Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney. Alongside
Speaker 1: my co host Matt Miller. Every business day, we bring
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Speaker 1: at Bloomberg dot com slash podcast. It is a macro
Speaker 1: day today. We're talking about inflation on the back of
Speaker 1: that CPI print. Uh this morning, certainly movie markets went
Speaker 1: a round table, uh this discussion here in this segment,
Speaker 1: Vince Cignarella, Bloomberg News macro strategist, and Jennifer Lee, Senior
Speaker 1: economist and Managing director at BMO Capital Markets. Jennifer love
Speaker 1: to start with you here. What's your takeaway from this
Speaker 1: inflation print we saw this morning? Good morning? So you
Speaker 1: know what what really worries about right now is that
Speaker 1: here we are midway through October and we're all like
Speaker 1: sort of reallying from this September CPI number, and I
Speaker 1: think there's gonna be more to come. And I actually
Speaker 1: told someone and I'm gonna humbly tell you guys this.
Speaker 1: You know, I've told some one last week. Oh you know,
Speaker 1: September CPI is gonna be important, but I think it'd
Speaker 1: be less important because October is going to be the
Speaker 1: one to watch. And I was referring to that because
Speaker 1: of these OPEC plus production cuts, you know, um um,
Speaker 1: and it's going to be upward pressure for energy. But
Speaker 1: you know, I wasn't expecting you know, such broad really
Speaker 1: really broad based gains that we saw in this report.
Speaker 1: So this is troubling obviously, and using you know, the
Speaker 1: reaction of the markets and uh, you know, and so
Speaker 1: of course the question is gonna be what happens to
Speaker 1: the FED, and uh, you know, is their credibility gonna
Speaker 1: be at stake? You know, they might be saying we
Speaker 1: might even have to raise rates longer. And I think
Speaker 1: we cannot completely discount the possibility of a bigger hike
Speaker 1: and Nove, Yeah, what about more, Vince, what about a
Speaker 1: hundred basis points in November? I think that would show
Speaker 1: a little bit of a sign of panic. First, when
Speaker 1: we say I love Jennifer's work, I do read our material, uh,
Speaker 1: and it's very good and very informative. Then if you don't,
Speaker 1: you should um my weary here, and you know you've
Speaker 1: heard me say this is a million times, is that
Speaker 1: this is a systemic supply chain problem and the FED
Speaker 1: is basically trying to fix a leaky pipe with a hammer.
Speaker 1: I don't see how monetary policy is going to crush
Speaker 1: and demand, if you will. What we need to do
Speaker 1: is increased supply and I know that takes time. But
Speaker 1: if the set is too impatient and raises too aggressively
Speaker 1: and doesn't give it an opportunity to work its way
Speaker 1: through the system, I believe without question there is a
Speaker 1: sheer danger that he's going to do exactly what he's
Speaker 1: trying to avoid, which has drive us into a stay
Speaker 1: aflation scenario because wages are not going to keep pace
Speaker 1: and Kohla was announced today the Bureau of Labor Statistics
Speaker 1: announced social security increase next year at eight point seven.
Speaker 1: That's not going to happen to the average worker going
Speaker 1: into next year, so you're going to see a decline
Speaker 1: in in UM spending power and glad I just I
Speaker 1: get the supply chain problems. Yesterday we had a great
Speaker 1: story in the terminal about Jim Bullard trying to buy
Speaker 1: a bicycle and it took in so long. Did you
Speaker 1: see that, Steve Matthews are a great piece. First they
Speaker 1: told him like it's gonna be a and then he
Speaker 1: was I guess he complained and said, listen, I'm on
Speaker 1: the fed, damn it. And so then they gave it
Speaker 1: to him in four months, but they delivered it to
Speaker 1: him with a with a bill for an extra two
Speaker 1: bucks because they said, dude, prices have gone up since
Speaker 1: you ordered this. Um. So the supply chain problems are clear,
Speaker 1: but it looks like the issues in this print were
Speaker 1: shelter so rent, food which I don't think that's a
Speaker 1: supply chain issue, and medical care, which definitely isn't. So Jennifer,
Speaker 1: where do you how do you see this coming down?
Speaker 1: Why where do I begin? I mean food, I mean
Speaker 1: you got to eat, right, But there's also mother nature
Speaker 1: playing a role in that as well. Um, you know,
Speaker 1: and of course the war and that that's dragging on
Speaker 1: and on and on, and that's also causing upper pressure
Speaker 1: on food. You can't forget the I mean, Ukraine is
Speaker 1: the bread basket of the East, so right, yeah, um.
