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Speaker 1: A growing list of companies are warning of a slowdown,
Speaker 1: Mariot cutting its full year outlook, expecting weaker demand in
Speaker 1: North America and China. Mariot International President and CEO Tony
Speaker 1: Kapawano joins us now, Tony, always wonderful.
Speaker 3: To see you.
Speaker 1: Thank you for being in the studio. You know, I
Speaker 1: want to start. I feel like the US consumer and
Speaker 1: the Chinese consumer are two completely different stories. So I
Speaker 1: want to start with the US in terms of the
Speaker 1: greater weakness. Is it across the board or is it
Speaker 1: this bifurcation that we just keep seeing higher end still
Speaker 1: spending going nuts, lower end really really crimped.
Speaker 4: Well, there is certainly a bifurcation across consumers. The lower
Speaker 4: end consumer is feeling the pressure of economic headwinds. In fact,
Speaker 4: while we don't operate in the economy tier, in the
Speaker 4: economy tier, they actually had negative revenue per available growth
Speaker 4: in the second quarter. But as you move up the
Speaker 4: chain scales, we are seeing continued strong RevPAR growth really
Speaker 4: across segments and across geographies. In fact, the strongest growth
Speaker 4: we saw in Q two was in the luxury segment,
Speaker 4: and so that luxury customer continues to spend, continues to
Speaker 4: have confidence, and continues to prioritize spending on travel and
Speaker 4: experiences versus hard goods.
Speaker 1: Can you give a sense of in the non luxury
Speaker 1: segment where consumers are pushing back what they're not willing
Speaker 1: to spend on in the same way that they were,
Speaker 1: say a year ago.
Speaker 4: Yes, So it's really interesting if you look at our
Speaker 4: Q two numbers, with the exception of Greater China, which
Speaker 4: I know we'll talk about, we saw strong growth across
Speaker 4: every geography and across all three segments we operate in, business, transient, group,
Speaker 4: and leisure. So it's not that we're seeing really a
Speaker 4: pullback and travel. We are seeing a little bit of
Speaker 4: a level of caution in some of the related discretionary spend.
Speaker 4: So when you look across most of the markets we operate,
Speaker 4: food and beverage spending for instance, was down a bit.
Speaker 4: So those consumers, it appears, are still prioritizing travel, but
Speaker 4: maybe they're being a little more judicious on their spending
Speaker 4: as they travel.
Speaker 5: Well, Tony, you've been with Marriott for a few cycles,
Speaker 5: joining in nineteen ninety five. I wonder when you look
Speaker 5: at the consumer now and some of that concern, that
Speaker 5: pickiness of what you're seeing, how similar or how far
Speaker 5: away does it look from past downturns.
Speaker 4: I think well, from a macro perspective, not terribly dissimilar
Speaker 4: other than the trend I just mentioned to Lisa, which
Speaker 4: is we have great credit card partners in American Express
Speaker 4: and JP Morgan Chase, and so we have really rich
Speaker 4: consumer spending data to evaluate and pre pandemic. You saw
Speaker 4: some of the younger demographics starting that shift away from
Speaker 4: purchase of hard goods towards experiences post pandemic. It really
Speaker 4: appears to be across demographics, and that's a trend that
Speaker 4: seems to have the legs to endure long beyond the
Speaker 4: end of the pandemic. So I think that's a distinction
Speaker 4: for Marriott. We're a different company than we were in
Speaker 4: different cycles. A higher percentage of our businesses franchise versus managed,
Speaker 4: so you don't have that incentive management fee volatility. Higher
Speaker 4: percentage of our revenue comes from non RevPAR related sources,
Speaker 4: like our branded residential business, like our branded credit card business.
Speaker 4: We're much more international than we were in previous cycles.
Speaker 4: But there are certainly some similarities. And you have yachts now,
Speaker 4: now we have yachts Ilma. Our second yacht launches next month.
Speaker 5: I'm just curious about this idea of investing in luxury.
Speaker 5: How much of this do you say this is just
Speaker 5: of the moment the split we're seeing, or we want
Speaker 5: to buy more boats, we want to have Marriott private
Speaker 5: jets in the sky. What does it mean to either
Speaker 5: just continue on the trend or double down on it.
Speaker 4: Well, the good news is we're not buying any of it.
Speaker 4: You know, we're an asset light model, so we have
Speaker 4: terrific partners who are investing meaningfully in luxury, and we
Speaker 4: want to lengthen the lead that we enjoy in luxury.
Speaker 4: We've got the industry's largest luxury footprint, we have the
Speaker 4: industry's largest luxury pipeline, we have the industry's largest luxury
Speaker 4: branded residential business, and yacht is just a natural extension
Speaker 4: of that. We find that luxury customer wants to spend more,
Speaker 4: higher and higher percentage of their travel wallet with the
Speaker 4: brands that they really trust. And when we look again,
Speaker 4: it's more anecdotal because we've only been in the water
Speaker 4: for two years, but more than fifty percent of the
Speaker 4: passengers have never cruised before, and so I think they
Speaker 4: look at that rich Carlton brand as a little bit
Speaker 4: of a housekeeping seal of approval. And more than seventy
Speaker 4: five percent of the passengers we've had our Bonvoyd members,
Speaker 4: and so that two hundred and ten million member loyalty
Speaker 4: platform really gives us a channel to talk to them
Speaker 4: about our expanded offerings before we move.
Speaker 6: On to internationals. So I want to ask you about
Speaker 6: the Chinese consumer. I want to ask you about Hawaii,
Speaker 6: and I know you have a lot of concern. You
Speaker 6: put a lot of effort into rebuilding what was going
Speaker 6: on in Maui after the wildfires. Is tourism coming back?
Speaker 7: It is?
Speaker 4: You know, we just passed the one year anniversary of
Speaker 4: those horrific fires in Lahina. I had my whole leadership
Speaker 4: team in Maui just last month. The great news is
Speaker 4: the Army Corps of Engineers is to be applauded. The
Speaker 4: progress they've made in cleaning up Leahina preparing Lahina for
Speaker 4: redevelopment is really encouraging. We had the commander who's running
Speaker 4: the effort give us a tour of Lahina. There's a
Speaker 4: house under construction, which was really important symbolically. But the
Speaker 4: aloha spirit of Hawaii is as strong as.
Speaker 8: It's ever been.
Speaker 4: Our people are passionate, they're resilient. They're excited to see
Speaker 4: tourists coming back. But they're still operating at occupancies in
Speaker 4: the sixty percent range. And so if your viewers hear
Speaker 4: nothing else, go to Hawaii. They need the business. It's
Speaker 4: as attractive as a destination as it's ever been.
Speaker 6: So who is traveling right now? We spoke to the
Speaker 6: four season CEO yesterday who said the Americans are out
Speaker 6: there and they're traveling, they're seeing weakness with the Chinese consumer.
Speaker 6: Is that similarly what you're seeing.
Speaker 4: Yeah, although interestingly, the high end Chinese consumer is traveling
Speaker 4: a great deal, but they're not traveling in China. So
Speaker 4: when we reported our second quarter earnings, the highest sub
Speaker 4: market we had in terms of year over year RevPAR
Speaker 4: was Japan. RevPAR in Japan was up twenty one percent,
Speaker 4: and a lot of that was driven, certainly by American travelers,
Speaker 4: but by high end Chinese travelers.
Speaker 6: Have also how much is that driven by the weakness
Speaker 6: we've seen in the end and consumers travelers take.
Speaker 4: A time on that that's the case, but I think
Speaker 4: that outbound Chinese traveler was locked down in a really
Speaker 4: significant way. And you've seen the Chinese government create visa
Speaker 4: free travel across the APEC region, and so we're seeing
Speaker 4: strong outbound Chinese travel in Japan, Thailand, those sorts of destinations.
Speaker 1: As an American company based in America.
Speaker 9: Does it give you pause to keep.
Speaker 1: The footprint in the size that you'd have in China
Speaker 1: given some of the overlay of tensions between the two countries,
Speaker 1: as well as the lack of appetite to go beyond
Speaker 1: that Apec region by Chinese wealthy travelers.
Speaker 4: Well, I have an expectation eventually they will come back.
Speaker 4: If you think about pre pandemic, the growing middle class
Speaker 4: in China and their appetite to explore the world was
Speaker 4: one of the things that drove a lot of optimism
Speaker 4: across our sector, and I think that will come back eventually.
Speaker 4: To your first question, We've got a little more than
Speaker 4: five hundred hotels in China today, nearly the same number
Speaker 4: in our pipeline, and almost the entirety of that portfolio
Speaker 4: is owned by Chinainese companies, and so I'm not sure
Speaker 4: we're necessarily viewed as an American company in China because
Speaker 4: the assets are owned by the Chinese and they love
Speaker 4: global brands like Mariott and so of course our business
Speaker 4: thrives in times of political stability, and when you have
Speaker 4: ratcheting up tension between the US and China, that's not
Speaker 4: great for travel. But our demand levels in China are
Speaker 4: back to pre pandemic levels. The reason we reported such
Speaker 4: weakness in RevPAR is because a rate and rate is
Speaker 4: soft one because a lot of the high end Chinese
Speaker 4: consumers are leaving China to travel across the region, and
Speaker 4: the booking window because of weak consumer confidence in China,
Speaker 4: believe it or not, is under three days, and so
Speaker 4: they're making those decisions very close to travel for in
Speaker 4: country travel.
Speaker 1: So just to tie this all together, I know that
Speaker 1: Mariett had a subdued kind of outlook going forward in
Speaker 1: terms of how quickly you can see some normalization or
Speaker 1: at least reversal of what we've seen, particularly in the
Speaker 1: lower end consumer. How deep do you think some of
Speaker 1: the weakness goes the reluctance? I mean, is this just
Speaker 1: a matter of economic uncertainty or is this something that
Speaker 1: you're seeing escalate in a more significant way.
Speaker 4: Well, I think your term normalization is the right one. Remember,
Speaker 4: we saw our business drop by more than ninety percent
Speaker 4: in the early days of the pandemic. So for the
Speaker 4: last couple of years, you've seen demand come roaring back,
Speaker 4: the benefit of those really favorable year over year comparisons
Speaker 4: has faded, and we're settling into a more normalized demand environment.
Speaker 4: Weakness in the consumer obviously hits our business. We operate
Speaker 4: in a cyclical industry. But I think everybody's waiting for
Speaker 4: September and if the rate cuts that are expected materialize,
Speaker 4: that'll be a boost for the consumer. Obviously, I'm going
Speaker 4: to be watching you at eight thirty to see what
Speaker 4: the inflation numbers look like. But all of that factors
Speaker 4: into that mindset of the consumer. But the thing that
Speaker 4: gives me confidence beyond the next quarter or two is
Speaker 4: this almost sociological shift we've seen with this appetite for travel,
Speaker 4: and I think that bodes really well for our business.
Speaker 1: Tony Copano, thank you so much. Always wonderful to have
Speaker 1: you on the show. Marriott International, President and Chief executive Officer,
Speaker 1: Tony Copano, thank you. Joining us right now, we've got
Speaker 1: David Kelly of JP Morgan alongside Steve Rshudo of Mizuho. David,
Speaker 1: thank you for being on with us. I want to
Speaker 1: start with you, what's your action to this.
Speaker 9: I think it's pretty good news because if you look
Speaker 9: at what's you know, first of all, it was slightly
Speaker 9: better than consensus in the headline, I mean very slightly.
Speaker 9: But if you look at what's still holding CPI up.
Speaker 9: We got a one point two percent increase in auto insurance,
Speaker 9: so it's still that an auto insurance anomaly there. And
Speaker 9: we did, you know, we did see a five tenths
Speaker 9: of a percent increase in rents, but that's showing the
Speaker 9: rental numbers up over five percent year of year, and
Speaker 9: owner's equivalent rent of over five percent year over year.
Speaker 9: Now we know that that is somewhat misleading, and I
Speaker 9: think the auto insurance number is also somewhat misleading.
Speaker 3: But everywhere else inflation is nowhere to be seen.
Speaker 8: And I think that's really the important point.
Speaker 9: Where in the actual transactions markets of the economy, where
Speaker 9: people are sort of bidding and asking for in terms.
Speaker 3: Of prices, inflation is disappearing.
Speaker 9: So I think that overall this is this very much
Speaker 9: confirms the idea that inflation is heading down. I think
Speaker 9: over the next two months we're going to have some
Speaker 9: relatively easy comps, so I think that by September de
Speaker 9: BED may actually hit it's two percent year over year
Speaker 9: number on consumption to flater inflation. You know, we will
Speaker 9: see what happens, But overall, I think this is further
Speaker 9: confirmation that inflation is gradually whittling away.
