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Speaker 2: Right now, we're going down to Houston, Texas. Our good
Speaker 2: friend Alextel from Bloomberg Television. She's speaking with Dow CEO
Speaker 2: Jim Fiddling. Let's go to that net right now.
Speaker 3: Paul, good to hear you. I'm glad you're back from vacation.
Speaker 3: That's right, and here with Jim Fitterling. It's such a
Speaker 3: pleasure to have you. Thank you so much for joining.
Speaker 4: Thank you for having me.
Speaker 3: Is this an economy, a US economy that needs bed cuts?
Speaker 5: What's your take on a global scale?
Speaker 6: Yeah, it's starting to feel like the economy is gaining
Speaker 6: a little bit of strength at the beginning of the year.
Speaker 4: It's not. It's not robust.
Speaker 6: Maybe a little bit early to tell if this is
Speaker 6: a long term trend, but it's been a decent start
Speaker 6: to the year. Electronics has been a bit stronger than
Speaker 6: last year. Last year was a kind of a weak spot,
Speaker 6: so our outlook is good. Automotive had a good year
Speaker 6: last year, and I think despite the discussion around electric
Speaker 6: vehicles and some of the flat to negative sentiment that's
Speaker 6: in the news, the reality is I think it's going
Speaker 6: to be another good year in the automotive sector. Housing
Speaker 6: has been the slowest start, but there's been an uptick
Speaker 6: and single family home starts, which is good. That usually
Speaker 6: has a ripple effect through a lot of other durable
Speaker 6: goods manufacturing. We haven't seen that yet, So a modest
Speaker 6: good start to the year and we just see how
Speaker 6: things develop.
Speaker 5: So we're getting there.
Speaker 3: So that begs the question that if we do, say
Speaker 3: get two to three cuts this year, for example, from
Speaker 3: the FED, is your expectation that we see accelerated growth
Speaker 3: higher infletion. Does that actually start more growth?
Speaker 6: Well, I think in the commodity space and in our
Speaker 6: industry in particular, we tend to lead into a slow down,
Speaker 6: and so we started to lead into this eighteen months
Speaker 6: middle of this year will be twenty four months ago,
Speaker 6: and we typically tend to lead out, and so it's
Speaker 6: too early to say we're coming out, but you can
Speaker 6: start to see shoots that are like when we see.
Speaker 4: A recovery and of course that demand.
Speaker 6: You know, what's missing from the economy right now is
Speaker 6: the durable goods demand. And when that construction demand and
Speaker 6: when that comes back, those are high volume applications, and
Speaker 6: that demand pool is going to mean that prices are
Speaker 6: going to move up a bit. I don't know if
Speaker 6: I would call that necessarily inflationary, but that's just the cycle.
Speaker 5: What do you think it's waiting for.
Speaker 6: I think it's waiting for rate reductions, for the mortgage
Speaker 6: rates to come down. I think that's the next big
Speaker 6: thing that typically triggers kind of a shoot up in
Speaker 6: the housing market, and then that triggers a lot of
Speaker 6: other services and durable goods demand that comes behind it.
Speaker 3: So we may see a second half recovery. I'm hopeful,
Speaker 3: sort of what I'm hearing from you that hopeful. Is
Speaker 3: it a similar picture over in Europe? So the chemical
Speaker 3: sector in Europe is under a lot of pressure. I mean, INPO,
Speaker 3: costs are high. The economy there is weaker in many
Speaker 3: sense compared to the US.
Speaker 5: What's your take.
Speaker 6: European consumer demand is not nearly as strong as it
Speaker 6: is here in the States, and of course the weight
Speaker 6: of a higher energy costs has hit the consumer a
Speaker 6: lot of different ways. Now we're seeing an improvement year
Speaker 6: over year. Obviously, energies come down, but natural gas is
Speaker 6: below ten dollars a million BTU landed in Europe, but
Speaker 6: we sit here today at a dollar sixty and maybe
Speaker 6: the long term trend is two fifty to three Fiftyference still.
Speaker 4: A big difference.
Speaker 6: And electricity, you know which most consumers purchase electricity costs
Speaker 6: are double maybe a little bit more than what they
Speaker 6: are here in the US. So I think, you know,
Speaker 6: there's a big question when I look at my downstream
Speaker 6: customers in Europe, I'm always questioning.
Speaker 4: How long will they be there?
Speaker 6: And if you don't have a domestic market to service
Speaker 6: in Europe, you really can't afford to export from Europe.
Speaker 6: So if you don't have a domestic market to service,
Speaker 6: you have to say, you know, what does my footprint
Speaker 6: need to be? How long can I be there in
Speaker 6: order to be part of that economy.
Speaker 5: That's a big deal.
Speaker 3: You're talking about the automotive industry, construction industry, like, is
Speaker 3: that going to move?
Speaker 5: What's your best sense?
Speaker 6: A lot of technology comes out of there too, I
Speaker 6: mean beyond just the industry.
Speaker 4: A lot of the technology that we use around.
Speaker 6: The world starts in Europe, and so you know, exporting
Speaker 6: technology obviously is a little bit easier than exporting product.
Speaker 6: But we're already starting to see imports of electric vehicles
Speaker 6: from China into Europe. We're seeing China has become a
Speaker 6: lower cost competitor than Europe in petrochemical, so you're starting
Speaker 6: to see product move into Europe. The Middle East obviously
Speaker 6: has been a big supplier because of their cost position
Speaker 6: into Europe. Europe's getting a bit of a reprieve right
Speaker 6: now because of the Suez Canal situation, so operating rates
Speaker 6: are up a little bit, but I think that'll once
Speaker 6: that Israel Gaza conflict is resolved, then we'll see things
Speaker 6: go back to normal.
Speaker 3: Is it fair to say that you wouldn't build a
Speaker 3: new chemical plant in.
