Bond Market Is Detaching From U.S. Policy and Looking Globally, Vogel Says

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. So it wasn't that long ago that we were talking about a possible bond market route, that all of the central banks are getting more hawkish, and that bonds globally, government bonds we're gonna all sell off, And now we see a rally yet again. Jim Vogel, who is the interest rate strategist at ft N Financial in Memphis, Tennessee, joins us now to explain whether this rally can continue. So, Jim,

today we got some disappointing CPI numbers, inflation numbers. We also got retail sale that were not that great, and consumer sentiment also came in below expectations, and now people are saying it's going to be lower for longer again. How much can this cause bonds to rally over the near term? At Lisa is whether the curve starts flattening again. That was the big news out of June, and we lost that in July. So far we still have a

steeper curve. Until we see thirties begin to pick up and do better and participate fully in the rally, we're not going to get back down necessarily to the tenure. Well wait, so, so just broadening out a little bit. In other words, you're saying that there was this curve steepening. In other words, people were increasing their expectations of longer term growth, of of of lower near term rates and higher longer term rates, and you're not seeing that stop

due to these disappointing inflation numbers. Correct, So today's big star on the treasury her is the seven year. It's rare that the seven year is necessarily going to be the leading barometer of what happens next for interest rates. So we have got to see the thirty trade back below two and seven eights. So why isn't it There are still lingering positions that need to get out of some uh incorrect longs coming into this month, and so we haven't about two weeks of not a lot of

news for people to try to rebalance their positions. So that they can participate in the long end and we can perhaps see a rally there that allows us to again trade the ten year back down another five basis points and truly get back into rally territory as we move into August. What kind of chances would you give

for that to happen. We're under forty percent at this point because the CBS story, even though it doesn't appear every single day, UH is going to constantly hit the headlines as we approach August, particularly now that drag is going to be speaking at Jackson Hall. I just wonder if you can comment on something that my colleague Arcolague Tom King was talking about earlier that the president at President Donald Trump, his barometer seems to be the stock market,

not the bond market. How do you come out on that the bond market has detached from fiscal policy. You're really basically starting in May, so I think Tom's correct them. The bond market is really looking globally now and not focused on Washington because the general opinion about whether we can get significant legislation passed in two thousand and seventeen

has fallen off the radar. You know, earlier in the program, we were talking about possible contingency plans should the US come up against uh, the debt ceiling and fail to pass some measure to lift the threshold. And I'm wondering, with that kind of political pressure, is that on your radar? Do you think that that is something a material risk that could cause a bond market sell off that's sort

of unrelated to some of these broader economic indicators. Yes, it certainly can if you go back and you look at the volatility. There are a few events over the last ten years that quite matched the debt ceiling fight of two thousand and eleven and then the small government shutdown or brief government shutdown in the fall of two

thousand and thirteen. Those are always going to be major events that cause people to pull back from treasuries, not because they necessarily see long term risk, but just simply they have got to have the information of how that's going to resolve. And talking is keeping on the theme of political influence on the bond market. I also have to wonder right now, and we see the healthcare debate raging and the fact that the Senate GOP cannot get

a bill together that they know they can pass. Does this sort of remove any promise of fiscal stimulus, and has the specter of fiscal stimulus been completely removed already from the bond market. Other words, our bond trainor is pretty much expecting nothing in terms of fiscal stimulus at this point. The stock market still has about a confidence that we're going to get some sort of fiscal stimulus.

You continue to see that chatter around equities there. And so our view is that it's probably still somewhat in the in the bond market, but not in the near term. And so now any impact that might improve the economy and therefore really have a big impact on rates would not occur until the second half of two thousand and eighteen,

and the impact would be rates higher. So, in other words, if there is no fiscal stimulus whatsoever, that will actually put a damper on yields and they could potentially go lower stay where they are more longer than people expect. It would certainly allow nervousness about the Fed shrinking balance she to calm down a little bit. If we don't have a stimulus bill that looks in some sort of shape to pass by the middle of the fourth quarter,

do you think everyone's prepared for that. Are they positioned for it? The bond market generally is. But there's so many things that are happening with regards to deposit growth and how excess reserve management will take place among the in the national banking system that it's really hard to say that the entire balance she uh plan is fully

