Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa A.
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Speaker 3: I've been looking forward to this conversation all morning. Richard Clarida,
Speaker 3: the Global Economic Advisor at Pimco and former Fed Reserve
Speaker 3: Vice Chair and a good friend of this program for many,
Speaker 3: many years. Rich wonderful to catch up with you, sir.
Speaker 3: I was thinking back to our conversation we had on
Speaker 3: the West Coast when Pimco put out their second outlook
Speaker 3: and you and I talked about what you called the
Speaker 3: Fed tolerating two points something. Did you hear that from
Speaker 3: Chairman Power in that news conference yesterday, because I did.
Speaker 4: Well, well, yeah, I think that you know, they've had
Speaker 4: a lot to do, They've done a lot of happy
Speaker 4: at lifting. Ultimately, they do want to get inflation to
Speaker 4: two but they understand and that if the year from
Speaker 4: now it's running in the twos, that will have been
Speaker 4: a big accomplishment, and they can adjust rates down. They don't,
Speaker 4: you know, they obviously don't want to tighten too much.
Speaker 4: And so yes, I think two points something is kicking
Speaker 4: and alive for sure right now.
Speaker 3: Rich, it's worth going over what they're basically talingus. Explicitly,
Speaker 3: they're willing to cut interest rates with inflation above two percent?
Speaker 3: How controversial might that be?
Speaker 4: I think they'll do a good job explaining it. What
Speaker 4: they're going to say is, look, as inflation falls, if
Speaker 4: the Fed doesn't count rates, it's actually tightening policy because
Speaker 4: policy is the real rate. So if the nomine rates unchanged,
Speaker 4: inflation's falling, they're tightening and they won't think they need
Speaker 4: to add additional tightening if they think the inflation momentum
Speaker 4: is going in the right way. So that's the way
Speaker 4: that they will that they'll explain it.
Speaker 2: The FED was talking a lot about data dependency and
Speaker 2: how they really aren't giving forward guidance at this point.
Speaker 1: Did you get a sense.
Speaker 2: Of which data could really shift their views before September?
Speaker 2: Even though we do get a of data, we've heard
Speaker 2: every time them come out and say, one data point
Speaker 2: a trend does not make.
Speaker 4: Sure, and I think so they'll have They'll have two
Speaker 4: more inflation prints and two more labor market prints. But Lisa,
Speaker 4: I thought for a long time that another important development
Speaker 4: that they're going to be following is what's going on
Speaker 4: in the labor market. They like the fact that the
Speaker 4: labor market is buoyant, but wages are going up faster
Speaker 4: than consistent with the with the two percent target. So
Speaker 4: I do think they'll be looking at the labor market data,
Speaker 4: wage employment cost index, as well as the price inflation.
Speaker 1: So what would they have to see?
Speaker 2: How high is the threshold for them to hike again
Speaker 2: in September or, if not in September, in November.
Speaker 4: I think it's I think it's maybe a closer call
Speaker 4: than some of the market pricing right now. You know,
Speaker 4: they did write down two more hikes in June. We
Speaker 4: got one of them yesterday, and an overwhelming majority of
Speaker 4: the committee thought in June that appropriate policy would call
Speaker 4: for one more hike. So I think certainly one more
Speaker 4: hike is in play at some point in the fall.
Speaker 4: The chair said that explicitly. He also said that when
Speaker 4: he was in Europe, a couple of weeks ago. So
Speaker 4: I don't think it's an overly high hurdle to get
Speaker 4: that hike. I don't think they necessarily have to do
Speaker 4: it in September. I will say this, whatever hiking they
Speaker 4: think they need to do, I think they want to
Speaker 4: get in this year.
Speaker 5: Why this year, Rich? Why is that important?
Speaker 6: Well?
Speaker 4: I think a couple of reasons. I think that I
Speaker 4: think they think they're close to the end anyway, and
Speaker 4: inflation's moving, however, slowly in their direction, and I think
Speaker 4: they would like to stay out of the spotlight in
Speaker 4: an election year. Now we've had the FED hike in
Speaker 4: election years four nineteen eighty four come to mind. And
Speaker 4: they'll do that if they really think that inflation really
Speaker 4: requires a much higher ratepath. But I think this cycle
Speaker 4: is aiming to finish up sometime in the fall.
Speaker 3: You know that this FED is always criticized. The Committee
Speaker 3: always faces criticism for something. The criticism we heard from
Speaker 3: some guests in the news conference before the news conference
Speaker 3: and after the news conference too was just how data
Speaker 3: dependent this FED actually is. They took a break from
Speaker 3: hiking rich, then they come back and hike again, and
Speaker 3: in the intimated period we had inflation that actually improved
Speaker 3: the inflationy backdrops seem to get better, and yet they
Speaker 3: hiked anyway. How data dependent are they?