Speaker 5: Europe right now?
Speaker 4: Be very tough.
Speaker 6: You'd have to be in a very specialized downstream market
Speaker 6: that you knew could handle the higher input costs. But
Speaker 6: I would say, in general, be very tough.
Speaker 3: So for you, then let's take a look at inmpleation
Speaker 3: for a second. Where are costs still rising and where
Speaker 3: are they falling.
Speaker 6: You're starting to see some costs I mean cost and
Speaker 6: commodities came off pretty dramatically. I think one of the
Speaker 6: reasons we announced our final investment decision on our project
Speaker 6: in Canada at the end of last year was because
Speaker 6: we were able to lock in a lot of bulk
Speaker 6: material costs like steel, concrete, cement, all the things we
Speaker 6: need to build a plan.
Speaker 4: So I think that's been good now.
Speaker 6: Obviously, as some of this construction demand and things come back,
Speaker 6: that'll tend to rise with the cycle. But I think
Speaker 6: if you looked at the commodity portion, a lot of
Speaker 6: inflation came out of there. If you look at the
Speaker 6: concer like going to the grocery store, some of that
Speaker 6: hasn't come out yet, and so I think we're starting
Speaker 6: to see that.
Speaker 4: With the de stalking that happened.
Speaker 6: Last year, no signs of really restocking in the value chain,
Speaker 6: I think you're going to start to see some of
Speaker 6: that consumer inflation come out to and I think that's
Speaker 6: a little bit what the Fed's looking at.
Speaker 3: Are you worried about tariffs come I don't know November
Speaker 3: January from either President.
Speaker 4: Yeah. You make a great point, both.
Speaker 6: As a global company and as a company that's been
Speaker 6: part of global trade for many, many years. Tariffs don't
Speaker 6: stimulate demand anywhere, So I think what would happen under
Speaker 6: a teriff regime is we might not be happy with
Speaker 6: the demand result. Global free trade has been a better
Speaker 6: platform for growth. It's been better for growth, not just
Speaker 6: for the US, and we're advantaged, of course because of
Speaker 6: energy among other things, but it's been great for other countries.
Speaker 6: It's lifted so many people out of poverty, it's created
Speaker 6: a middle class, it's allowed technology to trans transfer around
Speaker 6: the world.
Speaker 3: So I would also just mean that you would have
Speaker 3: to produce and use the products in country, right, You
Speaker 3: have to produce and do in country be totally separate
Speaker 3: from each other.
Speaker 6: Right When we have a supply chain today that is
Speaker 6: not US centric and hasn't had time to reshore, so
Speaker 6: that would become inflationary in and of itself. So I think,
Speaker 6: you know, the thing we're trying to fight and the
Speaker 6: tool we're using, they both could end up being inflationary.
Speaker 4: I don't know that tariffs is the answer.
Speaker 3: Let's turn to if you're building a new plant today,
Speaker 3: what are you going to power it with in the
Speaker 3: next ten to fifteen years, Like, what's going to.
Speaker 5: Be that thing?
Speaker 6: Well, we're all building a new plant in Canada, and
Speaker 6: the purpose for going up there was to build the
Speaker 6: world's first zero scope on and two emissions ethylene complex.
Speaker 4: We will power it with hydrogen.
Speaker 6: It's a pretty elegant solution because we actually take ethane
Speaker 6: and natural gas liquid, we crack it to make ethylene
Speaker 6: and we make two byproducts methane and hydrogen. Lindy will
Speaker 6: come in and build an auto thermal reformer that'll convert
Speaker 6: that to pure hydrogen, and that pure hydrogen will fire
Speaker 6: the furnace. So it's a very closed loop system that
Speaker 6: will allow us to capture all the CO two off
Speaker 6: the auto thermal reformer and sequester that and make Zeroscope
Speaker 6: one and two ethylene and plastics there.
Speaker 4: It'll be the biggest.
Speaker 6: Hydrogen carbon capture project of its kind in the world,
Speaker 6: and it'll be the first one. First phase will be
Speaker 6: up in twenty twenty seven.
Speaker 3: One more question on that, when are you going to
Speaker 3: make money off of it? And that's why way of
Speaker 3: understanding is it to put together as soon.
Speaker 4: As we started up.
Speaker 6: It'll be as competitive as our project that we did
Speaker 6: here in Texas and started up in twenty seventeen has
Speaker 6: got a Price on Carbon, so we were able to
Speaker 6: recover some of the higher costs of scrubbing out the
Speaker 6: CO two from the price on carbon. And the Alberta
Speaker 6: government and the federal government in Canada have investment tax
Speaker 6: credits and incentives for us to put in the hydrogen
Speaker 6: technology in.
Speaker 4: The first place.
Speaker 6: So both of those things mean we'll be able to
Speaker 6: make a return like the project we build down here
Speaker 6: in Texas.
Speaker 4: And I think if you look.
Speaker 6: At what we did with IRA, we also made a
Speaker 6: big step forward one with the tax credits and the
Speaker 6: support for new technologies, but I think more importantly the
Speaker 6: breadth of the IRA. So we as opposed to say
Speaker 6: the EU, which is very focused on a transition but
Speaker 6: very specific you can only make green hydrogen a certain way.
Speaker 6: We said, look, all forms of low carbon energy are
Speaker 6: part of the equation, and we're going to make it
Speaker 6: accessible for everybody to be part of the equation. So
Speaker 6: that could be small modular nuclear, which we've signed up
Speaker 6: with the DOE and the Advanced Reactor Demonstration program with
Speaker 6: x Energy. We're looking at one of our sites here
Speaker 6: in Texas, seed Drift near Victoria, Texas, and we're looking
Speaker 6: at that site to basically replace all of our combined
Speaker 6: cycle gas COGEN with a small modular reactor for eighty
Speaker 6: megawatt units that would take all the power and steam.