integrated into prices right now. We think the level of say the tenure accurately reflects it, but in terms of all the other changes that are going to take place, there's still a lot to learn. I want to thank you very much for joining us. Jim Vogel is interest

rate strategist for FT and Financial joining us from Memphis, Tennessee. Well, Jenny Yellen, chair of the Federal Reserve, just finished up what could be possibly her last Congressional half year testimony yesterday, and uh what she said was largely, uh, pretty consistent with what people were expecting, but there were some little moments of surprise. For more context, I want to bring in Bob Eisenbie's vice chairman and chief monetary economist at

Cumberland Advisors in sarah Sota, Florida. He also was formerly the director of Research at the Federal Reserve Bank of Atlanta. So, Bob, what was your number one takeaway from this two day testimony. Well, my takeaway was that things seemed to be, as far as the fform C is concerned, on track for a gradual return of interest rates to a more normal position and probably move on the portfolio to normalize, beginning perhaps in September. I think that's the most likely date at

this juncture. Um, Well, hold on, that's actually important, right, So if they begin allowing some of their holdings to run off starting in September, they have a pretty pretty determined preset course of how much the let to roll off, and under some estimates, that would mean that more than four hundred billion dollars of securities could roll off in the two years ended at the end of two Is

that what you're expecting. Yeah, They've they've got baby steps about two hundred and forty billion up through the end of two thousand and eighteen. And that's really where my focus is on this point in time, because we'll get a pretty good sense of what the market reaction is likely to be and what the Treasury does. I mean, it depends on whether the Treasury replaces those securities are

not as to what the ultimate impact would be. I did find it interesting that I thought that Janet Yale intended to put herself in the group of people, and there's a wide range of views on the f m C in that group of people who felt that there would not be much of an impact as far as

treasury yields were concerned. I want to pick up on something you said, because you bring in this idea of the people at the Federal Reserve, you have experience with the people at the Federal Reserve formerly executive vice president and director of Research at the Federal Reserve Bank of Atlanta. You mentioned eighteen who's going to be at the Federal Reserve in that Board of Governor's table that is the sixty dollar questions? Oh, come on, there's a little bit

of inflation. Well, we we have four people right now. We have one new nominee uh from the Trump and illustration uh Stan Fisher's term is up in two thousand and eighteen as well, So this is going to be another give us some names. Come on, we're gonna I'm pushing you here. Oh well, I mean who would I like to say? Well, who do you think do you think that Janet Yellen will get the nod. I think

it's questionable whether she'll get the nod or not. And it's more likely we'll get some sort of a business person in or um, someone like a former head of the Council of Economic Advisors that John Taylor. All of those would be good potential people to have on the

board as as as potential uh the leader. Well, I think John Taylor would be would be my first pick too, but Glenn Hubbard would be certainly right there along with it in terms of someone who's a top errat economist and and the knows about policy and and understands policy. So Gary co has also been flirted. He's currently the chief economist for President Trump and former CEO at Goldman Sachs. How do you think his influence would change the FED if he were chairman? You mean, um, well, I think

you bring a little bit more of a market's focus. Uh, maybe a shorter term view, because most of the people on Wall Street tend to have, uh, you know, a long term is the end of the day. Would you be more hawks? I think that that's that's the question that people are wondering. That's that's a good question and I don't have a good sense of where he would

come out on that. Uh, right now, with inflation being where it is, I'm not sure what Hawckeys really means, because you know, we don't really have an inflation inflation problem at this point. So and if the if there's an inflation problem, it's that people are concerned that inflation is too low. I personally don't think there's anything wrong with one point four percent inflation. I think it's perhaps diverting attention at this juncture and creating some potential risks

by attempting to keep the economy overheating. And having said that, the path that the f o MC has laid out seems to be a reasonable one at this point as far as rates are concerned, at least from my perspective. Bob, earlier, you were saying that chair Yelling puts herself in the camp not thinking that the bond roll off will the balance you roll off will affect treasure yields all that much.

