets into this global growth narrative of when does the
Speaker 4: benefit on the inflation side get out weighed by the
Speaker 4: sort of detriment on the growth side.
Speaker 3: Well said, I'm just looking at Target on my screen
Speaker 3: right now, slightly distracted. It's by by eight point five
Speaker 3: percent at the back of this. Do you those one
Speaker 3: of those stories if you told me the earnings before
Speaker 3: they came out and then said, guess what the stock
Speaker 3: price is going to do, I'd be like, we they've
Speaker 3: cut the outlook on profits, so that's not great, that's right,
Speaker 3: but it'll be like this second quarter reband for profit.
Speaker 2: I personally think this is just where where the expectations
Speaker 2: have been set, because if you look at those shares,
Speaker 2: they're down considerably on the year. So at a certain point,
Speaker 2: if they're not hemorrhaging money and throwing all in, you know,
Speaker 2: some negative news, I guess it's positive. I can't really
Speaker 2: read it any other way?
Speaker 3: What can I learn from a MAF like that.
Speaker 4: Well, the thing is you say Target. If you said Tarja,
Speaker 4: it would be much more be much more understandable of
Speaker 4: the type of move. But look, this is the important
Speaker 4: part earnings, right, It's what happens with the consumer.
Speaker 3: Santaturists over in China. Couldn't they taj out of out
Speaker 3: of the mh some kind of collap What you said?
Speaker 3: Did you say this how syncs?
Speaker 1: No, you're the one that they sell. I know, the
Speaker 1: soap that goes on saying so I can affirm that nice.
Speaker 2: Okay news you need to know.
Speaker 3: To see city. Thank you? Thank you kinda right. The
Speaker 3: guess that comes on this show, they're like thank you.
Speaker 1: Yeah, I think I think I'm going to run away.
Speaker 3: Now, thank you, and I'm kind of sorry. Let's turn
Speaker 3: to Greg Peters, co c I of PGIM Fixed Income
Speaker 3: Greg Joints. Just now, Greg, not to talk about what's
Speaker 3: happening with Target, t j X, and Walmart, to talk
Speaker 3: about this bond market. Greg. A question that we've asked
Speaker 3: all week, and we've got a different perspective from different people.
Speaker 3: What is behind this bond market move? Greg, of the
Speaker 3: last month.
Speaker 7: Yeah, So I was listening to your rep artee, you know,
Speaker 7: before you came over to me, and I think I
Speaker 7: have a very different narrative than the one that you
Speaker 7: were just talking about.
Speaker 6: I think it's about growth.
Speaker 7: You know, the FED has raised interest rates, inflation is
Speaker 7: coming under control.
Speaker 6: Are they done? I don't know.
Speaker 7: There's probably some more room left to move higher. But
Speaker 7: it's the underlying growth element that has driven the bond
Speaker 7: market in my estimation, as it's about the shape of
Speaker 7: the curve, right, So if you believe that inflation is
Speaker 7: going to remain relatively high, the economy is strong and stable,
Speaker 7: then the curve has to start to normalize, and what
Speaker 7: that means is that back end rates have to move
Speaker 7: higher as a consequence. So to me, it's all about
Speaker 7: this strength and economic activity and sure, inflation you know,
Speaker 7: remains you know, above above trend, but it's really the
Speaker 7: growth story.
Speaker 2: But if you take a look at that implication, there's
Speaker 2: some broader market consequences to this. First of all, it
Speaker 2: means that the yield curve is normalizing up, not down
Speaker 2: to three percent, and that means that we could have
Speaker 2: higher rates for longer at a time, or this economy
Speaker 2: can keep chugging along despite rates where they are. Can
Speaker 2: the credit markets sustain a five percent or four and
Speaker 2: a half percent long term.
Speaker 1: Based treasure yield?
Speaker 2: Does that wreck some of the math behind the credit
Speaker 2: bed Well.
Speaker 6: Yes and no.
Speaker 7: So I mean I think the economy can handle higher
Speaker 7: interest rates. I think that has been the mistake that
Speaker 7: many investor has made, myself included the underlying strengthen the
Speaker 7: economy and the ability to handle higher rates and the
Speaker 7: benefit of higher rates that you're seeing visa via the consumer.
