Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app.
Speaker 1: Katrina Dudley of Franklin Templeton writing this, we continue to
Speaker 1: believe in a soft landing. Today's economy is better than
Speaker 1: it was at the beginning.
Speaker 3: Of the year.
Speaker 1: The one risk on the horizon is the impact of
Speaker 1: the presidential election. Katrina, I'm so pleased to say, joins
Speaker 1: us now, Katrina, Before we get to the presidential election,
Speaker 1: we have to go to the fact that we began
Speaker 1: the show saying that the runway to a soft landing
Speaker 1: skeet of narrower and narrow and you're basically coming out
Speaker 1: and saying, actually it's completely opposite, and people are getting
Speaker 1: more confident and we have complete conviction. Could you just
Speaker 1: sort of bring that together.
Speaker 4: Okay, So if we think about a soft landing and
Speaker 4: you're talking about that runway being narrower, that's just the
Speaker 4: impact of data coming into the market and informing our
Speaker 4: investment opinions. So, first of all, if we look at
Speaker 4: the beginning of the year and look at where we are.
Speaker 4: At the beginning of the year, the market was predicting
Speaker 4: six rate cuts. We were actually much lower in terms
Speaker 4: of the number of FED rate cuts, so we were
Speaker 4: actually slightly more optimistic. The market has come towards US.
Speaker 4: It's interesting though, because now soft landing is considered a
Speaker 4: bullish scenario, and I think that that really it just
Speaker 4: doesn't understand the resilience of the US economy. It doesn't
Speaker 4: also look at the fact that there are opportunities outside
Speaker 4: of the US market as well, so you look at
Speaker 4: valuations and everything. So when we look at this soft
Speaker 4: landing scenario, we're very positive. We go into the second
Speaker 4: half of the year. I think that we've got good
Speaker 4: earning support, we have a labor market that is not inflationary,
Speaker 4: and we do think that if I look at you
Speaker 4: the impact of AI and all of those things. We
Speaker 4: think it's positive for a lot of sectors.
Speaker 1: Do you think Mary Day is wrong of the San
Speaker 1: Francisco FED that this could be an inflection point and
Speaker 1: that often it's sort of nonlinear when you see some
Speaker 1: kind of weakening and a labor market.
Speaker 4: I think in terms of calling an inflection point is
Speaker 4: very very difficult because you're calling a kind of point
Speaker 4: estimate in time. And we look at the fact that
Speaker 4: you've got a FED, which we really do congratulate for
Speaker 4: the fact that they have been telegraphing so clearly what
Speaker 4: they're paying attention to. They're paying attention to inflation, and
Speaker 4: we've spent a lot of time talking about that because
Speaker 4: it's come from such high levels. They're also watching that
Speaker 4: unemployment number, but we're coming from historically low levels of unemployment,
Speaker 4: and so we can normalize unemployment and we can still
Speaker 4: have a supportive market.
Speaker 5: I want to ask about what supports that market. The
Speaker 5: environment is positive, but we're talking about a soft landing.
Speaker 5: We're not talking about some huge growth engine, or maybe
Speaker 5: correct me, maybe we are. But how do the cyclical
Speaker 5: stocks catch up if, again, it isn't this huge bout
Speaker 5: of growth, If it's just kind of this anemix off
Speaker 5: landing and anemic.
Speaker 4: Amount of growth is actually good for companies. You know,
Speaker 4: kind of a really aggressive amount of growth where you've
Speaker 4: got so many things happening, it's very difficult to plan
Speaker 4: for when you're sitting in that CEOC when you've kind
Speaker 4: of got teppered, but you've got predictable growth. I think
Speaker 4: it's much easier to plan and to forward forecast if
Speaker 4: I was to tell you that, you know, we know
Speaker 4: that things are only grow two to three percent, you
Speaker 4: can kind of get some productivity gains in order to
Speaker 4: be able to manage that, and so you can manage
Speaker 4: your cost in order to meet that revenue. When things
Speaker 4: are going your gangbusters and your market's growing ten or
Speaker 4: your revenues are growing ten fifteen percent, you're just adding
Speaker 4: bodies and you're adding cost and then you take care
Speaker 4: of the efficiency. So I do think that productivity is
Speaker 4: where we're actually going to see some upward surprises in
Speaker 4: terms of driving earnings going forward.