Speaker 4: Well, good good point. Data dependent is a very elastic
Speaker 4: phrase which has opened to various interpretations. I think, on balance,
Speaker 4: really the going forward, especially after this meeting yesterday, they
Speaker 4: really are data dependent. As you know, I've said on
Speaker 4: your air before most of this rate hike cycle, they've
Speaker 4: not been that data dependent. In March of last year,
Speaker 4: they knew two things. The funds rate was at zero
Speaker 4: and inflation was at five going to six. That's all
Speaker 4: the data they needed to set off this this very
Speaker 4: aggressive rate hike cycle. I do think that we do
Speaker 4: get close to the terminal rate, that the margin is
Speaker 4: more a data dependent although I did I agree, and
Speaker 4: I said on Bloomberg after that meeting it was it
Speaker 4: was an awkward pause in June, that's for sure.
Speaker 2: It's an awkward moment also right now, given that the
Speaker 2: FED is removing recession as the base case and we're
Speaker 2: looking at a soft landing. And yet there's a real
Speaker 2: question mark among analysts and a real split among investors
Speaker 2: about whether inflation could reaccelerate as a result of the strength,
Speaker 2: the resilience, the wages.
Speaker 1: Where do you fall on this? What do you think
Speaker 1: the FED falls on this, given that.
Speaker 2: They seem to be taking perhaps a bit more of
Speaker 2: a dubbish stance.
Speaker 4: Yes, quite quite frankly, Lisa, I was surprised in the
Speaker 4: press conference. I wasn't surprised to hear the chair says
Speaker 4: he has many times that he thinks there's a path
Speaker 4: to a soft landing. That's okay, sure there's a path.
Speaker 4: But I was surprised that he invoked the change in
Speaker 4: the staff forecast. I don't think that was in the
Speaker 4: June minutes, and so he's obviously entitled to do that.
Speaker 4: But yes, not my base case, not our base case.
Speaker 4: But there is a scenario where we get some good
Speaker 4: news on inflation in this fall because of falling rents,
Speaker 4: use car prices again falling. But if the FED finds
Speaker 4: itself in Marsha twenty twenty four with an unemployment rate
Speaker 4: of forig an inflation rate of four, you know, with
Speaker 4: some of that temporary good news behind them, they're in
Speaker 4: a very tough spot. So I do think it's a risk.
Speaker 4: It's not the base case, but it's certainly something if
Speaker 4: I were still there, I would be.
Speaker 2: I'd be assessing, what do you think right now is
Speaker 2: the bigger risk rich the idea of inflation reaccelerating and
Speaker 2: still being a problem, or the idea of recession and
Speaker 2: avoiding something more entrenched, which could happen if the FED
Speaker 2: moves slower.
Speaker 4: Well, personally, I do think that, you know, again, I'm
Speaker 4: in the private sector now, I do think that the FED.
Speaker 4: The bigger risk is for the FED is to declare
Speaker 4: a mission accomplished too early and find themselves next year
Speaker 4: having to restart the rate hike. So if I were there,
Speaker 4: it would skew me to getting in, you know, that
Speaker 4: additional hike this year, and I think some members of
Speaker 4: the committee we'll see it that way, lookly. So the
Speaker 4: other thing is the Fed's own projection, which I agree with,
Speaker 4: has unemployment rate rising by about a point by the
Speaker 4: end of next year. That would be very modest. That
Speaker 4: would probably be the most modest downturn we've had. But historically,
Speaker 4: as we know the so rule, whenever the unemployment rate
Speaker 4: rises by more than a half a point, it's ultimately
Speaker 4: declared a recession. So I actually think a truly non
Speaker 4: recession outcome without any rise in the unemployment rate at
Speaker 4: all is going to be tough.
Speaker 3: That's my personal view, would be phenomenal if that materialized.
Speaker 3: I want to finish on this if we can rich. Yeah,
Speaker 3: no dissent. We talked about this yesterday. I've been talking
Speaker 3: about it for a while. You've been on the committee.
Speaker 3: Why do people, even when we know they might disagree
Speaker 3: with the decision, make the decision not to descend. Why
Speaker 3: does that happen on the committee?
Speaker 4: Well, you know, the FED has been an institution that's
Speaker 4: been around for one hundred plus years, and there are
Speaker 4: certain cultural norms, and certainly it's been a very long
Speaker 4: time since you've had a governor dissent on a policy
Speaker 4: rate decision. If you go back to the Vulgar years,
Speaker 4: he had governors and his vice chair dissenting. But you
Speaker 4: know since green Span. But the Reserve Bank presidents can
Speaker 4: indue dissent. Certainly, during my time at the FED, especially
Speaker 4: in twenty nineteen, we had three descents, and we had
Speaker 4: several presidents saying they would have descended if they had
Speaker 4: had a vote. So descents can happen. The other thing
Speaker 4: I should notice we've had a lot of turnover among
Speaker 4: the Regional Bank, District Bank presidential, the announcement of Jim
Speaker 4: Bullard recently Aster George at Charlie Evans Rosengrin. You know
Speaker 4: there's accumulated fifty plus years of institutional experience that's no
Speaker 4: longer in that room. I think that's also relevant.
Speaker 5: Richard, thank you sir for wangan. That's catch up.
