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Speaker 1: Sebastian Reidler of marilynch writing this, we remain negative on
Speaker 1: European equities and underway France on expectations of weakening growth.
Speaker 1: The further acceleration in Euro Area growth could easily offset
Speaker 1: the drag from a more fraud political environment, Sebastin joins us.
Speaker 3: Now, Sebastian, which is it?
Speaker 1: And this is actually, frankly a confusion that we've been
Speaker 1: having all week that some people, Sebastian are saying, yeah,
Speaker 1: we could get that weakness if some of this political
Speaker 1: uncertainty continues, or if it does transpire in a way
Speaker 1: that's market unfriendly. But otherwise Europe is the place to go,
Speaker 1: especially next to an expensive look in the US.
Speaker 4: Absolutely, and we see that a lot in our client conversation.
Speaker 4: People highlight the data weakness in the US we've already
Speaker 4: seen and you discussed this earlier, But in Europe the
Speaker 4: macrodata until today was holding up. So people are saying
Speaker 4: this is a safe port in the storm, and we
Speaker 4: simply disagree.
Speaker 5: We think growth mentum will weaken in.
Speaker 4: The US in the your area because in very simple terms,
Speaker 4: monetary tightening works with the lack and the lacks are
Speaker 4: now to hit both economies. So we think growth is
Speaker 4: going to disappoint, is going to weaken, and it's going
Speaker 4: to disappoint the expectations of Europe being a safe haven.
Speaker 1: So when you talk about European equities possibly being at
Speaker 1: risk of further losses, are you saying that the US
Speaker 1: is preferable or are you saying that all regions, particularly
Speaker 1: equity markets that have gotten a boost from recent optimism,
Speaker 1: are subject to potential risk on that kind of weakening
Speaker 1: growth outlook you're suggesting might be understated.
Speaker 5: Yeah, I think that's a very good summary.
Speaker 4: And if you give give me that option, which of
Speaker 4: these two statements, I would make both statements. I think
Speaker 4: all equity markets are at a risk simply because you
Speaker 4: at the point where the unemployment rate in the US
Speaker 4: is very low, is starting to pick up, the savings
Speaker 4: ratio is very low, is starting to pick up. We're
Speaker 4: starting to see the weakness in the consumer. We're seeing
Speaker 4: consumer confidence really declining very sharply in the US, and
Speaker 4: the US so far has held up.
Speaker 5: The global growth story.
Speaker 4: So if global growth weekends on the back of a
Speaker 4: weakenings weeken Europe, that's negative for risk assets across the board.
Speaker 4: But we think European equities are particularly vulnerable because they're
Speaker 4: more cyclical and they have more value names, which would
Speaker 4: underperform if the weakness in economic activity, together with fading inflation,
Speaker 4: also leads to declining bonniards.
Speaker 3: So Sebastian, what can I buy then?
Speaker 4: So there are amazing opportunities in the beaten up defensive
Speaker 4: sectors that you've got in Europe. Take a sector like
Speaker 4: food and beverages, add a twelve year low relative to
Speaker 4: the market, cheapest sector in the market. It's the most
Speaker 4: defensive and it's gotten clobbled by the compression and risk
Speaker 4: premium global risk PREMIU effectively at all time lows. If
Speaker 4: this combination of macro factors we've just discussed leads macro
Speaker 4: risk premier to rise, that is a fantastic catalyst for
Speaker 4: outperformance for the defensive sectors and in particular the beaten
Speaker 4: up food and beverage sector.
Speaker 6: But overall, besides maybe the defensive sector. On European equities,
Speaker 6: you remain negative at the moment for now. So what
Speaker 6: happens after the election potential when we get some more clarity.
Speaker 4: To be honest, you were talking about economic downside as
Speaker 4: a function of the election. I would really think about
Speaker 4: them as separate. So there's political risk and there's economic risk.
Speaker 4: We think that and an investors have to decide always
Speaker 4: which in this kind of priority list, which is the
Speaker 4: thing really to focus on. We think the economic risk
Speaker 4: is by far the most important point. When the labor
Speaker 4: market starts to inflect negatively, that typically heralds bad things
Speaker 4: happening for risk assets, bad things happening for risk premium.
Speaker 4: We think that will be the dominant dynamic overcoming months.
Speaker 4: So if growth we can not because of the election,
Speaker 4: but because of the normal functioning of the macrocycle. That
Speaker 4: means equity is lower cyclicts underperforming defensives, but then a
Speaker 4: lot of scope for bonds to rally. And that's obviously
Speaker 4: my colleague Michael Hartnett has the exact same view, and
Speaker 4: for beaten up defensive sectors to outperform outside.