Speaker 4: At the site to zero carbon. Wow.
Speaker 6: That's a big project, but we think we can do
Speaker 6: that and help Xynergy bring that cost competitive with hydrogen
Speaker 6: carbon capture or combined cycle gas with CO two scrubbing.
Speaker 4: We think we can be competitive with both of those.
Speaker 5: Jim, so great.
Speaker 3: I love getting that perspective, the global perspective and the
Speaker 3: energy transition perspective.
Speaker 5: Thanks so much. In Fiddling a CEO of doubt, Paul
Speaker 5: and Molly back to you.
Speaker 2: All right, Thanks very much. Alex appreciate that. That's Alex Steele.
Speaker 2: She was sitting down with dal CEO Jim Fiddling in
Speaker 2: Bloomberg's Houston bureau.
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Speaker 2: All right, let's check in with Ira Jersey. He is
Speaker 2: our go to guy on markets, the treasure markets that
Speaker 2: really prices in kind of where this FED may want
Speaker 2: to go. Here, our Jersey chief interest rate strategist for
Speaker 2: Bloomberg Intelligence, joining us from the confines of our Princeton University,
Speaker 2: our Princeton, New Jersey set down there. IIRA again, not
Speaker 2: looking for anything tomorrow, but you're the smart money. When
Speaker 2: we've heard of the smart money, we talk about the
Speaker 2: Irad Jerseys of the world.
Speaker 7: What are you going to be listening for?
Speaker 8: Yeah, I'm going to be looking for a couple of things, Paul.
Speaker 8: So number one is a balanceee policy.
Speaker 7: You know, we've been.
Speaker 8: Waiting for more information and details on how that was
Speaker 8: going to develop over time, and at the last meeting,
Speaker 8: Jay Powell said, hey, hey, the next meeting, we're going
Speaker 8: to start talking about what we're going to do. So
Speaker 8: I'll be listening in this post meeting press conference as
Speaker 8: to what are the options maybe they're considering. There won't
Speaker 8: be any decisions and they won't make a and there
Speaker 8: won't be a lot of detail yet, but yeah, you know,
Speaker 8: what are they thinking in terms of timing and also
Speaker 8: in terms of size of how they're going to cut
Speaker 8: back their asset asset run off So that's number one,
Speaker 8: and then number two is obviously some of the nuanced
Speaker 8: in details. How do the dots change, And in particular,
Speaker 8: I'm not going to really look at the twenty twenty
Speaker 8: four dots, you know, there's a lot of focus on that,
Speaker 8: but it's the twenty twenty five dots that are going
Speaker 8: to matter for like the long term end of the
Speaker 8: treasury market and also for the mortgage market. So look
Speaker 8: at those twenty twenty five dots. How low does the
Speaker 8: Fed still think it's going to cut interest rates? Is
Speaker 8: it going to be lower than what they've said, or
Speaker 8: maybe are they going to you know, cut a little
Speaker 8: less than they said based on their projections of those dots.
Speaker 9: Well, let's get into the projections also a little bit
Speaker 9: more that this is going to be the first updated
Speaker 9: summary of economic projects we're going to get this year.
Speaker 9: So the twenty twenty three dots at the end of
Speaker 9: in December that we saw had those three cuts priced
Speaker 9: in for this year. As you said, maybe to twenty
Speaker 9: twenty four dots less interesting than twenty five. But we're
Speaker 9: also going to get updated inflation projections, updated GDP projections,
Speaker 9: any movement a sense might happen in there.
Speaker 8: Yeah, I think that the GDP projections maybe not so much,
Speaker 8: but the CPI projections and the PC core PC projections
Speaker 8: probably have to move up a little bit just based
Speaker 8: on the data and information that we've gotten so far.
Speaker 8: I would be pretty surprised if we didn't get an
Speaker 8: uptick in what they call the central tendency. So keep
Speaker 8: in mind when you see the summary of economic projections,
Speaker 8: they come up with what's called the central tendency, which
Speaker 8: is a trimmed mean they take off some of the
Speaker 8: outliers and then say, here's the central tendency that we
Speaker 8: think that CPI and GDP are going to be in
Speaker 8: this year. So I would be pretty surprised if those
Speaker 8: didn't come up. The other one to watch, of course,
Speaker 8: is going to be there expectation of the employment situation.
Speaker 8: So where's the unemployment rate going in their forecast, because
Speaker 8: that is obviously the second key to their dual mandate
Speaker 8: besides besides the inflation.
Speaker 7: That besides inflation.
Speaker 8: So right now they don't have to worry about the
Speaker 8: employment situation because things are very tight, so a three
Speaker 8: point nine percent unemployment and the like. But if their
Speaker 8: forecast suggests that maybe employment is going to remain better
Speaker 8: than what the December SEP had said. Then there's the
Speaker 8: possibility that maybe at some point in the not too
Speaker 8: distant future they might go from three cuts to two.
Speaker 7: Cuts in the dot plot come June.
Speaker 8: Of course, there's a lot of data we get before then,
Speaker 8: but I think that in order to prepare the market
Speaker 8: for that, one of the ways that it can it
Speaker 8: can do so without without having two or more members
Speaker 8: move their dots up, would be to say, hey, we
Speaker 8: actually think the employment situation is going to be better
Speaker 8: than we thought just three months ago.
Speaker 2: So IRA w I r PG, the WORP function. We
Speaker 2: started the year with six the market pricing in approximately
Speaker 2: six rate cuts were now down to approximately three. Does
Speaker 2: that seem more realistic to you?
