Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Find the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. All right, let's break down this inflation print this morning a little bit deeper, and along chief youos economists with Bloomberg Economics. Anna, you got this one right again? What did you take away from today's print?
You?
Anaalog, So we want to get your opinion. And then number two, what do you think your feeder reserve will take away from this print?
Yeah?
My takeaway is that this is one of the best CPI report, probably in this high inflation two years with that we had had. If you look at all the detail, the details are pretty encouraging. There's some broader disinflation across more goods. There are more goods who are undergoing deflation. They're less goods that are growing at more than four percent inflation. Shelter inflation is coming down, and that's not
just rent, but it's also hotels. You know that all that Airbnb collapse weil, and I think that's that's translating to domestic hotel fares coming down, and energy prices are also subdued. So I think it truly is one of those reports where you look at the you know, seams, and everything looks good in terms of how the FED look looks at it. So I always compare the FED to like a big cruise ship and when they try
to turn, they can't turn sharply. And so so today we have this pretty pivotal CPI report, right sharp slow down, but the FED is not about to make a sharp turn. I think they're still on track to hike in July. I mean they still have time until the next The meeting after July is September, and between July and September there's still the Jackson Hole. There's still plenty of data.
So even though that they indicate it in the dot plot in May that in June that they're going to do another hike after July, I don't think they're going to do it because by by September the evidence is going to accumulate that I think we're going to see more of this type of CPI reports. We see today where the core CPI is growing at a monthly pace. That's about where the Fed's inflation target of two percent is.
So if you had to put a percentage on it, and what would you say for the likelihood of another hike in September? If we look at the werp function markets pricing in about a sixteen percent chance of a September hike, what's your calculation on that?
Yeah, I think I think that's about where. I think the bond market got it pretty fair this time around.
So and if we're economists like yourself, are we taking the recession talk off the table?
No? You know, not for me?
WHOA no, no, no, So I you know a lot of it. And this links to today's report, right. Why is this today's cpr I report so beautiful? And I think part of it is.
That the lacks of monetary policy from the five hundred bits of rate hikes are starting to bite. And the stuff that takes the longest time to show up in the economy is unemployment rate rising. So typical economic models would show that unemployment rate would only peak eighteen months to twenty four months after a monetary policy shock. So that means that unemployment rate should be rising and towards the second half of this year, too early next year.
And on top of that, when I look at the consumer household balance sheet, it's just it's going to be very nasty in the second half, especially when student loan payments resumed in October. So I think, just looking at how the bills of a typical household, I calculated that a person needs to earn at least twenty one dollars per hour to be able to stay afloat on all the payments. It's supposed that he has a car payment,
he has student loans, mortgage credit cards. So I think a lot of people would be feeling the stress of their finances starting in the second half of this year.
Well, continuing on some of the bad news that you bring up, Anna, I wonder to what extent we're seeing softness today just because the conditions were so bad a year ago that's when we got that nine percent number. Is this number that we got today about a genuine cooling that we're seeing currently, or is it more about less bad news than what we were seeing a year ago.
Both, So, the headline inflation at headline CPI beans three percent is mostly due to the base effects that you point out, but also the core CPI growing at zero point two percent on a monthly pace that's free of any base effects. That's genuine disinflation. And if you annualize that zero point two percent, you get a low two
percent annual pace of inflation. And then I do expect that the CPI print in the next couple of months, the core CPI print to continue to be around zero point two or even zero point three and most which means that yeah, that annualized you about between two two three percent inflation.
All right, So I guess then the question will be for a lot of people as it relates to the Fed, how long do they stay at this higher level of rates before they really consider the opportunity to maybe move rates down.
Right, So, you know, it depends on wage growth, and Powell seems to be putting a lot of attention on UH wage growth. The the inflation metric that the Fed pays a lot of attention to is core PCE services excluding housing, and half of that is supposed to be related to labor intensive industry, which in turn is the inflation there is driven by wages. So UH that is
that I think we're also seeing some progress. We're seeing in the jobs market jobs report last Friday, we saw that that that that effect private hiring was below two hundred k and and so I think I think even on that front, it's it's pretty uh, there's progress.
There, right, Yeah.