Speaker 5: Does this market make sense to you right now? I mean,
Speaker 5: maybe we want to strip out the n video to
Speaker 5: ask does it make sense? But okay, let's say we
Speaker 5: strip out you look at the rest of this market
Speaker 5: and market where over the past quarter it's been utilities
Speaker 5: and staples that have done well and the others have
Speaker 5: lad do you look at that and say, Okay, given
Speaker 5: we're trying to approach this landing, that all makes sense
Speaker 5: or it is something strange happening to you.
Speaker 4: So the concerns about the consumer are not new news
Speaker 4: in the last couple of weeks. I mean you talk
Speaker 4: about McDonald's for example, they were used three six months
Speaker 4: ago talking about the fact that we're seeing a shift
Speaker 4: in the consumer to being more cost conscious and what
Speaker 4: does that mean. When McDonald's sees the shift, they use data,
Speaker 4: They use a lot of technology in order to be
Speaker 4: able to forward project and they say, we are going
Speaker 4: to bring out more cost conscious offerings to meet the
Speaker 4: consumer where they're at. And that's a really key aspect
Speaker 4: of what a company needs to do. You need to
Speaker 4: understand what's going on. So we already have known that
Speaker 4: consumer has gotten more cost conscious. You're going over to
Speaker 4: the oil prices and looking at what's happening at the pump.
Speaker 4: We know that that's also starting to pressure the consumer.
Speaker 4: Interestingly enough, you know a lot of people are using
Speaker 4: the strong US dollar to travel internationally, so oil prices
Speaker 4: are actually not such a big component of the cost
Speaker 4: of travel in this you know, summer vacation series as
Speaker 4: they've been in the past. So I think that there's
Speaker 4: just a lot of dynamics going on in the market.
Speaker 4: But we look at it the fact that you've got
Speaker 4: a high end consumer supported by a strong stock market,
Speaker 4: and they're very much a driver. The middle income consumer
Speaker 4: has got a lot of good things going for them,
Speaker 4: and the lower end consumer we're paying attention to, but
Speaker 4: that strength in the job market is really positive for them.
Speaker 6: I'm glad you've got to travel because in the consumer
Speaker 6: confidence survey yesterday, one thing they did notice, even though
Speaker 6: we have seen some subdued sentiment, is that most respondents
Speaker 6: say they plan to take at least half We're saying
Speaker 6: they plan to take some sort of vacation the second half.
Speaker 4: Of the year.
Speaker 6: So does that still maintain this idea that Okay, we've
Speaker 6: seen disinflation, but services is going to be the.
Speaker 4: Most difficult services in terms of what the number involves.
Speaker 4: The biggest driver there is actually the housing market and
Speaker 4: what's happening on the rent side of things, and that's
Speaker 4: a very significant lagging indicator, and so I think that
Speaker 4: the indication there is that that number is going to
Speaker 4: come down. So we really need to pay attention to
Speaker 4: that second derivative impact. So we do think that there's
Speaker 4: less inflation there In terms of traveling abroad, it is
Speaker 4: the strength of the dollar that's really driving that. I mean,
Speaker 4: I'm heading over to London and to Portugal, and you
Speaker 4: look at the prices that we're going to be paying
Speaker 4: for accommodation, for trips and for travel, and it's significantly
Speaker 4: lower and that's a really big driver for a lot
Speaker 4: of these travel Before we let.
Speaker 1: You go, you said that the biggest risk is the
Speaker 1: election later this year. Is there are scenario in your
Speaker 1: mind about which presidential candidate could potentially be more disruptive
Speaker 1: to the market.
Speaker 4: I think the reason we talk about the fact that
Speaker 4: the presidential election is disruptive is the fact that there
Speaker 4: is no clear contender for the White House we can
Speaker 4: bank on, and you've had some data earlier to yesterday.
Speaker 4: So if I take a look at what we think
Speaker 4: is going to happen, each of them has a unique platform,
Speaker 4: and each of them has sectors of the market that
Speaker 4: will work if they're elected. And not work if they're not.
Speaker 4: And that's the uncertainty that we're talking about in terms
Speaker 4: of it's a difference in policy and the fact that
Speaker 4: you don't have a clear person that is going into
Speaker 4: the White House. As a result, what will happen is
Speaker 4: that all of the stocks will price in the fact
Speaker 4: that you're going to lose. Everyone likes to price in
Speaker 4: their downside. So we do think that once we get
Speaker 4: through the election, we'll have that kind of those games
Speaker 4: come back into the market that we see the risk.