Speaker 3: So next time in studio please Richard Cloard of the
Speaker 3: the former FED Vice Chair and now with pim Coke
Speaker 3: joining us now for a preview of the ECP. James Athy,
Speaker 3: investment director at Aberdeen. James much had a decision for
Speaker 3: the Government Council in the European Central Bank. The FED
Speaker 3: has the luxury of saying growth is good, the labour
Speaker 3: market is strong.
Speaker 5: Right now.
Speaker 3: I'm not sure President the Guard can go into that
Speaker 3: news conference a little bit later this od James and
Speaker 3: say growth is good.
Speaker 5: Is this a hard one for her?
Speaker 7: H Hey, John, I mean you could argue it's a
Speaker 7: little bit easier because again, these the transmission for monetary
Speaker 7: policy to influence inflation is largely via demand. So if anything,
Speaker 7: the ECB is facing a slightly easier task because they
Speaker 7: can see that demand and forward demand through things like
Speaker 7: the bank lending survey are already softening and softening significantly,
Speaker 7: which suggests that their policy is further into restrictive territory
Speaker 7: and maybe they can more convincingly consider the end. Whereas
Speaker 7: you know, as you guys were just discussing, if the
Speaker 7: US consumer doesn't die down, if the US labor market
Speaker 7: doesn't soften, it's difficult to believe that they've found equilibrium,
Speaker 7: and it feels like would have to come back to
Speaker 7: the table. So the communication is difficult because we're moving
Speaker 7: from this very backward looking policy stance into something highly
Speaker 7: data dependent. Central bankers know that markets have a tendency
Speaker 7: to get carried away and they don't want that easing
Speaker 7: of financial conditions, but that's a problem they cannot really resolve.
Speaker 7: I think we'll see a very similar outcome today. Non committal,
Speaker 7: not really full of information.
Speaker 2: Meanwhile, we've been talking about the bank lending transmission mechanism
Speaker 2: in Europe and John rightly pointed out that it is
Speaker 2: more sensitive to this type of contraction which we've heard
Speaker 2: and we've seen. What are you experiencing, What are you
Speaker 2: seeing on the ground in terms of how quickly credit
Speaker 2: is contracting in the euroregion?
Speaker 7: Well, I mean, that's difficult to say on the ground.
Speaker 7: I think we all have to rely on the data
Speaker 7: as we see it. And I look at the contents
Speaker 7: of the bank lending survey and I think more pertinently
Speaker 7: on the demand side than the supply side. Of course,
Speaker 7: supply conditions matter, they always do. But what matters for
Speaker 7: judging the stance of and transmission of monetary policy is
Speaker 7: more about the demand for loans, and we can see
Speaker 7: that that really does look incredibly soft across the Eurozone.
Speaker 7: If you look at the sort of pre pandemic estimates
Speaker 7: for neutral rates in Europe and the US, maybe half
Speaker 7: a percent in the Eurozone and maybe two and a
Speaker 7: half percent in the US, there's two hundred basis points
Speaker 7: between them, but actually there's only one hundred hundred and
Speaker 7: fifty basis points between the cash rates. So that alone
Speaker 7: suggests that European policy is already tighter than US policy,
Speaker 7: and I do think we see that in the data.
Speaker 7: And that's without even getting to the structural challenges in
Speaker 7: the Eurozone.
Speaker 3: We've got to talk about some of those challenges now
Speaker 3: on the ground. In Frankfurt, Germany, Bloomberg's Marit toed out
Speaker 3: outside of the ECB headquarters. Maria, I just frame how
Speaker 3: difficult this is going to be for the European Central
Speaker 3: Bank in thirty minutes time for President of Guard when
Speaker 3: she has to deliver that news conference.
Speaker 8: Well, this is going to be a very difficult communications
Speaker 8: exercise for the head of the European Central Bank because
Speaker 8: on the one hand, we know they will hike twenty
Speaker 8: five basis points out with the guidance to the market
Speaker 8: and everyone as well calibrated for them. But the big
Speaker 8: question is what happens next. And you've talked about this
Speaker 8: range of data, some of it very soft when you
Speaker 8: look at the BMIs, and it wasn't just Germany this week.
Speaker 8: You also had significant downturns coming also from economies like France.
Speaker 8: We also had that lending survey, which we know they
Speaker 8: look at. But then core inflation's sticky. So again the
Speaker 8: market will be focused on any guidance, any bias potentially
Speaker 8: in this decision, but I'm not sure they want to
Speaker 8: do that. If anything, the European Central Bank, you could argue,
Speaker 8: wants to go for the most neutral possible, the most
Speaker 8: options open, look at the data, say we go back
Speaker 8: to very data dependent and look back in September where
Speaker 8: we are so, I think this is going to be
Speaker 8: a tricky exercise. There will be a lot of questions
Speaker 8: to try to get an indication of.
Speaker 1: Where they want to go. But I'm not sure she
Speaker 1: wants to do that yet.