Well, and Paul brings up the great point about labor, which, of course, as you've taught us very well, Anna, the FED is really looking at when determining their next moves. For my friends and folks listening in who are wondering whether cooler inflation data is going to make it harder for them to argue for a raise this year, talk to me about how you can help them pitch their bosses for a raise even though we are seeing some cooling when it comes to the inflation picture.
Well, first of all, I think the best reason for arguing for pay raise is that the real wage cumulative real wage over the last two years has decreased. Many people pointed out that real wage growth this year is positive again because nominal wage is higher than inflation. But on the whole of you added up over the last two years, people are still worse off. Like that breakfast sandwich in the airport is still costing more relative to how much you can make, you know, in terms of level.
So even if inflation were to be zero percent tomorrow, people will still feel worse off just because the level of prices is permanently higher than relative to their income.
All right, and I thank you so much for joining us. I always appreciate getting your analysis and insight had along chief US economists for Bloomberg Economics and her team have been really spot on kind of the inflation call, the GDP call, and the most importantly, kind of where the FED is going. She was, you know, about a year ago she was saying this, you know, I mean, I take it.
More than a year ago.
She was saying that FED is going to take this rate to north of five percent, and that was not the consensus call at all. And she's absolutely right.
You're listening to the team Ken's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
The futsy this year up about about eight percent this I'm sorry, the footsy is flat. The stocks index, the European indext stock six hundreds up about eight percent, so lagging they outperformed last year. But let's get an overview what's happening in the European markets. We can do that because we got that kind of person here. Tim Craig had director research for Bloomberg Intelligence. He's a senior European strategist. He's based in London. We got him here in New
York this week. A couple of you guys are here in New York this week. I mean, everybody's traveling, all right, So Tim, thanks for coming in here today. Give us an overview of kind of year to date, how are the markets in Europe and kind of what's the outlook.
So there's been a tuggle war going on in Europe between earnings and valuation depending on the mood of the market as it relates to what's going on with inflation and interest rates. So it is not dissimilar here from the standpoint of some of the drivers. With one big exception we can get to tech. But in Europe, essentially we've had, as you said, a pretty decent market, and you talked about the eurostocks being up eight percent or
I should say the stock six hundred. That's the broader market that include D's a big chunk of the UK, which, as you said, was flat. If you take out that, you look at say the eurostocks fifty, whichould be sort of the Dow Jones equivalent, that's now up fourteen percent.
I mean, it's been a decent year. The key has been positive earnings revisions that started as we got out or we got into one Q earnings off setting and overwhelming valuation contraction that's occurred with the idea that interest rates are going to be elevated for longer because inflation is still very sticky in Europe, in particular services and wages. So I just threw a lot of stuff at you,
but markets are behaving. Key now as we look into second quarter earnings that are getting ready to hit the tape, is can margins really maintain where they are, which are record levels. They've been very sticky in Europe, unlike here where they had rolled over. So it's a very very interesting dynamics as we go into mid year earnings.
So things are good, but it's still relatively cheap when it comes to an American investor to get in on the UK. Right, So is it an argument of the UK is so cheap that you have to own.
It at this point.
Quick answer on that is absolutely no.
Ye tell me why, Tell me why?
And you could you could look at that more broadly within Europe. I mean, our work in terms of global equity strategy within Bloomberg Intelligence leans towards emerging markets, then Europe, then US. So you know, we do like Europe in concept. And within Europe itself, the market overall is trading it
about thirteen times forward earnings. You know clearly that's very low relative to the US, where you're at eighteen and a half nineteen times takeout tech if you look at the equal weighted S and P several multiple points lower, so it's not such a start contrast. And Europe just doesn't have technology. You know, we don't have the Internet element. We do have some semiconductors, but we don't have the rest of it, and that's a big difference. So you
can't just say it's cheap you should buy it. It's cheap because of composition and the UK specifically not to overegg this, but big on some big consumer staples, but a chunk of that's tobacco. Tobacco trades at a lower multiple. It's big on financials, but a chunk of that is commercial banks, which trade on lower multiples. And it's big on energy and materials. And given that we're still close to cyclical peak commodity earnings, they're trading in a low multiples.
So it's not cheap in a comparable basis because of composition China.
