'Bloomberg Surveillance Simulcast' (06/16/23)

I wasn't surprised by this Pause by the FED nor was I surprised that they're not done yet I would certainly expect the debate to heat up this summer around the need to continue our melting September they are trying to message recessionary type Behavior to slow things down without actually causing a recession I think at the end of the day applause was probably the right thing to do you can't ignore growth growth drives inflation inflation drives central banks this is Bloomberg surveillance with Tom Keane Jonathan Farrow and Lisa abramowitz the Great Central Banking Divergence good morning welcome back from New York City for audience worldwide this is Bloomberg surveillance the boys ditched me again Tom and John are both off today but you are in luck because not only do you have me but I have Peter Shear for the hour uh head of macro strategies at Academy Securities and Peter I gotta be honest talk about the Great Central Banking Divergence with the fed the ECB and the bank of Japan and then throw in the Bank of China all going their own ways yeah I think each country is kind of responding to what they have to do I think for us it's really kind of neat that the first time it feels at least in three years maybe the fed's not going to be the biggest driver right they're going to be somewhere between five and five and a quarter probably coming into October so we get this break from them driving our markets and I think other countries have to experience their own thing China's clearly going through some trouble Europe's you've got its Wild Card of what's going on so I like that it's independent that it's not this globally coordinated it's going to let markets kind of stand on their own two feet thanks for being here by the way was this a fun week it was an interesting week you know fed week's always kind of boring the worst part of my whole day is that like 8 A.M till 2 p.m on fed day because you're not sure what you're going to do right and you know any just trade you makes just a bad trade you wait for it you digest it everyone's exciting but again this time we haven't had these huge moves yes we've rallied since then but I really feel the markets are kind of getting divorced from the FED we understand what they're going to do it's a very very high hurdle to hike it's a very very high hurdle extremely high hurdle to cut let's just move on you said that the emphasis is moving away from the fed and we've been talking about that for a couple of months now suddenly people are focusing more on the underlying dynamics of specific companies of specific countries has big Tech kind of divorced the market from Central Banking dominance well they've certainly gone on their own path right and certainly there's been this AI theme which is a great theme I think we're looking at that we're trying to figure out where that's going to play out what's valued what's not valued I'm still a little bit disappointed though and I'm really looking to see whether it's the equal weighted indices or the Russell 2000 catch up even yesterday right the Russell really lagged and I'm not sure why we can't get this broader Market rally it's been so Centric to Big Tech in a couple other Industries and I really want to see something broad develop here well and one of the big questions underlying that is really the small caps and a whether we're going to go into recession but B whether we're really out of the woods when it comes to some of the banking issues and yesterday I was really struck by this because I enjoy at 4 30 PM every Thursday looking at the feds balance sheet and all their special letting programs because I have a fantastic life but I'm curious from your Vantage Point the fact that smaller Banks or banks in general are borrowing more from the emergency lending facility from the FED does that concern you you know I think those smaller banks are going to go through this period where it's moved from people taking deposits away because they're concerned about the health and safety of those Banks much more just people okay where can I earn five percent four percent what am I going to do with this money so I think there's going to be the slow bleed I also think they're preparing we're going to see you know some new tlac type rules come out so banks are going to be forced to issue more debt I think they're going to be forced to extend their balance sheet so maybe they're preparing for that so it's not overly concerning and one Divergence that really strikes me right now is two things that would normally be very positive for credit so low vix so typically investment grade credit spreads respond very well to Lovix we haven't quite seen that and then the other side of it the Russell 2000 tends to be correlated to high yield over time high yield is doing very very well and the Russell's still lagging so I think these divergents have to come together just to sort of sum up this week does it make you more optimistic or less optimistic about a soft Landing after all the Central Banking divergences I'm very concerned that we are going to see a hard Landing I think there's still very fixated on tight monies and we're ultimately away from the jobs data nothing's been that strong there's good parts there's bad parts you know spending was okay but it's inflation driven so I think now that's what we have to focus on though finally is not whether you know the fed's going to do this or that it's where is the economy really headed knowing that the fed's not going to do much if we start seeing weak data right now in the markets we are seeing a little bit of a pop after yesterday it was sort of shocking to see the initial softness turn into robust gains again once again led by the NASDAQ you are seeing just basically flat but slightly up almost bumping up against the 4500 level on the S P one of the biggest weekly gains or the biggest weekly gains on stocks going back to March just giving you a sense the Euro continuing its Ascent climbing back toward 110 109.47 after the ECB clearly took a more hawkish tone than the Federal Reserve and yields just slightly up but yields not necessarily doing all that much after climbing pretty significantly over the past few weeks 10-year yields at 373 and crude really hovering in there around 70 dollars a barrel on the nymex today just to give you a sense fedspeak does resume very curious to see what that entails and how much fetcher Jay Powell is alone in his dovishness Fred Governor Chris Waller at 7 45 a.m he's going to be speaking at a conference in Norway Richmond fed president Tom Barkin at 9am Eastern in Ocean City Maryland today this to me is going to be really interesting French president Emmanuel macron not only is he hosting Saudi Arabia Crown Prince Mohammed bin Salman but he also is planning to speak with Elon Musk to convince him to build a factory in France everyone seems to want Elon Musk to build factories Poland pretty much everyone so we hear the latest from Emmanuel macron 10am University of Michigan consumer sentiment survey comes out we've seen a real creeping higher of expected inflation over the next five to ten years in this inflation survey and before we get to a reporter I'm just wondering Peter from your perspective does that concern you are you starting to see on the margins the sense that perhaps people are just getting used to inflation being a bit higher it doesn't really concern me but I think it's going to happen our Outlook is kind of three to five percent inflation for the next you know three to seven years partly we really are seeing Supply chains change right so we are developing more and more things domestically there is going to be a higher cost to producing things the higher cost of goods I think companies have also realized right when we looked at the building of a widget right it's a dollar here and 80 cents a day in China you realize there were a lot of hidden costs in that 80 cents that made it more expensive we're going to monetize some of those costs right we're going to bring our supply chains closer we're going to have redundancies that is going to be somewhat inflationary but the good news is I think it comes with jobs it comes with more security more safety again I think we're going through problems with the chemo drugs right we don't have access to them because they're all Made in India so I think we're going to see more and more things made in the U.S that is going to be inflationary but it's going to be Golden Corral I guess a good inflation because it comes with jobs and it comes with National Security I didn't mention that it's triple witching because I never sure of what to make of that do we care that it's triple witching day today all I know is I try not to do anything until triple witching is kind of done because it sends all sorts of false Flags basically basic coming out and saying take the summer off that's how I'm hearing anyway that basically this is not a time where you're gonna get a ton of signal from the noise joining us now to really touch on this theme that we've been hearing about the big Tech dominance and how long that can really continue based on the actual developments Alex Webb of Bloomberg quick take and Alex before we get a sense of uh just sort of your take on the rally so far and where some of the nodes of concern are coming in I'm curious Elon Musk is he doing the world tour why is everyone trying to lure him so heavily what's sort of in it uh for him right now I think it's partly to do with of course jobs that if you bring a test to the factory to Any Given location of course they're going to be employing thousands of people but because of the way tethers are built they have such a high value supply chain that if you're bringing a Tesla fact fee You're Expecting also that there will be a bunch of other ancillary uh companies setting up shop in the vicinity in order to supply that thing so you know it brings a bit of Blitz and glamor in addition to the to the simple job story would you say speak to people about the incredible rally in Tech and how regardless of interest rates regardless of the cycle this is the Haven bet and it will continue to take off are people pushing back at all in terms of the promise of AI in terms of what it could actually accomplish and what time I think the look I think lots of people are excited about its prospects the challenge is knowing which are the right plays at the moment uh there seems to be such broad consensus around Nvidia around Microsoft that these are companies that are very well positioned over time there will be a little bit more Nuance as we start to see the limits of that optimism um but also who some of the other players are there is a a lot of startups in the space not that many public companies we saw um some some surprises to the upside from Oracle for instance but we didn't see as much a positivity around broadcom these are both companies who had gone to a lot of positivity around their AI story but inevitably there was some Nuance on how big an upside that really was broadside broadcom not that much Oracle more than expected yeah do you see over time companies developing strategies that benefit from this AI that again it seems like so far we've seen the AI producers or the AI companies really really benefit and we're not seeing much benefit flow through to other companies right are we going to see cost savings what are we going to see and how's that going to affect employment yeah I mean I think at the moment AI is actually basically a cloud story right that we've seen that the leaders in the cloud space uh particularly Microsoft and Google lead the charge when it comes to generative AI but it's kind of baked just to get businesses to build products on their Cloud platforms um over time when companies really appreciate the optimal way to use AI um you know they always say well this isn't going to be affecting the number of people we employ it's actually going to let them do it smarter I think inevitably that's probably a little bit um you know overly optimistic there will be jobs that are massively affected by this but as the sophistication increases we will see a whole second tier of AI companies with properly um carefully targeted solutions for given Industries at the moment it's like sort of one size fits all if you want to use chat gbt or gbt4 um and try and somehow plug that into your business you go to Microsoft Microsoft probably can't give you much of a keyhole solution in a way that other companies we see evolve over the next two three years will be able to do and that's when we'll start to get properly excited about it all Alex just quickly here president Xi Jinping uh is said to have been meeting with the Microsoft founder Bill Gates talking about possibly getting the the company to build its establishment in China a little bit more directly working with them saying it's the first friend in the business world that they've really sat down and met with how much is Microsoft alone and continuing to double down in China I mean the thing is that Microsoft hasn't been blocked in China right that Apple I think probably is the other company that is there in a massive way of course both in a manufacturing sense they sell a huge number of iPhones there but Google isn't allowed to operate a search engine there Facebook isn't allowed to operate there Amazon isn't there at all so it's the cloud business which is the only opportunity even in Microsoft season opportunity there it's still a very very small amount of its overall Revenue something in the order of perhaps two percent so there is opportunity there but not as much downside as there would be for or for instance if there would be a Crackdown Alex Webb thank you so much we really appreciate you taking the time talking of what's going on over in Asia overnight the bank of Japan we didn't mention this no surprise they didn't move but there were hints around the edges and it seems like people are really starting to push back with a real move in the Yen that is perhaps a little concerning listen they've had this yield curve control for so long I think they have to give up these things over time right we've got to go back to free markets again we're kind of moving that way here other places should so I think it'll be interesting but I do think it will put pressure on the FX yeah well this is something that we're seeing particularly expressed in the Euro Japanese Yen the Euro JPY because what you're seeing is uh weakness that we have not seen in the Yen going back to 2008 and there's this creeping feeling and this is sort of playing out into the dollar store as well Euros are the big winner right now because the ECB has diverged could that kind of change the risk sentiment a little bit if the dollar continues to weaken if the Yen continues to weaken if the funding currencies continue to experience volatility yeah and I'm more focused on the dollar I think we're going to see ongoing dollar weakness I think we're going to see dollar weakness versus em I think the hidden story that's behind the scenes right now is still the Chinese trying to get more and more trading to occur in the Juan so I think that's going to be the long-term story what does the wand do where does the Euro fit in I think Euro's going to be strong relative the dollar em is going to be strong relative to the dollar and that's the main story do you think it's going to be driven by growth or interest rate differentials I think it's going to be driven a little bit by growth but more I think it's going to be the efforts China's making to get more and more transactions to occur in their currency their efforts to sell their goods so that not every country is going to need dollars to purchase goods and services so as China can erupt and get really disrupt our economy in ways of they're trying to sell their automobiles they're going to start trying to sell their airplanes to other countries it's going to loosen the grip on this need for dollars and I think that's going to be the story and the one will benefit in Euro benefit I just wonder if they can accomplish that if they're not being clear about whether they want to participate more in the international business world or less I think it's going to take time but they're going to roll up the weaker smaller Emerging Market countries first right those are the countries that probably have the most struggles dealing with the dollar that's where China's going to fit in and it's going to be this gradual Rule and one day it's going to be Italy is going to be the teetering point for Europe it is Friday we are so lucky to have Peter share who will be with us for the entire hour which is a wonderful thing coming up at 7 A.M Sarah hunt will be joining Chief Market strategist at Alpine Saxon Woods as we set up for a post-central banking week of data and commentary this is Bloomberg thank you [Music] [Music] she's got an incred done more work in containing China and affecting China's rise economically than anybody else everybody else sees a China that is a constant conflict therefore those are working together as allies China sees that and they realize that we have an active engaged Alliance and allies working together which is why I believe secretary of state blinken is coming to Beijing with a little wind at his back and that's what China respects from Emanuel U.S ambassador to Japan speaking within the past few hours on Bloomberg television at a time when Tony blinken is set to arrive I believe in Beijing on Sunday for talks that were delayed after these by balloon was shot down Peter Shear with us still of Academy Securities for the hour which is wonderful and I'm curious from your Vantage Point how close you're watching this meeting with Anthony blinken to really get a sense of whether we could soften some of the tensions that have been really ratcheting up yeah I think it's the most important thing regardless of anything else going on geopolitically is what China's up to how we're dealing with them and I think it's been frankly quite disappointing that we have really no relationships with them we kind of had the separation so this is an important step I think it's a long way from soft Landing or anything like that it's the one thing I think DC is relatively in agreement on is that we have this friction with China that we have to figure out how we're going to compete with them in the current environment and in the future where they're headed on things like AI so this is important step but I think we're a long way from being friendly one thing that's wonderful about Academy security is you hire a lot of generals and formal former military officials and I'm curious what they're looking for the smoke signals that arise from Beijing after this meeting you know I think one thing we're a little bit cautious on is that China knows that we want better relationships U.S companies want better relationships so it's going to be difficult to figure out are they just giving us what we want and they're going to continue to do their own thing or will we really see progress and to that I think we're gonna have to look do companies really get more opportunity to sell there what happens with their companies so I think this is a little bit more for show but at least it's a step in the right direction perhaps a little bit more for show however very important from a political messaging standpoint how that's going to be translated into the population will be a big question Greg valiere joining us now chief U.S policy strategist at agf investments from your Vantage Point Greg how is this going to be positioned politically how is this reading after people are wondering again whether it's prudent whether it's a matter of who blinks first well I think Lisa good morning I think that there's virtual unanimity in Washington against China a great deal of animosity in both parties whether it's Chuck