Speaker 6: Of Europe and the United States, there's a lot of
Speaker 6: also talk about expansion and getting this potential exposure to
Speaker 6: places like Japan.
Speaker 3: Does that still make sense?
Speaker 4: So I'm, of course a European equity strategist, so I
Speaker 4: don't focus.
Speaker 5: Mainly on Japan.
Speaker 4: That said, we run our models in the background, and Japan,
Speaker 4: like Europe, is a value trade. So it has benefited
Speaker 4: from the spike in boniards because it got a lot
Speaker 4: of value sectors, and it has benefited from the weakening
Speaker 4: in the end, now the yen is a very defensive
Speaker 4: currency at would strengthen if you get a weakening of
Speaker 4: global growth. Plus if Boniard's declined, then value sectors and
Speaker 4: value assets underperformers we've just discussed. So therefore Japan had
Speaker 4: a good run, but the macro environment I'm describing is
Speaker 4: not one in which Japanese equities will continue to do well.
Speaker 1: Sebastian the picture that your painting goes to question that
Speaker 1: we've been asking pretty consistently for the past couple of months.
Speaker 3: Weakening but not weak.
Speaker 1: That has been the hope, the white hope for a
Speaker 1: lot of different markets, particularly the US, this whole idea
Speaker 1: of goldilocks. How do we know that threshold between weakening
Speaker 1: and weak when it is a good thing and when
Speaker 1: it is a bad thing. What data are you watching
Speaker 1: to see when we've gotten to that tipping point.
Speaker 5: I completely agree with you, that's the number one question.
Speaker 4: Is a little bit of data we need is good
Speaker 4: because it removes that overheating fear that the market has
Speaker 4: been grappling with. And for now, bad data has been
Speaker 4: good data. Though you could argue this morning in Europe,
Speaker 4: on the back of this very week PMI, that is
Speaker 4: starting to change, and in very simple terms, you will
Speaker 4: start to see bad data being bad data. If you
Speaker 4: get clear cracks in the labor market that means payrolls
Speaker 4: are potentially rising by less than one hundred thousand per
Speaker 4: months or going to zero or going negative, a more
Speaker 4: clear cut increase in the unemployment rate, and also very importantly,
Speaker 4: if you look at the Atlanta Fed GDP track and
Speaker 4: the best current estimate of.
Speaker 5: Where the run rate of growth is in the U.
Speaker 4: If that goes close to zero below as it did
Speaker 4: during the recession fear in twenty twenty two, then there's
Speaker 4: a lot of scope for risk premium rise from their
Speaker 4: current low levels.
Speaker 7: Yeah, that landed GDP track are still something like three
Speaker 7: percent even with the most risks of data, so still
Speaker 7: holding up.
Speaker 3: You talked about the weak pmis in Europe.
Speaker 7: Can I push back on one thing, Sebastian, You can
Speaker 7: tell me why I'm wrong.
Speaker 3: You say investors.
Speaker 7: Need to recognize political risk and economic risk, and the
Speaker 7: two are separate things, would in today's data argue that
Speaker 7: they're becoming the same thing. That if you have businesses
Speaker 7: holding back on their spending plans and decision making, that
Speaker 7: the political risk is turning into an economic one.
Speaker 4: I think it's a very fair point. That clearly is
Speaker 4: an inter section. And if you look at the country breakdown,
Speaker 4: you've got Germany down two points, arguably very little to
Speaker 4: do with the political situation in France, but France down
Speaker 4: four points, and I agree with you there will be
Speaker 4: some spillover, but of course they are well understood. The
Speaker 4: drivers of the macrocycle that have nothing to do with politics.
Speaker 4: That's the inventory cycle that gave a boost to Europe,
Speaker 4: but it's now rolling over. It's the lack of impact
Speaker 4: of monetary tightening. It's the very negative fiscal impulse that
Speaker 4: you have in the UN and they would be sufficient
Speaker 4: to weaken the macro picture even if nothing was going
Speaker 4: on on the political front.
Speaker 1: Sebastian, wonderful to hear from you. Thank you so much
Speaker 1: for being with us. Don't be a stranger. Sebastian Radler
Speaker 1: of Merrill Lynch Treasury is looking to erase this year's
Speaker 1: losses as investors ramp up their rate cut bests. Katie
Speaker 1: Kaminsky of Alpha Simplex, writing this, fixed income short signals
Speaker 1: begin to dissipate as yields moved lower on a better
Speaker 1: than expected CPI print and hopes for a rate cut.