It feels like to me when I think about some of these European companies as semens just for example, but some of the big manufacturing companies in Europe, they depend more or they do more business with China. What does the China reopening mean? What does the China I don't know, a little bit of a cold war building between China and the West.
What is that?
What are the companies in Europe saying about China as a I guess as a supply chain issue and as obviously an end market.
And I think China is a more relevant opportunity for the average European company than it is for the average US company. The US market itself has a lot more of a domestic focus than the European market, which has
both US and Asia. You know, if you look out on a revenue exposure basis, you know, Europe is more globalized and from that perspective, part of the hope early this year January was a good month specifically for the European markets, as was December was the China reopening trade right, and you know the issue with that has been as of late, I'm sure you're aware, you know, the more recent statistics have faltered and it seems like that's sputtering.
That's not great for the second half outlook, all else being equal, for the European markets, our China's strategist is still relatively sanguine that more stimulus is coming, more policy measures will come, and there are opportunities and as said said, you know, the emerging markets are an area all else being equal, that we do find intriguing. But China is a big deal.
Yeah, well, of course, and hopefully this earning season we're going to get a little bit more of an indication as to how the strength of the Chinese consumer is going to potentially impact some of these profit margins. Having said that, we are hitting seeing that the dollar is hitting near fifteen month, Now, how does that play into your county?
This is another one of those elements for the second half outlook in Europe. And by the way, if I were to use a word technical as it is, it would be sloppy. You know, that's kind of what we going to steal that from you.
When I'm trying to sound really smart there.
Exactly, currency is a big deal. If you look at the third quarter specifically, by the time we get into that as a reporting period in a few months, whether you're British, whether you're Euro based, or whether you're Swiss Frank based, currency is going to be somewhere between a ten and fourteen percent headwind for you on a year over year basis. It's a huge hit. And you know,
some companies will hedge that away. Some companies are producing in the local market, and so there's you know, different accounting, you know, sort of opportunity needs to minimize the impact. But just overtly, if I'm a Swedish company and I generate one hundred percent, you know, the Swedish industrials are a big deal. I generate all of my sales abroad, it's you know, it's it'll be an interesting element from the standpoint of currency impact.
But maybe a tailwind for some of the consumer stables that you mentioned.
Well, but again, if I'm if I'm Unilever, if I'm Diagio, I'm based in what is a strong currency, right, And so you know it may be you know, it's more a combination of what's going on from the local economic the local consumer spending perspective for those consumer based companies. But the issue with the defensives in ways they've got more currency exposure for a euro of revenue because they
don't have a cyclical element to offset. You know, it makes it more dependent on the currency being a swing factor. So if you look at a correlation analysis of who has the most negative correlation with currency, it's healthcare and its staples.
Real quick, twenty seconds. A pint in bell sized favorite, well sized park. It's a suburb of London. What's not going to run me today?
Seven pounds?
Really?
Yeah, but that's inflation. But that's a big beer.
Is a big relation.
That said, dude, I had breakfast this morning. Yea, yeah, you're talking ridiculous. My wife is over here. Had a pizza yesterday for lunch. Twenty six pounds for a pizza that was the size of a plate, I mean dollars.
All right, Tim, Thanks so much for that.
Tim Craig had Director Research, Senior European strategist, Bloomberg Intelligence.
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Looking at the fields space here, big move into two year treasury down fourteen basis points four point seventy three percent. That kind of gets your attention here and looking at the Bloomberg Index browser, I go on the terminal the Bloomberg aggregate total return unheedged return here for the bond market up one point three percent a year to date. It's that's a lot better than last year. Let's do some more work on the investment grade business out there
in a fixed income space. Natalie Trevortik joins us, head of investment grade credit Strategy. It paid in rego. Natalie, thanks so much for joining us here. What's your takeaway from this inflation print that we saw this morning.
Well, it was a very good print, but being a bond person, I always have to look for the bear scenario and like, maybe it's too good. Why can't we just get that point three percent month over month encore that we were hoping for, Because now you see the stock markets up again. We got really good news in terms of airfares and hotels moderating. But maybe it makes corporate America think that, hey, we can go about raising
prices again. And because the economy is doing so well, we still have that strong wage growth and the employment picture is still very strong. So it seems like the economy is firing on all cylinders. Are we in the Schooldilock scenario and avoid the recession altogether?