Speaker 8: That's been our call since last October, So yeah, it's
Speaker 8: like come back. You know, quite frankly that that pricing
Speaker 8: of six cuts was one of the three things that
Speaker 8: we highlighted as maybe being the biggest missed pricings in
Speaker 8: the rates market. That and also inflation expectations, because we
Speaker 8: had five year inflation expectations earlier in the year approaching
Speaker 8: two percent, and we thought that that was somewhat too
Speaker 8: low and unrealistically low and that they would probably have
Speaker 8: to come up. So three cuts at this point seems reasonable.
Speaker 8: It's because you know, obviously the Federal Reserve could cut five,
Speaker 8: they could cut one, right, they could cut zero. So
Speaker 8: I think that that's a more reasonable midpoint of potential
Speaker 8: outcomes than is that than was the six cuts that
Speaker 8: were priced in January.
Speaker 7: And yeah, you know, you look.
Speaker 8: At the rest of the treasury market, like two year
Speaker 8: yields at four point four point seven percent, two year
Speaker 8: yields are exactly pricing for three cuts this year and
Speaker 8: three cuts next year. So you know, I think that that,
Speaker 8: you know, those are pretty close to fair value. When
Speaker 8: they were down at four point four percent, they were uh,
Speaker 8: you know, obviously a little bit overpriced, and now it's
Speaker 8: it's more more realistic pricing.
Speaker 7: I think for the potential policy outcomes.
Speaker 9: How much do you think Powell is going to get
Speaker 9: into the cadence of rate cuts. I think it was
Speaker 9: maybe Vice Chair Jefferson who had brought up recently that
Speaker 9: in I think it was in Greenspan's tenure that the
Speaker 9: Fed had cut and then you know, waited a couple
Speaker 9: of meetings cut again. So maybe the you know, the
Speaker 9: stop and go nature of coming down. If Powell might
Speaker 9: allude to how that spacing is going to play out.
Speaker 8: Yeah, I doubt that that the chair is going to
Speaker 8: say anything completely outrageous, so he'll leave his options open.
Speaker 7: But I wouldn't be surprised if he mentioned.
Speaker 8: That, uh that a stop, stop go or not going
Speaker 8: every meeting, not cutting every meeting is a realistic potility.
Speaker 8: And clearly, you know, three cuts this year would require
Speaker 8: them to skip at least one meeting, if not too
Speaker 8: depending on when they started, right, So it wouldn't it
Speaker 8: wouldn't surprise me personally if the Federal Reserve did cut
Speaker 8: in June and then waited again until September to see
Speaker 8: what the economy was doing, get you wind up getting,
Speaker 8: you know, to almost three more months of data in
Speaker 8: between June and the September meeting. So given that, you know,
Speaker 8: I think that that going in June actually gives the
Speaker 8: Fed a lot more optionality. You know, cutting in July
Speaker 8: would also give them similar optionality where maybe they cut
Speaker 8: in July and then they don't cut again until November
Speaker 8: and then wait till December. Right, And there's the possibility
Speaker 8: that if the economy continues to be pretty good, then
Speaker 8: there's no reason for the FED to necessarily cut in December.
Speaker 8: And you only get fifty basis points of cuts this year,
Speaker 8: so that would not be a surprise, you know, going
Speaker 8: in a measured pace, right, something like that. That was
Speaker 8: the green Span hiking cycle back in the mid two
Speaker 8: thousands when he said, you know, we're going to go
Speaker 8: to measured pace, So this could be something similar. It's
Speaker 8: been hard for the FED in the past to calibrate
Speaker 8: things that way because they're always they've always been reacting
Speaker 8: to some crisis or some massive downturn in the economy
Speaker 8: that was where they were behind the curve. So I
Speaker 8: think the FED at this point would like to get
Speaker 8: in front of the curve and start to cut. The
Speaker 8: risk is that they make the mistake of reaccelerating inflation, right,
Speaker 8: and that's something that a lot of market participants are
Speaker 8: very worried about as well. So the FED is in
Speaker 8: a tough place right here, quite frankly, so doing nothing
Speaker 8: is actually the path of least resistance, at least until
Speaker 8: it's clear that the economy is slowing enough that they
Speaker 8: can feel comfortable cutting rates.
Speaker 9: Yeah. Well, I mean that's there's going to be a
Speaker 9: kind of a high bar to get that amount of
Speaker 9: slowing between now and June. Now, I mean, looking at
Speaker 9: the data that we've gotten for the first two months
Speaker 9: of the year, it looks like inflation is still pretty firm,
Speaker 9: the job market's still pretty strongly seen a ton of that,
Speaker 9: like you know, slowing activity that that you know, Powell
Speaker 9: said in his congressional testimony that they're not far from
Speaker 9: getting that level of confidence to start cutting rates. But
Speaker 9: I don't think we've really gotten much news since those
Speaker 9: comments that would make them more confident.
Speaker 8: Yeah, I don't disagree with that. I think that that's
Speaker 8: the reason why the markets, you know, now pricing for
Speaker 8: a July cut instead of a June first cut. But
Speaker 8: you still get another three months of data. There's still
Speaker 8: there are some signs that the economy is slowing. When
Speaker 8: you look at some of the uh some of the
Speaker 8: survey data, for example, you're you're seeing some confidence levels
Speaker 8: going down a little bit. You do have some some
Speaker 8: areas of consumption that are slowing pretty meaningfully. So so
Speaker 8: all is not great, but it's also as you note,
Speaker 8: it's it's fine, right, and and fine means that the
Speaker 8: FED doesn't necessarily need to cut interest rates. You know
Speaker 8: what what the FED would love to do is to
Speaker 8: kind of cut interest rates following how much inflation is falling.
Speaker 8: The The challenge with that is which inflation measure you're
Speaker 8: targeting and does the market understand that? And I think
Speaker 8: that that's maybe a communications issue that Jay Powell and
Speaker 8: some other members of the FED could address, because are
Speaker 8: they happy with having with having the Fed funds rate
Speaker 8: three hundred basis points above inflation based on you know,
Speaker 8: one of the measures of inflation. That's where it is,
Speaker 8: and that would seem to be high and very restrictive.