Do you think that they're accurate in that assessment? Well, they have essentially, uh, really moderated what the total rolloff would otherwise be and have taken I think a very conservative view when it comes to the maturing of the securities, because right now mortgage backed security paydowns have been running around twenty billion a month. Uh, and obviously they're going

very slow on that side. Uh. And the rest of the securities are, you know, they're they're really taking baby steps as far as I'm concerned because of the uncertainty about what the actual impacts will be, both in terms of impacts on interest rates, but also what if any implications market responses would have for the subsequent path of movements in the target rate. Bob talk about the market moves or consequences that JP Morgan Chase shares down one

and a half percent, Morgan Stanley down one percent. Uh. You know, City Bank down three quarters of a percent, Bank of America down two percent. Today. What do you take away from today's releases about banks and about investing in financials. Well, financials have done very well, So there's probably just a little bit of a reassessment um perhaps because of concern about the extent to which regulation and

the FED. One of the things that Jennie Ellen talked about was she was not in favor of removing removing a lot of the regulations that a lot of the financial institutions have been arguing for so uh you know, to the extent that she's for keeping a lot of those regulations, that's essentially a negative as far as the financials are concerned. I want to thank you very much for spending time with us. Bob eisen Biss is vice chairman and chief monetary economist of Cumberland Advisers. They are

based in Sarasota, Florida. But we got retail sales today and they were not great. Retail sales unexpectedly dropped for a second month in June. And not only did they drop, but it wasn't just autos, it was across the board. It's leaving a lot of people wondering what the future of retailers will bring. Sema Shaw joins us now. She's consumer discretionary analyst for Bloomberg Intelligence, and we're also joined by Christian Magoon, chief executive officer of Amplify Investments in

Colorado Springs. Sema, let's start with you retail sales unexpectedly dropping. What was driving that? Um, there was a deceleration, as you mentioned, sort of across the board. I think what was most notable was that, uh, May was weaker than expected, so I think maybe people thought there'd be some rebound and that non store sales, so online decelerated their growth from last month, so that's kind of it still is up,

but the growth wasn't. No, but this is important because it sort of suggests something more with the consumer than simply a show. I mean, personally, you and I have discussed that before. Other than building materials, which was flat last month, but up this month, I haven't seen a lot of strength across the board in any particular category.

And we were talking about Target. Target was better announced that sales might be better than expected for Q two, but that likely comes at the risk of margin and the investment they've made in price. So maybe people are willing to buy either online or in stores, but it's very price competitive, and so I think that's the risk, and you're seeing that seem you know. I was looking at the stock charts, and I want to bring in Christian Magoon on this as well, because I was looking

at the stock chart of Target. This was almost an eighty dollar stock last fall, all right, just last fall. It is now on sale at fifty three dollars. Macy's was a nearly a forty four dollar stock in November. It's also on sale at twenty two dollars and twenty three cents right now? Do they need saviors? Does someone have to come in? Because I want Christian to comment about the potential for Amazon spending even more money. But Sema,

what do you think? Um, I don't know if they need statis you have to separate the fundamentals and the stock reaction. So if there's any good news, these guys jump up. But so people try, you know, they think, oh, hey, this is a turn. But to me, when I look at the competitive landscape, I don't see any upside for many of these guys, not particularly Target or a Maze's. But I just think, like, look at the way that Amazon is because I think it's a change in behavior.

It's not just that it's one or the other. People want a combination. But as you get used to spending online and you have it's been your behavior. It's on your phone, and you're able they get the last mile through Whole Foods, it becomes increasingly difficult for other people to compete. Christian, you said that you think that Amazon could buy a player like Macy's. Can you explain why

this would be a beneficial move for them. Yeah, I think it'd be a strategic acquisition because Amazon is trying to a semi set kind of get that last little um, you know, a few feet into physically being on on people's mind. Whole Foods is a great example of adding you know, four thirty physical locations. Macy's would be another interesting example of adding you know, close to seven locations.