Speaker 3: You follow the speakers we heard from Klasska not of
Speaker 3: the Netherlands recently in the last couple of weeks, the
Speaker 3: individual members of the Governing Council, the traditional hawks, Maria,
Speaker 3: do you send from them that even they are unsure
Speaker 3: about what comes next after July?
Speaker 8: Yeah, and remember, Jonathan, this was presented today July as
Speaker 8: a quote necessity for the Central Bank. When it comes
Speaker 8: to September, we've seen maybe it's now fifty to fifty.
Speaker 8: Maybe it's now an open call. Maybe we need to
Speaker 8: look at the data again, the waiting for new projections
Speaker 8: in September. So I think there's been almost a rethinking
Speaker 8: over the past two weeks. What I'm also curious to
Speaker 8: hear about is, and this will be sure a question,
Speaker 8: is this idea of rate cuts potentially earlier than expected.
Speaker 8: That would be the worst case scenario for the Central
Speaker 8: Bank to have inflation that is above target and get
Speaker 8: all this chit chat and market's about potentially because of
Speaker 8: the state of the economy cutting beforehand. I'm also very
Speaker 8: curious is to see can she shut it.
Speaker 1: Down and how will she push back against that idea.
Speaker 2: We're about five minutes away from that ECB rate decision,
Speaker 2: still with us James Athey of Aberdeen and James, I'd
Speaker 2: love your take on the data dependency, the maximum optionality
Speaker 2: that we're hearing certainly from the FED and as Maria
Speaker 2: was suggesting, from the ECB coming up as well, what
Speaker 2: data are you.
Speaker 1: Honed in on?
Speaker 2: Are you going to be trading more aggressively on data
Speaker 2: in a new way?
Speaker 9: Yeah?
Speaker 7: I mean that's unfortunately the game of investing it. It
Speaker 7: really is John Maynard Kine's beauty contest. Much as I
Speaker 7: would like to look more heavily at the most forward
Speaker 7: looking data, the fact of the matter is that the
Speaker 7: markets are still somewhat focused on the most lagging indicators,
Speaker 7: that's jobs and inflation. So I think some balance between
Speaker 7: the two is probably the right path to tread. I
Speaker 7: agree with Maria completely. The EACB really doesn't want to
Speaker 7: give a strong signal one way or the other. There
Speaker 7: is definitely persistent weakness across the manufacturing sector that's much
Speaker 7: more significant in the Eurzone than it is in the US.
Speaker 7: We're now starting to see softening in the service sector
Speaker 7: as well, and that is good news. But of course
Speaker 7: none of these central banks want to box them in,
Speaker 7: you know, to Nick John's words, they want maximum optionality,
Speaker 7: So some sort of obfuscation, constructional, constructive ambiguity is what
Speaker 7: we're likely to see. I think once these risk of
Speaker 7: are out the way, the market at the moment is
Speaker 7: in the mood to then run with the themes and
Speaker 7: the trades that it wanted to run with anyway. So
Speaker 7: I think we saw that in the US last night.
Speaker 7: Week a dollar risk on probably lower yields for the summer.
Speaker 7: That's what I'm expecting, and I don't expect Madame Lagarde
Speaker 7: to necessarily put a hole in that this afternoon.
Speaker 2: Do you expect the dollar to weaken and the euro
Speaker 2: to strengthen because of the US or because of Europe's actions.
Speaker 7: Well, I think the dollar is weakening because it's become
Speaker 7: a bit of a self fulfilling prophecy. The market always
Speaker 7: has a bias to want a week a dollar because
Speaker 7: risk tends to perform better in a week dollar environment.
Speaker 7: The market has been and continues to love the carry
Speaker 7: trade that generally involves at least selling dollar as an
Speaker 7: intermediate step. But I look at the dynamics currently and
Speaker 7: it doesn't necessarily look like a week dollar environment. To me,
Speaker 7: US rates are higher than European rates, the European data
Speaker 7: is rolling over far more quickly. As a general rule,
Speaker 7: that looks like a reasonably solid dollar environment versus the
Speaker 7: US euros. So we're marginally long the dollar here. We
Speaker 7: think already the market's got a little bit over excited.
Speaker 7: But short term, as I say, the market tends to
Speaker 7: run with the themes it wants to. I think positioning
Speaker 7: is a bigger headwind, a bigger headwind medium term. It
Speaker 7: exactly everybody sees what they want to It's.
Speaker 3: Always the way, James. I just wonder, I know what
Speaker 3: investors want. They'd like a big easing program out of China.
Speaker 3: Do you think that's what policy makers under government Council
Speaker 3: would like to see right now? Would that be welcomed
Speaker 3: by them?
Speaker 9: Yeah?
Speaker 7: I mean that's a really good question. I'm not sure
Speaker 7: there's necessarily a huge supply side stimulus from China easing aggressively,
Speaker 7: so that might actually complicate their picture ad to demand
Speaker 7: without an offset via supply. I think I think the
Speaker 7: Central Bank would like to see inflation closer to two
Speaker 7: percent by hook or by crook, and then they can
Speaker 7: worry about the balance between supply and demand and how
Speaker 7: stimulatory or how restrictive their policy is. For what it's worth,
Speaker 7: I don't think China is going to engage in the
Speaker 7: sort of massive sticks we've seen in twenty fifteen, sixteen
Speaker 7: or two thousand and seven and eight. I think there's
Speaker 7: a lot of adjustment and fiddling around the edges. I
Speaker 7: don't think they're going to go back to the sort
Speaker 7: of debt funded infrastructure investment stimulus that we've seen historically.
Speaker 7: So I don't think there's a massive impulse for Europe
Speaker 7: coming from China so far.
Speaker 3: Lots of people would agree with you. James Athy, investment
Speaker 3: director at Aberdeen.
Speaker 2: Right now, I really want to get through what we're
Speaker 2: looking at in terms of is it a soft landing
Speaker 2: or is it a head fake? And I'm pleased to
Speaker 2: say that we're joined by Vincent rein Hart, chief economist
Speaker 2: and macro strategist at Dreyfus and Melan Vincent, what's your
Speaker 2: take on the slew of data that we just got
Speaker 2: that really highlights both the soft landing and on the
Speaker 2: margins disinflation.
Speaker 10: We probably heard it from care Pal yesterday. Importantly, he
Speaker 10: said that the board staff had taken out air forecast
Speaker 10: of recession, and Mike noted that GDP wasn't a surprise
Speaker 10: to the Atlanta Fed that had an estimate of two
Speaker 10: point four percent growth last quarter. Board staff invests a
Speaker 10: lot of resources in doing the same thing. So I
Speaker 10: don't really think that this morning, certainly from the National
Speaker 10: Income Accounts, was that much of a surprise. Big question
Speaker 10: is does it make it more or less likely there's
Speaker 10: a soft landing? Sure leans that way, but it's one
Speaker 10: data point. That's what shar Pale would say.
Speaker 9: At this point, What.
Speaker 2: Do you make of initial jobless claims second consecutive month
Speaker 2: that there's been an upside surprise or at least a
Speaker 2: positive downside surprise. Basically there are fewer people filing for
Speaker 2: unemployment than previously expected in the prior month. How does
Speaker 2: this confirm with the idea that we need a loosening
Speaker 2: labor market in order to achieve disinflation.
Speaker 10: Yeah, So the other part of soft landing is new
Speaker 10: productivity that we are getting very strong employment growth that
Speaker 10: is at least matching that and output we're not gaining
Speaker 10: anything in terms of output.
Speaker 9: Power, among other things.
Speaker 10: That means that wage gains are more serious because there's
Speaker 10: no cushion between what firms pay workers and what they produce.
Speaker 9: I think that, among other.
Speaker 10: Things, you know that the main takeaway is tight labor
Speaker 10: market is fueling household income, and household income is supporting consumption,
Speaker 10: which isady to get a recession that way, which.
Speaker 2: Is a reason why some people are wondering whether this
Speaker 2: is somewhat of an uncomfortable rational that you're seeing strengthen
Speaker 2: the economy, and yet the Fed is moving away from
Speaker 2: any forward guidance of further rate hikes. Do you think
Speaker 2: that this is a mistake that there wasn't a greater
Speaker 2: indication to markets that the Fed did plan to raise
Speaker 2: rates again once in this particular year, Considering that rich
Speaker 2: Clara earlier on this show said that he, if he
Speaker 2: were still on the FED, would vote to raise rates
Speaker 2: again this fall.
Speaker 10: Well, last guidance was that they would raise rates. In
Speaker 10: the summary of economic projections, chairpala is pretty confusing. He
Speaker 10: wanted to assert very strongly that every decision is every
Speaker 10: meeting is live, that every meeting is made based.
Speaker 9: On the data.
Speaker 10: But in fact there seemed to be guiding us to
Speaker 10: a slower pace of policy firming. Twelve and a half
Speaker 10: basis points of meeting on average. That sounds like a
Speaker 10: committee that is number one divided and number two pretty
Speaker 10: close to the end.
Speaker 2: Do you get the senses you look through this data
Speaker 2: that there is strength in the economy, that perhaps they're
Speaker 2: not really watching closely enough that there does seem to
Speaker 2: be something that could reignite inflation later in the year.
Speaker 10: So I think they're watching closely the data. They see
Speaker 10: the strength of the economy, and if your chair of
Speaker 10: pal you're encouraged by it. He's never really had a hard.
Speaker 9: Landing in his outlook. I think that.
Speaker 10: The extent that the strong data is coming from the
Speaker 10: labor market, it's got to be troubling. It's got to
Speaker 10: be reason why you have to lean toward more policy firming,
Speaker 10: and I think it does pose a fundamental challenge.
Speaker 2: Are you concerned that there isn't more dissent, at least
Speaker 2: publicly on the federal Reserve at a time where as
Speaker 2: you said it was somewhat confusing, and it seems as
Speaker 2: though there's a bit of a herding cats type of
Speaker 2: trend going on there.
Speaker 10: So I think we saw the the division in the
Speaker 10: committee just by the two press conferences in a succession.