Schumer or Kevin McCarthy and I think there's a feeling China has not been transparent on covid they don't treat their dissidents well they spy on countries they've talked very aggressively about the South China Sea so while there might be a nice photo op and maybe things will look superficially better we got a long way to go yeah one thing we're seeing at Academy Securities and kind of want your take on this is it feels in the last year we've kind of lost some of our Global presence and China stepped up right they were able to negotiate this deal between the Saudis and Tehran they're able to do things I think that China didn't really project before do you see that as a trend do you see us losing kind of This Global position where do you see that well I I don't see our Global position getting any better and maybe today could stop the bleeding and maybe there will be a positive uh communique when the meetings are all done but on specific issues especially Espionage stealing of intellectual property they're still big big problems that makes sense and kind of shifting a little bit domestically how do you see things playing out here it's we tend to be very geopolitically and you know globally focused and we're starting to get more and more questions about what's going to happen with the election cycle here who's going to win what are you what's your sense of what's going on in DC what happened from the debt ceiling is there going to be this carryover where we get some good progress or is this just going to be messy a couple of points first of all I think everybody has Trump fatigue and we may have a few weeks here where there's not going to be quite as much I think even in his own party people are sick of the uh the friction as far as big issues there's an a nasty fight among Republicans in the house over the the budget for the fall and even though we got a deal a month ago and we are not going to have default there's still a a movement in the house to revisit that deal which is of course angered a lot of people in both parties so that is still out there the wild card in my opinion over the next several weeks is a possible strike by the teamsters against a UPS that's a huge Union 340 000 workers and if we did see a strike toward the end of the summer that could get people a little gloomy about the holiday season and once again having to face supply chain disruption there's a lot there I want to start with the potential for another another potential government shutdown or another debt ceiling debate that comes up within the next couple of months not the next couple of years as a result of this Skirmish between replica House Republicans how much is that looking increasingly likely well you know I'm old school Lisa I thought once you have a handshake once you say we've got a deal we got a deal but as it turns out McCarthy is under such pressure from the right wing in the house he may reopen the deal we're not going to reopen debt ceiling that's done for two years but a government shutdown when the fiscal year starts on October 1 is not out of the question in fact I'd say the odds were at least 50 50. we could have a shutdown at least 50 50 at a time when you could also see a further supply chain disruptions given that there has been sort of a renewed push from labor and frankly the supply demand Dynamic has been such that that labor has a new power how much will this Administration weigh in on behalf of the teamsters on behalf of the union members considering that it has been a very pro-union kind of president this is probably the most pro-union Administration in our lifetimes and I don't see that changing I think the Biden Administration will come down on the side of the teamsters yet they have to know a protracted strike going into the fall would be disastrous for Biden's re-election prospects which suddenly looked quite a bit better Greg valiere of agf Investments thank you so much as always uh for your wonderful notes and for joining us this morning Peter I'm curious about just this sort of Supply demand dynamic in the labor market the fact that we continue to see a lot of pressure there despite the rate hikes despite signs that perhaps the unemployment rate is coming up at the fastest Pace going back to October of 2021 what are you looking for to understand where we are in this sort of gradual slowdown so one I think low-income jobs are plentiful so there's that that's one Dynamic and then to me it's very Regional I think you've got to start looking through the data what's going on in San Francisco is very different from what's going on in Florida or Tennessee I think it's affected home builders affecting jobs so that's the sort of trend and how hard to hit do these high income jobs get and I think to me this if we get the recession and there's still a lot of debate whether we get that or not it's going to be driven not by job losses the total number of job losses it's gonna be what type of jobs are lost what income's gone and how that gets replaced one place that's seen a number of job cuts and we were seeing this yesterday from the likes of Citigroup from perella Weinberg today we have a story out talking about how biggest and the biggest banks are going to see job cuts that are poised to surpass 11 000 so far and so people saying this is the worst environment for this industry going back to 2008 does it feel like that well you know I'm still hoping I'll have my Bloomberg terminal by the end of the show and my bosses haven't fired me or something like that but yeah I think it's a very tough environment you've seen the deal slow down right you've got certainly the FTC is really tight on approving deals every deal that gets comes up seems to get challenged so that part of the business is slow and now all of a sudden you have this fed being quiet so I think you're going to see volatility drops that's going to drop creating revenue and transaction Revenue has gone down a lot in the mortgage space right everyone wants to refi their mortgage that's constant stream of income that slowed down so I think it's tough across the board right now in banking some people are saying that this is just the catch-up from the pandemic period because they didn't light people off and then they hired a lot of people all in the immediate aftermath is it is it more than that I think it's a little bit more than that I think again we had the spat craze right so that created all this hiring people really saw different businesses develop and it's all slowing down at the same time I think it's healthy though you want to see some calling you want to see some shrinkage it's going to force the firms to be better smarter more aggressive with their Capital how they deploy it what relationships they develop so I think at Academy Securities we see what we're seeing Even in our space the smaller broker dealer it's a challenging environment but for us it's an opportunity if you can make your way through this develop the relationships coming out of this potential slowdown I think it's gonna be a great time are more people going to the office though to do there are more people going to the office definitely I imagine that a bunch of the executives are looking to leverage this to bring a couple more people back into their seats coming up we've got rubella faruki chief U.S Economist at high frequency economics to really weigh in on the labor market what we are seeing how much it's starting to shift or not from New York this is woodwork foreign [Music] [Music] for U.S equities going back to March during the height of the concern with respect to the banking situation right now we do see perhaps a continuation of that welcome back this is Bloomberg surveillance on Bloomberg television and radio Tom and John are both off today well that's bad news and good news because you get Peter Shear who is with us for the hour and that's a wonderful thing right now we are seeing perhaps a little bit of a shift but a pause ahead of what has been a really kind of tumultuous week with Central Banking decisions Peter yeah it's you know we saw the initial reaction to Powell's stock sold off then they kind of recovered part of that and then yesterday started week again and then kind of followed through so I think everyone's digesting what does it mean and I think the good part is we're pretty much done with the FED driving markets here for a while the bad news is I think it's unclear what the next narrative is going to unfold the AI stories played out very well the recession versus soft Landing story I think that's what we're going to focus on for the next few weeks is where has this economy really headed and what valuations are correct in this sort of economy which is the reason why perhaps right now the most interesting area of the market is the currency Market because people are trying to figure out rate differentials but then also growth differentials your euro is definitely gaining against pretty much everything uh bumping up against 110 when it comes to the euro dollar and right now the Euro yen to me is one of the most interesting currency pairs after the bank of Japan did nothing at their meeting despite some concerns about inflation pressures and this feeling that the economy was stable and this is leading to a weakness that we have not seen in the yen versus the Euro going back to 2008 Peter picking up on your point here and I think it's a really important one about the labor market where we end up kind of the growth and that you know just sort of the waiting in Godot kind of picture do you think that the the FED sent a conclusive message that it was bad that they didn't necessarily have a unit unified conviction or do you think that it's good I think it's good right now I think they're saying it's a extremely high hurdle to cut and it's a pretty high hurdle to hike so they're wanting to see how this plays out the data is going to come through I think the one thing that came across a little bit of each is their fixation on inflation and everyone kind of understands that the housing data is going to be deflationary because it's really lag data why we still use this lag data when everyone knows what the current state of housing is it just seems insane but they're going to rely on that so I think that's why he comes across a little bit more dovish than maybe intended but yeah to me they're they're a little bit behind the scenes now it's like okay let's move on let's really figure this out because we know the FED is not going to move much either direction for the next few months and also because it's a slow-moving grind in a lot of the areas of the economy that need to come clear for there to be some sort of conviction joining give us a sense of the biggest aspect frankly that the FED is looking at as well as a lot of investors rubila faruki on the U.S labor market chief U.S economy at uh Economist at high frequency economics rubila I want to start with the FED with their view on unemployment and ask you if they are accurately reflecting the ongoing deterioration that we're seeing on the margins versus the overall payrolls number which shows something very different right good morning so great to be with you today uh you know what we're seeing in the labor market is it's still very tight labor market yes there are some adjustments on the margins but if you look at job openings if you look at quits if you look at you know where claims are we're not really seeing any nothing to suggest that the labor market is about to collapse so the labor market is still very strong the issue really is uh the lag defensive policy at what point are we going to see that adjustment we don't think this economy can you know uh sustain 500 basis points of tightening without a response so I think that's what we're focusing on yes that adjustment that the initial adjustment that we've seen is very welcome uh we do want to see the labor market loosen a little bit that supply and demand badly balance uh but we're not seeing it to the extent that the FED wants to see uh you know if you look at the claims numbers that's what we're actually following very closely uh you know the highest level since 2021 for two weeks that really does not make a trend yet but that is something that we're focusing on for signs of energy investment that actually will give the FED some comfort in terms of your policy actions working and then not having to do much more than that than they have already done the 11 000 people who are getting laid off from Big banks are going to listen to this and say it feels perhaps a little bit softer the tens of thousands of people who've been laid off from Big tech companies may feel similarly how much are we seeing in idiosyncratic recession in jobs in White Collar sectors that perhaps were overstaffed during the pandemic but that's continuing and continuing to pressure the labor market even as lower wage jobs continue to boom and continue to be very much robust right and and you're absolutely right it has been very idiosyncratic it has been very uh you know sector driven and uh the pandemic has resulted in such distortions that it's very difficult to sort of uh uh say with any level of confidence that you know these are the adjustments that we're seeing and that these are this is what's going to persist and the you know what we're going to see on the other side of it but you're absolutely right there are adjustments going on there are people who are losing their jobs the real hope is that you are going to you know the labor market is still strong enough that you know those people are able to find other jobs now whether that's going to happen in the tech in this industry or banking sector that's really not clear right now but yeah you're absolutely right it has been reducing ground it's very difficult to call in terms of white girl color versus you know low paying jobs yeah and one of the things I struggle with lately is I look at the last jobs data and every single economic Economist missed the print right there was no one that was above the actual print and yet I look at the data that's coming in from the government right the survey response rate's very low are we supposed to truly trust the government data or are we supposed to actually look at what a bunch of economies thought was the jobs data and go to that that's where I'm really torn is is the government data super accurate right now is it fraught with errors what's your kind of take um you know you probably are seeing some level of distortion from the survey responses but it is the only data that we have it's the only thing that we can rely on uh and you know that's that's the difficulty here um if you but also I mean if you look at a whole range of data right I mean we're not just talking about the household Services The Establishment survey we're talking about the timely weekly jobless claims data uh we're talking about the Joel's data you know yes again response rates are low but those are the only things that we can really you know rely on in terms of trying to uh figure out where this labor market is going uh what we saw throughout the you know the over the last year is that yes we saw layoff in announcements but the labor market really did appear to be strong so I think there might be a little bit of a disconnect but not enough uh to suggest that labor market is actually collapsing but the data are not capturing it right so you're reasonably optimistic unless we see kind of continuing High claims yeah I'm reasonably optimistic until we see a sustained gain in claims in layoffs and uh that that employment part of the household survey that is also something that we're watching very closely uh you know which is reflected in the unemployment rate and that eventually has to if that is actually going to be sustained that the pharaoh's data is eventually have to will have to catch up with that Peter have you seen evidence that we're not in a wage price spiral is that sort of put aside at this point because we've heard a lot of discussion about that yeah people don't really seem fixated on it at all anymore right I think and we've all accepted the wage are stable or higher but it's not going to drive this inflation that I think remains to be seen well especially because Greg valier was just talking about the potential for strikes right the potential for Doc workers to once again really pressure for more benefits for more wages repeal how much do you see this kind of activity really pressuring wages in a way that's being underappreciated not just the unions but just sort of the wage price price pressures that haven't necessarily accelerated but aren't really decelerating to the point that people had expected right and that is something that we're watching very closely that is something we don't think we are in a page price fire we just don't see that Dynamic happening we are actually seeing wages decelerating in an environment where the labor market is tight that really shouldn't be happening we should see the opposite but you are absolutely right wages are rising at a pace that is not consistent with a two percent Target so I think that uh we are less worried about the wage price spiral but we um you know we would like to see more of an adjustment to a level where rates of change are more consistent with two percent inflation rubila we were talking about the layoffs in the banking sphere and how a lot of the pressure in that space has caused a lot of Executives to say okay just come back to the office if you want to keep your job although that might be subtext and I'm wondering how much that's because it's more effective and efficient for people to be in the office and how much that is that perhaps some of these banks are concerned about their commercial real estate portfolios and want to bolster the industry um I think it's a combination of both I think there are arguments to be made you know uh in terms of presence in the office I'm not really sure that it's going to uh the effort to bring people back 100 is going to be very successful but yes I mean and and the commercial real estate part of it is a very uh very large part of you know what the what this effort is all about especially if you look at areas like New York city so I mean I think uh a combination of both and I think it's a it's a valiant effort I'm not really sure that we're going to go back to the way things were before the pandemic yeah I think that makes a lot of sense that's how we've been looking at it's very Regional and also some of it's going to come when do leases come due right because that's the only chance that people really have to shrink their Footprints so right now you've got this access space I think that'll be the question is as Lisa's come do are you able to shrink your footprint and have you know with work from home and is that when companies maybe start embracing it that is probably when companies started start embracing it you know anecdotally we do hear that there are companies that have already made the adjustments right so leases have come up for Renewal and they have actually decided that maybe their footprint doesn't need to be that big again you know it's very it's very region specific so I do think that uh the effort is uh you know like I said it's it's something that is going to continue I'm not really sure that we're going to go back to where we were before the pandemic a lot of companies have already embraced work from home you know in terms of a majority of the employees I think it's in the banking sector and that is where uh you know you're going to see that Bush come back and I think a lot in a lot of cases it's already been successful right I mean there's been certain times that one the managing directors back five days a week and I think those sort of things you're going to see but it's going to be I think an uneven sort of uh uh you know outcome for different companies rubila faruki at high