Speaker 1: Katrina Dudley, thank you so much. Neil Dadda a macro
Speaker 1: renaissance research, a renaissance macro writing this, the Fed needs
Speaker 1: to get on with it. The rationale for cutting policy
Speaker 1: rates is quite strong. In short, unemployment is up, cor
Speaker 1: inflation is down. This is why a federal funds rate
Speaker 1: based on simple monetary policy rules that relate changes to
Speaker 1: unemployment and inflation to a policy rate, suggest cuts now,
Speaker 1: Neil joins is now, Neil, I love this idea that
Speaker 1: you're on the same page with Mike Wilson. After having
Speaker 1: quite a bit of divergence for a number of years.
Speaker 1: Why are you saying just get on with it, and
Speaker 1: why are you beating the drum right now saying as
Speaker 1: loud as you possibly can, you are making a mistake.
Speaker 3: Well, so I would say a couple of things. I mean,
Speaker 3: to me, it's just look at the realized data. You know,
Speaker 3: the unemployment rate is up. It's up about sixty basis
Speaker 3: points from it's low. It's so far it's been rising
Speaker 3: about thirty basis points every five months, which all LSEQL
Speaker 3: would imply that it would be around four point four
Speaker 3: percent per year end. That's higher than where the Fed
Speaker 3: currently thinks it's going to be. And if you look
Speaker 3: at core inflation, after some wobbling earlier this year, which
Speaker 3: I think the Fed is a little bit too concerned about,
Speaker 3: generally speaking, the trend in inflation is lower. Core PC
Speaker 3: inflation is likely to be around two and a half
Speaker 3: percent in May. And to me, it's thinking about which
Speaker 3: direction are both of these indicators going over the next
Speaker 3: six months. What's the risk for unemployment? Is it higher
Speaker 3: or lower from here? I mean, with initial job this
Speaker 3: claims rising and the hiring rate low, I think the
Speaker 3: risk is that the unemployment may rise a little bit,
Speaker 3: not a lot, but a little bit from here. And
Speaker 3: with respect to core inflation. There's still a significant amount
Speaker 3: of disinflation in the pipeline, and Powell's going around worrying
Speaker 3: about import prices. The dollars basically running it year today highs.
Speaker 3: That's going to put downward pressure on imported consumer good prices.
Speaker 3: We know that things like used car prices have more
Speaker 3: room to deflate over the summer. New car prices are
Speaker 3: already declining year over year, and auto adjacent service is
Speaker 3: like maintenance, repair, motor vehicle insurance, those will continue to
Speaker 3: come down.
Speaker 1: Well, I just want to break in. No, I just
Speaker 1: want to break in here because I understand all of
Speaker 1: these points, and I think that they're valid points, and
Speaker 1: I would love to talk extensively about each individual one,
Speaker 1: especially in light of the fact that inflation came in
Speaker 1: hotter than expected in Canada, came in hotter than expected
Speaker 1: in Australia, and some people are arguing that some of
Speaker 1: these indicators are going to reverse into next year, especially
Speaker 1: if rates come down. I'm thinking of housing in particular.
Speaker 1: How do you assuage those concerns, especially given the readings
Speaker 1: we got in Australia as well as Canada.
Speaker 3: Well, come on, Lisa, you're cherry picking some of the data.
Speaker 3: I mean this is after I mean Canada's cutting because
Speaker 3: the inflation numbers were coming in better than expected a
Speaker 3: few months ago, so we're going to I mean, look,
Speaker 3: I mean these numbers have in play. You have to
Speaker 3: you have to have a fundamental framework for why the
Speaker 3: data will move the way they do. You can't just
Speaker 3: be a slave to the high frequency numbers as they
Speaker 3: come in, because that's a recipe for making a mistake.
Speaker 3: You have to actually have a fundamental framework for how
Speaker 3: these things will operate. Where's the upward inflation surprise coming from.
Speaker 3: I mean, if the Fed's cutting, you know, it's interesting
Speaker 3: financial conditions people are making that argument, Well, if the
Speaker 3: fedies's financial conditions will ease, growth will pop and so forth.
Speaker 3: Look at mortgage purchase applications, Lisa, I mean, yeah, the
Speaker 3: fact that rates have been already coming down. If you
Speaker 3: look at ten year yeelds, they've generally been falling. What's
Speaker 3: that done for purchase applications? Well, not much of anything,
Speaker 3: not much of anything.