Okay, so you think that the CPI print from today could lead to price increases, because why not. The economy's cooling a little bit, so let's just try it out.
Yeah, Like, maybe not right away, but it also shows that there's still strong underlying growth in the economy, from the employment picture, the spending that we're seeing in services. It was great to see that moderation and goods and that's definitely come down, but there's parts of the economy which are still running a little bit hot. So maybe companies don't have to do the layoffs they were possibly thinking they had to do earlier in the year, and
it is a very nice scenario. Doesn't mean the Fed's probably going to have to cut anytime soon, even if the second right hike for this year is maybe more in doubt at this time.
So Natalie, of you and the good folks have paid in regal, have you taken the recession risk off the table?
Here?
Not off the table, but we've definitely pushed it out further down the road, So it's not a time to be cautious. Yield, even though they've come off the peaks
from last week, they're still pretty high. So as you were saying, you know, the ad return one point three percent year to date, ID corps are above two percent, but Hi, you bonder have returned five percent year to date, so we still think it's a nice cupon clipping year for credit and so you can still expect some good returns in the second half of the year, and we don't want to be too defensive and lose out on those.
And what about corporate spreads in particular looking a little bit tighter in the month of June. What do you anticipate that looking like in the second half of the year.
Yeah, they really rallied after the debt ceiling resolution, and they're continuing to do pretty well in July through the types of where they started the year at the beginning of the year, despite the banking crisis. So we think there may be a little bit on the hot side right now, but we don't really see a case for them to blow out if the recession is pushed out to say late twenty twenty four or twenty twenty five. So we think you have to definitely pick your spots now.
We saw a little bit of a beta rally in June and maybe that went too far, But there's a lot of good names out there which we think can perform well. But we wouldn't expect too much further spread tightening from here, So the bulk of your return is going to come from that carry and coupon clipping.
Natalie hels the credit quality out there in the mark as you look across your portfolio, we've heard people say, boy, it's pretty darn good. We don't really have any big issues here at the moment.
We really don't, because companies that are on the cusps maybe of low triple B going to high yield have already taken steps to either reduce cap X or cut dividends, so they're really focused on maintaining their ID ratings. And if anything, we're seeing more upgrades, particularly out of the energy space. So if anything, we're expecting more rising stars than fallen angels in the coming year.
And when you look at the second half of the year two, I'm curious if you think that we're maybe underpricing the idea that the market will always give us the most painful possible scenario. Do you think that there's a potential outcome here of you know, big tech dropping and volatility going to the upside in the second half of the year.
I think there's potential. I feel like we're going to cruise through the summer, but there's definitely potential in the second half of the year. It seems like tech is you know, really celebrating the CPI print today, but it does seem like it may have gotten a little bit ahead of itself. But still the magic words AI just propels them for.
All right, Natalie, Given where we are here in this cycle, given where we are with kind of I think most people feel like that where the FED is going to go over the next meeting or two, if not the next six months. What are some of the sectors that you guys are finding attractive right now.
Yeah, we like some of the defensive sectors like consumer, non cyclical and utilities because we think they're well positioned to do well if we do get that volatility. We become a little bit more cautious on the banking sector, even though we think we're out of the crisis. We think banks have a lot of funding to do, especially
if there's increased regulation and capital requirements. So just a little bit more cautious here from more of a relative value perspective, and then it really comes down to individual name selection where we think, you know, we rely on our credit analysts team to find value there.
And longer dated bonds, would you say that they're becoming more attractive given some of the potential FED moves we're anticipating.
Yeah, they've kind of been the sweet spot all year, ten and thirty year. Demand in the new issue market is always the strongest, and at these higher all and yields closer to six percent or above six percent in some names, it's attracting a lot of buyer interest, even though you can get higher yields in the front end of the curve, but people want to lock in these rates for longer.
All right, Nattie, I can tell from your accent that you're Canadian. Yeah, and I see you went to Queen's University, So I have to ask, how did you find yourself all the way down in Austin, Texas for your MBA.
Yeah, Austin. I just wanted to go somewhere hot, and it was in two thousand during the energy boom, so I thought I was going to go work for Enron, and I interviewed with them. Fortunately I made the right decision and ended up at Barkley's Capital and Wall Street and from there down to Pimpco and now at Peydon.