Speaker 3: Katie joins us.
Speaker 1: Now, Katie, someone who is incredibly brave to go short.
Speaker 1: Vond's when everybody else was going long, who talked about
Speaker 1: the potential of ten year yields getting to six percent
Speaker 1: just simply on trend following, you've noticed a shift of
Speaker 1: late and treasuries hinting at more of a long position.
Speaker 1: Can you tell us what that shift is and how
Speaker 1: much conviction you.
Speaker 3: Have around it.
Speaker 8: Well, something is very different this month, Lisa, and what
Speaker 8: we've seen, as you pointed out, weaker economic data.
Speaker 9: Secondly, we're starting to hear some murmurs of demand destruction.
Speaker 9: What does that mean?
Speaker 8: From a technical perspective, it means that we've seen synchronous
Speaker 8: cell us in the cross asset space, So that's in
Speaker 8: the agriculturals, also in the metals, but particularly rallying in
Speaker 8: yields I mean sorry, rallying in bond's and really really
Speaker 8: a big adjustment in the yield space. We've seen risk
Speaker 8: off behavior which we hadn't seen most of this year,
Speaker 8: and so if you think about.
Speaker 9: That, it really feels like the other.
Speaker 8: Asset classes are telling us something about the economic picture
Speaker 8: that we're still not seeing in the equity markets. So
Speaker 8: for us, this means that signals and fixed income have
Speaker 8: really started to dissipate for the first time since the
Speaker 8: beginning of this year. To me, this looks a lot
Speaker 8: like an inflection point and a pivot where we might
Speaker 8: be looking at some sort of sea change for markets
Speaker 8: that we hadn't seen before.
Speaker 1: Katie, this is fascinating at a time where a lot
Speaker 1: of people are wondering that difference between weakening and weak.
Speaker 1: You're saying the signal from a lot of acid class
Speaker 1: and he points to commodities in addition to some of
Speaker 1: the individual corporate moves that pointing to some kind of
Speaker 1: weakening that was unexpected or week.
Speaker 9: Not just weakening.
Speaker 1: What does this do in terms of your conviction to
Speaker 1: say go long bonds pull out of a lot of
Speaker 1: different equities, particularly those that have been the highest flyers.
Speaker 8: Well, I think the big challenges seeing risk off type
Speaker 8: of behavior in the market is an indication that for
Speaker 8: the first time this year, the market is starting to
Speaker 8: get nervous about the potential or higher probability of some
Speaker 8: sort of harder landing.
Speaker 9: And that wasn't in the data before.
Speaker 8: So when we saw weaker data, it usually meant relief.
Speaker 8: It meant that we might have cuts and that we
Speaker 8: could get a soft type landing that we wanted.
Speaker 9: Right now, what you're.
Speaker 8: Seeing is this type of flea to bonds is leading
Speaker 8: to change signals and fixed income and causing people to
Speaker 8: be more likely to be long to kind of hedge
Speaker 8: the potential risk that we might have a correction, particularly
Speaker 8: if you think about the equity markets where there's such
Speaker 8: a biifurcation in the sense that valuations are very high
Speaker 8: even though we're starting to see stabilization of a lot
Speaker 8: of economic data. So that's something that we haven't seen
Speaker 8: stabilized and nobody would like to stabilize, but multiples remain
Speaker 8: high as data starts to get back to normal.
Speaker 7: It's also been interesting to look this flee from bonds
Speaker 7: as you talk about of who's been fleeing to bonds.
Speaker 7: Just looking at the ETF flows, we're on track for TLT,
Speaker 7: that's the black Rock long bond ETF to put on
Speaker 7: its best month in terms of flows so.
Speaker 3: Far this year.
Speaker 7: So you do have households buying bonds, you have hedge
Speaker 7: funds buying bonds. So it's clear with all this discussion
Speaker 7: of who's going to buy all the bonds out there,
Speaker 7: people are, but the type of people who are buying
Speaker 7: it are price sensitive buyers. What does that do to
Speaker 7: the volatility of this bond market when those are the
Speaker 7: types of folks who now are the majority owners of
Speaker 7: this market.
Speaker 8: This is a good point because we have really seen
Speaker 8: bond volatility remain elevated since COVID or particularly once we
Speaker 8: start to see higher rates and you see in a
Speaker 8: slightly higher inflation environment, there's a lot more bifurcation of.
Speaker 9: Buyers and sellers.
Speaker 8: And before it was much more focused on rate cuts,
Speaker 8: but now it seems that people are also embedding some
Speaker 8: sentiment in their flows, meaning that as they get concerned
Speaker 8: about the high evaluations and equities, you start to see
Speaker 8: that risk off pattern where people think about bonds again
Speaker 8: as a safety trait, something to lock in if rates
Speaker 8: go up or if something goes wrong, and we end
Speaker 8: up in a situation where, like Lisa said, week is
Speaker 8: actually weak means weak economic data.
Speaker 7: What does that do to an automated strategy like your own,
Speaker 7: Because you can see a clear trend perhaps of people
Speaker 7: going out buying bonds bonds rally, but it's more volatile,
Speaker 7: it's not as state as the market once was.
Speaker 9: This is this is definitely an issue.
Speaker 8: When you have higher vaults, it means that you have
Speaker 8: less conviction in general and signals, and we've seen that
Speaker 8: in fixed income. Fixed income volatility doubled in twenty twenty
Speaker 8: two and it's still up at elevated levels, which means
Speaker 8: that the overall direction of fixed income has been difficult
Speaker 8: to follow, and you can see that by looking at
Speaker 8: the graph this year, being short was the right call
Speaker 8: until recently, and now it looks like the trajectory of
Speaker 8: bonds is actually lower yields, and that suggests that technical strategies,
Speaker 8: they're just picking up on price behavior and where markets
Speaker 8: are moving at the moment, and markets are definitely moving
Speaker 8: somewhat towards this risk off hedging bets against equity potential weakness.
Speaker 6: Katie, you have some research on potentially how the markets
Speaker 6: could trade with the upcoming election. A third of CFOs
Speaker 6: in a survey yesterday we learned see the elections impacting
Speaker 6: investments Given the fact that we're on the edge of
Speaker 6: waiting for potential cut from the Fed and we still
Speaker 6: don't know the outcome of this election, how do you
Speaker 6: position for this?
Speaker 8: So positioning elections from a technical perspective is actually quite tricky,
Speaker 8: but it's really about following whatever the prevailing price trends are,
Speaker 8: and they usually tend to be pretty strong around volatile environments.
Speaker 9: So I think this fall what's going to be interesting
Speaker 9: is going to be.
Speaker 8: To see how does the market, how do people react
Speaker 8: to how the election unfolds, and what potential trends might emerge.
Speaker 8: And it really feels right now because of the uncertainty
Speaker 8: around this, that there's a wide range of outcomes, which
Speaker 8: means that there could be very interesting trends in the fall.
Speaker 9: Could it be long bonds. Maybe.
Speaker 8: Right now it's starting to hint that that could be
Speaker 8: the case and that there could be much lower yields.
Speaker 9: But of course we've got to wait and see.
Speaker 8: From the data if we actually see that pivot in
Speaker 8: fixed income positioning completely to long and.
Speaker 6: When it comes to the election, as Greg Valley told
Speaker 6: us earlier, potentially this is going to be dragged out
Speaker 6: for weeks and potentially not knowing the actual makeup of
Speaker 6: what Washington is going to look at. Bank of America
Speaker 6: today has a note talking about the zeitgeist, and it's
Speaker 6: if there's a clean sweep, there's this potential concern about
Speaker 6: a Liz Trust moment. But whether we get Trump or Biden,
Speaker 6: how much are you starting to take into account the
Speaker 6: concerns about the US fiscal deficit.
Speaker 8: Well, this is a great question this week because, as
Speaker 8: you know, sort of numbers came out this week in
Speaker 8: the bond market and people have been watching it because
Speaker 8: with deficits up, there's definitely concern about valuation and fixed income,
Speaker 8: so people definitely have their eyes on fixed income markets.
Speaker 8: So I think there's going to be a lot of
Speaker 8: focus on auctions and there's also going to be a
Speaker 8: lot of questions about how does that impact the overall
Speaker 8: valuations of.
Speaker 9: US fixed income.
Speaker 8: So again that goes back to the point things are
Speaker 8: very volatile for fixed income. It is not an easy
Speaker 8: trade like it used to be a simple risk off asset.
Speaker 8: In a world of inflation with high deficits, bonds are
Speaker 8: just not as.
Speaker 9: Easy to call.
Speaker 8: I think that goes to the volatility point, plus correlations
Speaker 8: being positive this year so far with stocks.
Speaker 1: Katie, just to put a bow on it, Earlier this year,
Speaker 1: you had pretty high conviction to be short bonds based
Speaker 1: on the trend following. Now you're seeing a pivot point.
Speaker 9: Where is your conviction level?
Speaker 1: Can you have conviction in the near term to be
Speaker 1: long bonds.
Speaker 9: I think in the near term it's definitely very mixed.
Speaker 9: But you have seen a pivot.
Speaker 8: We have seen more long signals in the European in
Speaker 8: European debt and international debt, so that to me is
Speaker 8: sort of ahead of the curve in the sense you've
Speaker 8: seen the cutting cutting in the ECB, you've seen other
Speaker 8: central bankers cutting, which has definitely pivoted those particular markets
Speaker 8: to long I think the US curve, especially with the
Speaker 8: cautious FED, still remains a short view in the short term,
Speaker 8: but if we continue to see evidence of risk off behavior,
Speaker 8: you're going to see that pivot as well.
Speaker 1: Katie Kaminsky of Alpha Simplex, thank you so much. Right
Speaker 1: now joining our city groups, Veronica Clark and Daneer Peterson
Speaker 1: of the Conference BOARDIC, I want.
Speaker 3: To start with you.
Speaker 1: It seems like the world is shifting your way in
Speaker 1: terms of looking for more economic weakness and not necessarily
Speaker 1: celebrating the resilience in the same kind of way. Do
Speaker 1: you think that maybe there is this tipping point in
Speaker 1: the economy that's becoming more clear or do you think
Speaker 1: that people are just realizing that maybe they got over
Speaker 1: their skis with betting on the soft landing.
Speaker 9: Yeah.
Speaker 10: Yeah, it was only a couple months ago where we were,
Speaker 10: you know, the narrative was reacceleration even but I think
Speaker 10: the data now have more clearly slowed and I don't
Speaker 10: have trouble convincing people that the economy is slowing. I
Speaker 10: get it a couple months ago, but yeah, it does
Speaker 10: feel like us to us that this has been a
Speaker 10: very gradual slowing house cycles usually begin, and we might
Speaker 10: now be at that tipping point where you enter this
Speaker 10: nonlinear weakening, where you really do get layoffs that build
Speaker 10: on each other, and that would be obviously a much
Speaker 10: worse economic backdrop.
Speaker 1: Dana, do you see this tipping point from your vantage
Speaker 1: point as well? Well?
Speaker 11: For a long time we have been predicting a slowing
Speaker 11: in the economy. In fact, we had a recession call
Speaker 11: for a long time. Now we think that the second
Speaker 11: and third quarters are going to be weak growth, probably
Speaker 11: between zero and one percent. Consumers leading that decline. But
Speaker 11: the thing is that consumer spending could even be wiped out,
Speaker 11: but not really have a recession because or even a
Speaker 11: bad recession, because most consumers are working. The labor market
Speaker 11: is doing quite well. Wages are elevated, and businesses, according
Speaker 11: to our CEO Confidence survey, are not looking to let
Speaker 11: go of workers. That is a key factor that's going
Speaker 11: to keep the unemployment rate low even if we do
Speaker 11: see some layoffs on the margins.
Speaker 7: Okay, well, this looks like an area that perhaps danding
Speaker 7: you and Veronica disagree, So let me press you on this.
Speaker 7: Dana says that you could start to see what we
Speaker 7: typically see in a cycle, that some layoffs turn nonlinear
Speaker 7: and it picks up with some speed.
Speaker 3: Why would this time be different, Well.
Speaker 11: This time is different because of labor shortages. And the
Speaker 11: reason why we have labor shortages is because of demographics.
Speaker 11: It's never been the case that we've had ten thousand
Speaker 11: people retiring per day. Those are the baby boomers, and
Speaker 11: so that's why businesses are saying, even though they expect,
Speaker 11: even though for at least a year and a half
Speaker 11: they're expecting a recession to happen, they were not interested
Speaker 11: in letting go of their employees for two reasons. Yes,
Speaker 11: of course labor shortages and people were retiring, but also
Speaker 11: because they had the sting during the pandemic of trying
Speaker 11: to find qualified workers and raising wages to do that.
Speaker 11: So you don't want to repeat that even if you
Speaker 11: think there's going to be a slowdown and this is
Speaker 11: a structural change in the economy that we have not seen.
Speaker 3: Not to do this to you, Veronica, but why could
Speaker 3: data be wrong?