Speaker 1: And then of course shelter, you know, it's it's like
Speaker 1: a big chunk of c p I and and there's
Speaker 1: also a leg on that, so this is what's going
Speaker 1: to happen when you of you know that that the
Speaker 1: big housing um boom last year, so this is almost
Speaker 1: a leg legging effect UM and UM would also says
Speaker 1: still a que way of supply team issues. I should
Speaker 1: also mention, you know, there's like news overnight that and
Speaker 1: I kind of wentf great when I saw this headline
Speaker 1: that Shanghai is back to introducing more restrictions again. Apparently
Speaker 1: a bunch of bars and restaurants are closed again, and
Speaker 1: I was like, oh great, here we go again. So
Speaker 1: there's there's still you know, some of that working through
Speaker 1: the system UM UM. So I don't think we can
Speaker 1: completely discount all the supply pressures. At least we're getting
Speaker 1: some of the auto's back on back into the lots,
Speaker 1: but you know, like there there's still all those computer
Speaker 1: chips that are still short. I think Conda recently was
Speaker 1: saying that they are cutting production. This is in Japan,
Speaker 1: but still like it was a big picture, you know,
Speaker 1: because there's still should word a lot of UM materials,
Speaker 1: so they had to cut their production plans for the
Speaker 1: month of October as well. So it's almost like everything
Speaker 1: is piling on UM when it should have been easing
Speaker 1: at this point. So this is what is quite worrying, right.
Speaker 1: And do you think that the markets are pricing in
Speaker 1: a flat out recession in the in the near term.
Speaker 1: I don't know if they fully priced it in, but
Speaker 1: just about everybody I talked to is absolutely convinced it's
Speaker 1: going to happen. Um. No, no later than the first
Speaker 1: quarter of honestly, not sure how it's not going to happen.
Speaker 1: I mean, we're I'm really curious to see what the
Speaker 1: retail sales number is going to be tomorrow. I'm that's
Speaker 1: going to be enormously interesting. I think we've I think
Speaker 1: what the FED has done. And if you look at
Speaker 1: mortgage rates today nearly seven percent, the highest in twenty years,
Speaker 1: you can't say it's not squash demand with with with
Speaker 1: what you've already done. And we're not even taking accounts
Speaker 1: to what the balance shrinking of the balance shoes doing,
Speaker 1: um and and so you know, we saw what happened
Speaker 1: in the UK with systemic risk and the change of
Speaker 1: financial conditions, not really seeing it here just yet, but
Speaker 1: you know, really interesting to see how markets grabbed a
Speaker 1: hold of that yesterday and rallied when sort of. The
Speaker 1: the UK backed off a little bit, um will be
Speaker 1: said Blake. The financial conditions in the United States to
Speaker 1: that extent anybody's guests, You really don't know. They keep
Speaker 1: saying banks are highly much more capitalized. But no one
Speaker 1: saw two pound in the eight the either. So yeah,
Speaker 1: exactly except for Gary Shilling, who yesterday was on our
Speaker 1: air and said, listen that no one has Stimmy's anymore.
Speaker 1: Housing prices are going down, stocks have gotten crushed. Um,
Speaker 1: you gotta worry about this consumer. Gotta worry about the consumer.
Speaker 1: We'll see to mark some retail sales. Jennifer Lee, senior
Speaker 1: economists and managing director at BEMO Capital Markets, and Vince Ignarella,
Speaker 1: he covers all things markets strategy here for Bloomberg News,
Speaker 1: both jointing us giving us their thoughts on these markets
Speaker 1: which are filling the impact of higher inflation. Print this
Speaker 1: morning still got read on the screen here snp off
Speaker 1: eight tens and one percent. But we're rallying off the
Speaker 1: bottom a little bit, so we'll see how this thing trades. Uh.
Speaker 1: This afternoon, we're handled off the Harold Master and Tim
Speaker 1: Stamix see if they can do something with these markets.
Speaker 1: Never good, I don't know, and you'll send the reins. Mona,
Speaker 1: do my protenential last name Madgen Mona Mahdgen Joints is
Speaker 1: in studio, so I get the ASCAR. Actually, uh in
Speaker 1: a bluebrig in our active broker studio. She's a senior
Speaker 1: investment strategist for Edward Jones. Mona, what do you make
Speaker 1: of this print today? Did it confirm kind of what
Speaker 1: you guys were thinking at Edward Jones? Did it was
Speaker 1: kind of an aha moment, like, oh boy, we got
Speaker 1: more to go here. How did you guys think about it? Yeah?
Speaker 1: You know, generally, coming in we were expecting probably a
Speaker 1: softer print on the headline, but we were expecting that
Speaker 1: core to remain elevated. And look, this core number is
Speaker 1: sticky and it's broader basin probably any of us had
Speaker 1: thought it would be. But the good news, or perhaps
Speaker 1: the silver lining, is that when you look at the
Speaker 1: underlying fundamentals in inflation UM, they've actually been all moving
Speaker 1: in the right direction. You know, not only things like
Speaker 1: break even rates UM inflation expectations I S M prices
Speaker 1: paid even to some extent commodities which have been volatile UM.