Speaker 7: And that's one of the reasons.
Speaker 8: Why when when Ja Palell or Chris Waller or some
Speaker 8: of these other members of the Fed Reserve say that
Speaker 8: rates are restrictive, Yep, that's what they're talking about, right,
Speaker 8: that difference between the FED funds rate and inflation.
Speaker 2: All right, Ira, great stuff, Really appreciate getting couple of
Speaker 2: minutes of your time before this important FED meeting tomorrow.
Speaker 2: That's our Jersey chief US interest rate strategist for Bloomberg Intelligence.
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Speaker 2: Waiting to Fed tomorrow and not much as expected from
Speaker 2: the Fed and their statement and from jpal Steady as
Speaker 2: she goes. I guess Marcus is trying to get a
Speaker 2: sense of when the FED will begin cutting rates this year.
Speaker 2: Where's theercenaria where maybe they pushed out the next year.
Speaker 2: It certainly is impacting the markets. Let's check in with
Speaker 2: a professional on this stuff. Phil Orlando, chief equity market
Speaker 2: strategist and head of Client portfolio Management and federator at
Speaker 2: Hermes joins us via zoom. So Phil, what are you
Speaker 2: looking for from the Fed tomorrow and do you expect
Speaker 2: it to change your outlook?
Speaker 10: Paul, good morning, Thank you very much for having me
Speaker 10: back on. We are very much out of sync with
Speaker 10: the market. You know, as you and I talked I
Speaker 10: guests earlier this year, the consensus view on Wall Street
Speaker 10: was that there'd be six or seven rate cuts this year,
Speaker 10: with the first one starting tomorrow, you know, due to
Speaker 10: immaculate disinflation and the immaculate pivot thesis. And we just
Speaker 10: didn't see that. We were sort of in the three
Speaker 10: cut camp, with the first one coming maybe in July, July, November,
Speaker 10: December was sort of the way we were timing this out.
Speaker 10: And what's transpired over the last couple of months is
Speaker 10: that inflation, you know, as we discussed, is a little
Speaker 10: sticky or a little more persistent than perhaps the consensus thought,
Speaker 10: and the FED recognizing that, has been trying to tamp
Speaker 10: down some of this enthusiasm for a significant number of
Speaker 10: rate cuts. So fast forward to tomorrow, we expect the
Speaker 10: Federal Reserve to do literally nothing. We still think that
Speaker 10: first cut is coming in July, and I think the
Speaker 10: market is going to talk about what we've seen with
Speaker 10: CPI and PPI and PCE over the last four or
Speaker 10: five months, in that the rapid decline that we saw
Speaker 10: from the middle of twenty two two into the end
Speaker 10: of twenty three has now gotten chopping. Well. We've actually
Speaker 10: seen an increase in inflation a little bit over the
Speaker 10: last couple of months due to energy and food prices,
Speaker 10: and housing and labor cost pressures and all the things
Speaker 10: that you and I talked about earlier this year.
Speaker 9: What's the trade that you're preparing for Phil in terms
Speaker 9: of tomorrow, maybe you and your team, if you've played,
Speaker 9: you know, run out a few scenarios. Obviously the you know,
Speaker 9: interest rate move being expected to be zero, but looking
Speaker 9: at more in terms of what might happen with the dots,
Speaker 9: what might happen with the economic projections? Have you guys
Speaker 9: come up with a game plan of how to move
Speaker 9: in either direction depending on what those materials show.
Speaker 10: Fabulous question, Molly, And there are two parts to this.
Speaker 10: I want to focus on the dot part of your
Speaker 10: question first. And the one thing that sort of confounded
Speaker 10: us at the last SEP a week or so before
Speaker 10: Christmas was the fed's forecast that core PCEE inflation would
Speaker 10: get to their two percent target. But by the end
Speaker 10: of calendar twenty six, literally three years from now, and
Speaker 10: we're at two point eight percent now, down from like
Speaker 10: five point six percent, you know, a year and a
Speaker 10: half ago, two years ago. So in our minds we're saying, Okay,
Speaker 10: is the FED being too conservative because they screwed up
Speaker 10: that whole transitory thing a couple of years ago and
Speaker 10: they don't want to make the same mistake twice, or
Speaker 10: are they trying to tell us something that they recognize,
Speaker 10: you know, taking a really deep dive into the data
Speaker 10: that achieving this last mile, getting core PC down to
Speaker 10: two percent is going to be really hard, and we
Speaker 10: need to adjust expectations within the market. So that that's
Speaker 10: sort of one issue. What does the FED do with
Speaker 10: that dot? That two percent core PCE by the end
Speaker 10: of calendar twenty six dot? Did that stay exactly where
Speaker 10: it is or do they move that? Upon point? Is
Speaker 10: the market question, how do we invest for this? And
Speaker 10: over the last say, three or four months, there's been
Speaker 10: a significant divergence in the marketplace. Benchmark ten year treasury yields,
Speaker 10: which were three point eight percent you know, in the
Speaker 10: fourth quarter of last year, are now sitting at four
Speaker 10: thirty all right, so we've backed up fifty basis points
Speaker 10: and treasury yields over the last couple of months. The
Speaker 10: S and P five hundred is up nine percent year
Speaker 10: to date, it's up twenty seven percent since it's low
Speaker 10: the end of October. That's incongruous that there needs to
Speaker 10: be more in synct. Frankly, I think the bond market's
Speaker 10: got it right. The backup in rates over the course
Speaker 10: of the last couple of months because of the disappointment
Speaker 10: with inflation, in our view, is the right move. Equity
Speaker 10: markets seem to be overly optimistic, and perhaps that's because
Speaker 10: of the performance of what now turns out to be
Speaker 10: the you know, the mag one. In Vidia is nearly
Speaker 10: a ten bagger over the last eighteen months. Now in
Speaker 10: Video is down about thirteen percent over the last couple
Speaker 10: of weeks. So maybe from that oversold position and video
Speaker 10: is going to start to ratchet back to more reasonable
Speaker 10: valuation levels, and maybe the equity market, reflecting what's going
Speaker 10: on in the bond market, but begins to come back
Speaker 10: to more reasonable levels as well.