frequency economics thank you so much for being with us today have a wonderful weekend and I was trying Peter Yesterday by Charles Edmond chief executive officer at kaisted Quebec people will absolutely Massacre me that was I think worse than Tom Keane would have done it so I will just tell you uh you know hopefully nobody was really listening too closely who actually knows how to speak French but I'm curious uh he was talking about how there's going to be a bloodbath in some areas when he was talking about commercial real estate he was talking about uh how difficult it was to get loans for some of these properties and how it really hasn't been felt out from your Vantage Point how closely are you watching this how are you watching this to understand where it kind of feels the most stress I think it's always going to be very Regional very local I think you know two weeks ago I was on your show and that was the day they announced a cmbs deal that had two San francisco-based hotels that did not pay on their cmbs so I think it's gonna be Pockets like that and it's going to be centered around some of the big cities I think the places where you're hearing the crime stories that's having an impact you're seeing companies whether it's uh you know pharmacies start moving out or closing locations so something has to be done to arrest that or it's going to be the slow slippage and it's when you see the neighbors move out you see people closing down their businesses less places to get lunch well maybe we move out so I think something has to be done I think it's going to be a three to five year maybe seven year problem it's not gonna happen overnight but I'm not seeing a end of it right now I'm seeing it actually just starting to develop momentum is it just San Francisco Chicago a couple of other places I mean is that what we're talking about here yeah I think it's just the big places and at the other end you're having these opportunities right where people are doing the satellite office type thing so it's been great for Westchester County for example Fairfield Connecticut you're seeing these offices it's been great for Tennessee hold on a second we're Academy's offices we're in New York city so we've actually we actually took advantage of our friends trying to grow and I think we believe heavily in the work from office to the large degree I try and avoid as much as possible myself but having said that it's been this huge opportunity so we have a much bigger space the headquarters is in San Diego so that's where all the smart people at the firm are based um but yes I I think we're seeing that but it's going to give people more flexibility more ability to move around you're seeing companies set this up and people are going to have the flexibility are people going to take the summer off wasn't there a firm basically saying in Europe they're basically saying you can work from anywhere for a month and a half of the year is the US going to move to that model or is it just Europeans I've certainly heard some hedge funds doing stuff like that where August you can work from anywhere it's you know it'll be interesting I personally love being in the city in the spring and fall summer and winter I try and avoid it what's that what's that Peter you're being called into the office that's the best this is going to be a professional discussion as we Face Off there's also going to be a discussion we will continue it about the leadership in this market coming up considering the fact that Tech continued to lead all of the inflows and continues to break out despite interest rate fears despite recession fears even in growth fears all of those coming together to support the NASDAQ continuing to outperform today on a very very slow day let's just be honest not a lot of action here a little bit of dollar weakness a little bit of of bond weakness a little bit of crude weakness not a lot to write home about this is Bloomberg foreign [Music] investors who drive the Chinese market it's the Chinese investors and I believe they're going to be back there's no question about that as the property sector begins to get revived and the problems of debt to solve then you'll see the Chinese investors come back and you already begin to see that you see that the price indexes begin to recover the legendary Mark Mobius of Mobius Capital the founding partner of that legendary Emerging Markets firm and there is this sort of tension about what's going on in this week of Central Banking Divergence with China which is starting to potentially re-stimulate although unclear to what extent Peter share with me both Tom and John are off today and there is this question Peter after they made a 10 basis point cut in a one-year rate does this indicate an opening Salvo for a whole host of other measures and I think the China reopening story has been a bit of a dud right their economy is not really cranking at all cylinders I think they have to look at this and figure out what they're going to do right it's they haven't reopened they've lost some traction clearly this friction with the US isn't really good for them at least not near terms so what are they going to do it would not surprise me to see stimulus out of China pretty much everyone says that if they stimulate it's really going to be the domestic economy more than anything else and then it's not necessarily going to feed into either inflation supply chain repairs or anything else on a global scale so I wonder how isolated it actually is I think it's going to have an impact inflation I think we're kind of at friction with China we're competing for natural resources that's going to continue again I think we're it's early stages of what we've been calling this shift from made in China to made by China where you're going to see more and more effort by chinese company to sell their brands globally and I think that's something we've never really experienced before Huawei was maybe an example of them selling you know their semiconductors which probably weren't as good as our semiconductors but were a fraction of the price I'm looking for them to do that more and more across different Industries and that I think is going to be something we're dealing with and no one really seems to want to discuss but there's signs that it's happening and that's going to be real competition especially in the Emerging Markets countries who probably will go and gravitate towards the cheap Chinese Brands rather than expensive American brands so got that very clear how to trade that's basically the Central Bank soup of Divergence and the Sea changes that we're seeing in international relations that are leaving people without a clue which is the reason why markets are barely moving today not seeing a lot of action across the board as everyone digests all of the action that we got perhaps some more interesting moves crude is Up Is Down about eight tenths of a percent hovering around the seven dollars seventy dollars a barrel on the nymex level but really it is in the FX channel with the Euro dominant especially versus the Yen as people look toward a more hawkish ECB joining us now to give us perhaps a little more clarity than I just did Jens nordvague founder and CEO of exante data and Market reader again what's your takeaway that we do have these Divergent central banks is it just a matter of the U.S getting out front having a cycle that it had to deal with first and everybody else catching up or is this truly a splintering of the biggest Global economies at a time of great transition I think there's an element of both right so clearly the U.S uh started to recover quicker the stimulus was more aggressive in the U.S and therefore the U.S cycle has been more front loaded right and then we have economies such as the Eurozone economy where uh the stimulus was slower uh and the more drawn out and we are having a situation now where inflation is actually having more momentum in the Eurozone than in the in the US and therefore the ECB cannot do any pausing the ECB has the signal that it's going to go every single meeting right and they are highly likely to be hiking in July and probably September and maybe even further than that right so this is the first time for a while where we've seen monetary policy Divergence in a way that's going to support the Euro we saw a big big move yesterday and then I think if we scan the globe right then there's some special issues around China right so I think one data point that's very important this year is that we've had a China reopening we have had some recovery in certain sectors in China right but there's no inflation pressure in China right if we compare to other countries that have reopened we are not seeing any inflation pressure in China that resembles what we've seen in other reopening situations and that's really important and this is also a sort of evidence that there's something structurally different in the Chinese economy and uh and and one thing that I think investors are not paying enough attention to is that there's been a massive structural shift in terms of this Capital flow that's coming in into China right it used to be the case that people just wanted to invest in China build manufacturing capacity in China but that foreign direct investment from companies has slowed very very dramatically and that has not recovered after reopening so that's a structural shift that's very important for everything including the Chinese currency right what do you make of China's attempts to get more and more trade occur in the one are they attempting to over time become a competitor of the dollar in terms of Reserve currency is this just going to be a small tiny part of World Trade as where do you stand on that so China is a huge part of of global trade in terms of the goods moving around right but they've been attempting to get the that stuff invoiced in in local currency and and try to create competition to the dollar but look at how the the Yuan has been trading this year right we're up uh over the last two days but the big trend has been uh the Chinese currency has underperformed very dramatically consistent with monetary policy being uh one of the easiest in the world right they've not been any tightening related to the inflation Dynamic that I spoke about right so we have a situation where from a trade perspective China is in a very strong position and could argue okay we dominate many many types of trade we should have a reserve currency aspect right but when you look at the asset side nobody wants to buy the Chinese bonds there's literally outflows from Chinese bonds almost every single month even central banks around the world are starting to reduce CNY Holdings right so it doesn't have the reserve currency aspect on the asset side it's only on the trade that you can make the argument and that's that's why that goal that the Chinese have is not so easy to achieve yeah that makes a lot of sense and what do you see Japan playing out I think that's a country we're seeing actually get a lot of benefit from people moving away from China and their power and the region is important and clearly their stock market has done very well where do you see Japan playing out in terms of the global economy yes I think if you sort of look at a situation where Global multinationals are getting more cautious about investing aggressively in China where are they going to build capacity right so there's a number of countries in Asia that have uh manufacturing histories Japan is one of them careers another one and then there's newer countries like uh Taiwan and and obviously Thailand and Vietnam too and closer to the US Mexico is benefiting from that right so we do have a number of emerging markets that are going to stand to benefit from that Japan is a bit of a special case uh they have their own demographic issues and so forth but clearly the Nikkei is now moving in a way that's very interesting and it's a very ironic situation you have inflation in Japan that is running around five percent in terms of the momentum we're seeing on core and financial conditions are easy right bond yields are packed at zero effectively right and uh equity and this is a going higher the yen is going weaker right So eventually this is going to create a problem for the bank of Japan that they have to deal with given all of this does it make sense that people are just looking at the divergences and saying I guess there's only one thing to do go into big Tech I mean that basically was the theme of the week going to Big Deck go into the Euro those were the two trades of the week do they have lasting power so uh I'm getting asked if that every day certainly every week we're getting asked about okay is the AI Trend the bubble right is it overdone um there are certain companies where the valuations look uh pretty crazy right but uh I have to say take a step back we think about this technology what kind of incredible changes it's gonna create in the economy right and then we think about how relatively young this excitement about this trend is like really only really a couple of months in so given how big the structural shift these Technologies are going to create I don't think we've run for very long in terms of investors really getting uh involved in these trends like I track Global Capital flows very carefully like one thing I track is okay what is the foreign money that's come into U.S tech in the last couple of months it's actually very limited right so it seems like foreign investors have kind of missed the AI the turbocharged rally and and I wouldn't rule out that they're going to come in later so I think it's too early to fade it and and then I would say in terms of other themes uh Emerging Markets have had a very good run right so there are other asset classes that are on the move that have perhaps been forgotten about for many many years uh so it's not just checkups say the emerging market trends are pretty interesting and certainly something we've been watching data and Market reader thank you so much for being with us and he's not alone Peter in talking about how perhaps there's more to run with this rally Even If eventually it will cool some uh some bit a bit and I will just say Michael Hartman over to Bank of America said that this looks like 2000 or 2008 with a big run up and then a big run down do you agree I don't think so again we haven't seen this widespread rally right the Russell's barely budging a lot of the equal weight indices are on weight and there is a real story behind what's going on with the AI as maybe some companies are getting ahead of themselves but again if this is as transitional as transformed as it potentially is it's going to be important it's something we're spending a lot of time we actually just added a geopolitical Advisory Board member who just retired from the Marine Corps was charge of their artificial intelligence so it's something we've got to get a handle on because getting this right is going to really Drive returns for the next several years I think Peter share thank you so much for spending the hour with us we really really appreciate it I hope you have a wonderful rest of the day coming up Sarah hunt Chief Market strategist at Alpine Saxon Woods speaking with a chat GPT just kidding I wasn't surprised by this Pause by the FED nor was I surprised that they're not done yet I would certainly expect the debate to heat up this summer around the need to continue our melting September they are trying to message recessionary type Behavior to slow things down without actually causing a recession I think at the end of the day a pause was probably the right thing to do you can't ignore growth growth drives inflation inflation drives central banks this is Bloomberg surveillance with Tom Keane Jonathan Farrell and Lisa abramowitz all eyes on big Tech as it continues to lead good morning from New York welcome back this is Bloomberg surveillance on television on radio Tom and John both off today but I am so pleased to say that with me for the next hour Sarah hunt who is Chief Market strategist at Alpine Saxon Woods and it comes at a day where we are seeing potentially the biggest weekly gain for Global stocks and for U.S stocks going back to the March concerns about what happened with the banking sector Sarah so good to see you it's been quite a week I mean has this been a week of clarity or a week of more muddle I think it's a week of more muddle to be honest I mean I think that you had some reasons for the FED to pause there were a lot of people calling for a pause and then the data came in and it was so iffy in terms of like you have to keep going that I could see where a pause came in but what I will say is that it's still you look at underlying conditions they're not that tight the FED is still saying we're going to Titan and I think that the reason you're seeing the conditions not so tight is because if you look at the fed's balance sheet and you look at a one of my brilliant colleagues put together a chart where he took all these components you run that against the s p and it tracks very well the s p is now ahead of that but the fed's balance sheet had overall been rising that means that there's still a lot of liquidity so that's one of the issues about not quite tightening the market so it seems like people are looking at all of the vagaries on trying to understand the words from the actions from the noise from the other central banks around the world and they're saying we'll just buy Nvidia and we'll be fine I mean that seems to be the theme that everyone is saying are you seeing legs to this does this continue to give you a sense that it could keep going I think it can keep going I mean if you look at what happened and I I know that the parallels people are either it's 1995 or It's 1999 I don't know where we are but if you look at when you start to get these enthusiasms they can continue to go the question is what is going to slow that down and whether or not we start to see some underlying data in the economy that starts to pull that back could be part of that people are looking at Ai and saying it's going to revolutionize things and I don't disagree the question is in what time frame and for which stocks and I think right now you might have a little bit of a mismatch on that as Peter Scheer was saying earlier we also saw some outflows potentially from cash for the first time in a while it seems like people are experiencing fomo in full force and perhaps taking money out of the sort of very high frequency instruments and putting them into stocks putting them into junk bonds putting them into other areas does this seem like luring people in for well the adage is that the market causes them maximum amount of pain for the maximum amount of people right so to the extent that last year was such a volatile year and people were happy to sit in cash and get five percent right it was like oh thank goodness there's less volatility now all of a sudden they're like well the Market's going up and I'm not so I think that there's a race into that and I don't know that that's necessarily long if you have a long wrong if you have a long-term time frame but if you have a shorter term time frame this could be a little bit to us one of those rallies that gets everybody excited about being in there and then you start to see little issues and you wonder can the equity markets hold up or are the bond markets more correct and there's that fight that's going on as well we're going to take a look at markets and you can see not a lot's going on and I'm wondering whether you have less conviction and more conviction after this week well I guess the question is less conviction or more conviction about what right I mean I think the I think that the FED is going to have to continue to raise rates or stay higher for longer the market is not pricing that in the market to start pricing and cuts that start now in November now in March before the banking crisis those cuts were priced in to start in July or September now all of a sudden we're moving that out if we really stay higher for longer a lot of the theories of I don't have to roll over my debt yet or I can wait to pick up a mortgage or some of that activity I think becomes more of a question if you have a higher rate level for a longer period of time and that's what they seem to be signaling right now we are seeing uh stocks sort of fluctuate between gains and losses pretty much stable yield is just slightly lower readjusting or slightly higher I should say basically unchanged 3.73 in crude down just a touch regaining some of the losses that it had experienced earlier in the day the real move has come from what we saw over in the Euro particularly versus the Yen Euro strength versus the dollar you're strength that is the greatest strength going back to 2008 versus the Yen as the bank of Japan remained on hold today what we're watching fedspeak including fed Governor Chris Waller at 7 45 a.m Eastern he is at a conference in Norway Oslo and a Richmond fed president Tom Barkin at 9 A.M Eastern in Ocean City Maryland curious to see whether they indicate some disagreement with Fed chair Powell about perhaps either not moving or how he signaled the actions going forward by the U.S Central Bank today French president Emmanuel macron is hosting not only Saudi Arabian Crown Prince Mohammed bin Salman but perhaps more interestingly speaking with Elon Musk saying yeah perhaps we're not a huge fan of Twitter but we love your uh we love your factories and we would love a Tesla Factory in Europe in in France and he is going to be speaking later this morning with him and at 10 A.M the University of Michigan consumer sentiment survey comes out very curious to see the forward-looking projections of inflation the five to ten year belief in inflation which has crept up well past the fed's goal of two percent to three three point one percent if that continues what is the fear and before we get to uh the sort of issue of the tech and and sort of Elon Musk and his role in it because he has definitely had a role in the tech rally that we've seen so far Sarah from your Vantage Point how much is that something that we're seeing this idea of longer term inflation expectations becoming somewhat unmoored and really causing you to shift your belief in how long the fed's going to have to remain perhaps in a restrictive stance well I think that's part of why the FED is why the Dot Plot changed I think part of that is why they're emphasizing along higher for longer and I also went back and looked at expectations on the Michigan sentiment which is coming in later today when went back and looked okay over the last decade or two so they used to be a bit higher they were running around three they dropped down to two they're back up to three the question is when they were at three inflation wasn't there it was at two we didn't get to two for a very long time chair Powell also had said back in the day day when we couldn't get to two that we could stay higher for longer because we were lower for longer prior to that there's a lot of tension in all of that and the question is where does that end up driving policy and expectations and if people start to think inflation is more sticky then you are going to have more issues with wages which so far have not been as bad as people were worried about and just to sort of build on this fear that perhaps rates will remain high around the world for longer ECB member wound was commenting this morning and said raid hikes may have to continue over in that region Beyond September joining us now to talk about the race not only the race rates but also to get Tesla to build some factories in European cities Maria today a Bloomberg European correspondent in Brussels Maria why is it so interesting and frankly a bigger story that Emmanuel macron is trying to woo Elon Musk today yes and look it speaks to the fascination when it comes to Elon Musk but also the difficulty uh for Europeans to just kind of deal with uh the man because you alluded to this at the start of the show and I really think you nailed it there's this idea of Elon Musk the man that will tweet and owns Twitter and at times is very controversial and the Europeans again have repeated many times there is a code of contact or quote of conduct excuse me when you operate in the European Union if they have to find you uh they will do that if they have to take it to court they can also do that but then of course you have Tesla and the jobs that that provides and one of the industries potentially of the future so the Europeans find themselves in a situation where they want us keep an eye on what's going on on Twitter maybe regulate even further but if you ask any country do you want to Tesla site they will say absolutely yes and that's the reason why women makong is meeting with Elon Musk today he was in Italy by the way yesterday where he met with the Italian Prime Minister Giorgio Milani and we also know that the Spanish are also interested on the site and just to wrap it up remember there is already a Tesla site on the outskirts of Berlin I was there when it opened it was quite a show well I'm looking right now at Tesla shares they're up a cool 107 so far year to date and about 50 more than 50 percent in the past month alone and this comes not only as people look to to Elon Musk as a car builder but also to this belief that he is going to create the electric vehicle charging Network for the world Maria how much is that underpinning some of the renewed enthusiasm that European leaders have toward Elon Musk look absolutely and I think obviously there's a realization beyond that and and the idea that Tesla as you say could be one of those ski Industries but we also could provide some of the key infrastructure for the European Union at a time in which there is a massive push to look to those alternative ways of driving a car and just build the entire network across the European Union I think there's also this idea of just the influence that he carries for Emmanuel macron in particular remember he had a lot of pushback over the pension reform he wants to move away from all that negative press the negative cloud and he gave himself two months to present a new more vibrant French Republic and maybe that's what it is remember he said by the time we get to July 14th that is a French national day he would have a plan to show the French Republic has turned the page on the French pension reform which is very controversial and look to a bright future maybe Elon Musk is somewhere in that bright future Bloomberg's Maria today thank you so much the bright future that people have all been hoping for Sarah when they've been filing into Europe and they've been avoiding the U.S saying that Europe was going to have the new dominant leadership over the next year two years three years has that been dashed by the U.S tech story I'm not sure it's been dashed because I'm not sure that I mean every Year's been Europe's here for the last decade right so it was supposed to be Europe series and then it was Europe's here I think that because the ECB was raising rates and because people were thinking that the U.S had sort of had a decade of a long Market run it was time for it to be someplace else I think that the war in Ukraine has really been a problem for them I think Energy prices are going to continue to be a very serious problem for them on the industrial side and also on the personal side I mean on the spending side all of a sudden natural gas prices in Europe have doubled again in a very short span of time because people went from oh it's okay we got through this winter oh my goodness there's another winter coming so I think that there is there are going to be some issues that Europe is dealing with and that's tougher than some of the issues that the United States is dealing with at least as of right now so you are perhaps overweighting the US versus Europe still Yes okay and we're looking at a situation where we're seeing that shift back even if the dollar continues to weaken uh some people are saying if you have the likes of Tesla gaining 108 so far this year perhaps this is something a secular story just quickly you bullish on Tesla I think that the was a huge win on the charging standard I think that that made the fact that the stock had been rallying which was a little bit curious to us something that was at least had some real teeth behind it so I think that that is a very positive situation for them whether or not the stock is well priced here that's another question for another day it's one of those things where how do you even price out the hope and the promise of becoming a dominant player in an industry that is nascent but has a lot of promise and this has been sort of one of the underlying angsts of the market at a time when you do have the artificial intelligence story driving so many of the names Nvidia among them as well as meta I mean honestly if you take a look and even Apple getting in on the game with my 13 year old 14 year old son saying that he wants an augmented reality headset and I told him yeah you can go work for it because I'm not going to chill out 3 500 right now if you're just joining the program we're seeing a little bit of a game basically stasis in Marcus the s p just below 4 500 44 72 after the biggest weekly gain going back to March we've also been seeing this ongoing bleed higher in the tech space which we continue to look for today is triple witching it has been a question mark around what that means Sarah I got to be honest I woke up this morning and I saw that and every time I see Triple witching quadruple witching all I know is things could happen so watch out I mean how do you interpret this how do you watch out for it well you've had such a shift in the options markets right we used to be able to look at the volatility of options and go okay we know what people are doing with options then you've got zero dated options and then it's today's option so how do I get a gauge for what's going on there and what are people going to do I mean there's so many more types of hedging and there's so many more types of looking at different instruments to use that I don't think it's the same as it was even five years ago so I think it's hard to say what that actually means it could be more volatility I think that's the easiest thing to say about that which seems to be the way that everybody's discussing all of these things do you feel like this Rally's real that's a tough question I think it's a little bit of of trying to get everybody into a faster move I mean the question was what was going to make it go higher AI started that I think you know as people try to figure out what to do with their options positions are they rolling them over into more calls are they rolling them over into more puts that could add to volatility I don't I think that it is tough to see at 20 times or nearly 20 times earnings on the S P right now with the expectation of higher earnings next year that's a little tough for me which is probably the reason why we still have people on the sidelines kind of tepidly wondering when will be the good time versus perhaps this is just luring in for some tougher times ahead coming up at 8 A.M Neil Richardson joining us Chief Economist at ADP focusing very much on the labor market the big question mark for a lot of the central banks around the world on a week of split Central Banking decisions it is very likely the case that we will continue to increase rates in July which probably doesn't come as a big surprise to you but that's what I'm telling you and this is so because we are determined to reach our Target in a timely manner a very consistent message from Christine Lagarde president of the ECB yesterday coming out and saying inflation is running too hot for too long it's going to continue to rise and they're going to fight it and this is one of the reasons why the only decisive move other than rally a rally in U.S equities and Global equities is the Euro gaining steam versus all other currencies welcome back this is Bloomberg this is Bloomberg surveillance I am Lisa Obama it's Tom and John both off today I'm very happy to say that Sarah Hunt is alongside me today as we try to parse through a confusing week of Central Bank Divergence honestly I do think though that Sarah the the one takeaway has been a stronger Euro and it seems like people have conviction about that at least in the short term do you buy into that well I think the stronger euro is coming right now from the fact that Christine the guard is saying we are absolutely going to continue to raise rates and the FED is like well we're going to pause for a second but really it's a skip but don't say that out loud I mean there was a whole strange thing with that yesterday that said okay so if the FED is is just going to stop here and the ECB keeps raising rates then that's attractive for the Euro right so the question really becomes what does the FED do in July and does that start competing again because it seemed for a while that's where the Euro was strengthening of that early on and then when the FED started racing rates it started to flip back and forth a lot of people don't believe that the FED is actually going to hike rates in July the fact that there was no guidance whatsoever the fact that if you really thought that it was so important to tighten further why not just go now right and there was a sort of feeling among a lot of people stop trying to say something and do something else and expect us to respond are you in that camp well I think the the feeling about if you're going to do something do something now is also tempered by the other people going you raised so fast you need to step back and see what is going to happen now that you've raised so fast so I think that they could really go either way here but I'm not sure that we are clear exactly which way they're going which is why I think the Euro becomes more attractive in that moment where Christine Lagarde is very very seriously saying we are going to raise rates here if you haven't been following all the festivities of the week we got on Wednesday the Federal Reserve putting on hold their policy for the first time in 15 months then the ECB came out yesterday raised rates by the expected quarter of a percentage point to three and a half percent but they increased their inflation forecasts materially going out three years and they ratcheted down their expectation for growth we saw the Bank of China stimulate People's Bank of China stimulate Just a Touch so a question there about moving in the exact opposite direction and then the bank of Japan doing what they do which is remaining on hold to understand the divergences the Crosswinds in the Central Banking world that was so active this weekend to current joining us now Bloomberg global economy reporter in Washington and it seems like the takeaway from these sort of split decisions is that each economy is in a very different place and that the one that's still fighting inflation the most is Europe do you concur yeah a very different space and as you mentioned there in the US and Europe going in One Direction China obviously heading in a completely opposite direction looking at more stimulus there because of where the economy is at and Japan even though inflation is well above the target Governor u8 is sticking with the Viewpoint that it's not demand-driven inflation he's not a buyer of that he's more worried about the fragile underlying economy about triggering Market volatility so he's sticking with that massive support that are continuing to pour into the economy maybe some debate about whether he tweaks it at some point but this is the point he's talking about a tweak it's very unlike what's going on we'll say with the ECB and defend so Japan and China in a very different space well that's interesting because it seemed like there was a question about whether or not the boj was going to change policy and change it rather quickly or at least more strongly so do you think that that's really a timing issue or do you think that they've decided that they're fine where they are and that's just because their inflation has been quieter than it has been in the US and Europe well they might there's some talk that it might have to list their inflation forecasts when it comes to July so that will probably light up the debate around tweaking the ycc yet again but since he took office a few months ago uade has been very consistent that he's a continuity candidate he seems very keen not to want to trigger broader Market volatility and he certainly is not as I mentioned earlier he's not a buyer of inflation story in Japan he said overnight that it's not being demand driven so it seems though at the very least even if tweaks do come with the Japanese policy and there's plenty of reasons why they should not least given the distortions in financial markets it doesn't sound as though it'll be major tweaks at least not in the year term and obviously though if the water move that would be a significant surprise one of the big takeaways for me this week and uh is that there is perhaps a question Around The credibility of the FED about why they didn't go if they really believed that there was further tightening that was necessary from your Vantage Point based on Market positioning and based on the reviews from economists that you've been speaking with how much do people think that the did the right thing in pausing and then messaging some sort of hawkishness that left a lot of people scratching their heads well I think there's a view at least that look people can understand why they're trying to Signal this hawkish a Viewpoint because if they're doing the opposite the market would go to town on the idea that the FED hiking cycle is over they would start pricing in records and of course that would undo some of the feds work so there's some logic to it but again to your point nobody's really buying the idea that maybe they are a serious about going again I think a lot of people that I spoke to and the interaction that I read were making the point that really the Federer on a fingers crossed month by month that they might be done by now maybe if there is a significant upside surprise they will have to change course and tighten again they've made it clear to have that option but the mood music seems to be that um they've done the heavy lifting and they want to see what those big rate hikes do from here at least that's the sense that I'm getting for the American people that I spoke to and there was a focus and there is right now just in terms of central Bankers that are speaking over in Oslo about financial conditions and this concern about an ongoing crisis in in banks that frankly the markets moved on from people are not talking about this anymore is there something that the fed is worried about or seeing that perhaps underpinned their decision in a way that it's underappreciated well that was one of the astonishing things of the press conference that defeat I mean I think most of the press conference passed before there was any discussion of the banking crisis uh which was only a few more banking shock only a few months ago I think Lisa police makers are concerned that there are still cracks hidden under the system look what happened in the UK last year look at the shock that we had with U.S banks a few months ago rates have rates can't rise at the clip that they have without leaving some kind of capital damage and this comes up in chats that I've had with policy makers not just in the US but other people visiting here over the last few months there's definitely a sense of nervousness nobody's quite sure where it's going to turn up residential housing was the obvious one that's not really playing out the way people expected though so I would say the fed and others are very cautious about where the pain from these rate hikes eventually might surface and uh thank you so much for being with us under current of Bloomberg we really appreciate that and I really do think that the banking issue is sort of underpinning in some ways the fear is it off the table I mean do you think that that was part of Sarah the decision that the FED made to just wait for a bit that's a really interesting observation and I think I mean to the extent that housing is a little bit constrained by the fact that people don't want to get rid of their cheap mortgages to get more expensive mortgages but whether or not the banking crisis was visibly solved so far it seems to be the case but there are still a lot of people holding assets that are underwater relative to that fast moving interest rates so maybe that's part of it but if that's true they're going to have to keep them higher for longer and that's going to be the issue do you know anyone who has a mortgage with rates at seven percent no do you know anyone who's borrowing at 12 13 14 15 rates no right so this is the issue how much are we actually seeing transmission of rates where they're at well that's excuse me that's sort of the issue and a couple of weeks ago there was somebody on Bloomberg talking about the fact that the home builders have ability to make that less painful for home buyers in the near term so you're seeing this big move on the home builders you're seeing a lot of activity which also picks up employment on that side because existing home sales are much lower than they would normally be as a percentage of home sales and if they can be subsidized by the Home Builders then that transmission isn't going through yet the question is if they only are going to hold them at five percent for six months and they're going to start getting in November it's not as much of an issue if they say no we're going to keep rates like this for a year or two that's a different story and we were speaking yesterday with the CFO Ford and he was talking about how their credit arm is having its own proprietary data that shows the credit valuations basically they can lower the rates on some of these auto loans that they can continue to sell at a rapid pace and this is sort of one question how quickly is this transmission mechanism of higher yields getting out into the U.S economy 10-year yields at 3.72 percent up just marginally after a pretty substantial whipsawing week a little bit of dollar weakness 109.54 for the euro dollar and looking at s p Futures basically going nowhere this is Bloomberg [Music] [Music] this is Bloomberg surveillance on Bloomberg TV and radio Tom and John off today very happy to have Sarah hunt beside me I'm Lisa abramowitz as we look at a digestion day that is what I would say after the biggest weekly Rally or at least poised to be the biggest weekly rally going back to March taking a bit of a breather and not really doing much after Divergent Central Banking uh opinions as well as a question of how much the AI boom can really fuel that Tech dominance s p Futures up about a tenth of a percent climbing toward that 4 500 Mark Euro strength has been one consistent Story 109.58 versus the dollar as we see that rise continue following a hawkish ECB 10-year yields marginally higher a real whipsaw at the front end with people assessing how far the FED is not only willing to go but how long they are willing to hold rates 3.73 percent on the 10-year in crude just marginally lower softer but how has risen just a touch from lows as low as 68 67 dollars a barrel on the nymex as people came out the Dynamics of slower growth with perhaps slower demand from China with perhaps technical moves that people talk about just to give you some sense of some single name movers and Sarah I'd love you to weigh in but Adobe really weighed in on the AI craze they reported earnings yesterday better than expected second quarter results raised their full year forecast great all good and fine probably would have given a little pop but those shares up almost four and a half percent because they mentioned AI I mean how much is that going to be sort of a catch-all from your Vantage Point to get some sort of gains well in the I don't want to make parallels but I'm going to make parallels anyway Camp if it's it's very much like you put a.com after your name and all of a sudden you're an Internet stock I think that there's plenty that adobe can do in the AI space I think it's not wrong to emphasize that I would if it was up to me I mean if you could make a credible story for that why wouldn't you it's currently the flavor of the month it could be the flavor of the decade we're not sure yet but if but if you can do some something with that I think you will I think everyone's going to layer into that and then the question becomes when are you actually monetizing that how do you parse out the reality from the fiction well I think if you can show better earnings and you can show better Revenue can you can say this is generated because of this or maybe there was a coincidence and you had a great quarter and you threw AI in there we don't know yet because it's that that's not you're not going to see that on the first release you're going to have to wait until you get through companies a couple of releases and really see what's driving things the next stock that I wanted to take a look at was Cava Falafel balls and other types of Middle Eastern Market spice it went public a couple days ago doubled on Thursday's debut and yesterday uh it's continued to see gains ahead of the market open today 3.24 percent gain there and Virgin Galactic this I find fascinating those shares up a cool 40 after saying that it's planning its first commercial passenger space flight later this month June 27th to June 30th and I have to wonder how that's gonna really sell I I hear it's actually going for for quite a bit would you be interested are you going to be among the first passengers I am not going to be among the first passengers even if I were interested I'm fairly certain that the price tag on a journey like that is not going to be a small one but I can imagine that there's quite a few I mean you don't need that many early adopters to make that a pretty good a pretty good thing to do right you need a handful of people but it just really strikes me and and before we move on because to me this is a sort of Time Times kind of question a time of the moment issue where people are piling into the next best thing in Tech and perhaps asking questions later have things started to feel a bit frothy in that sphere in the sense that people are so caught up in the promise of new technologies and secular growth that they're perhaps not able to even focus on the balance sheet as much I think that's exactly what happened which which caught this AI rally that was allowing this s p to break out of its range once the s p broke up and you need a hook right so the hook was Ai and how it was going to transform things now again I don't think that it I'm not here to say that it won't transform things I know a technology analyst who said you know this was as exciting as getting an iPhone in my hand but the question is it took a long time to develop that ecosphere how much of that ecosphere develops and how quickly but people also wanted a reason to be positive I think and I think that this gave them something to say I can hang my hat on AI now I don't have to worry about those annoying things like valuations and fundamentals just want to point out my colleague Joe weisenthal here at Bloomberg wrote this story that the Kroger CEO Kroger the grocery store chain mentioned AI eight times on company earnings calls talking about some home Chef menu options and other potential ways that they could leverage AI so everyone is a tech company including grocery store chains let's take a look at what's going on with the Central Banking Divergence how much the sort of perhaps lack of drama on that side is allowing people to get caught up in other stories or perhaps just focus on the reality of the hope and Other Stories whichever way you believe you've got gilaba is joining us now I'm so happy to say it's been a long time gilaba Chief fix income strategist at Jenny Montgomery Scott do you believe the FED when they say that they are going to hike more perhaps even twice more before the end of the year well first of all Lisa it definitely has been too long and thank you for having me back I find it unlikely though nothing is certain given the responsiveness to a lot of short-term economic Prints but I find it unlikely the Federal Reserve is going to raise interest rates again for this portion of the cycle there are extremely few historical examples of the FED hiking pausing and then resuming hiking first of all really I suspect what the Federal Reserve wants to avoid here is a stealth easing through which they announce that they are finished and then the markets begin to pull forward rate Cuts so by saying hey we might do it again on the hike side the FED in part avoids that that accidental easing syndrome Mickey how much is this really questioning the fed's credibility because if they're trying to use rhetoric as a monetary policy tool and people aren't buying it you're saying they're done Morgan Stanley saying they're likely done the Market's saying ah we'll give you a 60 chance of hiking rates in July but after that you're done I mean doesn't this sort of question their ability to use rhetoric as a way to uh to job on the market into submission about four guidance is rhetoric and they've been using it relatively effectively over the course of the last year granted in many respects it failed prior to that however the Federal Reserve can ultimately make whatever rate decision they deem necessary and the markets will snap to that decision if it actually does happen and that is the essence of credibility it's not necessarily whether fed forecasts are right or wrong but whether they follow through and commit to doing in the market response to what they have committed doing and so far that's been absolutely the case and particularly over the course of the last couple days or so as interest rate Cuts later in 2023 have been priced out of the markets that is essentially the market saying yeah they're perfectly incredible in their Outlook so I have a question for you gee if you look at the other tools that the FED has because the question really has been what are they doing with rates but also what are they doing with their balance sheet because as the balance sheet expands that's more liquidity that drives risk assets and the whole picture that we had from basically the financial crisis until fairly recently so what are the other tools and where do you think that they're going to come down on using those even if they pause here and leave rates higher and is the market going to start pricing them into the middle of 2024 because right now it's just at the very beginning of 2024 or is the market really going to start thinking okay yeah the FED is serious and they're going to leave rates higher here so with regard to tools specifically the size of the balance sheet I think it's important to separate out some of the emergency or semi-emergency measures such as the forgiving me I forget the acronym but the dtfp that that was announced back in March separate that from the economic stimulus tools such as quantitative easing which are really designed to be more systemic in nature so in terms of the economic stimulus tools I fully expect that QT the wide out of the fence balance sheet will be give or take on autopilot until which point we run into evidence of scarce reserves in the banking system our best guess on that is the middle of 2024 granted there's a lot of uncertainty about that number so I would expect QT to be functionally on autopilot until that period and realistically I don't think rate cuts are going to be a high probability until that happens uh my my sort of running public joke is that our that Jay Powell is wondering around the halls the Eccles building saying I will not be Arthur Burns right he doesn't want to and he said this very very publicly repeat what he and his colleagues see as the mistake of the 1970s by easing off the pedal too early so as a result I think it's going to take a relatively large economic downturn which is not in our forecasts in order to cause a rate cut or some unpredictable Financial catastrophe which obviously is unpredictable we don't have in the forecast so that mid-2024 rate cut period I think is a good base case for fundamental reasons even though the markets are obviously not pricing it at this point and how far will the fed's balance sheet be wound down by that by in that mid 24 area and to the extent that you know that if Cuts really do come then where is inflation where would you expect inflation to be because that's still fairly sticky I mean it's come down from the highs but in a lot of cases it's not as it's not as benign as people are hoping for and do we end up in a period where we just allow for higher inflation yeah so first on the Flesh and the inflation Point excuse me the economic Outlook is unusually uncertain at this point and that has to do largely with the fact at least in our review that different components of economic activity are moving at very different paces and in some cases very different directions you can obviously imagine the stresses that are likely to come in commercial real estate construction that's a regional banking industry provides less Capital to that that's a pretty good source of possible economic downturn later this year at the same time jobs growth strong income growth is strong and the consumer provides a little bit of support so different areas of the economy are diverging that makes it very very hard to have sort of a top-down macro forecast it appears that inflation is slowing I do not have a good evidence one way or the other of what it is likely to descend to a hunch that it will be slightly higher than it has been for much of the period in the call it from about 2000 to 2020. back that should be enough for the FED to declare mission accomplished metaphorically of course probably relatively soon as those month-to-month rents decline Gila boss of Jenny Montgomery Scott thank you so much enjoy the long weekends we appreciate you uh being on but that lack of certainty seems to be was underpinning people getting sick of just imagining the worst and going into the specific stories here's one of them that Intel and Micron are planning to spend billions of dollars on new plants outside of the U.S we keep hearing about this these U.S companies that are building you know whether it's Tesla building a factory somewhere in Europe they're all trying to woo him versus uh you know even Microsoft having conversations with Xi Jinping I wonder if again this is the new story it's like who can sell it the most internationally and then that's really what's going to drive people with some certainty rather than the sort of mumbo jumbo of what's going on macroeconomically one you also see there have been a lot of announcements about building things in the US and have you really Broken Ground on them or are people making those announcements when they're talking about doing that in Europe are they really in other places are they going to do it are they just talking about doing it I think that the supply chain issue has been obviously still something that is that is a problem for a lot of people and they want some security of Supply so that so I think that there's a real need to do some building in areas that are not traditional but at the same time are we really going to do that because it's going to be more expensive and consumers don't like to pay more for things so there's a real tension there between what can I charge for it versus where do I want to make it yeah this is definitely a question of how much again is noise versus signal all of these sort of question marks on a week that perhaps is ending with a whimper after a lot of bangs from the central banks given all of the Cross currents of different economies at different phases in fighting inflation the U.S going one way pausing the ECB going another hiking rates and the Euro rising and that has been the one clear trade if you're just joining the program the s p is lower is actually Higher by a tenth of a percent gaining steam as a session goes on we've been looking at this rally and I really Sarah want to talk to you about whether you are seeing a broadening out in a way that gives you conviction kind of how you've shifted your mentality heading into the second half of this year so I think you are seeing it broadening out I mean if I think about some of the places where we're looking there's an ancillary effect to AI if you think about things like data centers and you think about things like computer chip maker the equipment makers there are places that have not had this massive AI move they've had some move but not quite as much as some of the Darlings of the AI world right now and I think that it does I mean there is a an argument to be made that this will be something that people can use to boost productivity which has been on the Wayne lately and so I think that there are some definite reasons to be positive about it the question again becomes do the valuations just run so far away from you that you think okay are they going to grow into that or do they have to come back before and do I get another chance and right now there's the the fomo that you mentioned earlier that seems to be driving so much right now when people are pulling money out of out of cash and they're pulling money out of money markets and they're trying to I got to get back into this Market I think that is where the excitement about the new technology is perhaps overstepping what the new technology can deliver in the near term we're not sure yet though but we're not we you don't know whether we're there that so are you just sort of like holding Pat I think that we've added some things that we in areas that we've liked and we you know I'll go back to the energy trade John will kill me for not being here but well if that's something we can talk about we will talk about that coming up we'll also be speaking with Congressman french hill republican from Arkansas and perhaps we can get a sense of when we're going to start refilling the Strategic petroleum Reserve talking of oil but we're also going to be speaking of course International and domestically could we enter another situation with another dead potential default this is blue Burke [Music] she's got an incred done more work in containing China and affecting China's rise economically than anybody else everybody else sees a China that is a constant conflict therefore those are working together as allies China sees that and they realize that we have an active engaged Alliance and allies working together which is why I believe Secretary of State Clinton is coming to Beijing with a little wind at his back and that's what China respects that was Rahm Emanuel U.S ambassador to Japan speaking earlier this morning as Tony menkin Anthony blinken Secretary of State heads over to Beijing probably getting there around Sunday for talks that had been delayed after the balloon incident the spyballoon incident I do want to bring you this Lisa bramwood's here Sarah hunt as well not here is Tom or John they are off today on a well-deserved day off I am not going to call it assignment as Tom Wood and I'm not going to say that they're on sabbatical a day off can be a good and beautiful thing we are getting some heads from the FED Governor Waller he's talking Chris Waller is speaking in prepared remarks saying the U.S financial system is resilient enough to handle large shocks So speaking to the potential fear of some sort of banking crisis Financial stability essential for the FED to meet mandate a real question here and goes back to whether the bank turmoil intensified credit tightening they just don't know yet and they talked about the tools that they have to really address some of the potential buildup in Financial Risk we saw those tools in cold relief last night when they came out with the latest of their emergency lending facility rising to a new all-time high exceeding a hundred billion dollars as we talk about this there is a real question of where we are in the economy and how the the government will actually respond with respect to two cuts with respect to fiscal tightening and joining us now especially at a moment of huge debate is Congressman french hill republican from Arkansas and I want to start there especially welcome by the way to New York I want to start there especially because there is this increasing fight among House Republicans right now about whether to cut spending much more substantially maybe raising a question around whether we have to discuss defaulting again in a couple of months where do you weigh in on this how concerned are you well we have our fiscal constraint deal that we struck between House Republicans and president Trump I mean President Biden and and that's put in place and that governs the top line for Appropriations and now both the house and Senator working to pass those 12 Appropriations bills and that'll be what tees up as you say a spending fight this fall potentially as we attempt to pass all 12 of those bills at the agreed upon level in the fiscal restraint measure or below and so that's the issue but let's be clear discretionary spending is 40 percent higher than it was just before the pandemic so we're spending two trillion dollars more per year on spending in this country than we were before the pandemic and so there's an effort and I think we've made that clear that we should lower that rate of spending growth and cap it and that's what we did in this bill although Greg Volare who is on earlier of agf was saying that he's been in this business a long time and he's never seen anything like this to agree on spending a certain amount and then retracting it to essentially say okay well maybe not so that's not that's not what the deal is that's not what to do I think this has gotten exaggerated in the press these are spending caps these are ceilings and so the appropriators now take those numbers and write the spending bills in each department of Cabinet Government and they can spend up to that amount that's the goal and we've set the goal of if we're going to spend the spending curve down we want don't want to do supplemental Appropriations we want to make the government live within this enormous budget that we have do you think that it's worth threatening another default potentials threatening another default I think what you see is if you don't pass those Appropriations bills then you're confronted with an FY 24 fiscal 24 continuing resolution which I don't think anybody in congress wants because you you freeze spending at the current level but you get all the policies that are frozen too and members of Congress like to debate in the Appropriations process both those spending levels and the policies that go with them and you can't do any new starts when you have a continuing resolution so you can't start construction on a new nuclear submarine if you have a continuing resolution so it's not in the best interest of the government to have a continuing resolution but that's why I don't see it as a default debate at all it's more of a typical government shutdown type debate if you want to use that term on whether we're going to have appropriated funds approved across both houses of Congress or if we're going to be confronted with a continuing resolution have you ever seen the Republican party as split as it is right now we've been talking about this for a while but perhaps the prosecution a former president Trump has brought this into even colder relief just because you have people lining up behind him and other people saying wait for some information to come out where do you stand on this on are you talking about still talking about spending your time about President I'm talking about President yeah president Trump well look I think he made this situation a lot worse by the way he handled the interactions with the government regarding the presidential records act so I think he's made the situation a lot more challenging I do believe that we need complete reform on how we handle classified information we just saw the news this morning that this young man National Guardsman out on Cape Cod is facing 60 years in in prison for releasing and distributing classified information I think this sends a lot of confusing messages to the American people we didn't make sure those rules are fair clear and that presidents abide by them and everybody else in the government abides by them so if I think about the if I think about that issue specifically it's clear that there have been more than several people who have had issues with documents so whether or not that's more egregious for him than other people led is yet to be determined but clearly we need to do something with that is that just because we're so far behind in what we're doing with our paper versus digital is that just because we just don't have a clear view on what really is classified and how classified it needs to be it's such a good question in fact we Declassified in the house intelligence committee the other day the instances of this uh the the National Archives reported to us in a hearing that they have found classified material in over 80 80 different former members of Congress records at their local University or wherever they're stored and that they've found classified information in unclassified file boxes from every president from President Reagan on so this tells me as a former White House staffer I can remember vigorously the pack up process on leaving the administration in January 1993 what was in a classified box and what wasn't out of my office so we have rules but I think we need to improve training and you raise a point of do we classify too much information do we declassify information effectively and communicate that and the difference between digital as in the case of Mrs Clinton and paper so I think there's work to be done here it doesn't excuse anyone's behavior on this topic though well and to that point are you concerned about the rhetoric around this that this is an issue of you know Prosecuting the people and going after someone just in terms of political interference are you concerned about how this is Raising questions about the Deep State and reigniting those discussions rather than the discussion around how to keep classified documents secret you bet Lisa I mean when you indict you know a former president by officials of the justice department of his opposition party you're going to invite political speculation that it's a political activity and it will absolutely take us off the substance and back to that but I simply I think that everybody ought to have clear understanding about how to handle this and do it right and the weaponization of the federal government which you're implying is the subject of a select committee in Congress this year because of the top at the FBI during the end of the Obama Administration and Trump Administration has disappointed a lot of people in Congress it's under a tremendous scrutiny director Ray is on the hill routinely trying to defend that we have fired the people who brought you Russia Russia Russia we've fired the people who we think did wrong and that whole issue around Mrs Clinton or around Mr Trump and we're trying to clean up our act and do the right thing but there is skepticism among the citizens and people in Congress and I think it's a heavy lift it's as heavy a lift as the church commission back in the 1970s and I'm not that's not hyperbole so director Ray has to make the reputation of the FBI the the one that we all know and love over the over over history so you see the onus on the FBI rather than on the former president to change the rhetoric well I think the onus is on on your point about is is the Deep State uh potentially uh in trouble and and creating Mischief I think it was clear in the Russia investigation and and Crossfire hurricane that they were involved and it was very political at the top of the FBI that's hurt the FBI's reputation I think it's up to director Ray to help work with Congress and rebuild that reputation which then I think rebuilds trust through the American people french hill thank you so much Congressman we really appreciate you uh taking the time with us Sarah Honda of outfit tax and I do Wonder just to sort of sum up how much you're focused on domestic issue news versus International well domestic issues are going to be very that's going to affect the economy so for us that's very important because we are also a fundamental analysts we want to know what's going to happen with our companies and with their and and with the economy I think that it's hard to game out right now how the politics are going to go I think the whole country is exhausted by the idea of two people who already had this fight fighting this out again but I don't see right now what what's going to change that but we've got some time before that happens Sarah thank you so much for being with us I can't tell you how wonderful it was to have you uh coming up in the next hour Nila Richardson Chief Economist at ADP as we parse through the labor economy in the United States and whether it is tightening up or loosening a bit from New York this is Bloomberg are seeing signs that the economy is is growing at a sub Trend Pace right now is it possible the narrative no longer becomes this rotation from small to large or from growth to Value the market moves so fast and the data does not look that fast what we're experiencing right now is the lagged effects of the inflation of last year we're in a really weird period look every major economy has had successive shocks this is Bloomberg surveillance with Tom Keane Jonathan Farrow and Lisa abramowitz perhaps people are just sick of worrying good morning this is Bloomberg surveillance of Bloomberg television and Bloomberg Radio Tom and John both off Lisa abramowitz here and I am so happy to say that I am here with Nila Richardson for the hour she is Chief Economist at ADP and that seems to be the feel today everyone's just sort of taking a breather after getting it wrong looking around saying you know what let's buy stocks because we are seeing the biggest rally for for the week going back to March when everybody was worried about the banking crisis Nila welcome is there a reason to feel optimistic or is it just simply there's no reason to feel pessimistic you know the sun is shining it's Friday and when you asked me to join you for an hour to catch up I didn't realize it was going to be on air so I'm thrilled to be with you today welcome yeah we're seeing some good economic news it's just when you look too closely just like when you look at the sun the blare of that can be really irritating as long as you don't look directly at the data and on what's underneath it what could be brimming for the future you're fine you can enjoy the weekend incredibly not encouraging so what's actually going on and we will dig into the data which is what Nila does every day what did you call it a pause of pessimism it's a pessimism pause love it I like that that's really kind of where we're at which raises a question of okay let's get blinded a little bit and dig under the data do you think people are missing the forest for the trees a little bit well if you're focused on the short term you're focused on the FED action but if you're focused in the long term you realize that the economy has changed structurally and that this current bout of inflation is not one and done even if it takes longer to get to where the two percent Target is it doesn't mean it stays there it doesn't mean that everyone goes back to just a happy day like we were before the pandemic when it came to inflation so I think the FED has to sleep with one eye open well into the future because the economy has changed well and one of the reasons why I was so thrilled to have you and yes surprise it's going to be on air but one of the reasons why is because really the labor market is the key to all of this mystery how much are we seeing ongoing momentum with respect to wage increases is there a wage price spiral are we seeing evidence of that perhaps beyond what the FED is indicating what's your data showing you well wage growth peaked last year and I say that on the basis of 25 million workers that we provide payroll services for it is clear that that double-digit momentum that we saw that moves sideways towards the end of the year that never decelerated despite all the FED interest rate hikes is starting now to decelerate and that is good news there's no sense that there is a wage price spiral Brewing right now inflation is still too high wages are though decelerating still higher than is consistent with a comfortable level of inflation so but we have seen progress and that's good news in terms of the wage price spiral issue so coming up later in the show I am going to be speaking with Nila about Ai and whether we're all not going to have to work again and we'll get into all of that and how much that's going to transform the labor market I'm sure you're thrilled for that right now in Marcus just to give you a state of play on a quiet day after a pretty big week we're seeing basically stasis on the S P are we talking about 4 500 I remember we were talking 4 300. can we get above that now we're talking 45 500 and Beyond meanwhile the euro is stronger versus the dollar versus again the strongest versus the Yen going back to 2008 versus the dollar 109.61 this is the one theme of the week the euro is gaining because the ECB is hawkish their fight is not done their increase in inflation is highly concerning to them 10-year yields basically range bound 3.73 percent crude uh just basically stays at 70.60 after reaching be below 68 earlier this week a real question around where we are in terms of the rally and whether it has legs and joining us to really get into that is Anne maletti head of active Equity it all spring Global investments before we get into and welcome this question of do we end up with just a stock picking Market can you Pile in and get some sort of sense of relief from the rally that seems to only be gaining steam it's a great question Lisa and and I think the hardest part for investors is do I stay on this Sidelines or not and we were talking earlier is the market really pulled and drawn by emotion and it is it always has been and so investors have to fight that emotion every step of the way and remain disciplined and I think despite all of the kind of chaos that's happening around us and outside of us within the economy with the FED with global um uh Global unrest I think it's brought a lot of focus to our investment teams and what they're looking at is the narrow focus on which stocks you want to own I think investors when you're out of the market you have to be really careful about when you get in what I tell people is regardless if you know overall there's negativity or positivity you really want to always have some allocation in equities so let's pick some stocks Nvidia meta Tesla you like all the popular ones no I'm just wondering I mean how do you basically understand what valuation even means at a time when things are going to the Moon based on promise of future invention yeah you know I mean I think what's been really interesting is the flow in that we're seeing into equities is going into index funds right most most importantly and when that happens investors are buying more of the big names and paying a lot more for those names that's just the way it works and so in a way active managers are a little bit trying to not fight that Trend we own some of those names too but we're also trying to find those names that haven't been recognized we're really you know like mining for gold right now there are opportunities that do exist out there in an emotional Market where do value stocks come in yeah it's a great question neela and you know as you saw in the beginning part actually last year when the market really started to kind of pay attention to Value there were good reasons for it Mark multiples were compressing and that's when investors went to Value I like to think about it like don't discriminate between value and growth right you can buy high quality Goods at a good price so I kind of like to say I like to shop at Saks or Neiman's just don't like to pay full price I kind of think our investment teams like to do the same thing right they want to buy Quality Companies but they want to pay a good price for them and there's real opportunity to do that now so I would say don't discriminate between value and growth I just wonder what does even value mean yeah I mean honestly no I'm serious I was talking to some people and they're saying that basically conservative stocks defensive stocks value stocks everything's Tech I mean that's basically what everyone is saying so at what point do you start to say well maybe we're just falling behind and if you own the broader index well at least you'll catch the stories that might come out of nowhere and blow up the index yeah it's it's a great point and um you know over the years you know people have categorized value and grow separately but as you know we've had big Industries change from you know we've seen energy via value industry and energy be a growth industry and so I think investors have to kind of frame that up and I think Lisa you did really well any category any company can move from value to growth at any time which is why we kind of face the individual stocks individual companies and look at what we're paying for them just quickly here going into the second half we've gotten a lot of reassessments a lot of people are just getting more bullish so seems to be the theme pretty much across the board with the exception of Mike Wilson but I'm wondering from your Vantage Point how you're shifting either the names or your thesis heading into December yeah it's a great question Lisa because clearly I think the last time I was on the show I said we expected the rally to kind of either spread down market cap which we have started to see a little bit we would expect that to continue if the rally is going to continue investors are going to flow more broadly into the market but again I think our investment team's focus is looking for those unique opportunities trimming names where the valuation just doesn't make sense because what we do is all about risk versus reward and really trying to set up our investors to protect them against big risk and focus on reward over time because again the future is pretty foggy all right well Emily thank you so much in the foggy future after the fog has luckily passed for us in the New York City and Melody of all spring thank you so much Nila it is that time I really do want to get your take on what you're hearing about how artificial intelligence is going to all put us out of a job and that chat GPT will be sitting in the seat well and delivering the news I have a singular Source on that my 15 year old and we do an automation check every single week on my tasks I don't think that's actually going to happen though really maybe we'll have more vacation time that's the hope maybe we get off of work two hours early maybe you can do surveillance in 45 minutes instead of three hours but what the promise of AI is is to automate certain tasks not necessarily jobs the more variable the job the harder it is to automate no matter what the job is and so the idea is that AI we're still at this press a piece of precipice of choice whether it's labor saving or labor enhancing if AI increases the productivity of the worker and we know that we're in a productivity slump that we haven't seen since we've been tracking productivity in official government statistics since 1948. five consecutive quarters of productivity declines AI has the promise to not only reverse that Trend but to accelerate productivity growth so I'm really excited about it also I'm excited about more vacation time but primarily I'm excited by the promise of an increased standard of living for the U.S worker I was speaking with a friend yesterday who's a doctor and he was talking about some of his uh sort of online calls and he said there's no reason this couldn't be done by a chat bot you know that sort of the online Health visits this is all going to be taken over and his concern was well what's the point of humans right I mean you quickly get to you know my boss will talk to your Bots and we'll put together your charts then we'll deliver about recommendation what's the distinction between layoffs though and you know something that is more of a productivity boom well layoff said if you look at the recent spout of headline layoffs and let's be clear when we look at initial jobless claims they've gone up the last couple of weeks but they're still relatively low there's not there there's flashing a little bit of yellow but they're not flashing red yet um in terms of the labor market but when you look at that kind of kind of right sizing of your head counts especially for large firms that hired aggressively last year that's very different than the long-term investment in an AI and you know AI needs people unfortunately otherwise it would be like Mass adoption very quickly you need people to adopt that technology which means for companies you have to skill up your Workforce and enable them to deploy that AI so it's not just that this Innovation happens in a vacuum people actually have to use it they have to be trained to prompt properly and get the right answers make the right decisions you still need people for that if you're just joining the program the s p is basically flat on the day but indicated upward and as the day goes on probably it will rise all the more we are here with Nila Richardson and we're talking about artificial intelligence and how that will transform the labor market and you mentioned your 15 year olds and I have a 14 year old who similarly is my early adopter and uses Chachi CPT for a lot of the schoolwork and that was sort of how I initially found out about this and how it's transforming education and I do Wonder just the sort of parameters of invention how that's going to transform the way that younger people do work at universities as well do you have the same conversations as far as the yeah um so my my son my expert my domestic policy team on AI thinks about it as a calculator as a tool just a tool and you know that companies around the world are trying to figure out how to innovate alongside the pace of progress and not just to save labor costs but also to really accelerate growth and I think that is where the rubber meets the road in terms of what our technology can do for an economy it can level out some existing fragmentation in the market it can help the US be more productive and globally so I I'm still on the optimistic side and I'm excited and then next half hour we're going to be speaking about science fiction armaged no I'm just kidding we're going to speak with Greg dacco Chief Economist at ey aparthenon from New York this is Bloomberg it's not a market that has been helpful to anyone in the macro space it really will be a problem if growth remain in the doldrens like this for let's say the rest of the year you can't ignore growth growth drives inflation inflation drives central banks but what we're experiencing right now is the lagged effects of the inflation of last year Jordan Rochester of namura basically trying to understand the macro mush that we're involved in right now trying to understand and parse through all of the spaces right now in markets as they try to pass through the macro mush the one aspect that stands out is a stronger Euro versus pretty much everything the dollar uh it's crossed we're seeing a gain of two tenths of a percent after a pretty big whipsaw upward the ECB more hawkish the FED 1.96 we're seeing one Euro excuse me uh the cross 109 68 we're also seeing basically a lift in crude after it hit a low of 71 and that was uncrewed and on then IMAX much lower than that lower than 68 earlier in the week as we try to parse through joining me today Neila Richardson uh joining from ADP Chief Economist there Tom and John both off today and trying to get a signal from the noise or the commodity space is giving anything to us right now you know they're staying put in terms of the inflation story I think there's something to be said for that because remember they were the first driver of inflation uh right after the start of the invasion of the Ukraine that ex expanded throughout that country so they they are giving us that in terms of the overall CPI index there was a risk at that time that the energy increases would spill over to the greater economy and make the inflation story much worse make it more than just about the supply chain bottlenecks in the good sector we haven't seen that where we're seeing the inflation is really on the labor side so if if they were heading into the summer driving driving season um we're heading into high temperatures again in terms of energy consumption so something to watch for sure in terms of the consumer budget and this has been sort of the question mark of why there hasn't been more commodity price inflation if the economy has held in and it's something that we keep hearing about with respect to oil having dropped about thirteen dollars a barrel if you take a look at crude on the nymex in the past two months Julian Lee joining us from London Bloomberg oil strategist and Julian from your Vantage Point do you understand why there has been such a substantial drop off in pricing even with additional cuts from Riyadh um I I think there are a number of factors that are playing into this I mean there are clearly uh worries about economies in uh in America in the Americas and and in uh Europe uh there are uh certainly uh suggestions that Supply um from a number of countries has held up uh much better than people had anticipated and indeed um in some places is unexpectedly growing if you look at the volumes of oil uh coming out of Iran uh onto the the World Market coming out of Venezuela and indeed still coming out of Russia despite sanctions on all those three countries their production has held up much better than people anticipated and that's giving a healthier Supply picture even as the big forecasters are tentatively increasing their demand estimates for China in the second half of the year and there are still big questions around that Chinese growth how much Julian is oil losing its clout as a macro play how much are people focusing more on the supply the demand the holding of oil and the costs incurred rather than using it as a way to express potentially slower growth well I I certainly think that um you know with with the the cost of financing um oil trades and and financing oil storage Rising uh as interest rates increase you no longer have this you know this this almost free um storage of oil or this this sort of uh free carry of oil and I think that does have an impact um you know when we had these these uh ultra low interest rates there was a lot of money uh virtually cost free that could could be invested in oil that isn't there now I think that has an impact and I think that the the huge um sort of global macro uncertainties is playing into this too yeah I'd like to follow up with that Julianne on energy demand because we're looking at a global growth picture that's slowing this year we're still seeing a lot of uncertainty about the second half for the US and in Europe there's a open question mark about growth as well so how do you square that Demand with the supply story that you're telling right now well I think if you you know if you look at the the supply forecasts um the the two big sort of forecasting agencies uh the International Energy agency a consumer focused group and the organization of petroleum exporting countries have both updated their their short-term forecasts within the last week um both of those have slightly increased their Chinese oil demand in the second half of the Year both of them um despite differences in the details of these figures both of them show the world short of Supply in the fourth quarter of 2023 by about two and a half million barrels a day against what the OPEC countries are currently producing so that suggests an oil Market that is set to tighten considerably the problem is I think that many people out there simply don't quite believe that combination of supply and demand and the size of of the deficit that these organizations are forecasting at the moment Julian Lee thank you so much for taking the time as always and as we talk about the demand side Nila I do think about the fact that we've gotten some signs that there is a bit of disinflation going on with respect to airplane tickets we saw that in the recent CPI also with respect to rental cars you're starting to see perhaps a bit of a cool down on the edges in the YOLO Trend the you know let's go travel around the world I mean is that something that has staying power it could I mean we saw this big burst of energy when everyone was traveling after being cooped up in their houses with their kids for like months at a time and maybe the some of that energy and enthusiasm for travel is starting to recede we're starting to see some good news on the food front too we didn't talk about food in the commodity prices tied to agriculture but that was really draining for a lot of consumers but this is nibbling around the edges when you're talking about the bread and butter spending of the U.S consumer those prices have accelerated a lot and they're not going down the growth may slow but they're eating into the budget every single month well one thing that we keep hearing from for example Airline Executives and I keep going back to that because every time I buy a ticket I just am shocked at how much the price has gone up from a year earlier but you hear that there really isn't a lot of pushback in terms of pricing from consumers are we starting to see it though I mean the CPI report again it showed the airline tickets were the ones that were coming down quite significantly yesterday we were talking to the Ford CFO he said you know the amount that they can increase their prices has changed and that the big price increases of the post-pandemic era are over I mean how much is this people shifting back to more even goods and services types uh type of spending time we've seen the transformation of the U.S consumer we saw it twice we saw them transform from going from Mostly services to goods and now we're seeing them head back into Services we're also seeing them more independent about their travel now there's cars now there's train and people are feeling better about public transportation now that the health care crisis has receded so there's more options now business travel is starting to pick up again so that's good news I haven't been on an empty plane in quite some time every plane ride I've had has been jam-packed but where do the consumers show up the consumers are still price takers in this market it's hard for the consumer to weigh in with their demand expectations right now they're not making Headway in any Market I would argue doesn't it surprise you that people come on and they're like you know demand just isn't picking up for fossil fuels and then you see everyone with these packed planes you see people traveling in cars you see all of these things doesn't it raise a question in your mind there's a lot of questions that are raised in my mind there's not a lot of coherence here I'm trying to put it together you know the consumer the structure has changed the consumer has changed but I think what you're seeing as a consumer who is trying to hold the line on on their budgets if you look at the savings rate we know there's a lot of cushion there but we also know that debt levels are accelerating that the student loan deferment is coming on board so that extra money that you spent on the airplane ticket you may not have it come October for example so there are a lot of things without good wage growth that are going to kind of push that demand story a little bit more for Airlines let's continue this conversation with Greg daco coming up next chief Economist at ey Parthenon this is Bloomberg [Music] [Music] the great reset after a week of Divergent Central Bank decisions the FED hold ECB went 25 basis points the Bank of China cutting and the bank of Japan doing what the bank of Japan does which is do nothing and that seems to be where we are with yield curve control still in place in the markets stasis after a really a really tumultuous week although indicating a little bit higher for the s p building on a rally that is the biggest since March since before the banking concerns really came to a four we're heading up against 4 500 44.80 the Euro Stronger versus the dollar consistent throughout the day throughout the week 109.66 again bumping up against some of the Year highs 10-year yields at 3.73 and crude a little bit of stasis after getting as low as just north of 66 dollars on the nimex 70.84 I'm here with Mila Richardson John and Tom both off today on a well-deserved payoff it is not a sabbatical it is not assignment it is a day off and it is deservedly so Nila wonderful to have you and as we parse through the data and understanding how things are working I'm looking ahead to next week housing market we're going to get a whole host of different housing indicators the FED characterized this as a market that was slowing down do you agree no I don't this is one place where I I see a lot of Divergence and I think that's been part of the market narrative that the housing market would slow down in the second half of the Year and that would necessarily bring uh the the CPI numbers down because of shelter cost being such a big part of the CPI but if you look at housing from a long-term perspective and I have been doing so for a very long time you'll see that the the supply shortages we're seeing in housing are structural they are long lasting they didn't start with the pandemic they've gotten worse during the pandemic the labor shortages are intense we see it in our own data at AVP there is a lot going on with housing that is not cyclical even though we look at it as a cyclical indicator it has structural holes right now and I think that what's under appreciated is the fact that one the US is chronically under under supplied especially with affordable housing and two there's been a lot of new households formed over the last two years in fact we're at a run rate of a million more households being formed than were was the case before the pandemic I remember coming on and talking to you about Millennials living in their parents basements well they've gotten out of the basement they are ready they are 40 years old now they better get out of the basement and so you're seeing an increase in household information that is going to put pressure on demand Millennials are reaching Peak home buying years and rental prices I think are going to kind of hold Trend not decelerate in a meaningful way for inflation if you take away anything from this program it is time for your 40 year old son or daughter to move out of the basement I am looking right now at some heads that are coming from get for the Governor Chris Waller who is speaking in Oslo in Norway and he was saying that everything seems to be calm in the banking system so putting that aside but saying this to nila's point the U.S economy quote is still ripping along for the most part housing perhaps in the Forefront even though the feds seem to categorize it at this week's meeting as slowing down and adding to the disinflation joining us now A buddy of nila's in The Economist Circle Greg daco Chief Economist of ey Parthenon do you agree with Nila Greg that the Fed was not exactly accurate in their characterization of a cooling off housing market that appears to be on certain data points turning the corner I think Nila made a great Point regarding the the structural deficiencies on the supply side I do think that we have seen the negative effects of tighter monetary policy via higher mortgage rates and reduced affordability in terms of demand we did see home sales plunge quite significantly over the past few months we haven't seen starts and construction activity plunge us hard and I think that goes to neela's point about the structural supply side deficiency and the need to continue to build more housing to support population growth but I think if you look at the broad set of interest rate sensitive sectors they have shown the Leading Edge of this slowdown when it comes to economic activity whether it's the tech sector the housing sector or even the banking sector those are all signs that the graduating to a higher cost of capital environments and that is really what the FED is aiming for I do think there will be disinflationary pressures coming from the housing sector but they may not be deflationary as we had seen over the early months of this year so you mentioned Victor's housing being one of the ones that are first and foremost what is your view on manufacturing and the role it's going to be playing in the slowdown in terms of an interest rate sensitive sector I think that's one of the the key areas where we're seeing synchronized slowdowns across most of the economies around the world right you're seeing a Slowdown in the US we have the latest data yesterday showing that the sector is slowing down it's not retrenching we're not seeing the type of massive retrenchment that we typically see in a recession but we are seeing sluggish activity down one month up another month but really declining on a year-over-year basis and that's the same type of situation that you're seeing globally you're seeing Germany being weighed down by its industrial sector you're seeing that in China the manufacturing sector is also struggling that is very important as well it's not just about domestic policy and domestic momentum it's also about the global pace of economic activity and I think globally we are also seeing this slowdown in terms of the industrial sector but also broadly starting to see it filter through in terms of service sector activity with a bit of a lag just to walk you through what we're expecting for next week we are going to be getting building permits we are going to be getting housing starts we're we're going to get existing home sales that's sort of the one two three punch Monday Tuesday and Wednesday leading into the pmis that we get on Thursday s p Global U.S manufacturing and services at pmis and a real question here as we move forward about how much you start to see a rollover a convergence of the services and the manufacturing and Greg from your Vantage Point do you see a convergence there even as manufacturing has been in a recession and continues to slow down that Services is also starting to slow down in a material way that perhaps is not being factored for it I should just correct those isms are on Friday my dates are getting a little confused with the holiday Greg what's your sense I think we will gradually see a Slowdown in terms of service sector activity I think you were talking earlier about what the consumer is doing I don't think there's one consumer I think there are multiple types of consumers depending on the income where they stand on the income spectrum and we are seeing more caution being exercised at the lower end of the income Spectrum the bottom three wind tiles are exercising more caution they have less of that savings buffer they're experiencing more cracks in terms of their credit Foundation when it comes to household finances and the top income quintiles are not immune to higher prices higher interest rates and I talk about prices here because we as economists talk a lot about inflation coming back down to two percent but two percent inflation is still an environment where prices are rising I think at one point prices for services become too high to allow people to travel and nilo is making a great Point earlier there are going to be some trade-offs that need to be made in the coming months with student loan relief ending and that should allow for people to make decisions in terms of what they spend their money on that in overall should lead to slower spending on services so Nelly you're sitting in Tom's seat so if you were here right now he would channel that you are overseeing all of these Divergent stories and the fact that there are A Tale of Two Americas he talks about that a lot and he's correct to do so and you have some people who can't afford it and some people who can so how do you aggregate this and get a sense of okay well if the spending power of some people is diminished well others will just swoop in and take over right because you still have a recovery on the upper kintyles the core of a rotten onion is still rotten and so that's why it's important that the Main Street view of the economy stays strong where we've seen growth and where we've seen frankly increases and workers coming into the labor market has been in low-paid sectors Leisure and Hospitality has been the stalart of this U.S recovery without restaurants and bars we wouldn't be talking about a soft Landing right now and I think that's under appreciated in terms of the story of there's going to be high income either workers or consumers that kind of save the day for the U.S economy no it's a bottom-up economy right now it's that's where we're seeing the highest pay growth that's where we saw the real demand for workers to recoup the loss head count and that spending is important and if we're seeing a Slowdown because of the end of covid release relief measures the final finish of that with the the student loan deferments then we have to be really cautious about consumer spending in the context of higher interest rates well and Greg weigh in on that because this raises a really interesting question are the lower Kent house the leading indicator at a time when you do see some of the lower end retailers struggle with margin pressures and in difficulty passing along price increases with really crimped budgets among their population is this a leading indicator as potentially that cohort ends up running out of their savings sooner and possibly in the next few months yeah I think that's right and just to make a point Lisa about your comment uh about uh Tom I think uh neela is much better looking than Tom everyone to Tom there uh but in terms of the economy we usually have the 60 40 split the bottom UH 60 of income earners do about 40 percent of consumer spending in the top 40 to about 60 of consumer spending activity that top quintiles those top quintiles have been doing more than their fair share in this environment I think we have to be very cautious about how the Outlook is going to play out we have an environment where we are seeing slower appetite for growth slower appetite for investment in a higher interest rate environment that will first and foremost apply to smaller businesses and that will lead to less employment growth but we're not expecting the type of retrenchment that we've seen in the past when it comes to the labor market I think one of the reasons is that the value of talent has shifted post-pandemic with employers having spent so much time I'm hiring training and retaining their talent they're very much reticent to let go of that valuable source of employment and so you're not seeing the type of massive layoffs that you've seen in the past instead you're seeing hiring freezes or strategic layoffs and that is the main reason I believe why what we're seeing today is a gradual cooling of the labor market and a gradual cooling of consumer spending growth and overall final demand Greg I think you make such an excellent point about small business and job creation and we know that they have been the engine of growth and we're seeing it as well in the ADP data that small businesses are really filling in the gap for larger firms who have retrenched their hiring right now so my question is given what we know about the strength of of small businesses and they're hiring right now but what we know what's to come in terms of higher interest rates possibly in the future can the FED engineer a return to two percent Target with unemployment less than four percent in your opinion I think it might be difficult but I don't know that we necessarily need to go to five six seven eight nine percent as we've been in the most recent two recessions I think there is sometimes a little bit of a near-term bias in terms of our expectations of any type of slowdown so I think we will likely see inflation with a three percent handle on the CPI next month so we're not going to be too far from that we know part of that is coming from energy and food prices or inflation is going to be a little bit stickier but likely to come back towards two percent I wouldn't be surprised that what we have is really a sluggish economy without necessarily having a deep recession and inflation gradually falling back in line with the two percent Target and we know that the FED is going to tighten monetary policy on an ongoing basis and maintain rates elevated which is very important in this context of achieving two percent inflation Greg Deco of ey Parthenon thank you so much for being with us if you're just joining the program the s p is up it continues to go up the more the session goes gone up about a quarter of a percent we are here with Mila Richardson and I'd love you to weigh in on that this basic idea of a soft Landing which is essentially what Greg was talking about this idea that you could see just to slow down a sluggishness not necessarily A recession and an increase in unemployment but definitely a little bit of softness but with inflation coming lower this is this is what the FED wants I think that the sluggishness is my base case of the economy with inflation going down slowly I mean I there's been a lot of talk about the soft landing hard Landing I feel like and this is a little controversial the economy has already landed we're seeing inflation decelerate and we're seeing the job market hold up but we're still on the tarmac we haven't been led to the gate we're just sitting on the plane waiting for exit because we're still waiting for that two percent Target so we're landed but we're not off the plane and that's how I see the U.S economy right now we're just sitting here and anyone who's flown out of the New York area airport knows exactly what I'm talking about you have no idea how you're how long you're going to be exactly you might be on that tarmac for so long if they sent you back to the gate and that's really the key question that we're dealing with here because we've got a situation where if we have landed then we're coming up to Jackson Hall where it's been a full year since Jay pal came up and for eight minutes said there's going to be pain there's going to be paying the unemployment rate's going to go up there's going to be pain and here we are the unemployment rate near record lows and we'll talk about that coming up as we force uh potentially some sort of slowdown but not a recession does that end up creating a more positive scenario coming up talking about home builders into all of that data John lavallo U.S home builders Analyst at UBS this is Bloomberg thank you [Music] those that have that three percent four percent mortgage are going to be very reluctant to give up that interest rate they have equity in their home they have equity in their mortgage so this is new demand this is a lot of the unraveling of doubling up people that have lived at home foreign with their parents for an extended period of time that was Stuart Miller Lennar executive chairman talking about 40 year old Millennials moving out of their parents homes and their basements as we were hearing from Neil Richardson who's alongside me today of ADP Chief Economist there and we were talking about home builders and let's just put this into perspective the S P homebuilders ETF I'm just looking at this is up 27 so far this year surging into what the FED said was weakness surging into a downturn that was going to disinflate this economy right now joining us to answer why and who is right and who is wrong John lavallo U.S homebuilders Analyst at UBS so I want to start John with a question that I keep asking people is anybody are these home builders selling to anybody who's paying a seven percent mortgage rate for that home that's the beauty of what's going on right now no the simple answer is no if you're buying a home from one of these public home builders you're paying six percent you may be paying five and a half percent and so it's a completely game-changing Dynamic that's going on right now so as we look toward forward about whether that demand can continue do you see this momentum or do you think that it's been overplayed that perhaps people are not seeing what the FED is seeing which is people aren't going to be able to afford it all of the cash buyers came in those Millennials have moved out of the basement and now it's just getting too expensive Lisa it's a fascinating Dynamic that's going on in the market right now what is really occurring is that there's zero existing Home Supply out there so and the homes that are out there are old and they are not at the right price points so there's no competition from that side of the market go to the other side of the market where you have the private home builders which are 60 of the market they can't get land they can't get labor they can't get financing now and so the demand that's out there and albeit is less demand than it has been over the past couple of years it's all being channeled towards this group of public home builders and that's where we're seeing in these massive market share gains such an important point about the Aging of the housing stock the number of units it takes just to replace deteriorated homes underappreciated story for sure you know I think that the real question to me is there so much about how interest rates are crimping demand but no one talks about how interest rates affect Supply and I think the medium mortgage rate in the U.S right now is around three percent homeowners have about a three percent mortgage rate so how do you you know deal with those supply shortages how as a home builder where do you target is it the affordable priced homes is it the expense of high-end homes how do you how do you like deal with such a big demand and such a short supply well Mila you're spot on I mean the fact that most folks have mortgages that are struck at a much lower rate than the prevailing seven percent rate today making that swap out into another home the math gets tricky right so more people are sort of locked in place so that Supply is not going to loosen up so as a public homebuilder what we believe is the main place to Target is this entry level first-time buyer where really it's a need-based purchase you're maybe getting married having children things and life events that necessitate more space and that is where we believe well that's where the demand to demand currently is and that's where we believe the real kind of tale to this will be as well okay hold on a second not to push back but to push back I mean I'm thinking about the people who I know who are creating homes and having babies and paying off student loans and dealing with jobs where they haven't like graduated into more senior levels where they're getting paid and they cannot afford any of these houses I don't understand where that demand is going to come from unless prices come down well that's again what the the public Builders are doing is they're making that math work for people and how they're doing it we talked about the mortgage rates right but they're also they're building smaller Footprints they're building a little bit further away from City centers they're offering fewer skus for lack of a better term so they're becoming much more efficient where they can actually you know incentivize folks and help them get into homes but do any banks want to give them loans like does anyone want to actually extend credit to a home builder at a time when people are worried about City centers having a complete you know sea change with office space not being used and given the fact that prices are so high at least that's a great point and that's the beauty of it is that the public home builders have captive Finance arms so they're offering their own their own you know a set incentives in-house and they have access to the capital markets and that's where they're getting the funding let's let's kind of turn to the labor market a little bit that supports all this housing construction and also what we're seeing in in terms of changes of work for my first question is has remote work change the the geographical footprint of home builders right now you know I don't know that it's changed the geographical footprint but it's really played into the geographical footprint so if you think about the public home builders they're all sort of in the sunshine States or the Golden Horseshoe however you want to refer to it and that's where the job growth is that's where migration is trending and that's been you know that's been the case for a number of years but I think work working remotely has sort of exacerbated that shift and we're seeing more folks move into into that into the kind of the Sun Belt and so it's really sort of playing into the hands of the public home builders right and then just the labor shortages that you know finding people to do all this building how extreme is that right now uh what would you like to see in that industry to help get more workers onto the the work sites yeah it's um it's tough It's really tough getting labor is one of the biggest challenges out there for the home builders I think that that's where size and scale become increasingly important and again public home builders are well positioned for that I think what uh is is needed is that this is an industry if you think about it that hasn't changed changed in 100 years we're still building a house the same way we did stick framing it on site no AI here this is actually true right this is the the point is that some jobs you cannot replace with artificial intelligence I just want to give you a viewer writes in so y'all think Millennials went from living at home with parents to paying for highly overvalued homes is all cash for real I mean there is this element of are you joking me that this is sort of what's going to continue fueling demand especially at a time when in certain of these Sunbelt areas insurance companies are not covering the housing the housing insurance anymore simply because of different weather threats and other things and people are starting to migrate back I mean at what point do you start to see a real softening and potentially housing Supply coming back online well maybe to take the last part of the question first to get housing Supply to come back online I think we're going to see interest rates need to come in pretty meaningfully and that you know that's anyone's guess um you know I think in order to sort of loosen up if you're a homeowner that has a four and a half percent mortgage making that swap into seven percent tough if rates come in maybe that loosens that up um but I think you know your question on the Millennials is is a good one uh what I would say is that Millennials are again reaching that Prime home ownership age of call you know 30 to 35 years old and they're having life events and and I know I know the math is tough but to the extent that they can make things work and the public home builders on their side try to make it work I think we're still in for a good Market I love that having life events sort of you know having a kid get married doing whatever moving getting a job uh just quickly to follow up with what you said that on to get supply to come online you have to see interest rates come in meaningfully you have to see mortgage rates come in meaningfully does that mean you expect prices to fall when interest rates come in there's just no Supply out there right and so I think that's what's really been booing home prices and we don't expect a big decline in home prices I think you know if you talk to the public home builders they'll tell you that their average selling price has come in about 10 from the peak but the peak was was high and so if you look nationally home prices are pretty flat on on a year-to-day basis and we don't see a big change in that so it is a tricky scenario to make that sort of affordability equation work and again that's why it's so good to be a public home builder today when you can offer that financing so novello of UBS pitching home builders quite clearly thank you so much uh for being with us Mila do you agree with that that we're not going to see any material shift lower in prices at least on average I mean in Pockets around the country not nationally I mean what you're seeing is fewer sales and so you're seeing a market that's shrinking because there's no Supply and that's pushing up the house prices um just because prices are rising doesn't mean everybody's buying right and what we need is more Supply we need more affordable housing I I think that's the most beautiful thing that we heard is that the entry point is uh more affordable than it was at different parts of the last 10 years where a lot of Builders were building at the high end so I think that housing is the must-have data tool of the summer because whether it goes housing goes to inflation goes to the U.S economy it is the Bedrock so do you think that it is going to slow down or do you think that we are on at a Tipping Point where it's heating up and a lot of home builders are figuring out tools to bring down rates I think it's lumpy I I think every new hit to interest rates causes a pause and a step back from home buyers and then they just kind of swallow it and they could step back in because there's no alternative if you got two kids and two dogs you need a house and that's for most people the reality they make the math work the problem is the finances are now becoming more and more constricted so it's a real issue this housing bottleneck we talk a lot about bottlenecks the housing bottleneck it's not just a bottleneck to the homeowner or the home buyer it's a bottleneck to the labor market you can't get people to move to where the jobs are especially as more firms go in office so it's an issue I think that Supply can help solve so with the data points of the summer will be the housing and I will say if you've got two kids and two dogs I know that Tom would probably pick the dogs but I'm sure that a lot of people will be making a lot of decisions Neil Richardson of ADP thank you so much a pleasure having you on with us wonderful to be here with you coming up but we're going to be hearing from crystallina georgava IMF managing director that conversation coming up at 10 30 a.m as they parse through fiscal versus monetary something they've been incredibly focused on from New York this is Bloomberg

Channel: Bloomberg Television

Views: 69,328

Keywords: Jon Ferro, Lisa Abramowicz, Tom Keene

Id: Q36YJLoCg5w

Length: 146min 18sec (8778 seconds)

Published: Fri Jun 16 2023