Speaker 1: So inflation problem dead. Steve Rashuddo, your.
Speaker 7: Take complete opposite.
Speaker 8: Few.
Speaker 10: I don't think you should ignore things like what's happening
Speaker 10: in insurance rates. I don't think you should ignore things
Speaker 10: like what's happening in the housing market. I think what
Speaker 10: you're really looking at is an index. You take the
Speaker 10: index for what it is. You don't parse through the components,
Speaker 10: throughout what you like. You can keep only what throwout. Well,
Speaker 10: you don't like keeping only what you like. This is
Speaker 10: a problem that we have over and over again. This
Speaker 10: is a problem we have with people who want to
Speaker 10: look at a particular component, like an unemployment rate or
Speaker 10: a yield curve and make macroeconomic forecast out of it.
Speaker 10: The reality is it's a little bit like chicken little
Speaker 10: getting hit in the head with an eggcorn and saying
Speaker 10: the sky is falling. The reality is these are individual components,
Speaker 10: but they're individual components.
Speaker 7: Of a larger aggregate set of data.
Speaker 10: And that aggregate set of data is telling you, A,
Speaker 10: the unemployment rate is still low. B.
Speaker 7: Wage gains are still happening in the economy.
Speaker 10: Inflation is not near the FEDS target, it's still one
Speaker 10: percentage point above it at the CPI level, at the.
Speaker 7: Pc level it is lower.
Speaker 10: And it's telling me that we have an economy that
Speaker 10: is still very, very healthy.
Speaker 7: So again they want to cut rates.
Speaker 10: They're probably going to cut rates in September because they
Speaker 10: opened the door wide enough to bring a mac truck
Speaker 10: through it, or should bring the Queen Mary through it,
Speaker 10: and then net result is they'll get what they want.
Speaker 10: But at the end of the day, is it going
Speaker 10: to have much macroeconomic effect.
Speaker 7: One way or the other.
Speaker 10: To be honest with you, it's going to affect financial market.
Speaker 10: It's much more show than the underlying bacro economic environment day.
Speaker 5: What I just want to give you a chance to
Speaker 5: respond to that.
Speaker 9: Yeah, well, you know, Steve and I have just got
Speaker 9: a slightly different view of this.
Speaker 8: I don't think this is an inflation area economy.
Speaker 9: I realize that labor market's tight, even with the unemployer
Speaker 9: rate up at four point three percent, But what's remarkable
Speaker 9: is how much wage growth has fallen, very steadily, all
Speaker 9: the ways since March of twenty twenty two. What that
Speaker 9: tells me is it doesn't matter how tight the labor
Speaker 9: market is. American workers are just not demanding huge wage increases.
Speaker 8: They're just not doing it.
Speaker 9: We're not seeing massive numbers of strikes, we're not seeing
Speaker 9: massive industrial action to try and get wage increases.
Speaker 8: Wages are still rising more than inflation.
Speaker 9: But if you look at core goods, if you look
Speaker 9: at food prices, you look.
Speaker 8: At energy prices.
Speaker 9: None of it shows inflation picking up, So we're really
Speaker 9: we're heading back towards two percent inflation is it's cooling slowly.
Speaker 8: But I think the greater risk right now is a fit.
Speaker 8: You know.
Speaker 3: I think the economy is in a soft landing. It's
Speaker 3: in a good place.
Speaker 9: But if I'm in the Federal Reserve, I want to
Speaker 9: try to get back to normal year because the risk
Speaker 9: of recession, I think, is greater than the risk of
Speaker 9: any resurgence in inflation.
Speaker 5: David, not that this is a competition between you and Steve,
Speaker 5: but if the market had to vote, it would probably
Speaker 5: be voting with Steve. Right now, front end fields are
Speaker 5: moving higher by about five basis points. You're looking at
Speaker 5: equities giving up on their gains except for small caps.
Speaker 5: Not to me, seems like a market that is saying,
Speaker 5: hang on, maybe the Fed can't cut as much as
Speaker 5: we thought it was going to.
Speaker 7: What do you make of that reaction, I think.