Speaker 1: The other thing is is that when you talk about
Speaker 1: cherry picking data, you could cherry pick data any which
Speaker 1: way and you could tell a different story. It's not
Speaker 1: as if there's one overarching narrative that dominates. So it
Speaker 1: seems like you've coalesced around one set of data that
Speaker 1: is more important to you than say, all of the
Speaker 1: perspectives that we're getting from say carnival with travel picking up,
Speaker 1: the idea of you know, certain, you know, retail sales
Speaker 1: picking up.
Speaker 3: Why only data that matters, Lisa is unemployment. You three unemployment,
Speaker 3: which is you know, in a wide body of FED
Speaker 3: research as these single best labor market statistics that we have.
Speaker 3: That was a comment from Janet Yellen back in twenty thirteen.
Speaker 3: Unemployment and core inflation, those are the indicators that are
Speaker 3: in the FEDS SCP. You want to talk about carnival, Okay,
Speaker 3: for every carnival there's a pool, Okay, a fewer home renovations.
Speaker 3: For every carnival there's a home depot. Okay. You know,
Speaker 3: So you know, it's sort of let's focus on what's
Speaker 3: in the Summary of Economic Projections. That's ultimately how you
Speaker 3: back out the Fed's reaction function in that In those
Speaker 3: projections are unemployment, core inflation. You know, you want to
Speaker 3: talk about economic growth, they look at real GDP as well.
Speaker 3: Tell me what is the I mean, the right tail
Speaker 3: for economic growth has basically been clipped. I don't really
Speaker 3: see much upside right now. I think growth is running
Speaker 3: at about two Maybe you can talk me into two
Speaker 3: and a half percent. I wouldn't be letting my hair
Speaker 3: on fire around recession, but there's not much upside risk.
Speaker 5: Well, they let me up into this because I think
Speaker 5: this discussion in itself just really hones in on the
Speaker 5: point that people can come away with different ideas. Whether
Speaker 5: or not you think it's the right one is a
Speaker 5: different discussion. But the FED is doing just that. Neil,
Speaker 5: I'm sure you would agree with Mary Daily about the
Speaker 5: inflection point of unemployment and of the labor market. But
Speaker 5: for every Daily there is a Bowman who says that
Speaker 5: inflation could go higher and that they could be hiking. So,
Speaker 5: in your view, if the FED is, for some of
Speaker 5: them setting rhetoric to yesterday's problem, when we do get cuts,
Speaker 5: how violent does it look?
Speaker 3: Well, I mean right now, if all we're doing is
Speaker 3: just waiting on a few more months of inflation data,
Speaker 3: then it won't look that violent at all. I mean,
Speaker 3: I think they could probably be talked into a cut
Speaker 3: in September. Someone like Bowman if the inflation data continue
Speaker 3: to sort of do what they did in May through
Speaker 3: the summer, then I think it'll be very difficult for
Speaker 3: even the hawks on the committee not to at least
Speaker 3: make a nod to cutting over the summer. And you know,
Speaker 3: folks like Governor Waller, I mean, all they're really doing,
Speaker 3: I think is just following last few months of data.
Speaker 3: That's kind of setting their tone. So if you know so,
Speaker 3: in other words, their rhetoric is somewhat conditional. So if
Speaker 3: the data changes and their rhetoric quickly changes, then I
Speaker 3: think things will be okay. Now, if that doesn't happen,
Speaker 3: it could be a problem. I will say that I
Speaker 3: do think that, you know, we'll get another soft June
Speaker 3: you know inflation report that'll be coming out I think
Speaker 3: in a couple of weeks time. And as that happens,
Speaker 3: you know, I think the doves on the committee are
Speaker 3: going to be fighting tooth and nail to make a
Speaker 3: more sort of meaningful signal at the July form CEA meeting.
Speaker 3: So that's kind of what I'm looking for.
Speaker 1: Neil Dota Vertisov's background Jason Drahe of UBS alongside Florini
Speaker 1: Rici of t RO Price Ballerina, I want to start
Speaker 1: with you. You had a call basically saying people are
Speaker 1: overly sanguine about how quickly the FED could cut rates.
Speaker 1: Why do you say that?
Speaker 7: Well, I think when I look at the US economy,
Speaker 7: I don't see a lot of reason for concern and
Speaker 7: for a sharp deceleration. And then on the inflation side,
Speaker 7: we have had some progress, but the FED chair has
Speaker 7: made it very clear that they have a different reaction
Speaker 7: function to say the ECB. For Powell, the first cut
Speaker 7: is consequential. They want to have confidence by the time
Speaker 7: they cut they will deliver a series of them rather
Speaker 7: than one and done and see how the economy plays out.
Speaker 7: So in this context, I don't see the rush. I
Speaker 7: see them as playing with this patient approach, getting more
Speaker 7: confidence on inflation and getting a clear signal that the
Speaker 7: economy is really decelerating, which I don't see right now
Speaker 7: in the data.
Speaker 1: Jason, do you agree?
Speaker 8: I would agree. I think the market's are pretty sanguine
Speaker 8: about it because the Fed's been able to wait because
Speaker 8: the economy is strong. You think about where we were
Speaker 8: in mid January. The market was pricing nearly seven cuts,
Speaker 8: including the first one in March. Now we are a
Speaker 8: little under two cuts for this year, first one maybe September,
Speaker 8: and the S andp's at fifteen percent, largely because growth
Speaker 8: expectations have improved. Earnings expectations have gone up. So if
Speaker 8: the Fed's waiting because growth is strong, that's not a
Speaker 8: bad thing for the markets. I think the path thereafter
Speaker 8: is kind of uncertain, But the timing I think is
Speaker 8: less relevant for the markets. If the economy is doing fine, the.
Speaker 5: Timing is less relevant for the markets. But what about
Speaker 5: the magnitude. We've been having this discussion really for the
Speaker 5: past week about a broadening out. What magnitude of cuts
Speaker 5: do you need for things like small caps for the
Speaker 5: more cyclical parts of the market to actually become attractive again.
Speaker 8: So it's interesting. I think the consensus views clearly among
Speaker 8: investors that we're going to have a soft landing. I
Speaker 8: think there's lower conviction that the soult flane's going to
Speaker 8: exist of solid growth, disinflation and if they can do
Speaker 8: insurance cuts. To think about what happened last November when
Speaker 8: inflation came lower. You had some FED officials out there
Speaker 8: talking about maybe we can proactively cut that's when small caps,
Speaker 8: that's when cyclicals really rally for about two months now,
Speaker 8: it's a little bit concerned, Well, maybe the Fed's going
Speaker 8: to come to the party a little too late and
Speaker 8: cut their rates. So I think the market needs to
Speaker 8: be comfortable that this whole sort of really benign macro
Speaker 8: conditions can play out to really want to rotate away
Speaker 8: from the quality growth tech talks that have done well
Speaker 8: and broad note and to look to these more cyclical
Speaker 8: parts of the market that probably will happened for a
Speaker 8: few months at this point.
Speaker 5: In time, Wene, I want to bring that idea to
Speaker 5: you that Jason mentioned, this idea that is the FED
Speaker 5: going to be late to the party, Because while for
Speaker 5: every dove like a daily that talks about the fact
Speaker 5: that the label market is termed, there is a bowman
Speaker 5: who talks about the fact that inflation could rear its
Speaker 5: head and that would mean potentially another hike. Is there
Speaker 5: a risk of a policy error at that point when
Speaker 5: you can still hear that type of language as there
Speaker 5: are other metrics that start to soften.
Speaker 7: I think this kind of language and talking about possibilities
Speaker 7: and risk scenarios is actually quite helpful. It does prepare
Speaker 7: investors to better understand the FED reaction function. I do
Speaker 7: think that the bar to say hiking interest rates again
Speaker 7: is pretty high. It doesn't it comes with accelerating inflation.
Speaker 7: But that would only happen is if the economy itself
Speaker 7: is resilient and growth is reactrating. We're having here persistent
Speaker 7: in inflation in the US economy because demand is resilient.
Speaker 7: I don't think we're seeing the kind of cost push
Speaker 7: wage inflation spiral. So I think this is important to understand.
Speaker 7: And then I hear a lot of talk about the
Speaker 7: unemployment rate and the recent increase. I would say that
Speaker 7: the unemployment rate is a very good summary statistic, it's
Speaker 7: very important, it's the FEDS target, and so on. But
Speaker 7: this debate, I think ignores the fact that there is
Speaker 7: some uncertainty about how reliable our household labor market data
Speaker 7: versus establishment data. Are we undercounting population growth and immigration
Speaker 7: growth in the US? And I think this will all
Speaker 7: feature into the Fed's reaction function and their decision making.
Speaker 1: You know, I think from both of you, you're hearing
Speaker 1: a lot of strength. You're looking at a lot of
Speaker 1: strength in the economy, And Jason, to that point, why
Speaker 1: aren't we seeing that conviction markets yes, we're seeing all
Speaker 1: time highs, but we've been talking about all week. It's
Speaker 1: really on the heels of a couple of names or
Speaker 1: one name. It's not any kind of convicted sort of
Speaker 1: under the hood rally.