Speaker 7: But you're quite right, Lisa, there's been so many capital structures,
Speaker 7: whether it's in commercial real estate, whether it's in credit,
Speaker 7: that have been built on the backs of extremely low
Speaker 7: interest rates.
Speaker 6: So as interest rates.
Speaker 7: Remain at the high higher level here, then a lot
Speaker 7: of those capital structures really can't withstand that environment. So
Speaker 7: as a consequence, I think we're in this stronger growth environment,
Speaker 7: but at the same time we will see above trend
Speaker 7: default and distress activity as a lot of these companies
Speaker 7: really just are unable to.
Speaker 6: Be a going concern with the higher rate environment.
Speaker 2: One thing we keep hearing Craig is a number of
Speaker 2: investors say they're leading into duration because you might as well.
Speaker 2: Lock in yields where they are getting four point two
Speaker 2: percent for ten years looks pretty good relative to what
Speaker 2: you used to be able to get. Are you saying
Speaker 2: that there is more normalization to be had if we
Speaker 2: are going to create a more flat or more normalized
Speaker 2: yield curve.
Speaker 7: Yes, and that's what we've been saying, and I've been
Speaker 7: arguing that for the past six months, as I think
Speaker 7: it's too early to lock in duration. If you believe
Speaker 7: that the economy you know, is entering a soft landing,
Speaker 7: no landing, whatever landing you want to assign to it,
Speaker 7: that means rates have to move higher, not lower. And
Speaker 7: so yeah, the FED might modulate a little on the
Speaker 7: margin take rates down, but not as much as in
Speaker 7: the price right, and so for me rates are higher.
Speaker 7: I don't see any rush to lock in duration at
Speaker 7: this point. We're leaning against that and have been leaning
Speaker 7: against that for quite some time. So we're still short duration.
Speaker 7: As once again it's growth, Lisa.
Speaker 3: I see me taking that position, Greg, Not because you
Speaker 3: think we're going ten twenty basis points high than where
Speaker 3: we are. It must be bigger than that. What kind
Speaker 3: of numbers do you think we can get to?
Speaker 7: I don't know, there's been a big move already, right,
Speaker 7: So I don't want to get greedy either, But I
Speaker 7: think on balance, the tendency will be for higher rates,
Speaker 7: not lower rates. And so you know, we've been kind
Speaker 7: of talking about this range of you know, four to
Speaker 7: four and a half, but the truth of the matter
Speaker 7: is it's leaning against the forwards and what's in the price,
Speaker 7: and what's in the price in the forward.
Speaker 6: Space it continued rate cuts in a lower yield environment.
Speaker 7: So that's kind of what we're leaning against more than
Speaker 7: kind of making in the call and where rates ultimately
Speaker 7: settle out. But it's the tendency for rates to be
Speaker 7: higher that I think most investors are missing. As the
Speaker 7: regime that we were in pre pandemic is gone, it's different,
Speaker 7: and I think the rate regime is different as a consequence,
Speaker 7: and I don't think investors have accepted that reality or
Speaker 7: accepted the reality that the FED also can't easily and
Speaker 7: readily cut interest rates like they did in the past.
Speaker 3: So, Greg, what I hear then is just another way
Speaker 3: of saying, don't worry about the reinvestment risk of sitting
Speaker 3: at the front end. Is that right?
Speaker 6: Yeah?
Speaker 7: To a degree, I mean, I think cash rates are
Speaker 7: really quite attractive here. I think that's inducing investors to
Speaker 7: take risk off the table, not lean into it. On
Speaker 7: the credit side of the aisle, there's tremendous opportunity across
Speaker 7: the global credit markets. A lot of that opportunity, though,
Speaker 7: is in safe type of allocation. So whether it's end
Speaker 7: type of credit, whether it's structure products, these are safe
Speaker 7: bets where you earn a.
Speaker 6: Tremendous amount of carry.
Speaker 7: You don't have to dip down into triple c's take
Speaker 7: a lot of duration or credit risk, and so take
Speaker 7: what the markets are giving you, and what the market
Speaker 7: is giving you is really quite quite attractive here.
Speaker 6: So we're extremely.
Speaker 7: Bullish on the US economy kind of on a long
Speaker 7: term basis. We're very bullish on fixed income as well.
Speaker 7: But you don't have to take a lot of risk
Speaker 7: in order to be successful. And I think that's the
Speaker 7: important message that I want to leave.
Speaker 3: Message receaved a clinic, Greg, Thank you, sir, Greg paid
Speaker 3: us they have paygim fixed income.
Speaker 2: Carcadonna has been brilliant on this point. Chief you as
Speaker 2: economist at BNP Pariba who has been talking about how
Speaker 2: he will expect inflation to keep coming down, which it
Speaker 2: has this year, and that there can be some relief
Speaker 2: from the FED to move away. Carl joins us. Now
Speaker 2: I'm so pleased to say a good front of the show, Carl.
Speaker 2: What's your take on the resilience? Just starting with the
Speaker 2: housing market that we continue to see.
Speaker 8: There well as we look at this morning's numbers, I
Speaker 8: think when housing starts tell you one story and housing
Speaker 8: permits tell you a slightly different story, permits are the
Speaker 8: ones you're supposed to trust, because housing starts can be
Speaker 8: very volatile due to weather and other types of factors
Speaker 8: that custom choppiness. On a month to month basis, housing
Speaker 8: data have been in a pretty sour environment for the
Speaker 8: last several quarters. The pace of decline is slowing, but
Speaker 8: with affordability as low as it is and mortgage rates
Speaker 8: hitting new highs on a daily basis almost I think
Speaker 8: these are some real constraints going forward. Of course, the
Speaker 8: inventory shortages that you highlighted are a big factor supporting activity,
Speaker 8: especially encouraging new construction. But even yesterday in the home
Speaker 8: builder sentiment survey that buyer traffic prospective buyer traffic is
Speaker 8: extremely low and home builder sentiment declining for the first
Speaker 8: time this year.
Speaker 2: So straplight that into retail sales, are you saying that
Speaker 2: you're seeing similar signs that it cannot continue to have
Speaker 2: the same kind of robust gains and consumer spending that
Speaker 2: we've seen.
Speaker 8: Well, Lisa, I see some significant headwinds emerging for retail
Speaker 8: sales and consumption more broadly in the back half of
Speaker 8: this year. Now, as we dissected yesterday's retail sales data
Speaker 8: for July, and maybe Amazon Prime Day helped to support
Speaker 8: the numbers and whatnot, but as we went into the details,
Speaker 8: it looked like discretionary spending was particularly strong. So the
Speaker 8: sporting goods, hobby, leisure, restaurants and bars, all the things
Speaker 8: you would spend on if you have extra cash in
Speaker 8: your pocket. Those categories were actually the strongest categories in
Speaker 8: the report. So things are on a solid footing in
Speaker 8: the month of July at least, But as we go
Speaker 8: into the back half of the year, we know that
Speaker 8: labor activity is slow, We know that income generation from
Speaker 8: labor activity is decelerating as well. We have student loan
Speaker 8: payments resuming in October, so there's questions whether people will
Speaker 8: immediately jump back into paying those loans or not, but
Speaker 8: with an annualized price tag of about one hundred billion dollars,
Speaker 8: it could have a very significant consequence, even if it
Speaker 8: isn't fully felt in the initial months. You have a
Speaker 8: potential government shutdown coming in the back half of the year.
Speaker 8: And also all those excess savings generated during the pandemic
Speaker 8: have been getting spent at a pretty healthy clip, whereas
Speaker 8: we think the kind of excess savings will be fully
Speaker 8: exhausted by the end of the year, And as we
Speaker 8: look by income quintile, we can see really the lowest
Speaker 8: three quintiles that's a significant share of the population. The
Speaker 8: lowest three quintiles have basically exhausted those savings already, which
Speaker 8: should mean more price sensitivity among consumers, which helps on
Speaker 8: the inflation side, but also a slower pace of conser
Speaker 8: ssumption as well. Not there as of July, but that's
Speaker 8: something we're watching for in the back half.
Speaker 2: People have been saying this for a while, and then
Speaker 2: you see house after house push out their forecast for
Speaker 2: recession and say, well, maybe it's not happening as soon
Speaker 2: as we thought. Can you give us a sense of
Speaker 2: what gives someone conviction that it will eventually happen, even
Speaker 2: though month after month everyone had expected some of these
Speaker 2: consumers to run out of cash by midyear. Now at
Speaker 2: the end of the year, maybe it's early next year,
Speaker 2: when does it sort of start to shift to okay,
Speaker 2: maybe this is sustainable.
Speaker 8: Well, I think that, you know, as we see new
Speaker 8: data coming in, there has been more resilience in the
Speaker 8: labor market than a lot of folks anticipated earlier this year,
Speaker 8: you know, jobless claims. We've had a few false starts
Speaker 8: where they've started to back up and it looked like
Speaker 8: maybe there was some deterioration in the labor market and
Speaker 8: then kind of the numbers came right back down and whatnot. So,
Speaker 8: you know, those kind of like canary in the coal
Speaker 8: mine moments proved to be a false false flag in
Speaker 8: the past. But if we look at the broader trend,
Speaker 8: we do see that it is slowing. So as nominal
Speaker 8: GDP growth decelerates, as payroll gains decelerate, this does change
Speaker 8: a lot of dynamics in the economy, including corporate profit trends,
Speaker 8: which as corporate profits decelerate, that has an implication for
Speaker 8: both capital spending plans and also hiring plans. You still
Speaker 8: have a tightening of financial conditions or of lending conditions
Speaker 8: from the banking sector that we can see showing up
Speaker 8: in the FED surveys, banking surveys, bank earnings, etc.
Speaker 6: Etc.
Speaker 8: So there are some problems that are becoming pretty intense
Speaker 8: headwinds in an economy that's slowing already, but getting the
Speaker 8: timing right has been problematic for forecasters. More broadly, I
Speaker 8: don't think we're at the point where you're supposed to
Speaker 8: throw the recession call away and it's kind of immaculate
Speaker 8: disinflation and the soft landing for the economy. I'm still
Speaker 8: skeptical that we'll really be able to pull that off
Speaker 8: because monetary policy, as we know, is a very blunt instrument,
Speaker 8: and so kind of finessing the landing to have no
Speaker 8: contraction is something quite unprecedented, and so I would be surprised,
Speaker 8: given that the speed with which to Fed Titan policy,
Speaker 8: if we can nail the landing, given the uncertainty over
Speaker 8: lags and the net impact.
Speaker 2: So do you think, Carl, just to sort of underscore
Speaker 2: what you're saying, do you think that right now bond
Speaker 2: markets have it wrong with a four point two percent
Speaker 2: yield on a ten yure. Do you think that people
Speaker 2: are getting over their skis in terms of how high
Speaker 2: rates can be and how long the economy can be strong.
Speaker 8: Well, Ultimately, those longer dated yields are going to be
Speaker 8: a function of real growth in the economy and inflation trends.
Speaker 8: So if you think that there's a kind of a
Speaker 8: persistently higher inflation trend over the longer run, then you
Speaker 8: can make a case for four percent or higher on yields.
Speaker 8: We do think that we will see some pretty impressive
Speaker 8: cooling of inflation pressures over the next several quarters. We
Speaker 8: think inflation will be back to target by the end
Speaker 8: of next year, and I think that maybe part of
Speaker 8: that higher inflation for longer CAMP may have to revise
Speaker 8: some of those estimates as we see the economy decelerate,
Speaker 8: the labor softening, and a lot of these inflation categories
Speaker 8: moving in a favorable direction. The rent story alone is
Speaker 8: a big factor for the inflation profile that's coming down.
Speaker 8: That's a very big component of the CPI or the
Speaker 8: inflation basket that's decelerating. You have goods prices showing further
Speaker 8: signs of moderation. So the real question will be the
Speaker 8: labor market dynamics, and if we do get some softening
Speaker 8: of labor conditions and wage pressures coming down, then I
Speaker 8: think that might alleviate some of those inflation concerns, which
Speaker 8: then could factor into where longer term yields are headed
Speaker 8: as well. So I don't know that they're getting the
Speaker 8: story totally wrong, but maybe assessing it as being a
Speaker 8: little bit too hot at the moment.
Speaker 2: Just real quick, Carl, what's the one question that you
Speaker 2: want answered by J Powell next week at Jackson Hall.
Speaker 8: I'm very curious, given the theme is structural changes in
Speaker 8: the global economic outlook, you know, to watch the degree
Speaker 8: to which this might be setting the stage for changing
Speaker 8: inflation targets or things of that nature. Now, this is
Speaker 8: the conference or the symposium is put on by the
Speaker 8: Kansas City FED, which is notoriously hawkish, So this may
Speaker 8: be a way of kind of chopping down the straw
Speaker 8: men before they can even get any firm anchoring. So
Speaker 8: rather than saying there are structural changes and we should
Speaker 8: change the inflation target, they can say, well, there are
Speaker 8: structural changes, but these are the reasons why we don't
Speaker 8: think we should be changing longer term estimates for growth,
Speaker 8: inflation or inflation targeting.
Speaker 2: Kura Kadano VMP Paiva, thank you so much for being
Speaker 2: with us.
Speaker 3: Benasausie joined us now see and chief research officer at
Speaker 3: houseI Advice Recruit. Diana, great to have you with us
Speaker 3: on the program. Target I guess being a low bar
Speaker 3: because the stock is running really hard. Can you tell
Speaker 3: me what's going on there? How low was that bar
Speaker 3: and how much clarity have you got on what's going
Speaker 3: on over there.
Speaker 5: We'll have more clarity after they do the earnings call
Speaker 5: at eight o'clock. But I think the real change is
Speaker 5: the fact that the inventory levels continue to remain very clean.
Speaker 5: When you take a look at the gross margin, it
Speaker 5: was better than expected. Shrink continues to be an issue
Speaker 5: out there, but it's all about essentials, which is frankly
Speaker 5: much stronger than what you have with DISCRETIONATY. At Target,
Speaker 5: it's a world of difference because you had TJX support
Speaker 5: better than expected numbers talking about the strength and apparel
Speaker 5: and accessories. So if you have essentials, that's what's selling,
Speaker 5: but off prices where the action is for.
Speaker 2: Apparel, Danna, before we get into TJX and exactly what
Speaker 2: the retail trends are. I'd love your thoughts and what
Speaker 2: we're hearing more of, which is the social pushback and
Speaker 2: the consequence on sales. If you look at Target's earnings,
Speaker 2: they said that last quarter's profits took a hit as
Speaker 2: a result of the controversy around Pride Month collections of
Speaker 2: items that they were selling. Dana. We also heard this
Speaker 2: from Anheuser Busch. How much is this becoming a theme?
Speaker 2: How much is this a real potential threat for retailers
Speaker 2: that hadn't dealt.
Speaker 1: With this kind of thing as much before.
Speaker 5: It is a threat, and we've seen it happen to
Speaker 5: multiple different categories of companies selling consumer goods. Certainly, I
Speaker 5: think the care and the concern about how you navigate
Speaker 5: this landscape is something that is new for all the
Speaker 5: retailers and I think is only going to continue to
Speaker 5: become more of a topic going forward. And I think
Speaker 5: you can see these consumer companies even more mindful and
Speaker 5: planning about what stance they take on particular issues going forward.
Speaker 2: When you talk about the off price retailers really benefiting
Speaker 2: at a time where people are being more discretionary, is
Speaker 2: that a negative sign for the luxury players or is
Speaker 2: it just there's plenty of money to go around.
Speaker 5: I think overall the luxury players are in a world
Speaker 5: of their own. They have a high end consumer who
Speaker 5: has less succeptance to really being careful about their spend.
Speaker 5: But there's different magnitudes of certainly luxury and aspirational goods
Speaker 5: depending upon the price point. The comparisons year over year
Speaker 5: are very challenging in luxury and while many of them,
Speaker 5: even the European luxury goods companies, are lower year over year,
Speaker 5: when you compare it to twenty nineteen, they continue to
Speaker 5: be up, could be fifty percent or more. But I
Speaker 5: think every level of consumer spend overall, we've seen a
Speaker 5: moderation and where we're seeing the allocation. It seems like
Speaker 5: one of the only places in discretionary if it's any
Speaker 5: of the events like Taylor, Swift or Barbie, that people
Speaker 5: are buying new costumes or new items to wear to
Speaker 5: those events.