And this gives Amazon a way to not just show room things like Macy's does today, but also as a delivery center place to have storage lockers, potentially have autonomous vehicles go in and out of drone delivery, etcetera. And then also obviously Amazon has a great uh technology base, whether it's kind of these voice enabled devices or just um they're kind of ever present online um effort to promote some of these brands Macy's has. So I think

that physical footprint is going to be important. I believe Seema is exactly right. It's not going to be just online, it's not going to be just brick and mortar. It's going to be omni channel in Amazon's probably in the cat's seat to figure out that mix. Well, you know, Seema, there's a report today and and Christian you can come

in on this as well. There's a report from Goldman Sachs saying that while they put Walmart on their Conviction boy list and the stock is up one point three and they said that the Walmart is well positioned for any competition with Amazon. I guess it's also in reference to the fact that they're going to have to absorb that the Whole Foods acquisition. Seema, what about Walmart? Walmart to me is a little bit of a different customer.

It's a lower end on average. I mean, it's not really a direct competitor or Whole Foods, I would argue, I mean, I understand, but right relation to Amazon. Yet, Walmart has the stores, but they don't have the back end infrastructure online as well developed as Amazon. And as we've seen from multiple retailers, that seems to be the harder part to execute versus getting having the online and that infrastructure correct and the logistics and then buying the

bricks and mortar. So I think that is more that is a bigger That's something that's they're going to struggle to get. Like they've made all these small acquisitions like Jet and mod you know, modcloth and things like that. But how do you put those together and how do you have that seamless experience that people had, say like on Amazon Prime Day, where the site was so quick to load and to still you know, get the deliveries out.

That part, to me is very hard to replicate. So Christian, I want to I want to go back to that image that that you portrayed of Amazon buying Macy's and having these stores with drones flying over them and autonomous cars and Jetson's you know, uh family member flying overhead. I'm just trying to figure out, you know, in this image, are we getting back to the same model that kind of is failing right now for a lot of the retailers, which is uh that if people are ordering online, they

don't need the physical location, why store up? Yeah, I think it's a it's kind of hybrid, uh, based off the current brick and mortar model, and the hybrid nature is having those physical locations might allow you to do just in time delivery of thirty minutes or an hour. Um. You know, if grocery, the grocery industry is truly going to be disrupt is you need to be able to have something like a same day delivery service, and physical locations in in these major communities like a Macy's or

Whole Foods offer is going to help that out. In addition, there's a large, you know, population growing city city population that may need actually a storage locker or a different place besides their place of where they're living or their actual place of employment to actually go out and pick

up packages that are are delivered in a locker. And then I think, finally, um, it's it's hard to ignore the impulse buying that way we do him and Lisa when we're walking through a store, and Amazon is missing some of that. I think we do some of the impulse buying online, but obviously when you're a physical store, I think that increases um kind of the likelihood that you could pick up some other things. And I think that will be beneficial to Amazon and other online retailers

once they have a little bit more of a physical footprint. Right, Well, they've got to get into the store in the first place. I'm just to note the average Prime member at Amazon's spends hundred dollars on the online shopping platform annually. They spend non Prime members they spend seven hundred dollars, so nearly double the amount. And this is a big deal when it comes to Amazon Prime selling day, right, SIMI, because it's not just about the product, it's about signing

people up for that. Yes, because I think that part of what makes them so defensible against other people who mimic their online platform is the fact that it is a marketplace, it's prime, and it's almost part of people's behavior. It's on your phone, and that makes people, i think, at a certain price, even at a certain level, less

price sensitive. And then it then you would be typically because it's just so convenient and you don't really need more than one Amazon Prime membership like in for a competitor, and I think that's what makes their first mover advantage so powerful. Thank you very much, Sema Shaw, consumer discretionary analysts for Bloomberg Intelligence. Christian Magoon, chief executive of Amplify Investments, Well, we want to know that they have to go to

the blackboard again. Stephen Dennis is our senate reporter from Bloomberg News and he joins us from Capitol Hill in Washington, and he can be followed on Twitter at Stephen T. Dennis and he's got two ends. Well, are we going to get another rewrite? Stephen, Yeah, I think they're gonna have to put together a package for moderate there's a bunch of holdout moderates, about a handful that come from