Speaker 10: In the June meeting, the chair spent a lot of
Speaker 10: time talking about all they've done was slow the pace
Speaker 10: slowing policy tightening allows more information to gather. But this
Speaker 10: time it was had he had it, must have had
Speaker 10: a yellow sticky note on his talking point saying, say,
Speaker 10: meeting by meeting, live, live, data dependent as often as
Speaker 10: you can. That suggests to me that he wants a
Speaker 10: slow pace of policy firming. So he's got optionality. May
Speaker 10: may or may not tighten in November, but he's got
Speaker 10: enough rest of colleagues saying nope, every meeting is live.
Speaker 10: Go out there and remind everybody every meeting is live.
Speaker 10: That's a division in the committee. We'll see probably better
Speaker 10: in three weeks when we.
Speaker 2: Get the minutes in about five minutes time, will get
Speaker 2: maybe a sense of what's on the sticky note, the
Speaker 2: yellow sticky note of Christine Legard. In the meantime, I
Speaker 2: do want to head back to Michael McKee who's been
Speaker 2: parsing through all of the data, Mike, what stands out
Speaker 2: to you in the details, the fine line items underpinning GDP,
Speaker 2: underpinning durable goods well GDP.
Speaker 6: The interesting thing here is we've seen a couple of
Speaker 6: months where inventories in trade really affected the numbers, but
Speaker 6: not in the second quarter. They both subtracted about a
Speaker 6: tenth of a percent from the overall number. They kind
Speaker 6: of offset each other, and the real strength was in
Speaker 6: business spending up one percent and consumer spending up one
Speaker 6: point one percent. So that makes up most of what
Speaker 6: we saw during the second quarter, and it does suggest strength.
Speaker 6: Government consumption was up two point six percent. That's down
Speaker 6: from five percent in the previous quarter. Non defense spending,
Speaker 6: which was up ten and a half percent in this
Speaker 6: first quarter, was down one point one percent, so not
Speaker 6: a huge contribution from the government this time. It's consumers
Speaker 6: and business spending the C and I part of C
Speaker 6: plus I plus G plus NX, and in terms of
Speaker 6: durable goods, it's just overall good news that there is
Speaker 6: some spending, but it did slow in the capital goods
Speaker 6: non defense area. So we'll see what kind of contribution
Speaker 6: that we get from durable goods. When we go into
Speaker 6: the next month. I think the FED looks at today's
Speaker 6: numbers and has obviously has to change their forecast for
Speaker 6: GDP for the year at the September meeting, and the
Speaker 6: jobless claims numbers just tell the FED we're not going
Speaker 6: to see unemployment start to rise in the near future,
Speaker 6: so they may have to adjust those as well. And
Speaker 6: this is the kind of report I guess that keeps
Speaker 6: them on alert, not going to make them make a
Speaker 6: decision because we're a long way away from September twenty first,
Speaker 6: but keeps them on alert for the possibility of having
Speaker 6: to raise rates again.
Speaker 1: Thank you so much, Mike.
Speaker 2: Great synopsis there, especially as we start to see increasing
Speaker 2: momentum or at least stability in the consumer vincent rein
Speaker 2: hardstill with US vincent. How long can consumers keep spending
Speaker 2: like this at a time or we're seeing results from
Speaker 2: the likes of Hurts, from the likes of Royal Caribbean,
Speaker 2: that trend is still in place.
Speaker 9: So a couple things.
Speaker 10: They still have the retained fiscal transfers they got in
Speaker 10: twenty In twenty twenty one, they've worked down a lot
Speaker 10: of that nound but they still have that saving. And
Speaker 10: second is we're generating jobs and wage growth is strong.
Speaker 10: That means they're getting household income. Two points to what
Speaker 10: Mike said, I actually see a lot of the government
Speaker 10: and the GDP print and that's incentives for capital spending.
Speaker 10: I think that's part of the reason capital spending was
Speaker 10: so strong, given all the green initiatives. Second thing, inventory
Speaker 10: is on the soft side. The closest relationship of business
Speaker 10: loans to eken activity is the inventory component. So some
Speaker 10: of the softening in bank lending we've seen might actually
Speaker 10: be demand, not supply and credit constriction.
Speaker 2: And that's what we've seen over in Europe as well.
Speaker 2: It was a drop off in demand, not necessarily on
Speaker 2: the supply side. As you parse through this, though, are
Speaker 2: you watching things like the student loan repayments. Is that
Speaker 2: going to really play a role or is it really
Speaker 2: going to have to come from some I guess tightening
Speaker 2: further in a way that might be a little more disorderly.
Speaker 9: So I think it's got to be the latter. I e.
Speaker 10: At this stage in the monetary transmission mechanism, is the
Speaker 10: credit constriction that Japwell is waiting for. It is going
Speaker 10: to be uh, you know the cumulative toll of the
Speaker 10: earlier bank grounds.
Speaker 9: And by the way, quantitative tightening is actually.
