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You're listening to Bloomberg Intelligence Radio. I'm Alex Steel alongside Paul Sweeney. We cover all the top news for you with our Bloomberg Intelligence analysts. They cover two thousand companies and one hundred and thirty industries worldwide, and we're going to do that now with one of them in relation to Apple, So that stock is down to over one percent. It's a tough tape for sure. But the news overnight was that Apple has assembled about fourteen billion dollars worth
of iPhones in India in the last fiscal year. So we want to get perspective with anurag Rana. He's Bloomberg Intelligence senior technology analyst. He's the guy we go to for all these kind of headlines on AOG. Always a pleasure. Fourteen billion dollars worth of phone sounds like a lot, is it.
No, it's not a whole lot, but at the end of the day. You know, one of the things we have seen that over the last two and a half three years, Apple has been assembling its phone outside And you know, for us, the real reason for that is a couple of years ago there was a COVID big issue in China. It had an impact on some of the phones coming out, that had an impact on sales and so forth. Now having said that, that was one reason.
Second Apple prior to the you know, you could say the COVID issue was completely dependent on China for all the assembly and their parts. Now what we are seeing is they are moving out of the assembly from China into other areas, mostly India. But one of the things I tell everybody at the same time, they still make most of the parts. So it's you know, if we ever get into a problem with China in terms of geopolitical issues, we still lean those parts to assemble the phone.
It's not as if you know, those those parts are available all over the world.
An I just wonder how you know investors in Apple view this China risk. Are they of the opinion I assume that if they own stock in the company there, they have some level of comfort with the China risk.
Here.
Did they just believe it's hey, you know, it's kind of a mutually beneficial relationship Apple and China that at the end of the day, that's what's going to keep everything moving.
So well, I've seen two people, I mean two different buckets. One is, people are extremely concerned about the US China relationship in the long run. They obviously have you know, they don't want to deal with Apple or any other companies that you know, fall into that bucket. But the others said, listen, this is spart and parcel of the global world chain, supply chains, and most manufacturing companies are
dependent on China. Like it or not. They seem to be okay with it, you know from our side, you know, yes, absolutely. The biggest risk that Apple faces from a stock point of view, from a revenue point of view, from a supply chain point view, is if something happens between the US and China, and we've talked about that quite a bit.
But from a sales point of view, I think it is to me that's a bigger issue right now in the medium term, because China accounts for eighteen to twenty percent of total of Apples sale and frankly speaking, that is the big growth engine, and we have seen over the last twelve months of problems in that growth engine because of whahweh do we how.
Much do they make these phones for in India versus China, versus other areas, and trying to get a sense of where they make, where the margins are, and what they look like.
That's a very good question. And frankly speaking, we thought when they started making more phones in China or sorry in India, or we started seeing new phones coming out of that, that would have an impact on their gross margins. But they have managed it very well. And remember one of these things, it's the factories that they outsource their stuff to, and you know, it's kind of somebody else's headache. But in the end, you know, Apple will have to
make some you could say concessions. But at the same time, so far we have not seen any impact on Apple's gross margins. I mean, surprisingly, we have seen them, you know, hold up very nicely over the last two years.
Can you just kind of characterize the competitive landscape for Apple in China visa the Huawei and other phones here are they maintaining share, losing share, gaining share? How's Apple doing so?
Apple has not done this you know, same number of sales as WAWE over the last twelve months. Now. There are two elements of it. One is the competitive landscape. People are choosing Chinese phone so over a foreign brand,
So that's one aspect. The second aspect, which I'm hoping is probably you know correct in the long run for Apple's sake, is that Wawei didn't have a very you know, brand new phone for several years, and this is their first big new refresh, which is why people who have been using Quawei phones in the past are going out and refreshing their phone at a much faster clip. So that could be the second reason Apple is doesn't have that same you know, I would say, I mean, the
cache is still there. But typically what I would do is if I have an Apple phone, you know, I'm doing everything on it, you know, chat and the pictures and every but in China, what happens is you do a whole lot of your transactions using the the you know, the the apps that you have or the super apps, and for that you can download those app in any ecosystem. So I would say, on a on a you know, competitive basis, you are less prone to be an Apple customer than you are in the Western world.