Medicaid expansion state. They didn't really get much in yesterday's rewrite, and I think over the weekend before Monday or shortly thereafter getting a CBO score on this bill, I think Mitch McConnell is probably gonna have to dig back deep into the leftover pocket change in his pocket and start spending some of the extra money that he has to uh get these senators back on board, Stephen, When you talk with analysts and and policy wanks on Washington, on

Capitol Hill, what do they say about the likelihood that Republicans can come together in any way for this or whether at some point they'll have to reach out across the aisle two Democrats and try to do something a little more about partisan I think right now we're basically on a knife edge where McConnell is very much trying

to get to a deal. And if you if there's an uh, if there's a point of optimism here and momentum potentially is that after this bill came out, there were too hard nosed, and then there were fifty not hard anything, right, So you had any one of those fifty other senators could have tanked this bill yesterday, could have put out a statement saying I won't vote for it or I need massive changes or whatever, and they

held their fire. And so that means, uh, you know, the one way of looking at is that there's fifty senators who still want to get to yes. And there's a lot of time between now and Tuesday, frankly to get those senators to yes. So there's gonna be a major efforts today tomorrow, over the weekend to lobby the senators,

to lobby their governors. Mike Pence is going to be in Providence today lobbying senators like Brian Sandoval Key Center, a key governor from Nevada, at the National Governors Association meeting Yes Yes, so that the governors are all in Providence. Mike Pence is up there, you know, he tweeted yesterday one of the things you want to do is talk

to them about the healthcare bill. And it's no secret that if they don't get Brian Sandoval support in Nevada, they're probably not gonna get Dean Heller's support uh here in the Senate, and without Dean Heller, this bill goes down. So they need Dean Heller Medicaid expand to the state. They need Lisa Murkowski in Alaska Medica expansion state. Rob Portman in Ohio expansion state. Shelley Moore Capital in West Virginia Medica expansion state. None of them are on board yet.

They need to get them all on board before they vote next week. And you know, it's hard for me to square the comments that all of those people have made to me in the hallways over the last several months with supporting anything like this bill. You know, they've all said they don't want to vote for something that has millions more people uninsured. Well, I don't think the CBO is going to come out on Monday and say this is going to score that much better on the

uninsurance rate. You know, Stephen, I want to I want to really clarify one point because we hear so much with respect to uh, the Russia intrigue and the potential scandal. The Boston Globe now is reporting that a Russian American lobbyists confirmed that he attended June meeting with Donald Trump Jr. Build as part of a Russian government effort to help

the Republican campaign. Does this matter at all when it comes to really the important stuff of making this country work, like the healthcare bill, and like the subsequent tax bill that we have not seen anything drafted on but everybody's waiting for. Does it matter. I think it doesn't matter that much. You know, when I talk to senators and I see them in the hallways, Uh, they are very busy.

They're carrying griefing books, they are crunching numbers. They're talking to their governors all about healthcare right now, or maybe some of them are working on the tax bill. You know, the Gang of Six, which is the Speaker, ch McConnell and the Senate of Gary Cone, count of Economic Advisors and Steve Nuchin, you know, the in the in the ways and means and finance chairs. They've been meeting regularly. They met this week on tax reform. So those meetings

behind closed doors are happening. Numbers are, you know, papers being exchanged, and I think, yeah, it's not clear that Russia is really the problem. The problem here is the politics of this bill are terrible that's the problem. We see seven real quick when they go back if they do have an August research recess, which doesn't seem like they're going to. But if they were to go back,

what would they hear from constituents? Well, right now, this bill, this healthcare bill, has been pulling it around, you know, anywhere between twelve and that's not so hot. Now, it's possible that it gets a little bit more popular at the very end as they appeal to moderate and one of the things that they did is they took out the tax cuts for the wealthy from this bill, which was the number one argument that Democrats were making is that they were cutting the board to give might to

the rich and sort of a reverse robin Hood. So maybe this bill gets a little more popular, but you know, if they go home with empty handed, they're going to hear it from their own conservative base. So they're going to hear it from both sides. Stephen Dennis, thank you so much for winning us in for that perspective. Stephen Dennis is our Senate reporter for Bloomberg News, coming to us from at Capitol Hill in Washington. Thanks for listening

to the Bloomberg P and L Podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo wits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio