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So let's get to that consumer confidence data. So overall, as Paul and Jahmer talking about, coming in at one o six point seven, that is lower than January, and it also missed present situation not looking as great either, one forty seven point two, the expectation number coming in at seventy nine point eight. So Dana Peterson is chief economist over at the conference board. She helps to get through all this data. Hey Dan, what should my takeaway be from these numbers?
I think the k takeaway is that the numbers are still pretty range bound. We haven't seen a breakout in confidence to the upside yet. We did see a dip in the measure for February, and January was also revised. I'm sorry for January, and then December was also revised downward. And certainly in this month reading, we saw that both
expectations and current position. Current conditions were weaker and importantly, when we ask consumers about recession, that expectation ticked up a little bit after falling pretty steadily for many months.
So what do we take here, I mean, how when we look at this consumer confidence data points, how do you guys look at it?
What's a reasonable time series for you guys? Well, we look at it as a whole.
There's a lot of information in there, and certainly when we look at the details, consumers were a little less optimistic about employment and business conditions right now. They also complained about their finances not being as strong currently. Also looking ahead, consumers were pretty unhappy about employment, business and income and their financial situations. They're expected financial situations were
also a little bit worse. So we're still kind of just moving back and forth in the data, but I think some key things in the write in suggests that consumers are a little less concerned about food and energy prices,
and certainly they are. We're showing that the expectations gauge continues to decline, so that's all good news on the inflation front, But they are more concerned about jobs going forward, and they're also more concerned about the political climate, and so we'll be watching not only the inflation gauges, but also the jobs gauges within this, because if consumers get the whiff that more layoffs are coming, then they'll pull back on spending and that'll contribute to slower growth over
the course of this year.
What am I still spending on and what have they now avoided?
Well, consumers are definitely still spending on services. We see that in retail sales, we see that in the consumer spending data that the BEA puts out. But when it comes to goods, they are starting to pull back on things that require financing, so homes, cars, big ticket appliances, and that's because interest rates are high. And indeed, in this in today's report, consumers said that they don't expect interest rates to continue falling. They think interest rates might
actually tick up. So that's pretty material when it comes to their buying attitudes for goods. But certainly when it comes to vacations, we did see a little bit of a pullback and expectations about going on vacations. But that's just one aspect of services, and we're really going to need to see the PCEE data this Friday to see about whether services consumption is still pretty robust.
In the United States.
Talk to us about the labor market and how that impacts consumer confidence.
I would think that would be a big one, because it seems.
Like everybody who's got a job has a job, and wages are going higher, so that's got to be helpful.
Yes, I mean, when we look at payrolls, we saw really shockingly surprisingly strong numbers in January and December, and it wasn't just kind of your big three driving things. The big three are leisure and hospitality, government, and also healthcare and social assistance. You saw gains across the board, and you also saw an uptake contemporary employment for the first time in a little over a year. So those
data are pretty good. But we need to continue to see improvement in the labor market or in terms of the gains being more broadly based, or else we're going to see weakness ahead. Indeed, you still do have some industries that are letting people go, certainly finance, tech, transportation, and warehousing. We don't think that's really going to improve. Also, residential constructions probably not can improve until interest rates start
to fall more materially. So we're definitely watching the labor market. We think there will be weakness in the US economy slowing down probably around zero percent, between one and zero percent, a little bit of an uptake and unemployment rate before the end of this year to four point three set, but then we'll see things get better towards the end
of the year. Certainly as a FED as we think we'll have begun cutting interest rates, probably starting around June, and then we'll cut interest rates further next year.
So they're looking at sort of prices everyday, prices to sort of give them a read on inflation. They're looking at their job status to feel good about that. What other factors do they wind up looking for? Like, is it I'm gonna go buy a car and I don't like a five percent interest rate? Is it the mortgage rate? Is it the stock market? I know that the stock market's not the economy, but we have a four on one K probably pretty happy, which what has come through in the last year.
I think consumers looking at all of that, and certainly we've seen that consumers have continued to spend, but some of that spending is depicit spending. They're using credit cards, so that means that you know, their real incomes are probably not rising as much and certainly is below the real spending that we've seen, and this isn't really sustainable. So but again, as many consumers are working, they still feel confident that they can put expenditures on the credit
card and they'll be able to pay it off. But the thing is that if you fall behind, and we are seeing delinquencies rise, the cost of that credit is skyrocketed. And indeed, when you look at the amount of interest that people are paying in the PCEE data on debt, it's skyrocketed along with the amount of consumer credit card debt that's piling up.