Speaker 1: The tougher part has been the shelter and rent components
Speaker 1: of course c p I, and as we know, they
Speaker 1: move with the lag and in fact, when you look
Speaker 1: at underlying mortgage rates, housing prices, housing demand, even rental prices,
Speaker 1: we're starting to see them moderate shift lower. But it
Speaker 1: will take six or twelve months to show up in
Speaker 1: c p I. So we all know that, and hopefully
Speaker 1: the FED will acknowledge that at some point. Well the Fed,
Speaker 1: I mean, it's pretty much a lock. They're going seventy
Speaker 1: in November. It's just I think two weeks away, right, Uh,
Speaker 1: three weeks in any case, Um, the question is what
Speaker 1: they do after that? Right? Are they going to frontload
Speaker 1: everything this year and then sit on it next year? Yeah?
Speaker 1: You know, we're hopeful that they continue to go at
Speaker 1: a gradual pace, maybe for longer. You know, we don't
Speaker 1: want anything to happen like what we saw in the
Speaker 1: UK markets. We don't want dysfunctioning, we don't want credit
Speaker 1: markets um liquidity issues to arise, and we really want
Speaker 1: to see a more even, keel less panic approach to
Speaker 1: what the FED is doing. So perhaps seventy this November
Speaker 1: meeting is locked in. Markets are now pricing in another
Speaker 1: seventy five in December. Maybe they start to moderate after
Speaker 1: that fifty or twenty five in February, But generally speaking,
Speaker 1: I think markets were priced for four and a half
Speaker 1: to four and three quarters were now looking at a
Speaker 1: five percent terminal rate. I was talking to Steve Blitz
Speaker 1: earlier this morning, and he was saying, you know, we
Speaker 1: just have this demographics problem because everybody who left the
Speaker 1: workforce who was already sort of retirement age or close
Speaker 1: during the pandemic is gone. They're not coming back. And
Speaker 1: then gen Z is apparently a smaller group than the millennials.
Speaker 1: So the labor markets just gonna remain tight unless I mean,
Speaker 1: it's unlikely that the Biden administration starts to issue a
Speaker 1: ton of visa working visas they think there are almost
Speaker 1: two million people waiting for them who are going to
Speaker 1: have real trouble getting them in any short amount of time. Um,
Speaker 1: So they just have to get unemployment higher. Yeah, you know,
Speaker 1: it's an interesting point you bring up. We saw labor
Speaker 1: force participation ticked downward in the last labor report. That
Speaker 1: wasn't a great signal. Um, But over time, as people
Speaker 1: savings start to draw down, as maybe the wage gains
Speaker 1: moderator at least don't keep up with inflation. Uh, people
Speaker 1: are going to have to start coming back to the
Speaker 1: workforce in some to some extent. You bring up a
Speaker 1: good longer term issue though longer term labor force is
Speaker 1: declining here in the US unless we do something with
Speaker 1: immigration to your point, and that does weigh on longer
Speaker 1: term potential growth for the US, but not a near
Speaker 1: term problem. Near term, I think we will see softness
Speaker 1: in the unemployment rate over the next twelve to twenty
Speaker 1: four months. Again, there's a lag impact there, so the
Speaker 1: federals start now, we won't see it until about six
Speaker 1: or twelve months from now, but probably coming and probably
Speaker 1: what we need to see in order to get supply
Speaker 1: and demand back and check. All right, So I monna.
Speaker 1: Given that background, given that interest rate background, the economic outlook,
Speaker 1: what do you tell the good folks at Edward Jones.
Speaker 1: You know, they've got their clients out there all over
Speaker 1: the country. Edward Jones has offices. What do you tell
Speaker 1: them about what to do in this market? Because they've
Speaker 1: got crushed with their equities this year fixed income also,
Speaker 1: you know, worst year ever is what the purpose tell me? Man?
Speaker 1: What do you tell them, Yeah, it's been an unprecedented
Speaker 1: first nine to ten months in this market. It's been
Speaker 1: a challenge for diversified investors, for US investors that are
Speaker 1: more equity focused, more fixed income focused, across the board. Now,
Speaker 1: what we will say is we're probably getting closer to
Speaker 1: the end rather than you know, at the start of
Speaker 1: this Fed rate hiking cycle, at the start of this
Speaker 1: inflation elevation cycle. And so the good news is if
Speaker 1: we do see at some point a FED funds terminal
Speaker 1: rate or a peak rate, yields tend to peak a
Speaker 1: couple of months ahead of that, and so there is
Speaker 1: becoming more and more of an interesting opportunity. We have
Speaker 1: a lot of clients that are very heavily weighted in
Speaker 1: shorter duration bond CDs, you know, great source of income
Speaker 1: for now over time, we think there's an opportunity again,
Speaker 1: I know hearing mentions of CDs, c d s are
Speaker 1: are hot. It's it's very interesting, but we think there's
Speaker 1: an aportunity to complement these short term investments with longer duration,
Speaker 1: maybe some investment grade bonds that you're locking in close
Speaker 1: to four percent rates for a longer period of time.