Speaker 8: Yeah?
Speaker 3: No, I mean I don't disagree that.
Speaker 10: You know, we have experienced labor shortages over the last
Speaker 10: couple of years that might be leading to employers holding
Speaker 10: on to workers for longer. You don't want to lay
Speaker 10: people off and have to hire them back at a
Speaker 10: higher rate. But that is I think still a precarious position.
Speaker 10: If you've been holding on for workers for too long
Speaker 10: and then all of a sudden you do have to
Speaker 10: let people go, that could mean you're letting even more
Speaker 10: people go. I don't think that necessarily prevents the layoffs.
Speaker 3: Dana.
Speaker 6: Also, I have a question about what is going on
Speaker 6: in a labor market because we had Barkley's command with
Speaker 6: a report and they were talking about how pretty much
Speaker 6: we've had this insane surge of immigration that we're seeing
Speaker 6: so many jobs being filled by.
Speaker 3: So where exactly is the shortage.
Speaker 11: Well, when you think about immigration, a lot of it's
Speaker 11: catch up. So remember during the pandemic, we had travel
Speaker 11: bands and so that meant also if you were an
Speaker 11: immigrant or you know, whether you're an H one B person,
Speaker 11: you could not enter. So a lot of it was
Speaker 11: just getting back to the levels that we saw in
Speaker 11: terms of immigration right before the pandemic. But the shortages
Speaker 11: are definitely happening, especially in leisure and hospitality, healthcare and
Speaker 11: social as systemce not residential construction, and also government. And
Speaker 11: if you notice, many of these jobs you have to
Speaker 11: physically show up for work, and so companies that we
Speaker 11: speak to CEOs of the Fortune five hundred firms in
Speaker 11: the US have been saying, look, we can't find qualified
Speaker 11: workers for these jobs that are necessarily dirty or uncomfortably
Speaker 11: you have to deal with a public or there's no
Speaker 11: flexibility in terms of hybrid work.
Speaker 3: Veronica.
Speaker 6: When it comes to immigration, how do you view it
Speaker 6: as basically putting a cap on inflation? We've reached the
Speaker 6: point where pretty much that story is over and starting
Speaker 6: to normalize.
Speaker 10: Yeah, I mean, I definitely think you know, it's been
Speaker 10: helping to loosen the supply side of the labor market.
Speaker 10: Of course, you know, more and more workers, so it
Speaker 10: is helpful for inflation on that front. But immigration is
Speaker 10: a boost to both supply and demand. I mean, those
Speaker 10: are people who are gonna you know, buy goods and
Speaker 10: need housing. So it's not so clear what that does
Speaker 10: to inflation. It is probably overall a disinflationary force, but
Speaker 10: not necessarily a big one.
Speaker 1: Let's dig into this. And I'm glad that Emory that
Speaker 1: you brought up the Marchiano one report from Barclays. He
Speaker 1: was talking about how honestly it's counted accounted for about
Speaker 1: three quarters of all job creation so far in recent years.
Speaker 1: The immigration flows to me this sort of shocking and
Speaker 1: I love both of your takes, ronic I want to
Speaker 1: start with you this idea of is this the right
Speaker 1: kind of job creation that's going to really create a
Speaker 1: sustainably and stronger economy versus filling in gaps and doing
Speaker 1: it on the cheap in a way that maybe makes
Speaker 1: people understand why even though we have a good labor
Speaker 1: market on the surface, people seem so dissatisfied.
Speaker 10: Yeah, I mean, I don't think the immigration story is
Speaker 10: necessarily one that's going to last with the strength that
Speaker 10: we've experienced the last couple of years. I don't think
Speaker 10: we're going to have such strong immigration maybe five years
Speaker 10: from now. And it's not so clear. You know that
Speaker 10: these workers have been hired at lower wages. We still
Speaker 10: see avagell earning something like four percent year on ear
Speaker 10: so there hasn't been this big disinflation in wages. But yeah,
Speaker 10: it is probably you know partly adding tonnet well.
Speaker 1: But this also, Dana is something we were talking about
Speaker 1: with Marchianoni of Barclays, This idea of how much can
Speaker 1: we really understand the numbers that we're seeing for the
Speaker 1: labor market as being strong if they are very different
Speaker 1: than what they've been in the past, if the jobs
Speaker 1: being added are new people coming to the country and
Speaker 1: don't account for job mobility, also don't account for how
Speaker 1: much this economy has grown and how many more people
Speaker 1: are in the labor force. When you start to talk
Speaker 1: about just absolute numbers, how much is the view that
Speaker 1: we have of the labor market overly rosy based on
Speaker 1: just historical comps that are no longer valid.