Speaker 10: Starting in earnest only now first year of the program
Speaker 10: when the when the FED ran off its secure securities holdings,
Speaker 10: the Treasury paid for it by working down at its
Speaker 10: cash balance at the FED just move money from one
Speaker 10: pocket for the government to another. And now with the
Speaker 10: Treasury keeping its cash balance at a high level, all
Speaker 10: the security redemptions the FED is doing is going to
Speaker 10: be coming out of the assets the private sector holds.
Speaker 10: We're quantitative titan is really kicking in now.
Speaker 2: We're just minutes away from Christine Legard giving a press conference.
Speaker 1: It's scheduled to be eight forty five. However, there usually are.
Speaker 2: A lot of photos and introductions, so it may be
Speaker 2: a couple of minutes after that.
Speaker 1: Vincent Reinhardt with us of Dreyfus and.
Speaker 3: Mellon METSA up by close to one hundred and fifty percent.
Speaker 3: Yet today before these earnings, after them, we could it
Speaker 3: go through that level. The METSA right now is a
Speaker 3: close to nine percent in the pre market after beating
Speaker 3: estimers and providing guidance that the way well be more
Speaker 3: to come. Mandy's seeing joins us now senior technology analyst
Speaker 3: for Bloomberg Intelligence Mandate.
Speaker 5: Just Wow, they got it done.
Speaker 3: And the question I think lots of people are asking
Speaker 3: at the moment is that just cost control or are
Speaker 3: we seeing a reacceleration in revenue growth. I spoke to
Speaker 3: analyst later on yesterday who said, we're expecting the latter.
Speaker 3: Are you seeing the latter?
Speaker 11: I think so, And look, it's both. Cost control is
Speaker 11: the primary driver of why the stock has run up
Speaker 11: so much because the margins are trending in the right direction.
Speaker 11: But with inflation pulling back, it's good for ads spending,
Speaker 11: and that's what we saw that you know from Alphabet.
Speaker 11: I think Meta was an exception. The one thing both
Speaker 11: these companies seem to be doing right is the pivot
Speaker 11: to AI and how they are using it to improve
Speaker 11: their ranking and recommendations in terms of the content that
Speaker 11: is being viewed.
Speaker 5: On the apps.
Speaker 11: And that's what Meta called out yesterday. It's driving engagement
Speaker 11: in their blue app, which everyone thought was a declining business.
Speaker 11: Well it grew. And I think that is what AI
Speaker 11: can do in terms of driving that content engagement, which
Speaker 11: is the pole really to drive impressions, and you know
Speaker 11: in an ad business, that is what matters.
Speaker 3: At least I mentioned earlier that Facebook, not tourist, is
Speaker 3: very good at copying other people cough TikTok, and Reels
Speaker 3: how successful, how sticky has that product become.
Speaker 11: So one data point they shared last night was Reels
Speaker 11: is now a ten billion dollar rund rate business versus
Speaker 11: three billion last fall, and.
Speaker 5: That just goes to show three x wow in.
Speaker 11: A matter of three quarters. I think that just goes
Speaker 11: to show the point that yes, they're very good at
Speaker 11: incorporating new features, but I do think it's going to
Speaker 11: cannibalize their existing ad inventory, the high priced ad inventory,
Speaker 11: which is why in the print the only negative I
Speaker 11: could find is the ad pricing went down sixteen percent.
Speaker 11: We saw that from Snap it was down twelve percent,
Speaker 11: and we thought it's a so media problem. In this case,
Speaker 11: they're actually cannibalizing their own ad inventory because Reels doesn't
Speaker 11: monetize as well as their other formats.
Speaker 2: Of course, if you own the world and you earn
Speaker 2: a little bit less off of everything, you're still earning
Speaker 2: a lot of money. How much are we seeing them
Speaker 2: consolidate market share for the ad business versus simply just
Speaker 2: organically growing. In other words, is there gain someone else's loss.
Speaker 11: Well, so look at messaging. Messaging no one was able
Speaker 11: to monetize till now. Now they messaging is a ten
Speaker 11: pillion dollars rundread business for them. And they talked about
Speaker 11: incorporating AI agents. So the customer service use case for
Speaker 11: WhatsApp is huge. Again we are still very early on,
Speaker 11: but the fact that they're talking about running digital storefronts
Speaker 11: who can do their customer service through WhatsApp AI agents.
Speaker 11: I mean, the market gets excited with these kind of things.
Speaker 2: And can I just tell you, John, I get really
Speaker 2: frustrated when you go to a website and then you
Speaker 2: look for a phone number and there is no phone number.
Speaker 1: They're just chatbots. And then you discussed with the chat
Speaker 1: but and they help.
Speaker 5: You not to all space to the automatic chat bobs.
Speaker 1: Well then you can't find a total number. So frequently
Speaker 1: we can.
Speaker 11: Find their WhatsApp channel now and you can talk to
Speaker 11: that channel. That's what they're trying to do with their.
Speaker 3: Real person there though no no, of course, not that
Speaker 3: I've got no time for that. MANDI I want to
Speaker 3: speak to people.
Speaker 1: I totally agree. I absolutely hear you.