Speaker 1: And now is a good opportunity to start thinking about that,
Speaker 1: certainly in the weeks ahead. UM. Similarly with equities, you know,
Speaker 1: of course we're down the SMP, growth has gotten killed
Speaker 1: even more than that UM, and over time there's an
Speaker 1: opportunity to complement some of those value defensive parts of
Speaker 1: the market with probably more growth, more tech as we
Speaker 1: head towards a peaking yields and stabilization and a move lower.
Speaker 1: But you know, perhaps early days, but a good time
Speaker 1: to start thinking about that portfolio diversification. What do you
Speaker 1: think about the private markets? UM. We've been hearing a
Speaker 1: lot more about that lately as well, and I think
Speaker 1: retail interest is really growing. Yeah, you know, if you
Speaker 1: don't have liquidity needs in the near term, private markets
Speaker 1: are interesting, I think not as volatile of course, probably
Speaker 1: offer that diversification you're looking for. Or will they rebound
Speaker 1: as much as the equity market may in the months
Speaker 1: or you know, a couple of years ahead. Maybe not.
Speaker 1: But I think in any allocation or any portfolio, you
Speaker 1: can consider a five to ten percent maybe even more
Speaker 1: depending on your investment horizon into private markets. I think
Speaker 1: it's a great source of diversification. Is there any sector
Speaker 1: in the equity space that you're telling your folks sharpen
Speaker 1: your pencils now, because when we do see a bottom
Speaker 1: in this market, of this market does turn or we
Speaker 1: start getting out of the heavy heavy selling, this is
Speaker 1: where you might want to want to buy after the
Speaker 1: fed's last rate high. Yeah, now, I think you know
Speaker 1: it's a great point. And look, we've we've been talking
Speaker 1: about staples and healthcare for months now. I do think
Speaker 1: healthcare is an interesting one because it can offer you
Speaker 1: some growth and some kind of value components to it.
Speaker 1: There's parts of health care that are very much focused
Speaker 1: on biotech or um, you know, next generation technologies. But interestingly,
Speaker 1: of course consumer discretionary and technology at the core is
Speaker 1: probably where we would hunt if we did think a
Speaker 1: peak in yields was ahead of us. And I think, um,
Speaker 1: it's a greight way again to to barbell your portfolio,
Speaker 1: and I think that that theme will play out. Keep
Speaker 1: in mind, when equity or economic growth slows, investors do
Speaker 1: tend to look for growth in their portfolios. So all right,
Speaker 1: good stuff. I want to really appreciate you stopping by
Speaker 1: coming into Bloomberg and actor broker Shooter Mona Madgen Senior
Speaker 1: investment strategist Edward Jones. She was on with Survive that
Speaker 1: on Bloomberg Surveillance. Yeah, so I mean it's you know
Speaker 1: when you get a big dour John Farrell on on
Speaker 1: a inflation and a huge print like that, a huge print. Yeah.
Speaker 1: So it was much and radio is much more fun anyway.
Speaker 1: So let's let's be honest, all right, looking at these markets.
Speaker 1: You know, bad news is SNPs off seven tenths of
Speaker 1: one percent. The good news is it's well off its
Speaker 1: bottom of the day. So we'll see how this market trades,
Speaker 1: uh this afternoon and yields a two year four point
Speaker 1: four or five on your two year note. All right,
Speaker 1: let's dig into the CPI data came in hotter than
Speaker 1: expected this morning, putting some more pressure on the feder
Speaker 1: Reserve the keep those rates higher. Uh, let's bring in
Speaker 1: a Bloomberg Markets reporter. Critty couped up. She joins us
Speaker 1: here in our Bloomberg Interactive Brooker Studio and Bloomberck Economics
Speaker 1: chief US economist Anna Wong. And let's start with you. Boy.
Speaker 1: You were early, and it looks like you were right.
Speaker 1: This Federal Reserve is going to need to keep interest
Speaker 1: rates higher and probably for longer. What's your latest thinking. Yeah,
Speaker 1: so so the latest thinking is still the same as
Speaker 1: we had in two months ago when we made that call.
Speaker 1: So look, when we made that call, we have the
Speaker 1: idea that inflation is going to be more persistent and stickier.
Speaker 1: And for today's cp I, we were also the highest
Speaker 1: on the street. We were calling for point six percent
Speaker 1: core CPI inflation um and and we were right and
Speaker 1: and and I think the the insight there is that
Speaker 1: there's just a part of the economy which is being
Speaker 1: very sticky inflation. And we're not talking about just shelter
Speaker 1: I mean, everybody knows that shelter cause is going to
Speaker 1: come down next here because the um the way that
Speaker 1: shelter cost is measured, it lacks private measures by about
Speaker 1: a year. So that's going to come down. But the
Speaker 1: other stuff, like your car insurance premium. You're like, when
Speaker 1: your car broke down, you need to take take you know,
Speaker 1: pay to take care to take care of the repairs.
Speaker 1: All those are still in a catch up phase or
Speaker 1: if you break down. Medical care is also more expensive.
Speaker 1: Medical care. That's the tricky part because starting next month,
Speaker 1: there's a little quirk and how it's measure that's going
Speaker 1: to produce a drag. But you know it does not
Speaker 1: you know, it does not negate the experience the household
Speaker 1: r Z in which is that their physicians bills are higher,
Speaker 1: or it's you know so So I think the point
Speaker 1: is that next year, I think it's quite unlikely for
Speaker 1: inflation to fall below three percent. Our risk model is
Speaker 1: saying that sixty eight percent chance of inflation being between
Speaker 1: three and five percent next year. Can I just say,
Speaker 1: my daughter, not your head on the table. Yeah, we
Speaker 1: had to go to the hospital. She got eight stitches,
Speaker 1: four thousand dollars in change. Wo yep, how is that possible?
Speaker 1: But she's better, Well, she's fine. I just it's very expensive.
Speaker 1: So pretty, I mean, we've got this higher print here today,
Speaker 1: stocks and bonds are reacting, but it seems kind of
Speaker 1: rational here. It feels a little bit, you know, stash
Speaker 1: are coming off the bottoms a little bit. So I'm
Speaker 1: I guess the market is trying to right. Well, it was.
Speaker 1: I think the knee jerk was certainly panic and it
Speaker 1: was there, Yeah, and it was there. It was down
Speaker 1: there for I want to say, at least thirty minutes
Speaker 1: of trading um to see them paired. I think the
Speaker 1: way it's being interpreted is simply that and one thing.
Speaker 1: We're talking about this a lot. It's about the second derivatives,
Speaker 1: about the deceleration the the going into a third month
Speaker 1: where you were now expecting a cp I print to
Speaker 1: drop further below eight point one percent. I think what
Speaker 1: it does is just kind of dropped the bar even low.
Speaker 1: Um when you have two months now where you have
Speaker 1: inflation estimated at eight point one percent, two months they've
Speaker 1: missed it. So once again the bar for the equity
Speaker 1: market is going to be even lower. So reacting to
Speaker 1: any positive news there and I think perhaps is that
Speaker 1: early sentiment they might be trading on a little bit.
Speaker 1: But honestly, uh, to me, it does also feel like
Speaker 1: a move to the dollar a little bit to move
Speaker 1: to yields. As you see yields come back down, the
Speaker 1: dollar follow I think you're seeing an inverse reaction in
Speaker 1: the equity market. And since you and your team have
Speaker 1: been so hot at predicting this stuff, we got retail
Speaker 1: sales tomorrow, you want to give me a thought of
Speaker 1: what you think it might happen there? Um, So, so
Speaker 1: I think that what what what it is, is that
Speaker 1: what's driving inflation right now according to our whole we
Speaker 1: have a whole bunch of models that we look at,
Speaker 1: is that we see a slight revival of US demand. Um.
Speaker 1: Perhaps because the last three months we have seen oil
Speaker 1: prices coming down, and how hope have more slightly slightly
Speaker 1: better resources freed up for for discretionary s menday. But
Speaker 1: still so I think that the retail sales to print
Speaker 1: tomorrow would be better than what we had seen a
Speaker 1: couple of months ago when everybody was talking about recession.
Speaker 1: But we are entering into a downshift and spending UM,
Speaker 1: as you know, gas gaffolding prices climb back up again.
Speaker 1: So whatever good years we have tomorrow, what last Yeah? Yeah,
Speaker 1: I was gonna say. We're starting to see those commodities
Speaker 1: prices rise again. We're hearing concerns about um, China going
Speaker 1: into lock Shanghai going into lockdown again. It Shanghai, Shanghai, yeah, um.
Speaker 1: And it's Vince Signarella was telling us he thinks these
Speaker 1: supply chain pressures are are the real problem here. Do
Speaker 1: you agree? Well, I think the supply chain pressure was
Speaker 1: the problem in the first phase, initial phase of this
Speaker 1: inflation uh. Period, high inflation period, but now it's it's
Speaker 1: no longer the core driver of inflation that it's rather
Speaker 1: wages trying to catch up to high inflation. The Dow
Speaker 1: actually turns positive here up forty one point on on
Speaker 1: the Dow here. Uh. And it's just real quick is
Speaker 1: a recession? Where are you in terms of a recession call?
Speaker 1: And i'd get a sense of how long it might be,
Speaker 1: how deep it might be, or what are you guys thinking?
Speaker 1: Our baseline is for our recession to begin around the
Speaker 1: middle of next year. UM, I myself an increasing increasingly
Speaker 1: of the thinking that it might be not a shallow one,
Speaker 1: it could be a deep one because the FED is
Speaker 1: is keen on holding rates higher for longer. And in
Speaker 1: all the past recessions, the FED we cut in the
Speaker 1: middle of the recession at which provides some stimulus to
Speaker 1: the economy. We are unlikely to see that in this
Speaker 1: this current downturn. And also I think that the there
Speaker 1: are still a lot of buffers in the economy, for
Speaker 1: example at the state and local government level. But there's
Speaker 1: still a lot of cash that's left over from the
Speaker 1: pandemic stimulus we're asked to mating. Probably about eighty billions
Speaker 1: still still of extra buffer at the state and local level. Um,
Speaker 1: I live in Virginia. I just got five hundred dollars
Speaker 1: picture bake from the Virginia governor. All Right, put it
Speaker 1: all on red. That that's my recommendation. Put it all
Speaker 1: on red. Yeah. But but just saying that there's still
Speaker 1: a lot of juice in the economy. And while lower
Speaker 1: lower income household may have seen their excess savings depleted,
Speaker 1: the wealthier people still have a lot in their bank
Speaker 1: to cash of cash in their bank account. All right, good,
Speaker 1: good stuff. They're really appreciated. Uh, chief US economists for
Speaker 1: Bloomberg and Wong Uh. And pretty good to Bloomer Markets
Speaker 1: correspondent who was here in our Bloomberg interactive proper student,
Speaker 1: just doing a little round table there on that inflation.
Speaker 1: Uh did it? Kind of I'm gonna take a look
Speaker 1: at some stocks because we've actually had some earnings over
Speaker 1: the last twenty four hours. And one of the names
Speaker 1: that kind of jumps out of me a little bit
Speaker 1: is Walgreens. Boots, Walgreens. We have a walk rans right
Speaker 1: around the corner here from here at Bloomberg. They're all
Speaker 1: over the place. The drug store train, but they do
Speaker 1: so much more. Uh. Jonathan Palmer joins us here. Jonathan
Speaker 1: Palmer is an analyst at Bloomberg Intelligence. He joins us
Speaker 1: live in a Bloomberg Interactive broker studio. He's not phoning
Speaker 1: it in today. Uh. They had some better and expected
Speaker 1: results today, Jonathan. What are you taking away from this? Hi, Paul,
Speaker 1: thanks for having me on. So Walgreen's reported this morning,
Speaker 1: and really, if if we want to put some context
Speaker 1: around the report, expectations were very low. I mean, Walgreen's
Speaker 1: has been a huge beneficiary of vaccinations testing, and obviously
Speaker 1: with people going and getting lower boosters and COVID levels
Speaker 1: going down, they were seen as this huge kind of headwind. Uh,
Speaker 1: you know, year over year approaching their fiscal two thousand
Speaker 1: twenty three. So the guidance they gave next year actually
Speaker 1: met expectations, which I think was a bit of a surprise.
Speaker 1: And the company had a two hour call where they
Speaker 1: really got glar annual about their efforts to transform the
Speaker 1: company from you know, what we think of as just
Speaker 1: as a traditional pharmacy into more of a healthcare service provider.
Speaker 1: What are they saying about inflation? How's that impacting their margins. Yeah,
Speaker 1: so they've talked about it from a couple different angles.
Speaker 1: You know, they've had wag wage inflation over the last
Speaker 1: year year and a half. You know, they've had a
Speaker 1: hard time keeping pharmacist and pharmacy tax and they've been
Speaker 1: paying those people more. They see the wages are they're
Speaker 1: hiring actually improving over the last two months. It's interesting.
Speaker 1: You guys were just talking about China. You know, a
Speaker 1: lot of the products that that kind of go in
Speaker 1: that front of store, you know, of of Walgreens come
Speaker 1: from China, and they said they're they're actually seeing some
Speaker 1: of those supply challenges ease right now. Well, this interesting.
Speaker 1: So but you're talking about so when we think about Walgreens,
Speaker 1: we think about the drug store chains. But you say
Speaker 1: they're trying to kind of transform themselves into more of
Speaker 1: a broader healthcare company. How are they doing that. It's
Speaker 1: taking a couple of different tax So the probably the
Speaker 1: most obvious one is they've made a big investment into
Speaker 1: a company called Villa Geen d and are moving some
Speaker 1: of those clinics into their stores. They've been acquiring other
Speaker 1: assets that are kind of pharmacy or healthcare related, especially
Speaker 1: if armor se called Shields. They just closed an acquisition
Speaker 1: called care Centric earlier this week that does a lot
Speaker 1: of home health. There's a lot of move from traditional
Speaker 1: health care settings into the home. So they're trying to
Speaker 1: capitalize on the shift of healthcare, you know, from traditional
Speaker 1: providers into uh different locations and kind of capitalize that
Speaker 1: with their their their footprint. I mean, they have uh competition,
Speaker 1: right because I'm sure all the other drug store change.
Speaker 1: I know CVS is trying to do that as well.
Speaker 1: That's right, CVS is there with their health hubs. You know,
Speaker 1: we've got Amazon trying to buy or in the process
Speaker 1: of buying one Medical. We've got the big insurers moving
Speaker 1: and buying providers. So you know, I don't I don't
Speaker 1: want to say that the tip of the spear in
Speaker 1: this uh the strategy, but they're they're definitely making an
Speaker 1: effort to transform. You know, what has been kind of
Speaker 1: a business under pressure the last couple of years. So
Speaker 1: just for like an average Walgreens or an average CVS store,
Speaker 1: what's the revenue breakdown between the prescription part of the
Speaker 1: business and the toothpaste in the shampoo and all the
Speaker 1: other stuff. So Additionally, you know kind of rule with
Speaker 1: them in the pharmacy space, about seventy of sales come
Speaker 1: from the pharmacy and the rest is what they call
Speaker 1: retail or front end Alright, So that business is it's
Speaker 1: just like the rest of retail. It's kind of under
Speaker 1: pressure from e commerce or just I don't know other
Speaker 1: some of those pressures exactly. You know, you've had the
Speaker 1: Amazon impact, You've had wal Mart, You've had cost Co
Speaker 1: kind of eating away at those those retail margins over
Speaker 1: the last couple of years. So these companies are looking
Speaker 1: for ways to reinvent themselves and and you know people,
Speaker 1: you know, I think the statistic is something along the
Speaker 1: lines of, you know, like nine of the US population
Speaker 1: was within like five miles of a CBS or a Walgreen.
Speaker 1: So Cracker Barrel can say, now, you said their customers
Speaker 1: come within you know, their stores or within one mile
Speaker 1: of an ex of offer freeway. So I get where
Speaker 1: you're going with that. So the idea is that you know,
Speaker 1: go to where the patients are right and they're they're
Speaker 1: increasingly at home, so you know, they're they're looking at
Speaker 1: their footprint and saying, how do we how do we
Speaker 1: squeeze more dollars out of these stores. Are are any
Speaker 1: of the companies in your universe, um, lacking funding because
Speaker 1: financing costs are climbing. Yeah, it's a good question, you know.
Speaker 1: That came up on the call this morning. Walgreen's is
Speaker 1: kind of a little bit unique in that they own
Speaker 1: a couple of Big Steaks and some other companies. They
Speaker 1: own about of their distributor, Maris source Bergen. They've been
Speaker 1: trying to sell their Boots pharmacy for the last year
Speaker 1: or so. That's kind of pending right now, so they
Speaker 1: haven't had those same kind of capital constraints. But you know,
Speaker 1: most of the companies that I cover are big healthcare incumbents.
Speaker 1: They're pretty profitable, they have access to capital. It's not
Speaker 1: really an issue for these kind of bolton acquisitions. They
Speaker 1: want to do, all right, great stuff. Jonathan Palmer, Bloomberg
Speaker 1: Intelligence covers a lot of the healthcare space on the
Speaker 1: retail side of the healthcare space as well. Let's get
Speaker 1: right to it. Jeff Cleveland, director and chief economists were
Speaker 1: paid in in regal joins us on the phone. So, Jeff,
Speaker 1: this inflation print came in pretty darn hot. Um. Yes,
Speaker 1: thank you. What are your thoughts? What do you what
Speaker 1: do you tell your clients? Well, the problem here is
Speaker 1: that everyone thought that inflation was going to moderate, and
Speaker 1: the hope was the goods prices would fade, so like
Speaker 1: use car prices would go down, which they did in
Speaker 1: this month's report, and then that would track down overall inflation.
Speaker 1: But that hasn't happened. The services side has continued to accelerate.
Speaker 1: So this is a really really nasty report. UM. If
Speaker 1: you look at shelter for example, up point seven point
Speaker 1: eight percent month to month, medical care costs up point
Speaker 1: eight percent. If those services numbers that are sticky, and
Speaker 1: I think will continue to boost core inflation UH at
Speaker 1: least for the next few months and possibly well into
Speaker 1: next year. So that means, you know, core inflation year
Speaker 1: on year remains right around where it is UH six
Speaker 1: point six to seven percent UM into the middle of
Speaker 1: next year. And I think that is a really nasty
Speaker 1: situation for the Federal Reserve and in turn for for investors.
Speaker 1: What is going on in the equity markets. We were
Speaker 1: down more than two percent on the SMP. Now we're
Speaker 1: up one point two percent. You know, we're we're looking
Speaker 1: at it over thousand points swing on the down Jones
Speaker 1: and tess Ravage currently gaining four hundred and fifty points.
Speaker 1: Why our investors buying this? I don't know. If you
Speaker 1: got to talk to the producer here he brought a
Speaker 1: bond market economist to talk about the area market, I
Speaker 1: don't know. I mean, my gut tells me it's probably positioning.
Speaker 1: But there are people far far more, far better on this.
Speaker 1: Now that's what we're hearing as well. Yeah, I think
Speaker 1: the issue here for me is, Okay, if we're gonna
Speaker 1: see this kind of momentum month a month in inflation
Speaker 1: carring us through year in then the Fed goes seventy
Speaker 1: five in November. It's quite likely they go seventy five
Speaker 1: in December, the Fed phones rate gets to five percent
Speaker 1: very soon. Here, um, do two year yields at forty
Speaker 1: forty three makes sense? Oddly not? In my view. Two
Speaker 1: year yields have to go higher, probably up closer to
Speaker 1: five or even above five percent, because the FT is
Speaker 1: going to get to five and they're gonna stay there
Speaker 1: for a while if they really intend on bringing inflation down.
Speaker 1: So that to me is not a good mix for
Speaker 1: equities in the short run um, So that that's kind
Speaker 1: of my rough take. What's your recession call, Jeff, And
Speaker 1: I guess it's a question is kind of timing duration,
Speaker 1: you know, depth of those types of things. How what
Speaker 1: are you thinking about that today? Well? I have a
Speaker 1: simple man, So I think the fact that the unemployment
Speaker 1: rate fell last month is probably tells us we're not
Speaker 1: inter recession. Generally, the unemployment rate is rising when you're intercession,
Speaker 1: so maybe we're not there yet, it just hasn't started.
Speaker 1: The other way that I like to look at it
Speaker 1: is three months, uh, you know T bills versus ten
Speaker 1: year yields. When that yield curve slope inverts, that starts
Speaker 1: the clock and there can be a lag. I mean,
Speaker 1: it could be nine to twelve months before the start
Speaker 1: of the recession. So right now, you know, that kind
Speaker 1: argues for us maybe going into recession second half of
Speaker 1: next year. So it's something that's still off on the horizon,
Speaker 1: is it shall? I think the other question shallow. Everyone's
Speaker 1: in the shallow camp, so that kind of makes me nervous.
Speaker 1: You know. You hear a lot of like it'll be
Speaker 1: a we'll have a recession share, but it'll be mild
Speaker 1: I don't know. I don't know about that. I mean,
Speaker 1: on the one hand, you have aggressive FED tightening, which
Speaker 1: is likely to continue giving the inflation backdrop, so that
Speaker 1: means you could have a much harder landing. And the
Speaker 1: second thing is it's just just been an unusual macro cycle.
Speaker 1: We had a huge amount of stimulus, we had a
Speaker 1: huge shifting consumer behavior. As it shifts back, maybe you
Speaker 1: have a more significant downturn. Yeah, I mean, I can't
Speaker 1: rule that out. I guess there. It happens once in
Speaker 1: a while when you get super hammered and then the
Speaker 1: next day you're kind of okay and you're like, wow,
Speaker 1: I don't know how that worked out. But for the
Speaker 1: most part, when you drink this much, you know you're
Speaker 1: out sick. Yeah. People say, well, where's the imbalance, Jeffrey,
Speaker 1: I mean, we don't see it. Consumers look good, household
Speaker 1: balancies look good, and I say, well, you know, the
Speaker 1: imbalanced this time around was on the fiscal and monetary support.
Speaker 1: It was an unusual and epic amount of stimulus provided. Yes,
Speaker 1: perhaps at the time it made sense given what was
Speaker 1: expected to happen with COVID, but nonetheless it was huge.
Speaker 1: It was you know, two to three trillion in money
Speaker 1: transferred to household that went into spending, and that has
Speaker 1: to unwind at some point, right, Well, and all the
Speaker 1: other thing is, I mean, does the consumer look good? Um,
Speaker 1: Brett Farve got paid, but there were a lot of
Speaker 1: other people that found it more difficult to access that
Speaker 1: fiscal stimulus. And maybe you know, luxury apartments are still
Speaker 1: going for a lot. First class tickets are going to
Speaker 1: be selling. You know, young sales will won't get hurt
Speaker 1: that much, but it's gonna be harder for the other half. Yeah, well,
Speaker 1: we'll see how the retail sales comes in tomorrow. Jeffrey,
Speaker 1: thank you so much for joining us. Jeffrey Cleveland, director
Speaker 1: and chief economists for Paid In and Regal. He sick
Speaker 1: guy that did the Triple Crown of swimming, I mean
Speaker 1: around Manhattan that we went out the Catalina channel. He
Speaker 1: did the English channel. I don't know what possesses people
Speaker 1: to do that kind of stuff, but he did it.
Speaker 1: Good for him. Thanks for listening to the Bloomberg Markets podcast.
Speaker 1: You can subscribe and listen to interviews with Apple Podcasts
Speaker 1: or whatever podcast platform you prefer. I'm Matt Miller. I'm
Speaker 1: on Twitter at Matt Miller put on fall Sweeney, I'm
Speaker 1: on Twitter at pt Sweeney Before the podcast. You can
Speaker 1: always catch us worldwide at Bloomberg Radio