Speaker 9: Well, the thing is that I do work the details
Speaker 9: and all these numbers, and I was kind of surprised
Speaker 9: that consensus was as optimistic as it was in inflation.
Speaker 9: But I think people are looking for at this stage
Speaker 9: they want. Okay, if we get a negative surprise and inflation,
Speaker 9: then then maybe we can price in some more FED
Speaker 9: rate cuts. If we get something close to expectations, then
Speaker 9: we'll sort of sell the news.
Speaker 8: And I think that's what's probably going on in the
Speaker 8: bond market.
Speaker 9: But it doesn't change my view that things are weakening
Speaker 9: here on the inflation side. And the really important thing
Speaker 9: then is where is the economy looking when we get
Speaker 9: to September, because we'll get another inflation report, but important
Speaker 9: we're going to get a job support for the month
Speaker 9: of August, and that's going to be really crucial here
Speaker 9: because if it looks like the economy is solventing too much.
Speaker 9: I think the FED can look at these inflation numbers,
Speaker 9: they can study them, they can be confident they're going
Speaker 9: to head towards two percent, but they don't want to
Speaker 9: be responsible for coding rates too high for too long
Speaker 9: and helping trigger more economic weakness, and so I think
Speaker 9: they'll be looking very closely what's going on in the
Speaker 9: labor markets and on the demand side of the economy.
Speaker 6: So Steve David says the risk of recession at this
Speaker 6: moment is greater where we are than the risk of
Speaker 6: inflation reacceleration. Do you see that completely different?
Speaker 10: Yeah, I don't see a real risk of a recession whatsoever.
Speaker 6: When you see risk of reacceleration of inflation if you wind.
Speaker 10: Up with an accelerated economy, the answer is yes, and
Speaker 10: that I think is the risk in this scenario. This
Speaker 10: economy really hasn't slowed much. You look at the GDP numbers. Yeah,
Speaker 10: we slowed from last year's three point three percent number,
Speaker 10: but we continue to exceed expectations in terms of where
Speaker 10: we're going in the second quarter numbers and what we're
Speaker 10: looking like eventually. In terms of where we are in
Speaker 10: the current quarter. The Atlanta fad now casters are at
Speaker 10: very very high rates of growth, and this becomes an
Speaker 10: ongoing problem is that you do run the risk of
Speaker 10: a domestic cyclical story versus a global deflation story. And
Speaker 10: this really is the end result debate we were talking
Speaker 10: about it earlier. This is the discussion deflation versus cyclical
Speaker 10: inflation globally versus domestically. Where do we pan out on this?
Speaker 10: David's right, Inflation has been coming down slowly. It's coming
Speaker 10: down slowly primarily because there is this real battle going
Speaker 10: on between these two forces. And the problem I see
Speaker 10: is if you start backing away from the pressure that's
Speaker 10: allowing you to achieve your target, you might wind up
Speaker 10: creating an environment where you stop improvement towards your target.
Speaker 6: But what would you say to corporate CEOs that continuously
Speaker 6: say they are seeing this slow down from consumers. They
Speaker 6: do see consumers differring big spending.
Speaker 10: Again, after an environment of three point three percent growth,
Speaker 10: which is a one percentage point above trend, you're going
Speaker 10: to see that inflection point.
Speaker 7: And that's real inflection point.
Speaker 10: By the same token, you have services where spending is
Speaker 10: doing exceptionally well, and I think that becomes part of
Speaker 10: the problem.
Speaker 7: Again, it's the goods versus the services side of the equation.
Speaker 10: Services are doing extremely well. You're seeing that some of
Speaker 10: the components that people want to throw out of the
Speaker 10: CPI report. The reality is its services that matter domestically,
Speaker 10: it's goods that matter globally. Globally, it's a deflation story. Domestically,
Speaker 10: it's a six inflation story. The currency sits in between
Speaker 10: the two, and where the currency goes from here will
Speaker 10: be critical. If we get back to one hundred on
Speaker 10: your DXY measure from having been as high as what one.
Speaker 7: Thirteen, one sixteen.
Speaker 10: That's a huge depreciation in the currency, and you could
Speaker 10: start to see some of these benefits on the good
Speaker 10: side of the inflation dissipate at the same time that
Speaker 10: you may see a little weakening in the service side
Speaker 10: of the inflation, and you wind them stuck at three
Speaker 10: percent inflation. Now, if the Fed's willing to be stuck
Speaker 10: at three percent inflation, fine, bonds have to adjust to that.