Yeah, exactly. See dodged a bullet there with Enrons.
Yeah, definitely.
Yeah.
I bet your Texas sent a lot of kids to Ron back in the day. Oh, they sure did.
Yeah, all right, Natalie, thanks so much for joining us there. Natalie Trevor Thick, head of investment grade credit strategy at Peydon and Reid talking to us about what's happening in a credit space.
You're listening to the Team Ken's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
All right, let's go to Ira Jersey. You're talking old school, I talk Iri Jersey. I mean this guy, he's got a little sport. Cody keeps down a prince in case he needs to get on TV because he becomes super casual.
But he joins us from Princeton, Ira Jersey.
Chief, you wish to interest rate strategist Ira heck of a good print there for people that are like guest calling for FED to kind of hold off a little bit. What did you take away from the inflation data we saw this morning.
Well, first, let me say Paul that I'm with you.
Let's go out and get our food and if we want to bring it back for the family.
Because you guys don't live in walk ups. Okay, this is this is the key indicator.
Gotcha. I guess that's true.
Ahead, So yeah, yeah, so the inflation print was obviously good. Like members of the Federal Reserve are going to like it. They're going to say, Okay, we're we're heading toward our goal. We're not there yet. I think that's some of the Fed speak that you'll that you'll hear is that we're not out.
Of the woods.
But these this is a certainly decent data and the market reaction to it, I think is pretty appropriate. You know, very significant, very significant rallies in the front under the yield curve. So you're looking at two year, three or five year rates of you know, fifteen eighteen basis points lower at some points during the morning, and that's basically pricing out a second twenty five basis point hike late after after July.
So what is the single most important data point for the FED to make that September decision.
Based off of Yeah, there's not one, right, So, you know, the Federal Reserve, like most of us, we look at a mosaic of data that's coming in. But it certainly is the different inflation prints and those things that affect the inflation print. So last week's job's number obviously was one of them. Because even though, like when you look at the whole pantheon and of the data that we receive today in terms of the CPI report, services growth,
even though it's slowing, is still reasonably high. And you look at core services, so that's services excluding say shelter costs, and you see that that actually is still growing at a reasonably decent pace, and that's very impacted by how many jobs there are, what wages are doing in.
Those services sectors.
So I think that there'll be a very meaningful, you know, view of that when you get when we get both the July and the August data, because remember before the September meeting, we'll get both CPI and the Jobs Report for two more months for both July and August, so it's not any one of those prints's I think the continuation and do we see a continuation of this moderation in some of these data.
And of course I wrote looking at the world indust rate probability function on the Bloomberg terminal, the work the market is kind of taking down its expectations pretty dramatically for a second rate hike after this potentially one in July. Does that job with kind of what you're thinking.
Yeah, it is and it has been you know, one of the things that Annawang and I had talked about right after the Federal Reserve meeting in June was whether or not the dot plot, which was suggesting that they were going to be two more twenty five basis point interest rate increases this year, whether or not that's second one, in particular, was this jaw boning trying to get rid of some of the cuts that were priced into the market.
And I think that that's I don't think it's clear that that's what they were trying to do, but I think that that certainly is what happened in the markets. Was you not only priced in one more interest rate hike, but you priced out the potential for cuts anytime this year. And I think that that's really one of the policy decisions at the FED needed to do.
Now.
I think there's other ways the Fed could have communicated that, other than saying that they were going to hike more. They could have just said, look, we're not going to cut interest rates until the unemployment rate is above five percent or something like that, and give some kind of target for what the minimum what the minimum is for the for different economic indicators for the Fed Reserve to make a downward move in rates. And I think we're nowhere near any of those trigger points at the.
Moment when we got the FED minutes, it became clear that there was definitely some division months to the voting members when it came to the last rate call there. And we get the FED page book later this afternoon, which might give us some more details on that. But IIRA talk to me about whether a print like the one we got today leads to more division amongst the voting members or less.
Well, So I think if the FED does increase rates twenty five basis points, that it's possible after this kind of print, maybe you get one or two more dubvish members say that, hey, we should be done.
But I suspect that July is basically a done deal.