In terms of future expectations, the conference board expectations came in at seventy nine point eight last month versus last month, which was revised down to eighty one point five.
Where would you like to see that? Where would economists like to see that number?
Well, I mean the thing is that people always say economists they are dismal scientists, but really we are optimistic. And you know, anything above the eighty threshold signals that consumers think the economy is going to continue to expand, and that's always a hope among economists. But you know, this measure has been over and above eighty over the last few months, and certainly the uptick in the percentage saying that they think a recession might be on the
horizon is disconcerting. So we want to continue to watch the data and see how consumers feel in line with the real data that gets pumped out by the government. So certainly we want to see better growth, but we see tremendous risks to the downside.
All Right, Danny, thanks so much for joining us. Dan Peterson, chief economist at the Conference Board.
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Let's go to Macy's.
That's not us now up by three point six percent. They're closing about one hundred and fifty namesake stores. Certain areas like Blue Mercury did pretty well, which, as I keep telling you guys, invest in your face is a thing.
Okay, I think it's the time has past for John and I am no it's next.
I know.
I went into one of these stupid stories with my daughter. She wanted to whatever, the margins on these things must be incredible.
Yes, I'm like, there was eighty.
Dollars and they never go on You don't even want to know. And I spent on my skincare but they never go on sale. You just had to take it. And you can see that through Macy's numbers for Bloo Mercury. Anyway, Mary Ross Gilbert is going to help me out here Bloomberg Intelligence senior equity analysts covering retail. Okay, Mary, what did you make of Macy's quarter? And do you invest in your face?
I invest in my face. That's why beauty has been the outperformer for almost anyone who announces, including when Dillard's came out with their numbers yesterday. So with Macy's for the quarter, they beat their estimates on sales and on earnings margins, so sort of across the board. But the focus really wasn't on how they did in the fourth quarter. It's really their new plan that was the big focus.
The new plan and their guidance for the year. So their guidance came in softer than consensus, and I guess it's just no surprise just thinking about how department stores are under pressure, and we've seen it across the board with you know again, Dillard's showed some weakness yesterday. We're
seeing it with Macy's in their outlook. But Macy's has a plan to address the department store model in shuttering one hundred and fifty underperforming stores and then they're going to invest in the three hundred and fifty remaining and those are going to be primarily an A and eight plus plus plus malls, and what they're going to do is increase the service levels. Beauty has been something they've been investing in almost every year and expanding the floor
space dedicated to beauty. So you'll notice that if you walk into Macy's, you'll see that they have expanded the space and who knows, they could expand it again this year. We've been seeing it for the last five years that that space has been expanded. So there's a lot of details in what Macy's is doing. It's something they need
to do. They really need to up their game, and that's exactly how they started their presentation, and that includes really making the assortments a lot better than they are because if you look at the inline store performance at malls, they're the ones that are executing, such as the Abercrombi's, the Urban outfitters, they're outperforming.
So Mary I was kind of surprised to see this number of stores one p fifty because I kind of thought that this decade plus long shrinkage of department store footprints across the country by a lot of different companies, that was more or less kind of we're done that, or we're at near the finish line. So to see another big round of closings that kind of surprised me. Did it surprise the market at all? Or is this something that analyst and investors have been asking for.
What Macy's had said is we don't need to close stores except for the usual stores that you close every year, which is maybe less than ten year. But the reason that they've decided to close them is because these stores were underperforming, but they were still profitable on a four wall basis, so historically that their thought was, well, if it's still profitable and we're still generating cash, we'll keep
it open. And this time what they did is they took a more holistic approach and said, okay, even though it's four wall profitable. We could do a lot better with the funds that we could generate closing these stores, selling the real estate and redeploying it back into the existing store base. And for all the initiatives that they have going forward, it makes a lot of sense because that space, we really need to rethink the department store model. It has to evolve.
Mary.
Does this do enough to get activist investors off Macy's back?
That is a good question. I think it may. I think it may. I think board has made it very clear that they are supporting this plan. Could they enhance the board with additional directors That could be a possibility, So learn more about that in the coming months. But I think that this plan is it's been decided that this is the move forward. And when you think about what's happening with the activists, it's usually it usually involves
the real estate. And what we have seen in past transactions is the real estate is usually milked and it can be to the detriment of the retail operations, and so sometimes it's not always the best move. So they do have valuable real estate here.