Speaker 2: I were speaking, Phil Orlando, chief equity market strategist or
Speaker 2: federator Hermes coming up in just moments, we're gonna bring
Speaker 2: you a TV simulcast Bloomberg's Alex Steele. She's speaking with
Speaker 2: dal CEO Jim Fiddling in Houston. So we'll bring that
Speaker 2: to you.
Speaker 7: In just moments.
Speaker 2: Hey, Phil, So, given that backdrop on rates, am I
Speaker 2: buying them or am I selling them?
Speaker 10: Here?
Speaker 7: What are we doing?
Speaker 10: Rates? Or stocks?
Speaker 7: Stocks?
Speaker 4: All right?
Speaker 10: So our view going into this year is that we
Speaker 10: would have a barbell shaped year in terms of S
Speaker 10: and P five hundred performance. We thought we'd get out
Speaker 10: of the gate in great shape, and clearly we have. Frankly,
Speaker 10: we've gotten out of the gate in two grade a shape.
Speaker 10: Our full year target for the S and P five
Speaker 10: hundred and fifty two hundred, and we're essentially there now.
Speaker 10: We thought there'd be a lot of chopping volatility in
Speaker 10: the summer associated with the Fed's first rate cut, which
Speaker 10: we thought would start in July. Typically stocks go down
Speaker 10: when the stock when the FED starts cutting, and we
Speaker 10: think there's gonna be a lot of volatility in the
Speaker 10: summer and fall going into the election, and then we
Speaker 10: think there's going to be a powerful sort of post
Speaker 10: election sigh of relief rally that takes us back to
Speaker 10: fifty two hundred. So the equity trade here over say
Speaker 10: the next six months is going to be one where
Speaker 10: I think the froth comes off of a lot of
Speaker 10: the growth and the technology names that have done phenomenally well,
Speaker 10: you know, over the last eighteen months, and I think
Speaker 10: a lot of the sectors that frankly have been left
Speaker 10: for dead, domestic large cap value, domestic small camp growth, international,
Speaker 10: I think you're going to see sort of a reversion
Speaker 10: of the mean changing of the guard, if you will,
Speaker 10: and those stocks, I think we'll have a better next
Speaker 10: couple of quarters than the growth and tech stocks have
Speaker 10: had over the last eighteen months.
Speaker 9: So if your call is for the first rate cut
Speaker 9: coming in July, and you've been hanging with that call
Speaker 9: for several months now, you must be feeling pretty good
Speaker 9: right now these days. How about that? I mean, how
Speaker 9: many people not too long ago we're thinking tomorrow is
Speaker 9: when you know the recuts really start rolling.
Speaker 10: Well, it's there's good and bad to that. We were
Speaker 10: feeling a little nervous at the end of last year
Speaker 10: in the beginning of this year because we were completely
Speaker 10: out of sync with the market and we're sort of
Speaker 10: scratching our heads, sitting around the table saying we've got
Speaker 10: to be missing something. And it turns out that we
Speaker 10: got this one right, or at least it appears so
Speaker 10: at this point, tomorrow's another day or inflation data, more
Speaker 10: labor market data, more economic data generally, and this is
Speaker 10: a game that continues to play out. We come back
Speaker 10: every day and evaluate, you know, what's going to happen
Speaker 10: from this point forward.
Speaker 2: So, Phil, how about the energy space here, I'm just
Speaker 2: looking at WTA crude oil moving higher yet again today
Speaker 2: at over eighty three dollars for barrel. How do you
Speaker 2: guys think about the energy space?
Speaker 10: Well, Paul, again, this is one of the things we
Speaker 10: talked about at the beginning of the year. Energy is
Speaker 10: an overweight for us, with WTI sitting at sixty five
Speaker 10: dollars at the beginning of the year. Our view is
Speaker 10: that it was mispriced, yep, particularly given the volatility in
Speaker 10: the Middle East and the fact that our strategic petroleum
Speaker 10: reserve is sitting at half We felt that CREWD would
Speaker 10: get into that eighty to ninety dollars a barrel neighborhood
Speaker 10: by the end of this year. And you said, we're
Speaker 10: now in the low eighties three months in, so crude
Speaker 10: is actually is absolutely moving in the right direction, right all.
Speaker 2: Right, Phil, thanks so much for joining us. Always appreciate
Speaker 2: getting your thoughts there. Phil Orlando, Chief faculty market strategist
Speaker 2: and head of Client portfolio Management at Federated Hermes.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 2: One of the most read stories on the terminal today,
Speaker 2: Molly Oprah. If you put that in the headline, that's
Speaker 2: going to get.
Speaker 9: That's a good way to get some hits going on.
Speaker 2: Oprah hypes Zepp it bound and we go vy, but
Speaker 2: keeps her choice secret. So apparently she's out there. She's
Speaker 2: become kind of the unofficial spokesperson for his GLP one
Speaker 2: drugs that are all the rage here, just to.
Speaker 9: Catch all of them, because we don't know which one
Speaker 9: she's on right now.
Speaker 2: That's right, Well, they're all great.
Speaker 7: I guess that.
Speaker 9: Whatever she's doing, it's working.
Speaker 2: It's working for her Madison Ulla Joints, and she's a
Speaker 2: healthcare reporter for Bloomberg near she's a reporter on this story.
Speaker 2: What's Oprah's role here with these drugs.