Well that's interesting. So and then to that point is that what the regulation or the penalties in the EU in the US is going to force Apple to do an essence so it won't become that ecosystem in the same way.
Well, there is no super app in the US that is very much like v chat. I mean you could you could say WhatsApp could be one of them. But frankly speaking, I mean Apple has done such a good job of uh you know, I would say, maintaining their customer base in the in the US and in Europe. That I mean, I don't I don't see that happening. That is certainly a new app comes in and people start using that over what's going on with Apple or the habits that they have right now?
All right, Hona rock, I've got the iPhone eleven? Do I upgrade? Now? Do? I? Wait? What am I doing here?
You should look at Wait till the September October, you know framework, Because one of the things is, as we talked about it last week, if in June they are able to go out and convince the world that they do have an AI play with new features coming in, then you would need a little bit more firepower in terms of the memory and the CPO that's going to which means the next phone will have a faster version
of that. You know, I would wait for that because you know you will you will have both the both bigger memory as well as faster speeds.
Interesting, see, that's what they get you right, Like, once you start, you can't leave that and closed ecosystem. It's definitely a thing. So what's the next catalyst now for Apple? What are you looking at? Well, any catalyst I guess would be.
A big way. The June I mean that's it's Tune's Worldwide Developers conference where there are to talk about AI and what's a of Apple's AI strategy. That is the only thing that can actually put some fire in this particular you know, where is it down thirteen fourteen percent year a year todate Because other than that, I mean, we don't see China bouncing back this year, We don't see any major new product announcement, and obviously Apple Vision pro is not going to drive the overall growth rate
of the company. So it's the iPhone and if there is anything that's out there that can force Paul to go out and buy a new phone. I think that's going to drive the next cycle.
All right, Well, I'm heading down to Duke tomorrow Anarox, so there's a reasonable chance I might bump into Tim Cook. I'm going to make my dividend increase. Pitch. Yet again, he's.
Gonna run away from you probably, Yeah? Is that had that conversation though, as you say, he's like, leave me alone.
Paul I said, would a kill you to put a two and a half or three percent dividend yield on this thing? All right, Honorrock, thanks so much for joining us on rog ran a senior technology analyst Bloomberg Intelligence from the Technology Growth Boomtown of Chicago, Illinois. Go figure that? So AnyWho? So, yeah, we'll see the Apple. I think if you're a shareholder, you just you have to be just.
I'll take the China risk, you know. I think the bigger risk isn't necessarily so supply chain, but at the competitive risk and the risks of my sales people, for whatever reason, are in the we're not really buying American stuff if we don't have to.
Well yeah, and also it disrupts the thesis that like all of India is going to go buy an iPhone, which is like all of China's going to go buy an iPhone. Like, clearly we're seeing a difference in that thesis too. So such a good point. Not a supply chain issue with China, but just straight up demands.
Yeah, I think that could be the bigger issue.
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I'm interested to see we are breaching those technical levels for the markets, but then what winds up happening to buying the dip? Does that materialize or do we actually get a proper longer. Francis Donald is chief a global chief economist and strategist for Manual Life Investment Management, and she joins us. Now, great person to talk to on this. Do you think investors buy the dip on this?
Oh?
I'm not sure I'm there just yet, Alex. I mean, we've been living in soft landing euphoria where everything is perfect, growth is coming in just fine, but inflation is declining. And we've said you can't have your cake and eat it too Either growth will hold in too long, inflation will reaccelerate and you will lose your rate cuts, which is what's happening, or and I think this is the next phase of this, growth will deteriorate and you will
no longer be in this soft landing narrative. So we still have concerns that even though inflation is coming in sticky, growth is going to decline in the second half of the year. So what worries me. What worries me is this word stagflationary is probably going to come back a lot more in our narrative in the next three to six months. That's a very difficult place for the Federal Reserve to be. They're going to have to pick their favorite child, Sophie's choice. Is it inflation or is it growth?
And I think it's a really difficult environment for risk assets. They're going to have to deal with the worst of both worlds.
No bueno. So how about the Federal Reserve bump? FED Chairman J Powell. In the back of my mind, do I have a scenario where I don't cut rates with all this year.