Speaker 3: Dana, just to touch on luxury a little bit more.
Speaker 3: Different regions are performing better than others in America, it's
Speaker 3: been disappointing. I'm thinking of Richemont and others too. Data
Speaker 3: recently China have allowed group tours to I think the
Speaker 3: UK and the United States. Some people believe that might
Speaker 3: make a difference. I want your opinion on that, based
Speaker 3: on experience over the last year. Does that move the dial?
Speaker 5: I think it's going to help. I think it's going
Speaker 5: to help. I think it's going to help show an increase.
Speaker 5: I think it's going to help to drive demand. I
Speaker 5: think you need more than just the tourist groups to
Speaker 5: truly move the needle, but it should help stem the
Speaker 5: rate of decline that we've seen from some of those
Speaker 5: luxury players in the Americas.
Speaker 3: The theme I've tried to work on over the last year,
Speaker 3: and I have to say I haven't had much clarity
Speaker 3: on it, Dana, but maybe you can help me. A
Speaker 3: year two years ago, we would see a lot of
Speaker 3: people embracing buy now, pay later for entry level luxury goods.
Speaker 3: What we've learned in the last month or so is
Speaker 3: that entry level luxury at certain firms has been hit.
Speaker 3: Are the two things in any way, shape or form tied.
Speaker 3: Do those dots join up to you, Dana? Have we
Speaker 3: seen that buy now, pay later bubble burst for luxury?
Speaker 5: I think that it has burst, certainly a bit. Luxury.
Speaker 5: I think when you think about the headwinds of rising
Speaker 5: interest rates. You have student loans that are coming up
Speaker 5: in October. The average household has six two hundred dollars
Speaker 5: dollars of expenses and you're going to get an increase
Speaker 5: of three to eight percent on of spend coming from
Speaker 5: student loans. On top of that, there's less to go round,
Speaker 5: and so that's why there's the focus on essentials and
Speaker 5: a reduced focus on some of the aspirational items.
Speaker 2: Dana, just to build on what John was asking about,
Speaker 2: are you surprised that we haven't seen more of a
Speaker 2: hit to luxury retailers on the one two punch of
Speaker 2: certain entry level buyers stepping away and some issues with China,
Speaker 2: whether it's restrictions or whether it's the idea of just
Speaker 2: the contraction that we're seeing in certain aspects of the economy,
Speaker 2: why that hasn't had more of an effect.
Speaker 5: I think some of the aspirational players that are out there,
Speaker 5: they've added a lot of newness and product innovation. There's
Speaker 5: extreme demand for newness and innovation, and it's really led
Speaker 5: to be able to have continued strength. But it's not
Speaker 5: a world of equals. It's definitely a world where essentially
Speaker 5: what's the price you're charging, what there's some promotions on
Speaker 5: some of these items that people can get, And what
Speaker 5: are you seeing others wearing. What are you going to
Speaker 5: give up in order to buy that aspirational item? And
Speaker 5: I think it's definitely haves and have nots in terms
Speaker 5: of being choiceful in what spend is on.
Speaker 2: So what happens to all of the middle players, the
Speaker 2: middle tier that don't fall into bargain picking or luxury Well.
Speaker 5: Look what we've seen it be very challenging out there.
Speaker 5: We've seen it for apparel retailers like the Gaps of
Speaker 5: the world. Who is encouraging to hear American Eagle the
Speaker 5: other week talk about the pickup in July. We've seen
Speaker 5: retailers overall lower their inventory levels. But I think you're
Speaker 5: going to see these inventory levels continue to come clean
Speaker 5: because the lower freight costs being helped to the margins.
Speaker 5: The leaner inventory levels, there's more margin clarity. I think
Speaker 5: the cleanliness on inventory will be the key to managing
Speaker 5: through this is you have to keep your balance sheet.
Speaker 6: Dana.
Speaker 3: I have no idea how you listen to the call
Speaker 3: and conduct an interview at the same time, but you
Speaker 3: can it's amazing, Danna. Thank you, Dana Tausi Tasi Advisory Group.
Speaker 3: We appreciate it.
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