Speaker 11: Well, we're used to seeing Oprah as the face of
Speaker 11: weight Watchers obviously for the last almost a decade. And
Speaker 11: she said recently that she was exiting the board of
Speaker 11: Weight Watchers, and then she said that it was to
Speaker 11: avoid potential perceptions of conflict of interest, and then she's
Speaker 11: doing this special now, which was all about weight loss.
Speaker 2: She did special on ABC Television, Yeah, on Abc. Was
Speaker 2: it a paid promotion or it was not.
Speaker 11: Novo Nordisks said that they didn't have any you know,
Speaker 11: financial anything to do with Oprah really, and she's not,
Speaker 11: you know, to our knowledge, doesn't have a partnership with
Speaker 11: either of the drug manufacturers. But you know, people that
Speaker 11: were watching the show and were on Twitter last night
Speaker 11: sort of reacting to it, said that it watched and
Speaker 11: seemed sort of like an infomercial for the drugs.
Speaker 9: Yeah, tell us a little bit more about who was
Speaker 9: on it. You were telling us before we got on
Speaker 9: the air here that there were some doctors, but maybe
Speaker 9: they kind of glanced over the side effects a bit
Speaker 9: and that this was really just a big, you know,
Speaker 9: hype up moment for these weight loss drugs.
Speaker 11: Yeah, so they heard from patients, there were doctors. There
Speaker 11: were executives from Nova Nordisk and Eli Lilly on the
Speaker 11: program as well. The majority of the program was sort
Speaker 11: of centered on patient experiences with these drugs, but it
Speaker 11: really didn't get into details about the side effects, sort
Speaker 11: of glossed over them, and the doctor that they had
Speaker 11: on talking about them said that the side effects were overhyped.
Speaker 2: Really, so again that kind of goes to the editorial
Speaker 2: integrity of it. I mean I'm not a journalist, but.
Speaker 5: Really, yeah, I mean are we all journalists?
Speaker 11: Yes, there was definitely I think that it served a purpose.
Speaker 11: And Oprah is on these drugs. She's had a great
Speaker 11: experience with them, so she says, and that's sort of
Speaker 11: what the program was centered around, and really spoke to
Speaker 11: that positive experience on the drugs.
Speaker 9: So what are Oprah's feelings toward Weight Watchers right now?
Speaker 9: I mean, this is, like you said, she has been
Speaker 9: the face of that company for so many years and
Speaker 9: now just like really seems to be doing like, you know,
Speaker 9: a total one to eighty and that weight Watchers would
Speaker 9: probably be on the losing end of the success of
Speaker 9: these drugs.
Speaker 7: Yeah.
Speaker 11: Yeah, And she asked, I mean, weight Watchers CEO was
Speaker 11: on this program, and she asked a very pointed question,
Speaker 11: you know, what is the role and what's the point
Speaker 11: of weight Watchers now that we have these medications, which
Speaker 11: I think is sort of the question that the whole
Speaker 11: industry has been asking, and the diet industry and analysts
Speaker 11: and everyone and you know, weight Watchers. CEO said that
Speaker 11: there is still a role for them to play in
Speaker 11: supporting the community spporting people's weight loss journeys. But I
Speaker 11: guess that still sort of remains to be seen because
Speaker 11: their sock's not doing due all right now.
Speaker 2: I really hesitate to ask this question, but since you
Speaker 2: reported on it, what is ozembic face.
Speaker 11: Yes, so, ozempic face is another sort of trend that
Speaker 11: we're seeing happen right now, especially here in New York.
Speaker 11: People who have rapid weight loss from the weight loss
Speaker 11: drugs are getting this hollowed out look in their cheeks,
Speaker 11: which I mean it happens with weight loss. It's not
Speaker 11: just from the drugs, but it's the rapid weight loss
Speaker 11: that sort of makes it more noticeable. So then they're
Speaker 11: seeking out plastic surgery clinics medspots to get botox or
Speaker 11: facelifts and sort of help offset those effects.
Speaker 9: Add that to the list all the winners and losers
Speaker 9: off what comes out of ozetic I mean we've I
Speaker 9: mean the original kind of knock on effect was like, oh,
Speaker 9: you know, all the potato chip companies, maybe not so
Speaker 9: good for them, and now plastic surgery coming up. So
Speaker 9: it's just like the hollowing out of your face. You've
Speaker 9: got the saggy skin there.
Speaker 11: And yeah, yeah, like the extra loose skin ab view,
Speaker 11: which is makes botox has said that this could be
Speaker 11: a potential you know, boon for Botox sales going forward
Speaker 11: and said that at earnings last quarter.
Speaker 9: So it's like I can't keep up.
Speaker 2: Yeah, So on these GLP drugs, where are we in
Speaker 2: terms of uh, I know someone who has a prescription,
Speaker 2: but this person cannot get it filled because there's not
Speaker 2: enough supply where and it is not me? Where are
Speaker 2: they not insured?
Speaker 9: Right?
Speaker 2: So that two questions, Yeah, where are we on ramping
Speaker 2: up supply to meet demand? And then secondarily who pays
Speaker 2: for this stuff?
Speaker 11: Yeah? I mean the supply problem has been a huge
Speaker 11: issue and Nova Noorda, Skinnyla Lily are investing billions of
Speaker 11: dollars to ramp up supply to try to meet demand.
Speaker 11: But you know, I've seen an analyst notes there like
Speaker 11: the demand for these products just seems like it's insatiable
Speaker 11: and at this point they're already coming from behind. So
Speaker 11: and all of these investments in production capacity like take
Speaker 11: a couple of years to come online. So we're sort
Speaker 11: of just still racing to keep up with it. It's
Speaker 11: you know, probably Lily said it is probably going to
Speaker 11: be you know, not this year that they're able to
Speaker 11: meet supply, maybe next year. So we're still still trying
Speaker 11: to ramp up the supply there. And then in terms
Speaker 11: of paying for it, we have like I think fifty
Speaker 11: percent of commercial plans cover the drugs for obesity, A
Speaker 11: third of state health plans through Medicaid cover the drugs.