Speaker 1: David, we'll let you respond in just one second. I
Speaker 1: just want to, if you are just joining us, give
Speaker 1: you a sense of where we are right now. CPI
Speaker 1: month of a month coming bang in line, as Mike
Speaker 1: was saying, with forecasters expectations zero point two percent, up
Speaker 1: from negative zero point one percent in the prior month.
Speaker 1: Across the board, X food and Energy zero point two
Speaker 1: percent in line, CPI year over year coming in at
Speaker 1: two point nine percent just to touch below the expectation,
Speaker 1: and X food and Energy three point two percent bang
Speaker 1: in line. All of this really suggesting forecasters are getting
Speaker 1: it right. Mike has been looking through the details, the
Speaker 1: line items that we can debate whether they matter or not.
Speaker 1: What are you finding in terms of interesting nuggets.
Speaker 11: Well, I think in sure part of this plays into
Speaker 11: the whole political campaign season that we're in now. Insurance
Speaker 11: prices are very mixed. We do see motor vehicle insurance
Speaker 11: prices going up significantly in the You know, if you
Speaker 11: look at X formerly known as Twitter, I think you
Speaker 11: said yesterday a lot of complaints about that. But homeowner's
Speaker 11: insurance is flat on the month, Medical insurance down just
Speaker 11: a little little bit, so it's not a universal situation.
Speaker 11: Airfares were down by one point six percent, so if
Speaker 11: you're traveling, you're going to notice that. And overall it
Speaker 11: is housing that has pushed this up. Ninety percent of
Speaker 11: it was the four tenths rise in owner's equivalent rent
Speaker 11: and shelter and that the FED can't do anything about.
Speaker 11: So they're going to have to decide. You know, they'll
Speaker 11: go back to Poul's ex shelter measure and say things
Speaker 11: are getting better. One other political thing, and I know
Speaker 11: Anne Marie will appreciate this. Bacon price is down one
Speaker 11: point one percent, so that was I guess a big issue.
Speaker 11: On one of the candidate's public appearances.
Speaker 1: Bacon was on your Bengo card.
Speaker 5: Here you go, thank you.
Speaker 1: So much Mike, David Kelly, and Steve Rstudo is still
Speaker 1: with us. David, I want to go back to you,
Speaker 1: and there is this real question about the line items
Speaker 1: and how much they actually matter versus just the overall
Speaker 1: aggregate index pointing to a certain type of scenario. What
Speaker 1: gives you confidence that we are not at risk of
Speaker 1: reacceleration at a time when, as Steve says, the dollar
Speaker 1: is actually a weakening and as the Fed is likely
Speaker 1: to cut weakening even still, well, you know, a fooling dollar.
Speaker 9: Although frankly, it would be a good idea if the
Speaker 9: dollar came down in the long world, it wouldn't you know.
Speaker 8: I think the dollar has been too high for too long.
Speaker 8: But that would add a little bit to inflation. But
Speaker 8: this is not an inflationary economy.
Speaker 9: Let's just pick up an airline prices, because I think
Speaker 9: that it sort of exemplifies the exact nature of the
Speaker 9: US economy right now. Airline prices are down two point
Speaker 9: eight percent a year over year, but if you look
Speaker 9: at the number of people going through TSA checkpoints, it's
Speaker 9: up over five percent year over year.
Speaker 8: It is at an all time record high. Americans have
Speaker 8: never flown more than they are flying today.
Speaker 9: The planes are all packed, and yet the airlines can't
Speaker 9: actually push up the prices year over year, they have
Speaker 9: to push them down their prices two point eight percent.
Speaker 9: So you know, I know Steve is a little more
Speaker 9: worried about inflation going up. I'm a little bit more
Speaker 9: worried about the economy is sewing down. As long as
Speaker 9: we disagree in that way, the truth is the economy
Speaker 9: is just doing great here. What we're seeing is steady
Speaker 9: low inflationary growth, inflation gradually coming down, and hopefully the
Speaker 9: economy and voids recession. I do think the Federal Reserve
Speaker 9: ought to normalize rates to try to remove that risk,
Speaker 9: because I think they are distorting the economy by keeping
Speaker 9: rates a little too high at the short end or
Speaker 9: where the economy of financial markets are.