Speaker 11: Well, laborers are laborers. It doesn't matter if they're far
Speaker 11: and born or they're domestically born. The point is that
Speaker 11: we don't have enough people in the labor market right now.
Speaker 11: Look at the labor force participation rate overall, it is
Speaker 11: not returned to the pre pandemic level. Why is that, Well,
Speaker 11: if you break it out looking at people who are
Speaker 11: prime age sixteen to sixty four, yes that participation rate
Speaker 11: has recovered, but people sixty five and older has not.
Speaker 11: They're people exiting the labor market. So immigration certainly is
Speaker 11: going to be continues to be in will be an
Speaker 11: important solution to addressing the fact that we're losing workers
Speaker 11: hand over foot to retirement, but it's also getting those
Speaker 11: domestic workers out. And certainly when you look at the wages,
Speaker 11: the wage games that we're seeing, they're in goods, so
Speaker 11: those are the types of jobs where many people who
Speaker 11: are immigrants might gravitate to, and those wages are still
Speaker 11: rising very aggressively, and even among services wages growth has slowed,
Speaker 11: but it's still particularly elevated and relative to the range
Speaker 11: that we saw pre pandemic. So I don't see an
Speaker 11: issue with the types of jobs that people are taking,
Speaker 11: whether if foreign born or domestically born. The point is
Speaker 11: that they're working, their wages are elevated, they're getting income,
Speaker 11: and as Veronica said, these people are going to be
Speaker 11: consuming and spending. They're desiring the same things that domestic
Speaker 11: workers are.
Speaker 7: And it's a structural thing you're talking about, Dana, and
Speaker 7: you said that they're still aren't enough people to fill
Speaker 7: all of the jobs. So when we're talking about this
Speaker 7: world of trying to bring inflation down, waiting to see
Speaker 7: if there are cracks in the labor market, isn't waiting
Speaker 7: for Goodough? Do we need to get used to something
Speaker 7: a little bit more uncomfortable because there are still persistent
Speaker 7: supply issues.
Speaker 11: Well, really, when I look at the drivers of inflation,
Speaker 11: it's certainly labor supply, and that's beating up wages, and
Speaker 11: that's flowing through to services excluding housing and certainly excluding
Speaker 11: insurance premiums. But the thing is that that's probably not
Speaker 11: going to weigh. That's something that the FED is going
Speaker 11: to have very difficult time resisting because again, it's a
Speaker 11: supply issue, and the FED is good at addressing demand issues. Now,
Speaker 11: where we're going to get a lot of traction on
Speaker 11: inflation coming down over the next twelve months is from housing.
Speaker 11: And if you look at the CASHITDAL Home price index
Speaker 11: and you lag that by about eighteen months, that'll tell
Speaker 11: you exactly where OER is going. So the other thing
Speaker 11: that's going to be bidding up inflation is insurance. So
Speaker 11: certainly insurance costs for autos and also for housing very
Speaker 11: different reasons. But the thing is that we don't know
Speaker 11: when those rises are going to end. So the FED
Speaker 11: is still going to be challenged in terms of getting
Speaker 11: inflation back to the two percent targets sustainably.
Speaker 1: Dana Peterson and Veronica Clark with us as we look
Speaker 1: back on some of the data that we've gotten recently
Speaker 1: coming up, and I'm glad that data you brought up
Speaker 1: home sales and home values in terms of just the
Speaker 1: inflation that we expect to see. We do get existing
Speaker 1: home sales later today, next week, we do get the
Speaker 1: latest read on core Logic home prices.
Speaker 9: Veronica, how much do you.
Speaker 1: Believe what we've been hearing from the likes of Jonathan
Speaker 1: Miller and others who say, at this point, if the
Speaker 1: FED cuts race, that's going to only reignite a housing
Speaker 1: market that's just waiting for any catalyst for people to
Speaker 1: have a more affordable entry point.
Speaker 10: Yeah, it's definitely something we're watching, certainly anecdotally. It feels
Speaker 10: like maybe you could get.
Speaker 3: Some buyers coming back.
Speaker 10: But we did see, you know, with mortgage rates, you know,
Speaker 10: above seven percent last year, there was this surprising resilient
Speaker 10: demand for housing. In twenty twenty three, there was resilient
Speaker 10: demand for everything, but people couldn't buy homes because you know,
Speaker 10: people were.