Speaker 11: Medicare does not cover weight loss drugs, so it's very
Speaker 11: patchy still, and a lot of people are paying out
Speaker 11: of pocket.
Speaker 9: I want to come back to Oper's role in all
Speaker 9: of this, because I really find it interesting that, like
Speaker 9: we've been saying, this is still like, you know, these
Speaker 9: drugs are relatively in their infancy, and we don't really
Speaker 9: know a ton of the side effects at least over
Speaker 9: the longer term yet. And I just find it kind
Speaker 9: of amazing that somebody with a reputation like Oprah is
Speaker 9: I mean, obviously I would think, you know, she's done
Speaker 9: her research on this to the extent that it's available,
Speaker 9: but it's kind of amazing to you know, just be
Speaker 9: putting herself so behind all of this when like I mean,
Speaker 9: so many people really trust her and I don't.
Speaker 5: I don't know.
Speaker 9: I think maybe the skeptic in me is just thinking,
Speaker 9: like there's got to be some risk to that from
Speaker 9: her reputational perspective, this could backfire.
Speaker 11: Yeah, I mean I think that's like that's a risk
Speaker 11: that the companies are it's in the back of their
Speaker 11: minds too. I mean, it's so important, and there is
Speaker 11: such a long history of safety issues with weight loss drugs.
Speaker 11: I mean, Fenn Fenn in the nineties was shown to
Speaker 11: cause heart problems. There was a weight loss drug in
Speaker 11: the EU that was pulled from the market after it
Speaker 11: was shown to cause suicide, and you know, neurological problems.
Speaker 11: So there's just I think that the bar for safety
Speaker 11: with these drugs is really high, and that's something to
Speaker 11: just be really cognizant of.
Speaker 9: I mean, let's not forget too most of these drugs,
Speaker 9: weren't they also originated to treat diabetes, right, not weight loss, right.
Speaker 11: And so we know from like twenty years of the
Speaker 11: you know, diabetes drugs being around that they are safe
Speaker 11: and they're definitely safer than older drugs, but they're being
Speaker 11: used so widely now by people who don't necessarily have
Speaker 11: diabetes or obesity, and so that's sort of the risk
Speaker 11: is like we don't know what the risks are in
Speaker 11: patients who you know, they haven't really been studied or
Speaker 11: weren't the target population.
Speaker 2: What do the companies say about getting these drugs in
Speaker 2: a pill format or all for format because that a movie,
Speaker 2: it'd be another driver in usage.
Speaker 11: Yeah, that's the next big thing and that's both of
Speaker 11: you know, Novo Nordiskannilai, Lilly are working on pills. That's
Speaker 11: sort of the next exciting thing that people are watching for.
Speaker 11: And it also could help with supply because pills are
Speaker 11: a little bit easier to manufacture than the weight loss shots.
Speaker 11: Could help with you know, the active ingredients as well
Speaker 11: because it's a little bit different, So that might help
Speaker 11: from the supply standpoint. It also might make them more
Speaker 11: accessible potentially cheaper. So it's it's a big deal.
Speaker 9: How do people decide, you know, if you're looking to,
Speaker 9: you know, be taking one of these drugs, whether it's
Speaker 9: zet bound with govy ozempic, Like, how do people differentiate
Speaker 9: between all of these or they kind of like roughly
Speaker 9: looked at fairly equally from a consumer perspective.
Speaker 11: I mean, so ozempic and manduro which is Lily's sort
Speaker 11: of version of ozempic, those are four diabetes and then
Speaker 11: with gov and zet bound are the weight loss drugs.
Speaker 11: Those are for obesity. And so it really depends on
Speaker 11: insurance coverage most of the time, and the doctors are
Speaker 11: the ones that are prescribing it. So they've told me,
Speaker 11: you know, doctors have told me they tend to prescribe
Speaker 11: the one that insurance will cover, and so it's sort
Speaker 11: of dependent on that.
Speaker 7: But interesting, okay, in otherwise, what could this be?
Speaker 4: Like?
Speaker 5: A thousand a month?
Speaker 7: Right?
Speaker 4: Right?
Speaker 11: A thousand a month or more?
Speaker 7: Is that what it is?
Speaker 11: Really? And you have to do it for the rest
Speaker 11: of your life if.
Speaker 7: You want to, really, if you want to keep the
Speaker 7: weight off.
Speaker 9: Right and that hollow face, yes, and then.
Speaker 2: At exactly round and round it goes all right, Madison,
Speaker 2: thanks so much for joining us. Great reporting there.
Speaker 7: Manis Muller.
Speaker 2: She's a Bloomberg News health reporter and talking about her,
Speaker 2: she's got a couple of great stories out there, one
Speaker 2: on the Oprah and the other one on o zepic face.
Speaker 9: I mean, boy, I'm I'm just floored still at like
Speaker 9: the you know ripple effect of.
Speaker 2: All of this, right, I mean, having you know, these
Speaker 2: consumer propits companies CEOs come on and talk about ozepic
Speaker 2: and impact on their business. Yeah, that was incredibly silly
Speaker 2: but maybe not.
Speaker 9: Yeah, and now that you've got this new problem to
Speaker 9: deal with that, like, you know, you look great, you're
Speaker 9: slim down, but now your faces all all hold out
Speaker 9: And I mean, just man, how do you explain that
Speaker 9: to your friends?
Speaker 4: You know?
Speaker 2: Right, I don't know, but yeah I am seeing people.
Speaker 7: Boy, you lost a lot of weight.
Speaker 2: Oh yeah, yeah, I mean it's it's out there, even
Speaker 2: with the regular folk.
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