Speaker 3: But overall, this economy is in a pretty good place.
Speaker 9: And I hope that Steve and I are similarly disagreeing
Speaker 9: as vehemently in a few months time, because that'll probably
Speaker 9: say the economy is straight down the middle doing fine.
Speaker 5: I mean, you hear that from the Fed to be
Speaker 5: fair as well, this idea that the economy is doing
Speaker 5: fine and they have time and that means that they
Speaker 5: can just wait for more data. Steve, you look at
Speaker 5: this data is the weight over Do they have everything
Speaker 5: they need to cut?
Speaker 10: You know, if they could get a unanimous agreement, they
Speaker 10: will cut interest rates yet and I think you would
Speaker 10: need something on the labor market to do. And I think,
Speaker 10: you know we're arguing today over the CPI number. I
Speaker 10: think they've already taken that out of the equation. I
Speaker 10: think it's all about the employment numbers, and I you know,
Speaker 10: the claims numbers. Will see what the retail sales numbers
Speaker 10: give us. Tomorrow, We'll see what the claims numbers give us.
Speaker 10: People aren't getting fired. What's happening in the unemployment rate
Speaker 10: is people are coming back into the labor force. They
Speaker 10: finally used up all that excess savings that most of
Speaker 10: my colleagues on the street thought they had used up,
Speaker 10: you know, a year.
Speaker 7: Ago, and hadn't used up.
Speaker 10: The reality of the situation is the transition that's taking
Speaker 10: place from a very abnormal recovery period to an expansionary
Speaker 10: period is going to be volatile, and reading through all
Speaker 10: the tea leaves, trying to look at one or two
Speaker 10: indicators makes an enormous amount of mistakes. What's important is
Speaker 10: the breath of the data within the payroll employment report.
Speaker 10: It's like the breath of the data within the Jiltz data.
Speaker 10: And I'm not a big Jelts fan. It's the overall
Speaker 10: aggregate interpretation of the data and this is what the
Speaker 10: Chairman's trying to bring out. But by the same token,
Speaker 10: he also then wants to hang his hat on a
Speaker 10: particular component within a report to say, oh, well, this
Speaker 10: is what I'm looking at.
Speaker 7: But the reality is you.
Speaker 10: Can't have it both ways, and that's what they're trying
Speaker 10: to do, and I think that's what the markets are
Speaker 10: trying to do. You know, they want the FED to
Speaker 10: cut rates, and they want FED to cut rates a lot,
Speaker 10: but we don't want the FED to cut rates too
Speaker 10: quickly that people begin worrying about a recessionary environment and
Speaker 10: then the equity market goes down.
Speaker 7: So we want to.
Speaker 10: Craft an environment where bonds go up in price, equities
Speaker 10: go up in price, and everybody can go home happy.
Speaker 7: Doesn't always work out that way.
Speaker 6: To that point, David, of whether or not the FED
Speaker 6: is we likely they're going to be cutting in September.
Speaker 6: But now the debate is do they go twenty five
Speaker 6: or fifty. If you think we're closer than the risk
Speaker 6: of recession than a risk of reacceleration, the Fed needs
Speaker 6: to go fifty bases points in September.
Speaker 8: I think I.
Speaker 9: Would like them to go fifty bass points, but only
Speaker 9: if they can message this as being part of a normalization,
Speaker 9: because honesty rates are in the wrong place and they
Speaker 9: need to get to normal at a reasonably rapid pace.
Speaker 9: I think that's what they ought to do, but they
Speaker 9: have to message it that way because the problem is that,
Speaker 9: you know, as Steve said, if the Fed cuts the
Speaker 9: fifty basis points and does it because they are scared
Speaker 9: of the unemployery going up too five, it won't speed
Speaker 9: up the economy.
Speaker 8: It will scare people, will cause.
Speaker 9: People to hold business decisions, It will cause people to
Speaker 9: wait for lower rates before they borrow money. It will
Speaker 9: reduce the income for people the six trillion dollars in
Speaker 9: money market funds out there. So the problem is there's
Speaker 9: a j curb and monetary policy. When you cut rates,
Speaker 9: it actually hurts the economy before it helps it. And
Speaker 9: that's why they've got to be very careful here.
Speaker 8: Of course, See, the.
Speaker 9: Truth is they shouldn't be in the wrong place. They
Speaker 9: should never have raised rates as high as they did,
Speaker 9: and they should try to get back to a normal
Speaker 9: short run interest rate.
Speaker 3: Of somewhere in the range of three and a half
Speaker 3: to four.
Speaker 8: Percent and just stay there.
Speaker 9: But I do think that that, you know, I think
Speaker 9: the employment report for August will be crucial here. I
Speaker 9: do think they ought to do fifty basis points, but
Speaker 9: I think they ought to try to message that as look,
Speaker 9: the economy is fine, We're just getting back to normal
Speaker 9: at a reasonable clip here. We're not going to draw
Speaker 9: it out over a year and a half. We'll try
Speaker 9: to get back to normal a little bit more quickly
Speaker 9: than that. If they do that, I think they're managing
Speaker 9: the situation.
Speaker 8: Well.
Speaker 5: I guess what I don't understand then, is if we're
Speaker 5: fifty basis points and we have more room for that,
Speaker 5: is that not sort of like an emergency cut. I mean,
Speaker 5: isn't fifty on its own something you wouldn't do if
Speaker 5: the economy is healthy.
Speaker 9: Well, we didn't really have an accelerating inflation problem at
Speaker 9: all in twenty twenty two and twenty twenty three. The
Speaker 9: inflation it was coming down after June and twenty twenty two,
Speaker 9: and we saw plenty of fifty basis point rate hikes,
Speaker 9: So I think the Fed has to sort of desensitize
Speaker 9: the economy a little bit, say, look, you know, just.
Speaker 3: Don't freak out here.
Speaker 8: I was short.
Speaker 9: Big moves in short term interest rates don't seem to
Speaker 9: have much impact on economic variables anyway, So let's just
Speaker 9: get back to normal.
Speaker 8: But it's a close call.
Speaker 9: I mean, you're the thing that I wish they'd started earlier,
Speaker 9: because then they could have started, based on look inflation
Speaker 9: instantly heading back towards two percent. We're very confident, well
Speaker 9: in two percent, we're going to take off the brakes here.
Speaker 8: They ought to start doing that earlier because.
Speaker 9: I agree that if it looks like they're doing this
Speaker 9: as an emergency rate cut because the economy's in trouble,
Speaker 9: that's only going to weaken the economy.
Speaker 8: So they have to be very careful in messaging.
Speaker 9: I think should starts with expressing some confidence, based in
Speaker 9: today's numbers, that the inflational situation is on the road
Speaker 9: to two percent.
Speaker 1: Steve Just's final word thirty seconds your view on fifty
Speaker 1: basis point rate cut in September.
Speaker 10: There's no way. Given the dots, they can message that properly.
Speaker 10: Remember this is a committee that went from several rate
Speaker 10: cuts before the end of this year to one, one,
Speaker 10: twenty five basis points, and now we're talking about og
Speaker 10: in September.
Speaker 7: Let's go fifty. What are the dots going to do.
Speaker 10: Are we going to get a number of people on
Speaker 10: the committee to turn around say oh, I'm going to
Speaker 10: reduce the dots. Are they going to be able to
Speaker 10: do that. They don't talk about the dots in that direction.
Speaker 10: So the reality is if they go fifty basis points,
Speaker 10: then the question is what changed so much that you
Speaker 10: only had one that now you have two when you're
Speaker 10: doing it all in one shot, and then what happens
Speaker 10: to the additional meetings for this year. So the reality is,
Speaker 10: like we saw the other day, when the unemployment rate
Speaker 10: came out and the market moved, people jumped to the
Speaker 10: idea that when the FED cuts rates, your recession begins.
Speaker 7: And this is a mistake.
Speaker 10: Typically when the Fed is cut rates in the last
Speaker 10: four cycles, it's because we had a credit crunch. There
Speaker 10: is no credit crunch unfolding, and therefore there is no
Speaker 10: real need to move aggressively in monetary policy.
Speaker 1: Steep Shudeou of Mizuho, David Kelly of JP Morgan, thank
Speaker 1: you both. We love having you on, especially together.
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