Talk to us about that, like a relative performance between like a Macy's store and a comparable Bloomingdale store. Is the Bloomingdale store maturely more profitable.
I guess.
Yes, they don't disclose the profitability on Bloomingdale's versus Macy's, but Bloomingdale's outperform, as does blooem Mercury. This year, their comp sales were down one point six percent because the aspirational luxury consumer is spending less. And we've been, you know, hearing about the overall luxury business being impacted, especially after we came off the post pandemic spending from stimulus checks
that really had that aspirational customer going after luxury. So now that that's kind of you know, falling back, we're seeing more of a normalization. This is something Nordstrom asco slided, so their sales were just down one point six percent, but they think that could probably stabilize and go higher next year. And of course, you know, with the beauty side on luxury, you know that's posting positive comp sales, So that's that's stronger.
Yeah, Mary, I was going to ask about then, the inventory. Macy's notoriously last year struggled with inventory. The last quarter we saw they really got to together. What did we learn this quarter about their inventory.
Yeah, even though inventory was up two percent year every year, it's still down over twenty percent versus twenty nineteen. So they've really done a great job reducing their inventory and that means that they're having less clearance activity. This is something that's going to affect their first quarter because last year they had more clearance and this year less. So
they're doing a great job overall. They've just been improving their execution with data technology, logistics, and they talked about that on the call. They're going to be even employing some generative AI. They've already been employing machine learning, so you know, we'll see more. And they're going to be
streamlining operations. We didn't talk about that, but they're going to be consolidating some of their facilities, so they've really and they've reduced layers within the management structure, so overall simplifying the operations. So all of these things could restore positive growth in twenty twenty five.
Mary, who's the retailer out there that you think is doing the best job.
Of all of retail or just within the department store space, just.
Kind of within your coverage because you cover a broad range of the retailers.
Yeah, so I think that what we're seeing right now is some of the inline specialty retailers are doing really well. If you look at what Ralph Lauren has done, Ralph Lauren is outperforming. But what they did was they sort of retrenched the business they do supply to Macy's and other department store retailers with their wholesale business. But what they did is really focus on DTC direct to consumer. This is something other brands have been doing as well.
But Ralph Lauren cut back on off price, they cut back on wholesale, they elevated the product so it's much higher quality, and then they've theated the overall consumer and so it's much more of a luxury brand now and and uh. But but they also do have, you know, some aspirational brands in their portfolio like Lauren Ralph Lauren, which you'll find at Macy's, and then you'll find Polo Ralph Lauren and Double R Ranch in their Bloomingdale's concept
for example. Hey, Mary, I think Lauren's a good example.
Mary. We appreciate it, Thank you very much, Mary Ross, Gilbert Bloomberg Intelligence and your equity analysts. But my point is that like, what if you can get men really invested in skincare.
He's not like makeup on is he?
No, he's in investing in his face. That's what it is.
Can you become a certain age Tucker?
You gotta do that at what age? Well?
You know?
Now anyway, intelligence, do you That's not good?
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Hes is down three point twenty five percent. It's one of the worst performing stocks in the S and P.
Chevron is also off by two percent. Here's the interesting reason why so Chefron had a filing that came out late last night that said one of their risks about its takeover of Hesse is actually the fact that Exon and Sinook, which are partners with Hesse in Guyana, say they have the right of first refusal for Hess's portion of Guyana, which basically means that Exon and Sinok, which is a Chinese oil company, could bust up this merger between Chevron and Hess. So for nerds like me. This
is cool, that's big, this is stuff that's happening. So for that I turned to Fernando Vali. He's Bloomberg Intelligence senior oil and gas analysts. Fernando, when we think about these mergers, we think about ooh, competing bids, we think about antitrust, we think about those things. We didn't think that this was going to happen.
Yeah, Typically you don't see preemption rights on corporate takeovers.
It's very rare.
You saw it recently when Suncrep acquired Total Energies Canadian subsidiary, and there are some preemption rights there on Chronicle Philps acquiring fifteen percent of Sermid. But typically you're acquiring the whole company and the owner itself doesn't change, just the controller of it. So most joint operating agreements don't foresee for that to be a preemption right event.