Of course, that's always a scenario. I mean that team and I sat down this morning. Our base case has been the FED would go later but faster, but we'd penciled in June to the starting point, and so I said, team, you know, are we moving to September? And all of us agreed. We got to wait. In the next twenty four hours. There is so much FED speak coming forward, and I think you know as well as I do. It's not uncommon to see extra FED speak pop up
when you have big moves of this magnitude. So what we want to know is not the data itself, but what is going to be the interpretation of the data. There were many categories in today's CPI that are not going to flow through as strong to PCEE. Does Chair Powell want to emphasize that? What about that wages are decelerating fairly rapidly, and all of our leading indicators of wages say, well, there's not going to be a wage
price spiral. If the FED wants to cut in June, they have enough data to be able to say, hey, we're going to cut in June. If they like to take the opening the bond market gave them to go later, then you'll probably hear a lot less from them in the next twenty four hours. They'll try to stay mute. But this is this part in the cycle where macro forecasting and FED forecasting becomes a little less science and
a little more art. It's a lot more subjective. I need to hear what Powell says, not just what the data looks like.
And just talking about sort of market reaction. Euro dollars down as much as one percent. We're now at one spot oh seven, biggest drop since July. So we'll just watch out for more of those superlatives as we go. You mentioned the PCE CPI thing of a bob, and I say a thing a bob because like, not everything
counts in the same way to get different baskets. But you had the firmerical motor vehicle insurance costs and medical care and both of those are what feeds into PCE differently, So why how what does the FED talk about with that?
Whatever they want? And this is what's been really challenging for us is there are measures like six month annualized CPI X shelter. Heading into this was stub two percent. That was totally enough for the FED to be cutting or they can lean on the shelter side of the picture. So this is a really challenging environment where the FED can choose what numbers it wants to focus on. They can tailor which data they reference to what they think
is the appropriate outcome. We're talking a lot about inflation here, but let's not forget the job side of the picture. The job side of the picture, when you look at the leading indicators, is weakening and there on end, they can say headline job growth is good, or they can say full time jobs have been deteriorating very sharply, and
that suggests it's going to be labor market weakness. That's why listening to the FED is going to become paramount, and unfortunately, especially for those of us that are trying to actively trade, it a lot more volatility and rates in the next couple months.
All right, Well, if the underlying jobs data maybe is not as strong as the headline data, and we have persistent inflame here, it's got to be tough on the consumer out there. How do you think about the US consumer?
Depends which consumer you are, I know there's a lot of depends coming through here, and it's because we have so much diversification and desynchronization. This is a really big term. I mean, this week we had a horrible, horrible small business optimism number. It was more like small business deep pessimism number. That's very consistent with dark recessions. And yet CEO confidence is off the charts. Look at consumer confidence by income. High income consumers are feeling gosh, are good
and low income consumers are struggling. They're out of excess saving, their credit cards are too expensive, they're going to linquid. If you're a high income consumer, you're a saver. You're benefiting from investment returns and house prices returns. You're a really good shape. Let's not forget those high income consumers, the top twenty percent. They spend thirty five percent of all expenditures. So if you're a consumer right now that
is interest rate sensitive, you are feeling recessionary. If you are not interest rate sensitive, then things look really pretty for you. The key here is not to cherry pick
which side of theirs you're going to look at. It is to understand from a policy perspective that the economic experience across income groups and regions in the US is very different and from an aggregate perspective to look top down and say, what does this look like in totality, not just looking at one side of the picture or the other.
So and to that point, sort of just looking at the areas where we saw increases versus decreases. I found it was so interesting, not to like bore you guys, but things like car insurance and clothing and personal care and education and furniture that all went up, right, But what went down on are things like the price of butter for example, Grocery store foods went down, cereals and bakery products so like go make croissants, so like it's hard.
So I wonder, are we in like a rolling inflation scenario where we kind of saw that last year and the year before when it comes to rolling recession in certain areas of the equity market and industries. Are we in that place right now?
Possibly? I mean on the flip side, goods are actually in straight up deflation right now. So where we're seeing the inflationary pressure is on the services side. But we were a little bit worried today we're going through the number. We said, Look, apparel is starting to pick up there's enough categories that the momentum is moving in the wrong way, So that's proving a little bit of concern for us.