Speaker 8: So I think if you look at market performance over
Speaker 8: the past say roughly six weeks, it's interesting because the
Speaker 8: tech sector is up for a lot, NASDAK is up
Speaker 8: as a result, S and P is up, but things
Speaker 8: like the small cap index, the Rustle one thousand value,
Speaker 8: they're actually flat lining a team. That's the signal that
Speaker 8: the market is kind of skeptical about the growth story,
Speaker 8: and as valuations go high, as the market kind of
Speaker 8: goes higher, there's an issue where like do you actually
Speaker 8: want to chase that performance because again, maybe the growth
Speaker 8: is low and we don't know. We've seen the data,
Speaker 8: especially for the past eight weeks economic data surprise to
Speaker 8: the downside. We don't know. Is this asimp toating sort
Speaker 8: of like kind of a self learning or is it
Speaker 8: going the other way, kind of falling off a cliff.
Speaker 8: We just don't know yet. I think investors a little
Speaker 8: bit cautious and believing like if we're doing this when
Speaker 8: in fact we could be doing that.
Speaker 6: Chris Harvey made a point that the reason why people
Speaker 6: are still though so bullish, is that no one has
Speaker 6: been penalized. Earlier this year, people were talking about six
Speaker 6: cuts that didn't happen. Yet you do see the stock
Speaker 6: market continue to make new all time highs. Is there
Speaker 6: something to be staid for that no one got hurt
Speaker 6: and continues to do well just basically continuing on these
Speaker 6: consensus traits.
Speaker 8: So I think I would kind of break it down
Speaker 8: to the macro fundamentals that we have an environment where
Speaker 8: growth should still be fine. You know, it's around two percent,
Speaker 8: inflation still looks like it's going to come down, and
Speaker 8: you have a feather that spuys towards cutting rates. If
Speaker 8: you give me that sort of recipe, is this is
Speaker 8: the macro environment that's generally supportive for risk assets, and
Speaker 8: that leaves out the whole AI story of like a
Speaker 8: kind of driving things higher. So if you have those
Speaker 8: conditions that you think still are generally directly supportive, it's
Speaker 8: hard to get sort of you know, kind of cheoe
Speaker 8: bears in the markets at this time. Now, the fact
Speaker 8: that markets are up, I think people are probably been
Speaker 8: underweight risk to some extent relative how well things have done.
Speaker 8: I think we talked about this earlier. It's hard to
Speaker 8: you know, it's just as hard to be underperformed. You know,
Speaker 8: when the markets are going higher is and when the
Speaker 8: markets are going lower and you have too much risk on.
Speaker 8: So I think that's forcing people to kind of state
Speaker 8: you just have to be invested. If you aren't, you're
Speaker 8: going to you know, I think you're going to be
Speaker 8: laging your performance.
Speaker 5: And if you try to gather some sort of narrative
Speaker 5: to drive the market on a macro level, you'll probably
Speaker 5: drive yourself crazy. As I think we all have blurring
Speaker 5: it to that point mentioned the craziness of the labor
Speaker 5: market data that you can look at a household survey
Speaker 5: that shows weakness, you can look at NFPs that still
Speaker 5: shows some strength. It is confusing. I wonder what you
Speaker 5: make of what you hear from corporates. Are you hearing
Speaker 5: any more clarity When you hear someone like a carnival
Speaker 5: say that people are still growing on cruises, or you
Speaker 5: hear pools saying that people don't want to build pools
Speaker 5: on their backyard in their backyard, or Target yesterday saying
Speaker 5: that they're going to cut even more prices on their goods.
Speaker 5: Are you getting any clear picture at this moment from
Speaker 5: corporates in their exposure to the consumer.
Speaker 7: So what I'm watching very closely is announcements of layoffs
Speaker 7: and how companies are discussing the tightness in the labor market.
Speaker 7: So what I see from the data is certainly a
Speaker 7: loosening in the labor market. Labor is not as hard
Speaker 7: to come by, and companies are not hiring at the
Speaker 7: fast space that they did in twenty two and part
Speaker 7: of twenty three. But at the same time, I'm not
Speaker 7: seeing widesprayd layoffs in all the survey data from the
Speaker 7: companies by also the Challenger Report and so on. So
Speaker 7: this suggests to me that we're not at the point
Speaker 7: where the labor market is about to sour, because if
Speaker 7: that happens, then we should start thinking how sustainable is
Speaker 7: this recovery. So I'm getting a good signal from that.