So what does the contract say here? It's got to be cut and dry. If I'm Chevron and I'm buying Hess, I have to have a high level of confidence that I'm going to get the Hess steak in Guyana.
Well, all we can do is speculate because it's a private agreement. So we're not We are not really privy to the details of that contract.
Has seemed to be very confident.
That they will be able to push this through and there is no preemption rights. I would argue that that Guyana is the value the most valuable ascid In has his portfolio. I think most people would agree with that. And so, as Alex mentioned, if this if Guiana was excluded, then likely there's no deal for Chevron anyway, and so I doubt that that we'll get clarity in the next few days. But has seems to be fairly confident there's no preemption rights.
In this case.
So why is Chevron doing sorry, why is Exon doing this?
Well, because it's the second best asset in the.
World, So why isn't just buy Hess then?
Because you know, they don't want to buy everything else that's included with Hes.
They want to buy Guiana.
And so why did't they do this before Chevron got into this?
Probably because Hess wouldn't want to sell just Guiana. And now Chevron has laid out the marker, the pricing marker for it. And if you can just find a way to just get pull out the best asset out, why wouldn't.
You so this is an exercise for the lawyers here. Who's got the better lawyer? I mean, that's what it comes down to. Do we have any sense as to when we're gonna get some visibility here?
Probably within the next couple a month or two, I would expect some visibility. It does take the dragon tend to drag on with Konaco. It took upwards of two months to see the actual preemption and then to find a new over six months to get a new deal between Suncren to Hotel Energies. But I think probably within two months we'll get more clarity on this. It's really
about the contract at this stage. And you know, if they were negotiated at a suitable way for Hess and Chevron back when the joint operating agreement.
Was signed, how much of a bummer would this be for Mike where that Chevron if this deal collapsed.
I mean, this would be huge.
This is, as I said, the second best asset available for sale in it and you know, really that's the only block that has any production out of Guiana, any real potential as it stands. So if they lose out on that as a big part of the growth opportunity for Chevron and it puts X on a whole new level because now they would own upwards to sixty percent of that asset and give them a lot of growth
over the next decade. You know, you don't spend sixty billion dollars on hes if you don't think that Kayana is a very very attractive development over the next ten to fifteen years.
Yeah, And to your point, it's not like they can just like go buy the next asset, right Like, it's not like they're buying for areas in the Permian where there's a ton of producers where maybe you could look at different acres somewhere else. Like this is kind of a make or break it moment. If the deal does go through, then what's the relationship between chevron Xon and Sinook going to be?
Like?
Since they all sort of are working in the same area working together.
I mean they work in.
A lot of projects together and they are in Tangi's Chevroyal or in Kazakhstan, they are in reach Stone in Australia. They've been partners for a long time and I think there's no love lost. There's there's always going to be a competition. And if you can exercise your rights, you know, fair play to you. Obviously they won't be totally happy with it, but I just can't foresee.
You have to be.
Fairly sanguine in this industry and you have to move on to the next deal, into the next growth possibilities. So I'm sure it will be hurtful at first, but you've got to find ways to keep working together and do best for your shareholders.
That's awesome. Hurtful, It will be hurtful. Hey, just looking at the share price, you know, Hess off over three percent, shev one off by two of these legit reactions here.
Well, I think yes in the aspect that again, it's the second best asset after Pioneer, and if there's a movement that where excellent consolidates those two best assets, and it's really painful for or Chevron, and then for us. If you sell just your best asset, you take the diamond out of the rest. You know, the rest of the portfolio is hard is a much harder sale.
All I know is if I'm Chevron, I'm turning to my lawyers and I'm saying, tell me we're covered here, Yeah, I mean, tell me this is not a risk.
I can't imagine that this is even something that would be talked about. Is this something that happens in other deals?
Well, as I mentioned, it happened with Suncore buying Total Energies in Canada. It was a little bit different because the Sermont mine was only Conico in Hotel, and Conico managed to preempt at. I'll say that Suncore in sun Corps release saying that they were caring Totel, they noticed right away that that could have been an issue in Sermont, so as opposed to Chevron did not say that as a risk in their initial.
Filings, which is interesting too because if you take a look with some analyst notes out they also came out today it's like, look either way, it'll be fine. Let's just say it's going to take a lot longer for the deal than to get closed, which makes everything's a little more uncertain, the synergies, the development, et cetera. Fernando, thanks a lot, Always love talking to you. Great to see if under Volley Bloomberg Intelligence Senior analyst for Oil and guests, he's like my go to guy.
Yeah, he knows what's happening global energy. He's our guy Global.
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Excellent and Seinook are trying to prevent Chevron from taking over hes because of the guy on a asset. They're trying to sort of get the rights of first refusal. That's interesting. We're seeing a lot of natural gas deals getting done. We're also seeing natural gas prices continue to tank, like under two dollars mmbtu is really tough for some of these producers. So we want to get a broader
perspect on how to invest. And Haig Sherman is chief executive officer and chief investment officer over at Teutonic Holdings Now. He is a big deal in the energy space. He manages about six point seven billion dollars across all asset classes, not just energy, but he was the guy that you go to for this kind of energy advice and energy investing. Haig, it's great, great, great to have you. Thank you for
joining us. There's a lot to talk about what is foremost on your mind when you think of investing specifically in the energy space.
Well, I think foremost on my mind is really the consolidation that's going on in the industry. So if you look at both oil and natural gas, you have some major transactions that have been inked. You just mentioned one, which is the Chevron Hess steal, which is being attacked effectively by Exxon based on their right of first refusal on the Guyana assets of Hess. But you also have a natural gas you have the Chesapeake Southwestern transaction, which
is severally very interesting. So I really think this is the central thesis of energy, which is we want to have more scale in the basins in which we operate because we're really in the manufacturing business. We're manufacturing molecules, so scale, operational efficiency, and inventory matter.
Hey, I hear you know. I have a lot of buddies from my pain Webber day.
I know you were there, David bratch On, a bunch of other guys that were in energy space.
What I know is from them, EMP was the fun sector to cover there for a while.
But I get the sense that these EMP companies aren't doing too much e these days.
They're just kind of in production. Is that the case and why?
Is that good question?
That's exactly right. So if you look at historically as we grew up, especially here in Houston, you know, the e was kind of the glamorous part of EMP. I mean, you had these great offshore projects. You had, you know, these frontier projects, the North Slope, you know, when Russia opened up, you had the Cycling Island, you had Kazakhstan, kazaksand and you had other projects. And this was really the glamorous part of the industry. And our oil and
gas companies were intrepid. They would invest, but they also had a long time horizon. Today, that time horizon is much much shorter with the onslaught of renewables. The executive teams of these big or these big energy companies are more focused on delivering short term investor returns, delivering cash back to investors. They don't want to take duration risk.
So they're really focused on becoming manufacturing businesses with good core holdings and good inventories of areas of current operations.
So how do you invest in that when they're becoming a different type it's becoming a different type of industry in essence, Well.
I think you really focus on those that are best at at manufacturing the molecules. I think Exxon is an excellent and they've really been on this trend or quite some time. They had a big twenty nineteen initiative to cut costs and really become more efficient. EOG is another kind of a mini ex On without the downstream operations
very efficient. They understand that this is about inventory, unit level costs, unit level productivity, and economies of scale so that they can deliver the best return possible to their shareholders.
HEG.
So you're right there in Houston, you know, the center of the US energy business, maybe the global energy business.
I don't know. Talk to us about renewables.
How committed to what extent are US energy companies kind of committed to renewables Because some of the rhetor coming out, I don't know if it's just politicians or others.
I'm just not sure.
It seems like it's more commitment out of some of the European energy companies.
I think that's right. I think if you really look at the big integrats in the US, there are certain areas that they're focused on carbon c questration and other areas. But to their credit. They've been focused on what their core competency is, which is producing hydrocarbons. And if you look at Europe, which you brought up BPS, under a lot of pressure now for abandoning hydrocarbons or at least deemphasizing hydrocarbons. So I really think that the US energy
companies got it right. But we have other areas of investment, particularly here in Houston and Texas. Texas is a US leader in renewables. We have great private equity supported the industry here in Houston and throughout the state and really throughout the country. So we're getting that built out independent of our EMP companies, our energy companies.
So HeiG as I talk about how to invest, it's really going to be private equity, it's government money, and it's oil companies. Like those are three buckets that I see that invests in the energy transition, not just straight renewables, but the energy transition. What in the energy transition do you like the best? There's so much money that's going to be wasted on stuff that doesn't work.
What do you like?
Yeah, It's it's a tough space to navigate right now, because if you really look at kind of renewables right now and really over the past couple of years. It's really like the shell boom I can call it twenty thirteen twenty fourteen, two before it crashed, because there's a lot of money that's coursing in. You know, prices are inflated, so to me, it's really an area that you have to be careful in. And that's why I like, you know, fossil fuels better at this moment than energy transition, just
because I think the prices are better. And if you're a share or an investor looking for returns, you want to go to where you can get the best returns. So I've shied away from renewables, really focused on traditional fossil fuel energy. But the day will come when those will become more investable in my opinion.
You know, I'm looking at this chart for natural gas. What happened? Holy cow, things greater. I thought people like natural gas.
People like natural gas, and conservers like cheap natural gas. It's not great for producers, but it really is. It's a stunning collapse. I mean, if you look a year and a half ago, you're at nine dollars per mcf. Today it's a buck eighty or thereabouts, and so it's been a stunning collapse. A lot of it's weather driven. You had a big L and G facility that was offline that really started. It was a catalyst for the
current downdraft. And right now we can talk about natural gas being a global commodity, but right now it's still largely a domestic commodity. So we really don't have the global support until we start opening up more L and G facilities, which'll happen in twenty five and twenty six. If you look at the curve in twenty five and twenty six, it's more constructive, although it's not great.
So but to that point, I mean, with natural gas prices at this level, are they economic for producers and for LG exporters?
Uh?
For producers it's it's tough. So I mean a lot of them are hedged, and so for example, I think chess Peak's forty four percent hedged. Okay, so a lot of them are hedged in a higher price environment, so they're still getting by. But if you look at really what what chest Peak announced last week was we're not going to invest is aggressively in the space, and so that created a situation where natural gas got a modest bid, but all the or all the energy companies in natural
gas sell their stocks rally. There has to be this this sea change within natural gas production where rigs are laid down, and that'll happen to a certain extent through consolidation. That's why the continued consolidation the industry taking privates out because they've been more active with the drill bit. Uh and public companies have certainly been more disciplined than private companies as it relates to you know, producing our thrilling wells Haig.
Thanks a lot, Really appreciate Hig Sherman. He joins the CEO CIO of Tectonic Holdings. He joins us up from Houston. In the case of Chesapeake, for example, buying Southwestern, they also just are basically leaving the natural gas in the ground. But then in a moment's notice, when natural gas prices tick up, they're going to go and explore it. So they have like the reserves around to do it, they have the equipment to do it, they have the know how to do it, but not everybody does.
So we don't like firing oil.
I understand it's like forty to fifty dollars per barrel costs roughly to get it out.
Of the ground. Do we have it? What's the number four neck gas? Do we know?
You know, I don't actually know.
I'm wondering about dollars sixty seven, whether it's.
Like, yeah, I don't know that the hedging question was a good one for him. But I also think that I've been talking to LNG exporters. Under two bucks is really hard. It's really hard to make that export number work for them. So I think that's interesting too, particularly with the moratorium, et cetera, how that winds up playing out.
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Iira Jersey. He is a Bloomberg Intelligence Chief US interest rate strategist. So I care because yesterday we made the two week the five. We had record corporate bond sales, and we had a pretty solid takedown. I mean, there's a lot of supply overnight, we had a really strong demand for some French issuance. Come on, buyers are there?
Yeah, I think given where yields are and just the idea that you know, we are getting a bunch of mixed data that there are some people dipping in their toes. And keep in mind, going into the most recent sell off, it seemed like the market was positioned a little bit
on the short side. So if nothing else, you're going to wind up seeing contin to see some short covering, you know, talking about the auctions, you know, the two things that we look at very closely in the auctions is that bid to cover ratio if it's if it's basically at or near where it has been historically, that's actually a pretty good sign because these auction sizes are much larger, so that means that you still have bidders
who don't have to come in a bid. So these are bidders that aren't just the primary dealers that are coming in and looking to buy some bonds. And you saw that a tick up in the bid tocover ratios in some of the auctions in the last couple of in the last couple of weeks, So that's number one.
Number two is indirect bidders.
So indirect bidders are people who go to dealers put in their orders and their end users so those are hedge funds, pension funds, investment managers at mutual funds and the like, and so that is the end user demand and the higher that is, the better. So again we look at the trends in that. So those are the two things. Bid to cover and indirect bidders that those are the ones you want to key in on.
See see I learned something John Tucker cover ratio.
Those thirty years, He's learned one turn bid the cover.
All right, So is the market also positioned IR for kind of a hot inflation data point on Friday?
Yeah?
Yeah, Well, so the data that we're going to get this week is the is the PC deflator, and obviously that's the FEDS primary gauge that they look at and that they want to try and target when they talk about inflation. I think that the market is expecting somewhat of a better number or higher number than we had in the recent trend.
And it does.
Broadly follow CPI's there's different weights, but generally speaking, whatever CPI does, usually PC does that at least directionally does the same thing, maybe higher or lower magnitude, but usually the same. So I think investors are currently expecting, you know, inflation not to be coming down as quickly as it had been last year.
And that's one of the reasons why we have.
Ten year yields at four and a quarter percent instead of under four right, And then that was one of the big reasons.
For that, and then hence like the short positioning and then now the short covering. So are we going to come in more clean in terms of positioning for the PC.
Yeah, it seems that way that I still think that people are leaning at least a little bit on the short side. There were a lot of people who were long the front end of the curve and short the long end, so you had people in what we call yield curve steepeners, so people who thought that short term interistrates are going to go down more quickly. That's really been the big unwind. It's been the unwind of this
of this curve trade that has driven things significantly. So you know, we talk about ten year yield at four and a quarter percent, Look what the two year yield is done?
Right?
You have it all the way from just over four percent all the way up to four seventy, which which implies that the market's thinking the Fed's only going to cut six times over the next eighteen months or so. So that's pretty impressive that we've you know, come back and basically priced out two full rate cuts over the next year and a half. And I think that that's a very telling telling positioning shift that we've had in
terms of the curve. So I think, yes, people are leaning short, but also curve positioning is probably much cleaner now than it was before, which is the reason you saw a semi decent two year auction yesterday.
So the ten year treasury IRA is about four point two eight percent today, where do you think this is towards your end?
So year end, we still think that we're going to see a pretty significant rally in the treasury market, So that means that that means price up, yields down, and so we do think that we're going to see you know, somewhere south of three and a half percent over the next over the next nine months or so, And the primary reason for that is that over time, we do
think that the economy is going to slow. You are going to get you know, rate hikes ray cuts, excuse me, price into the market with and the Federal Reserve actually acting on that doesn't seem like it now, but over the course of the of the year, there are some cracks in the economy. They just haven't manifested themselves yet in some of the hard data. But you look at even the consumer confidence numbers that we just got a couple of minutes ago, and that was a pretty big downshift,
both in the current expectations and the headline number. So and that doesn't mean that people are going to stop spending tomorrow, but it does suggest that if we continue to have, you know, slightly better or higher inflation prints, and you have people who are worried about the political angs, and you also don't have people getting the raises that they were getting over the last couple of years, that all of those things can contribute to a slowdown and spending,
lower inflation, and therefore interest rate cuts. And that's why long term treasure yields could rally a bit by the end of the year.
So I'm looking at a chart not normalized of the two year yield and the SMP and I know you're the bond guy, but the peak that we saw in yields for the two year back in what October mark sort of the interim bottom for the SMP and sort of ignited that bull run that we've seen since then, where the SMP is up, you know, twenty three percent. If we keep grinding higher here on yields, like at some point, that's got to one denting the equity market.
No.
Yeah, I would think that the way that risk assets have been acting recently is that if the Federal Reserve is not cutting interest rates, then valuations are much too high.
Right.
So that's what you saw back September October when you wound up having us actually pricing in the potential and serious potential of hikes this year or over the course of the eighteen months following that, and that I think was really driving some of the equity valuations.
And the fall thereof.
I think the question is now, and this is where the uncertainty about what's going on in the economy really comes into play into how you position your portfolios. Is that if the economy is good, and that's the reason why we have interest rates that are relatively high, that's
not necessarily bad for equities. It doesn't mean that equity markets necessarily can go up or need to go up, but it doesn't necessarily mean that they need to fall either, because if you continue to have good top line growth,
you can hold your prob fit ability where it is. Then, you know, then it becomes a valuation story, not a fundamental story for I think companies more broadly so, I think interest rates are You know, there will be shifts in how the market and how the different markets react to each other, where that negative correlation you saw back in October might actually turn positive and be positive over the next six to nine months.
All right, Ira, thank you so much. We appreciate that.
Our Jersey chief US interest rate strategist, Bloomberg Intelligence, dialing in from our Princeton studio.
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