One thing I can't help but think about is last year, my team and I were saying constantly, hey, when the Fed cuts rates, you won't be asking why. And yet in December when Chair Powell pivoted, I constantly was asking myself why what changed from October to December to really create this movement? It didn't seem like a good idea.
And there's going to be criticism on Share Powell, I think today, especially that he pivoted too early, He eased indirectly and therefore inflated the economy a little bit too early. I think that's going to be some of the pressure he gets now. On the flip side, if they say, okay, you know what, We're going to push out rate cut expectations till later this year, you might see some of that inflation come back. Is a veritable rollercoaster for our clients.
We tell them focus on the two year horizon. Two years from now, rates will be much lower than where they are now, whether they start in June, September or frankly twenty twenty five is less relevant for most investors than that two year cycle. So that's what we're advocating, focusing on not big bets right now, not super tactical bets right now, unless, of course you have.
To I like that too. Your view makes sense to me. That being said, we do have the warp function on Bloomberg terminal where people are kind of racing it out month the month here. So are you guys in the camp that says, hey, this Fed doesn't have to rush, they can wait as long as they want.
Well, we're ver embarrassed on the economy compared to consensus. We still have a recession in our forecast, and actually today's inflation print, which tells us the Fed is going to stay a little bit longer, amplifies our concerns about recession risk for later this year and into twenty twenty five. So we see twenty twenty five as being really underpriced when it comes to easing. But for the rest of this year, as I said, we're going to listen to the a little bit in the next twenty four hours.
It's going to be June or September. Of course, we're going to have a lot of short term focus on that, but big market moves should really be driven off of are we heading into a recession? Is it a traditional easing cycle with hundreds of basis points of cuts? That's going to be far more important for acid allocation decisions or bonds and stocks than June or September.
Francis Francis Donald, thanks a lot, Manulife Senior chief chief economist and strategist over there. Yeah, And that's so interesting too, because when you take a look at what the forecast is, does it matter why they cut, Like are they cutting because the economy stinks? Or are they cutting because they're normalizing? And if they're normalizing, that's not going to be like three hundred bases points of cuts unless the economy super tanks. So does that change how you allocate?
Yeah? Exactly right. And I think if I think what a lot of folks took from today's data is in any scenario, you can make a stronger case today that they can wait a little bit.
Yeah or no, why aren't we talking about hikes?
Why aren't we talking Yeah? Right, yeah, that's no fun though.
No one always no fun and we don't like doing it, But like, why aren't we actually like talking about it at that point.
Yeah, exactly.
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I should point out the SEP is off the lows of the session, just down eight tens of one percent. I feel like my buying the dip question isn't as crazy as maybe would have got two hours ago. So let's ask it now to Shanna Sizzle, president and CEO of better On Capital Management. She joints now on Zoom from Chicago, Illinois. Shanna, do you buy the dip?
I always buy the dip?
Okay, But I mean, the market goes up more than it goes down.
Why wouldn't you buy the dip. It's not like the market's going to go permanently down.
I'm a big fan of buying on weakness, and there's weakness today for good reason. Also, I feel the need to tell you I heard your earlier comments about Funco and I had to have my bubblehead in the shot for that reason.
So is that a Funkco bubble head.
It is it is is that your head had to do it.
That is supposed to be my head.
I don't know how accurate it looks, but that's supposed to be my head. But I digress. No, I'm a big fan of buying on weakness. We have strong economic growth. CPI coming in hotter than expected.
Is an indication of that. We still have very strong demand.
I think the markets week obviously on the fact that this makes a FED rate cut less likely. But I've been saying all along that I thought the sixth that was originally priced in earlier this year was a pipe dream that would be more like three. Now I'm actually going to go really far out on a limb here and say I don't think they're cutting this year.
Torsten Slock over to Pollo Management agrees with you. He was at with a note this morning. We're affirming that call for him.
Sean.
So, when you think about your portfolio, think about the stocks that you like out there. How much do you worry about Federal Reserve policy, about the inst rate environment visa v the fundamentals of those companies.
I think it affects some of the growthier names more than an effect say a name like Fang, which is on my list. That's an energy name. I think that's more a supplied demand situation. I think the demand for oil in particular isn't going anywhere anytime soon. But for the growthier names, FED policy can really impact, you know, the valuations and the potential upside because of just how time value of money works.
Higher rates tend not to.
Be helpful for growth names because you've got to have more growth and so you know, you can't get as much of a premium as when rates are really lower.
But I don't worry about.
It too much because I think the overall tailwinds are so compelling that even in a higher rate environment, higher rates mean the economy is doing well, which will mean that stock should do well.
Fang is Diamondback Energy. Just to break that down, that stock trades about two hundred and five dollars and eighty five cents. So you mentioned that maybe the FED won't cut at all. Does that pair back the amount of cuts you expect overall in this cutting cycle, because that would also dictate kind of how the economy is doing.
Yeah.
So I think that the FED has a target interest rate, so I think they'll cut as much as they have to get to what that target is, I think it's probably somewhere between two to three and a half.
It's not zero.
I know we got used to zero, but it ain't zero, and so I think we'll get there. If they have to do it faster and there's less cuts, that means that we've had some sort of economic instability.
That's how I look at it.
If there's more cuts, that means that we've achieved the unicorn soft landing, which I'm still not convinced of, and so I don't have an opinion on that.
I just think that.
More cuts means smoother landing, right, that's stupid thing when you fly, you smooth landing.
Air air Force pilot.
Yeah, so we've achieved the smooth landing. The air Force is in control.
Uh.
And if they have to cut fast and they're bigger cuts, it's because there's some sort of economic stability and they have to hit the deck really hard.
All right. So a name like in video, which is a name we've talked about with you before you've you've you guys own that. I can't think of an interest rate scenario that would get me off of that story because I mean, the fundamental drivers of AI. If you really believe the growth potential of AI, that has got to be a building block story in that. So how does it, you know, the movement in today's market kind of impact your thoughts about a big growth story like Nvidio.
Well, you and me both. I don't think the it has any impact on Nvidia because of.
The AI trend We're so early on there. It's training it like a twenty eight times forward earning multiple, which is insane to me. I still look at like just the sheer price of it over eight hundred and fifty dollars per share, and that's intimidating because my cost basis on it is two fifty. But not to brag or anything, I don't own that much, dude, I don't own that much and I haven't added to it. That just sounded
really obnoxious. But yeah, so I'm not sure I'm necessarily a buyer, but I do find the twenty eight times forward earnings compelling. So maybe I jump in here, especially on weakness like today. If it got under say eight twenty five, I would be jumping in all day long.
You also own Vertex Pharmaceuticals ticker VRT. X. It's a biotech company, tell us more so.
That's a super volatile company. Biotech is not for the phantom heart. But I like some of these healthcare names right here, some of the more volatile ones actually, because drug development is always volatile. You you know, you might think you have something great and then you get to you know, the stage three trials, and all of a sudden, everything falls apart. Vertex has some great cystic fibrosis drugs.
The stock has been super volatile, but volatile to the upside, so you get some really crazy movement in the stock, but the stock has positive returns. I think they have kind of a dominant position and system fibrosis, which is, you know, a major concerned that's a major disease that affects a lot of people, and those things are positive for the stock. They have some great R and D and those are the things that I think are the
key drivers. It's good management, smart balance sheet, all the things you.
Look for in a good stock. But it is biotech, so it.
Is not for the faint of heart.
Biotech not for the faint of heart. In Nvidia one gard you not for the faint of heart? How do you guys, screen for stock at your shop. I mean, do you tend to go for growth? How do you screen?
So?
Oddly enough, my entire background, in all the years have been in the business has been value. So I know that seems strange looking at like my recommendations here, But I don't screen the way that normal you would normally hear. I started my career in manager research, and so I used to meet with managers of funds, hedge funds, mutual funds, ETFs all the time, and they talk about their socks, right, So I got.
A lot of my ideas from them.
So I've met with thousands of managers at this point in my career, and there are like a handful that I think are amazing. And those handful are the ones that I will look at their portfolios. I'll look at their thirteen f's and and see what they own, maybe pick up the phone and ask them and and write out their reasoning, and then I'll do my own work on the stock. See does it make sense to me? Is this story something that I think is compelling? But
that's how we get my ideas. I don't screen for stocks like most folks who sit there and pick you know, twenty thirty forty stocks because they have to manage a portfolio at any given time. I might be following ten names because that's not the core of our business, but that's kind of how I get my ideas.
Got you all right, Shannon, thank you so much for joining us. Really appreciate that. Shanna Sissel, President and CEO of ban Rhenn Capital Management.
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All right, let's check in with one of our favorite e congress. We'd like to talk about macro stuff Withjeffrey Cleveland. He's the chief economist at paid In and Regal. He's in that little hamlet out west called Los Angeles. Jeffrey, thanks so much for joining us here. Boy, the kind of a look at what's happened in the financial markets here today. I don't think they were discounting this kind of inflation print. What did you make about the CPI.
Well, someone said uggs earlier, and I just I just thought, ugly, that's all I could think about. Yeah, I mean so I think, as I always say, context matters for markets, and the context going into this number was that January was a fluke and February was a bump in the road and things were going to settle down. And this, this morning's number for CPI in particular, at another point, for that tells me it's more than just a fluke. A colleague just texted me and said, what's the technical
definition of a trend? And I said, you know, three months, three months is a trend. And so I think we have to have a trend here of stickier inflation, and that's what's playing out. And you could say, now the two year yield maybe is more fairly priced than it was certainly at the start of the year, but we still have a couple of rate cuts priced in, so there might be more room for repricing here. Still, even after today's number, do.
You believe that there'll be two cuts or do you think we could be in a situation where we're talking hikes in the next couple of months, or are we talking about no cuts?
Last week I said June was off the table, and I felt a little nervous about that until we saw this number. So I think June is off, and then I think you have to really wonder about July, and then September is tough for me. I'm not saying the FED is political. I'm just saying, do you really want to start a cutting or an easy or to even do just one right before an election? I think, you know, if the data justified it, maybe, but if there's any question mark, you wait.
So I think that.
Should really reduce the market should be reduce seeing the probability of that September cut as well, so everything I think is just going to get pushed out as possible. We only get one, and that would be contingent upon a second half that looks more like last year's second half, which could happen here. I don't want to get too caught up in the inflation many at the moment too emotional about it, but it's entirely possible that we could run the year without without.
Getting the caught.
At this point, I think that's a likely scenario that investors should consider.
Jeffery, how about just kind of the economic call here, soft landing, no landing, how do you kind of think this see economies behaving right now?
I heard hot landing, hot landing. Yeah, I don't really know what that is, but I heard about that today. Okay, so we've been sort of operating with the no landing.
You know, it would be an acceleration in GDP and acceleration inflation, a new low in the unemployment rate. We're not quite in that scenario yet. Maybe that's more the hot the hot landing scenario. Then we said, okay, sticky, sticky inflation. That's where inflation on core CPI hangs out. I don't know three, you know, three eight to four percent, somewhere in that range on a year on year basis, good growth above trend growth, the unemployment rates stays low.
So it feels like that's the scenario we're with. We're in the sticky inflation scenario. The soft landing is if you need to see a further moderation and inflation. So at present we're in we're not in the soft landing scenario in my view. Now the ones I would say, if people are getting too pessimistic about things, I mean, there's a worse scenario, which would be a stagflation type scenario where we do have this inflation that we're seeing, but growth is struggling, and that is not what we're
seeing the jobs report on Friday. We're still seeing aggregate income growth six to seven percent, So we're seeing good income growth that is feeding into spending, that is keeping price pressures. It's not a terrible situation. Good growth, higher than expected inflation. So don't be too bearish about things out there. I'm looking for a bond firm here, but I feel like this is advice to the equity investors in some way.
We get it. We get it. We were talking to a Francis Donald a Manu Life earlier in the last hour, and she basically, if I summarize that there is a narrative out there that this is Powell's fault that he called sort of the pivot in December two early and that actually reignited the economy, I'm really loose in financial conditions. Is is there truth to that?
I don't think so, you know, I want to defend Chair Pally. I think he's done a great job. I'm not being paid for this defense. But look, he said, hey, we had great progress in the second half of last year. If that progress continues. There's a case that we don't need to be at five point thirty on the funds rate.