Speaker 7: And then on the consumer spending story, it's going to
Speaker 7: be complicated and complex. During this recovery, we are due
Speaker 7: for a correction in goods consumption and that's finally materializing.
Speaker 7: Mind you, it's happening maybe in a year or year
Speaker 7: and a half later than consensus first expected it, but
Speaker 7: there is still some pentap demand and resilience in services,
Speaker 7: and that's where carnival and cruise ships and overall consumer
Speaker 7: discretionary services spending comes in. So again it's not going
Speaker 7: to be a very clear picture, but understanding that this
Speaker 7: recovery is playing out in phases, and I think the
Speaker 7: service is strength that phase of service is comeback is.
Speaker 5: Not over yet.
Speaker 1: So this really is an interesting point given the fact
Speaker 1: that so much of good spending has actually derived typically
Speaker 1: from home home building and home moving and everything that
Speaker 1: comes around the housing industry, which has essentially been frozen
Speaker 1: in place for quite a while. We've been talking about
Speaker 1: this consistently for the past couple of weeks. It's very unclear, Jason,
Speaker 1: exactly what will happen when the Fed starts cutting rates.
Speaker 1: Does that lead to more volumes and more potential supply
Speaker 1: that leads the prices to go down, or do you
Speaker 1: have all of this pent up demand unleashed when mortgage
Speaker 1: rates go down just a little bit. Where do you
Speaker 1: stand on this?
Speaker 8: It's a great question because ultimately comes down to look
Speaker 8: someway how restrictive as mounet air policy, why have it
Speaker 8: not really kind of slowed the economy. And one will
Speaker 8: think if it hasn't really slowed the economy, then maybe
Speaker 8: cutting rates the same time wouldn't be that stimuli. But
Speaker 8: there's an argument to be made that the housing market
Speaker 8: we've seen when mortgage rates came down last fall, suddenly
Speaker 8: housing starts, home sales kind of picked up, that there's
Speaker 8: kind of this pent up demand. I'd also think even
Speaker 8: for a lot of small businesses that were lost on
Speaker 8: bank lending, you know, they're boring at higher rates, and
Speaker 8: if you can go to the public markets and issue
Speaker 8: do at really low rates, that if those rates come down,
Speaker 8: a lot of sort of holding off on making new
Speaker 8: investment that could ramp up. So I think the Fed's
Speaker 8: back of their mind, or probably front of their mind,
Speaker 8: is if we cut rates, is it something where the
Speaker 8: economic activity can re accelerate, you know, pretty quickly and
Speaker 8: then sort of finding financial conditions ease. We just don't know.
Speaker 8: I think it's kind of an open question, and the
Speaker 8: argument that it may be not be that similar. I
Speaker 8: think there's a risk that it actually could actually really
Speaker 8: kind of ramp up activity enough that it just creates inflation.
Speaker 8: Concerns again, just to.
Speaker 5: Apply that to what you buy. Does that mean that
Speaker 5: even if the Fed is cutting the impetus for bond yields,
Speaker 5: then to move down isn't a straightforward Well.
Speaker 8: If they're cutting ins and being similar, I think the
Speaker 8: risk is that the tenure instead of kind of going lower,
Speaker 8: which is a typical pattern, the FED cuts rates and
Speaker 8: you see the tenure goes lower. That's kind of part
Speaker 8: of our thesis. The risk is that actually that's not
Speaker 8: the case, that they go lower almost reactively, and then
Speaker 8: turns that economic acuity is and slow and then we're
Speaker 8: six months, at twelve months on the line eu Reson,
Speaker 8: we're still growing at two two and a half percent,
Speaker 8: and maybe the tenure should be at four and a
Speaker 8: half percent, not you know, below four percent. There's definitely
Speaker 8: risk of that happening.
Speaker 6: Welrina, you have a lot of notes regarding the housing
Speaker 6: market right now, the inventory for the housing market. If
Speaker 6: we could just go back to that, what do you
Speaker 6: think will be the endgame if the Fed only I mean,
Speaker 6: if they cut, it's only going to be what maybe
Speaker 6: twenty five base points fifty base points the entire year?
Speaker 6: Is that really enough for people to want to get
Speaker 6: in that have been waiting on the sidelines because they're
Speaker 6: so concerned about mortgage rates.
Speaker 7: So here's how I think about it. First of all,
Speaker 7: I agree with the point that there is pentap demand
Speaker 7: for housing. We started this cutting this hiking cycle with
Speaker 7: very tight inventory, and that has only gotten words because
Speaker 7: builders are not starting new homes. We have the mortgage locks,
Speaker 7: so people are not bringing their existing homes into the market,
Speaker 7: so inventory has become even lower. I think the question
Speaker 7: here is even what we know from the FAD is
Speaker 7: they want to cut and start a series of cuts,
Speaker 7: and I think what happens when they deliver the first
Speaker 7: cut is that the ten year will respond This is
Speaker 7: the risk and will price even more cuts that maybe
Speaker 7: the FED will eventually be able to deliver. And then
Speaker 7: this loosening in financial condition and particularly in interest rates
Speaker 7: could give the housing market that leg up and release
Speaker 7: that pent up demand. It's not going to be about
Speaker 7: the just one cut or two. It's going to be
Speaker 7: about what the ten year prices and what the market
Speaker 7: price is for the FED. That's the real risk here,
Speaker 7: and if that happens, we're expecting a deceleration in shelter
Speaker 7: CPI and PC, and that's really fundamental to bringing inflation
Speaker 7: down to two percent. And then the next leg of
Speaker 7: that risk playing out is that the progress that we
Speaker 7: expect on shelter inflation is undermined.
Speaker 1: Well. Max Neil data earlier this morning basically said stop
Speaker 1: it with all of this that basically, if you look
Speaker 1: at the data and you stop cherry picking, as he
Speaker 1: told me in so Many Wars, then you'll actually see
Speaker 1: that it's important to do an adjustment because inflation is
Speaker 1: coming down and growth is slowing, and so if the
Speaker 1: FED doesn't cut now, they're going to risk having some
Speaker 1: sort of FED error. Do you agree with that, Lorena?
Speaker 7: I think it's very nuance right now. It's more nuance
Speaker 7: than that. I do feel like it's terry picking season
Speaker 7: at Bloomberg Surveilliance this morning. But it's important to understand
Speaker 7: that in this complex environment, the patient approach that the
Speaker 7: FED is delivering is the right one. We do have
Speaker 7: a lot of firepower should the economy decelerate. But I
Speaker 7: also am of the opinion that that first cut and
Speaker 7: the decision to start easing, it's very consequential because of
Speaker 7: how the market will price it. Just remember in January
Speaker 7: we were pricing six to seven cuts, and so I
Speaker 7: not pessimistic on the economy. If you think that the
Speaker 7: FED will deliver two maybe three cuts, that means that
Speaker 7: other people's baseline view is not for a sharp recession.
Speaker 7: And then in this scenario, just having more confidence on
Speaker 7: the progress on inflation, it is right waiting before you
Speaker 7: deliver on that easing and monetary policy.
Speaker 1: Jason, is it cherry picking here on surveillance or just
Speaker 1: globally generally right now, because that's all the people are
Speaker 1: left with.
Speaker 8: I think it's more like roar shock tests, like you
Speaker 8: have sort of preconceived notions and you look at the
Speaker 8: data and you sort of interpret in the way you want.
Speaker 8: If you are optimistic, you can you tell an optimistic story.
Speaker 8: If you more pessimistic, you can, you know, tell that story.
Speaker 8: I think that's that's really because I've had, you know,
Speaker 8: smart people on both sides say what Neil would say,
Speaker 8: that the faces can be too late. Now that people
Speaker 8: say it's crazy for the FED you even thinking about
Speaker 8: cutting the colomies, not slowing down, and this is kind
Speaker 8: of the reality we're dealing with. Still data that's noisy, distorted,
Speaker 8: kind of you know from the pandemic. I must focus
Speaker 8: on Friday when week at the PC data, not the
Speaker 8: inflation piece, but the consumption expenditures, because we see goods
Speaker 8: going lower. But at the end of May we set
Speaker 8: record travel for like kind of going to the airport,
Speaker 8: so our people still stay on services, not strong versus goods.
Speaker 8: So the picture is really kind of fuzzy. And then
Speaker 8: again you can sort of draw your own conclusions and
Speaker 8: that that's a challenge I think for the FED but
Speaker 8: also for us. But as long as it's not related
Speaker 8: to reading, it's sort of still I think kind of generally.
Speaker 1: Riscond, we like Cherry's Jason Drejo of ubs Blory nor
Speaker 1: your Urici of t rope Price. Both of you thank
Speaker 1: you so much for being with us.
Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best
Speaker 2: in markets, economics, angiopolitics. You can watch the show live
Speaker 2: on Bloomberg TV weekday mornings from six am to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business Amp.