Speaker 2: I am curious with respect to Meta going forward, how
Speaker 2: much of their earnings had to do with crushing it
Speaker 2: on the advertising revenue and how much had to do
Speaker 2: with the job cuts.
Speaker 11: I mean, job cuts was a big factor, twenty five
Speaker 11: percent layoffs. So they've already reduced their expenses six to
Speaker 11: seven billion, and that shows up in the free cash flow.
Speaker 11: And they didn't cut anything on the reality lab side.
Speaker 11: That was the big surprise. They talked about raising their
Speaker 11: expenses on the reality labs front. So they're still going
Speaker 11: to lose fifteen billion on building this metal works again
Speaker 11: this year, and that's why the stock is not up more. Otherwise,
Speaker 11: I think investors would have cheered this print even more.
Speaker 3: So you still think that day and Mark Zuckerberg's big
Speaker 3: hopes and dreams are the metaverse still.
Speaker 11: Oh absolutely, that was evident on the call, Like he
Speaker 11: firmly believes in this. He thinks this will still drive
Speaker 11: the next leg of growth. But at the time he's
Speaker 11: he's course corrected pivoted to AI rightly so, and that's
Speaker 11: been a good.
Speaker 5: For the need describe it. What does he have in mind?
Speaker 5: What does he think this is going to look like well.
Speaker 11: So he thinks once he has the install base, and
Speaker 11: he's very focused on building the hardware where you know,
Speaker 11: he can have the content and control that ecosystem. He
Speaker 11: called out Apple for thwarting, you know, their innovation and
Speaker 11: changing the rules all of a certain which hurt ten
Speaker 11: billion dollars of revenue last year for meta and I
Speaker 11: think he wants to control that ecosystem. But with Apple
Speaker 11: Vision Pro launch, I think at least it has validated
Speaker 11: the market. I still think they are spending way too
Speaker 11: much without really establishing a business case for Metaverse. I
Speaker 11: don't think it's going to be that next computing platform
Speaker 11: that he thinks is probably too far out of bed
Speaker 11: and losing fifteen bills in every year. I mean, investors
Speaker 11: won't like it. But at the same time, he's growing
Speaker 11: top line twenty percent, so you may get a pass
Speaker 11: for at least two three quarters.
Speaker 2: Is he investing enough on the other tech innovations, in
Speaker 2: particular artificial intelligence as he tries to lean into the
Speaker 2: metaverse with dubious application and frankly a dubious leg up
Speaker 2: on some of the other areas. They're companies that are
Speaker 2: developing this.
Speaker 11: Yeah, so they are open sourcing their large anguage model,
Speaker 11: unlike chat, GPT or you know some of the other ones.
Speaker 11: And what they're saying is since they don't have a
Speaker 11: public cloud, they're going to partner with Microsoft and really
Speaker 11: make that available for consumption. So it's a good way
Speaker 11: to go about, you know, driving adoption. But I still think,
Speaker 11: you know, with large anguid models and how they're going
Speaker 11: to be monetized, I think public cloud vendors are the
Speaker 11: best position, which is why Microsoft and Alphabet got a
Speaker 11: bump from that.
Speaker 2: Asam was talking about, in about a week's time after
Speaker 2: the bell, we're going to hear from Apple. From Amazon
Speaker 2: is the expectation that they'll similarly deliver than expected results
Speaker 2: that we've seen from most of the other tech giants
Speaker 2: snap not included. Is this basically a telltale sign that
Speaker 2: the rally has been justified by fundamentals.
Speaker 11: I mean, in the case of Amazon, you could see
Speaker 11: ads spending getting a lift because overall AD spending has improved,
Speaker 11: but a BLUs I think because of their lack of
Speaker 11: exposure to generative AI and the expectations are low, you're
Speaker 11: going to see a muted growth on that front. And Apple, Look,
Speaker 11: we saw that from TSMC print smartphone demand is down,
Speaker 11: so I can't see how Apple beats on the top line.
Speaker 11: But at the same time, they still control the ecosystem,
Speaker 11: which Mark Zuckerberg doesn't like, and I think that's why
Speaker 11: they are where they are.
Speaker 3: Apple earnings a week away, based on our reporting, maybe
Speaker 3: units this year is stable, don't change much from last year,
Speaker 3: but average selling prices are going to go up.
Speaker 5: That's the hope, anyway, hope for her. The stock exactly.
Speaker 3: Mine's a few years and I'm not upgrade on it
Speaker 3: unless they do that thing they do where they sort
Speaker 3: of press those buttons and come in and slow it
Speaker 3: down aggressively, and then I've got to upgrade it. But
Speaker 3: right now I want nothing to do with it.
Speaker 1: I understand what am I upgrading to better.
Speaker 11: You can run your large anguage model on your.
Speaker 3: Phone large no interest in that all.
Speaker 1: Well, I'm like a doctor.
Speaker 3: I know on pretty much everything when it comes to technology.
Speaker 3: Man Deep seen Genie technology analysts for Bloomberg Intelligence.
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