We can reduce.
We don't want to over type. That's what he said. And he also said, we need to see greater confidence. We want to see more data like we've seen in the second half of last year. Well, guess what, everyone, every investor can look at this. We have not seen more data like we saw in the second half of last year. It's come in hotter. So I think he set it up nicely. The problem is investors they hear what they want to hear. I do think a lot of mom investors. It's been a painful couple of years.
I get it.
They wanted they wanted rates to go lower, they wanted cotts, and so there was more hope than it was you know, actual reading of the economic data. In my view, so I don't blame the I don't blame the FED for this. Investors need to look in the mirror and not find some scapeboat out there and you know in foggy bottom and d C.
All right, Jeffrey, thank you so much for joining U. Jeffrey Cleveland, chief economist at paid in and regal based in La joining us via zoom. In just moments, we're going to be going to former US Treasury Secretary Larry Summers. He'll be sitting down with Bloomberg's David Weston talk about the CPI print.
YEP.
There's some interesting tidbits though that you just want to dive into a little bit with the numbers. So apparently care of invalids and the elderly at home soared five point nine percent from February. Okay, how does the and that's just you. You would imagine that's going to get so much worse as the baby boomers age. It's gonna be pretty dicey.
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So lots of drama unfolding after that hot CPI pause, I'm bringing it up the verb function WRP. That's where you go to see what everyone's sort of thinking about Wall Street and investors alike, about what the Fed's going to do, and it's currently pricing in about two cuts. Man, that is a very different kind of scenario than we saw just a few months ago. Well, let's break it down. Sally Bakewell is Bloomberg US Finance team leader and she
joins us. Now, Sally, as we dig through here, how many reports are in your inbox about pushing a FED cut back from June two?
Yes, approximately two thousand of the mire in my in box. And I think the sort of the level of uncertainty remains, but I guess they are. There is this sort of clear expectation of a path to cutting and around that. Wall Street banks which will start reporting on Friday, are probably going to have to be rethinking some of the guidance they've given on one of their key sources of revenue, which is.
Net interest income.
They had, you know, just a few months ago worn that they would probably have to probably see a slide in this metric. But it's looking like they'll be able to up some of the guidance on this now.
Yeah, it's interesting. I'm looking at the reporters in this story on your team here put in some you know, showed some of the big banks for providing twenty twenty four guidance and pretty conservative looking, and I guess it reflected kind of what they were thinking at the time, which is the markets pricing and six rate cuts. We have to reflect that in our P and L. So do you think we'll see revised guidance here? Is that some of the issues?
I mean, I think that's what analysts expect. I think investors are also optimistic of that. And the big question seems to be JP Morgan. It is being looked at as one that did have particularly conservative guidance at about ninety billion of net interest income for twenty twenty four, and it may have to up that based on the fact that you know that was they brought that out when you know they're expecting as many as six rate cuts, and now if they're only two, they'll they'll probably have
to revise it. And Wells Fargo is another one being discussed in the same vein. But I think analysts is saying a lot of the big banks, which are sort of more asset sensitive than the regional lenders, could have to rethink their guidance.
But that only holds in a good way if the loan demand is also good, right, I mean, that's the whole idea. Will loan demand be good?
Well, I think for the as we see banks reporting earnings on Friday, we are expecting to see quite a subdued loan demand because the sort of lagging effect of higher rates is still ongoing. But yes, interest rates come down, that is in theory sort of big tail wind for lending because people start to borrow more. And I think it should in theory be a sort of positive thing.
But there are there remain uncertainties here that might sort of cloud the kind of expectations that loan demand could come roaring back.
Yeah, I mean just on Monday, just looking in this article here from Bloomberg. On Monday, JP Morgan chief executive Officer Jamie Diamond delivered a warning on the economy. So you know, he might say, there was CFO and investor relations person saying, well, wait wait wait, wait, wait wait wait, I don't think we need to be taking up our guidance here a little bit because he may have some underlying concerns about the economy exactly.