Speaker 3: Not willing to sell.
Speaker 10: But We've actually in the last six or seven months
Speaker 10: seen listings of homes come up. They are above you know,
Speaker 10: levels of the last two years, and there's not demand now.
Speaker 10: So it does feel like, you know, that resilient consumer
Speaker 10: is waning everywhere.
Speaker 7: I also think this question of prices that Jonathan Miller
Speaker 7: also talked about is fasting. Not just do people come back,
Speaker 7: but what happens to pricing of homes. Could we be
Speaker 7: in a scenario that he thinks will happen that kind
Speaker 7: of ironically, the FED cuts, but instead housing prices go
Speaker 7: up because demand comes back.
Speaker 3: Yeah, it's not so clear.
Speaker 10: I mean, we have seen softer demand in the last
Speaker 10: six months or so, and that has been accompanied with
Speaker 10: softer prices. We've not seen the very strong, you know,
Speaker 10: exceptionally strong prices of the last couple of years in
Speaker 10: the last six months. So I think in the near term,
Speaker 10: at least, you know, this is still a soft demand
Speaker 10: story and so there's not quite that word pressure on prices.
Speaker 10: But longer term, you know, we are somewhat structurally short housing.
Speaker 10: Obviously construction new construction will be pulling back. You're gonna
Speaker 10: stay short housing. Yeah, that could put longer term pressure
Speaker 10: on prices, Dana.
Speaker 6: When it comes to the American consumer, you talk about
Speaker 6: how they're also trading down in types of services they purchase.
Speaker 6: What kind of cracks are you seeing in the US consumer?
Speaker 11: Sure, absolutely, Well, let's just start with the fundamentals. While
Speaker 11: most consumers are working, that excess savings from the stimulus
Speaker 11: is gone. Also, many consumers are financing their expenditures with
Speaker 11: debt and so all that's really coming home to roosts.
Speaker 11: And so what consumers are doing is they are not
Speaker 11: buying goods. We saw that good spending slowed at the
Speaker 11: end of last year, it was negative and GDP growth.
Speaker 11: And also when we look at retail sales so far
Speaker 11: in the second quarter, they're signaling another downswing in terms
Speaker 11: of good spending. When it comes to services, consumers are
Speaker 11: still interested in going on vacation. However, they are trading
Speaker 11: down in the types of services. So for example, instead
Speaker 11: of going to the movies, which might cost them one
Speaker 11: hundred dollars for a family of four, they're going to
Speaker 11: stay home and stream. And also consumers are looking at
Speaker 11: spending on things services that are necessities, for example healthcare
Speaker 11: and insurance premiums for your cars. But certainly not those
Speaker 11: highly discretionary types of services.
Speaker 1: Dana, Just to put this all together, what are you
Speaker 1: looking for to understand whether this is sort of a
Speaker 1: welcome softening and disinflation versus something that does have more
Speaker 1: pernicious legs.
Speaker 11: Well, this is all part of the Fed's plan, right,
Speaker 11: This is basic economic monetary economic theory. You slow demand,
Speaker 11: which helps reduce inflation. That's what the Fed's doing. The
Speaker 11: challenge is that the FED has all these other supply
Speaker 11: side elements that are leaning against what they want to do. Again,
Speaker 11: going back to labor shortages, which is a supply issue,
Speaker 11: raising wages. But this is all part of the program
Speaker 11: making sure that consumers pull back on spending. That also
Speaker 11: includes home purchases, and certainly if you're not buying a house,
Speaker 11: you're not buying all the items that would go along
Speaker 11: with it. So this is good. And the thing is
Speaker 11: that the FED is probably pleased with what's happening because
Speaker 11: at the same time, most people are working, you don't
Speaker 11: have a massive layoffs. Indeed, we do think the unemployment
Speaker 11: rate's going to tick up, but maybe we'll land at
Speaker 11: four point two percent. That's well below the natural rate
Speaker 11: of unemployment and that's still a really low unemployment rate.
Speaker 11: So if we have this perfect scenario of weaker consumer demand,
Speaker 11: weaker demand for housing, but also most people working and
Speaker 11: inflation slowing, that suggests that the FED can go ahead
Speaker 11: and start cutting interest rates, probably by the end of
Speaker 11: this year.
Speaker 1: Dania Peterson, Roonic Clark, both of you, thank you so
Speaker 1: much for being with us.
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