And actually, you know people are saying that potentially JP Morgan anyway, waits till it's invested a if it wants to boost its guidance and does it then, and that's in late May, but definitely, I mean Jamie Diamond, he kind of gave his his couched assessment of the economy, which is that consumers remain healthy and they are spending,
but there are all kinds of inflation repressures. There's this very difficult geopolitical backdrop the transition to sort of green, a greener economy, ongoing fiscal spending, all these inflationary pressures that actually are a big overhang to sort of, you know, a really robust economy continuing, and that could definitely end up dampening sort of the consumer's ability to borrow.
And that investor day for JP Morgan is May twentieth.
All right, marketing calendar. Maybe we should yeah, oh good, idea take radio down there. Okay, here's my pet, Peeve Marcus. So we are familiar with Marcus. Okay, it's Goldman Sachs's high yield savings account. Right. They lowered their rate ten basis points on what Friday. That's not okay. The Fed hasn't done anything. What's going on? And that's my personal way of talking about the deposit beta when it comes to these big banks. And then what the Fed's doing.
Right, I mean I think that all they continue to be under pressure to stop customers going to other high yielding options, and I suspect that's you know what Marcus is doing.
Oh they cut it. Oh, I say cut it ten basis points Okay, okay, to be fair, right, it's like four point six percent. They took it to four point five or something like that.
Put it on an account of your size. That's real money.
I mean, we're looking like billions at this point. But still, I mean, but the idea that they're already kind of front running cuts that may not happen or September.
Wow, I mean that's fascinating.
So what are the bank? Yeah? So what are the banks? I mean, as we were talking about before, one of the things is just simply are they making loans out there? Are they suffering charge offs? So what do we think that we're going to hear from the banks as relates to credit quality and charge offs of their loans? They think things like that because I know that's a big metric.
Well, I think charge offs are expected to be pretty stable actually, and again I think that's another sort of signifier and indication of consumers being in relatively decent health, but of course they were reliant to a degree on a lot of the savings they are massed during the pandemic, and those of course have faded and will continue to fade. So again, the situation with charge offs seems pretty stable
at the moment, but there are those headwinds. And I think also a lot of banks are expected to set aside more money in provisions this quarter than they have done in the previous quarter a year ago, which is another indication that they see sort of storm clouds on the horizon and that people will start to default on their loans, and loans will sell, and they all need to be able to cover the cost of those.
We've seen M and A started to pick up, investment banking started to pick up. Is that going to be squashed a bit if we still have higher for longer? I think this.
Is really interesting. It seems like a lot of the investment community and companies have gotten somewhat used to this, the current interest rates situation and the current uncertainty, which sounds a little bit paradoxical to say, and for that reason they have been more willing to do some deals. We've seen a pickup in deals. We've seen IPOs sort of start to slightly rebound, so I think higher for longer hasn't been a huge there's been a persistent deal
slump for months and months and months. But investors have started to get used to to this sort of uncertain rate path, I think, and so they have been coming out of the woodwork a little bit interesting.
Or could you see the certainty Well you're the former investor there coming in us in banker. Is it the rate or is it just a certainty or the trajectory?
It's just the trajectory here. So I mean, I think, you know, we're I think the market's more normalised. We're seeing investment grade market be very robust because you know, they can get deals done and so they're going to get them done. Could they have gotten them done at a lower rate two years ago, Yeah, but that's that's two years ago. Here we are, I mean need to we need to fund growth. So again just a trajectory of where things are going. So anyway, Sally, thank you
so much. We appreciate it. Sally bake Well, us finance team leader for Bloomberg News uh with the article out today from her team Wall Street banks may redo key profit guidance on fewer red cuts, i e. Take net interest income forecast a little bit higher.
Yeah, that'd be really interesting to be and just that even if they don't do it for their earning season, like recalibrating it, just the commentary on the calls will be quite interesting and I'm sure that analysts will be all over them to add that question. So that'll be very interesting indeed. And also for the JP Morgan, the city in the Bank of America, the consumer part of it and how their charge offs are doing and what
their read is on the consumer. As Frances Donald was talking about, just two totally different worlds, two totally different consumers.
Yep. Absolutely, So we'll see JP Morgan reporting on Friday, so that'll be You're off though, I'm off you darnel right, I'm long.
He's not going to care till Monday.
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