You won't get any descents for July, at least based on the data we have right now. I think it can and can become more contentious going forward. So when we reach September and November, if the inflation data comes in closer to say, on a month a month basis point three percent, do we end up with some members saying, well, we still have to hike more because inflation is still
not near our target. It's still running at three and a half or four percent year on year, So so you know, do we need to we should be hiking more, whereas you have other members saying, look, we've done a lot, we have to give it some time, let's see, let's wait and see for a little while. I think ultimately those wait and see people will win out.
That's that's our call right now.
But obviously, like you mentioned, there is a lot of data that we're going to get between now and September and then certainly the November meetings.
So Ira, if the data stays roughly the same as kind of what we're seeing right now, is a rate cut a not to a twenty twenty four? Is that the kind of an event we should be thinking better timeframe we should be thinking about.
Yeah, And I even think late twenty four.
I think that I think the Federal Reserve might not, you know, be thinking about really cutting until the third or fourth quarter of next year unless something significantly changes.
In the job market.
Remember, the Federal Reserve, unlike some other central banks, is really only concerned right now, is only concerned about inflation.
But it would would be concerned.
About the job market if you saw the unemployment rate go up significantly and if you saw certainly job losses and we still don't have job losses right, So until you start to see nonfarm payroll be negative, I don't see a reason why the Federal Reserve would necessarily be thinking about cutting at this point. Because in a situation where interest rates are at five percent, in the FED funds rate inflations two and a half percent, and the unemployment rate is right where it is now, that's a
great situation for the Fed. I think the Fed would be very happy with that situation quite frankly.
All right, important stuff.
When and where can I see Lionel Messi play for inter Miami.
You know that's a good question. I have not kept track. I'm not a messy tracker like that. We're in the middle. We're just at the very end of our USL League two season here at Real Central and Jay So.
We have our last home match tonight. So that's been my.
Oh really okay us playing.
We play Westchester United from Westchester, Pennsylvania. We had a game against Philadelphia lone Star on Monday which ended up pretty well for US. With an Olympico and you can look that up and you're interested in Seawoydal Olympico is.
Real Central, New Jersey. Good stuff there. That is minor league soccer. Ira Jerseys all over that he's our soccer guru, and he also does this interest rate thing on the side as well. Ira Jersey, Chief US interest rate strategist for Bloomberg Intelligence, joining us from the bi HQ down there in Princeton.
You're listening to the tape cats are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Greg Friedman joins us. He's to see of Peachtree Group. They own a lot of commercial real estate, including a lot of hotels. Greg, so put me my place here. Talk to us about the health of the commercial or the status of the commercial real estate business today, because it just seems like every commercial building I go in around the country, I see the sign out front saying, you know, three thousand, ten thousand.
Square feet available. Talk to us about the state of the market.
Yeah.
Sure, it's a great question. And there's definitely a bifurcation across commercial real estate today. So you know, not all assets, you know, asset classes within commercial real state are equal. So you have office that's going through a lot of secular distress. You know, the return of office has been slower on the recovery. And then you look at the
hospitality industry. You're going through the pandemic. You know, had its worse, you know, from an occurancy perspective, it was at the worst level of all time, and now it's recovered extremely well. So, I mean there's been a robust recovery across the hospitality space. And then you look at you know, multifamily, industrial, self storage, those asset classes continue to do really well across commercial real estate at the
asset level. Now, with that said, there's a lot of balance sheet to stress that's you know, taking place across
all commercial real state assets. That's today just given how fast the FED has increased interest rates, so you've seen you know, rates have gone up a good five hundred basis points and that's putting a lot of pressure on the underlying you know, valuations across commercial real estate assets because ultimately typically you know, about two hundred and seventy ten or eighty basis points above the risk free rate is where cap rates for traditional commercial real state assets,
that's where they trade. And right now, you know, the risk free rates around the ten yere treasure rate, which is four percent, So when you look at you know, I think it came down a little bit with with inflation moderating today, but still it's around four percent. So ultimately a lot of commercial real estate assets had experienced this just robust increase in valuations during the pandemic when
interest rates went to zero. Now we're on the other side of that trade, and so I would argue that there's more balance sheet distress right now across commercial real estate with loans that are maturing, because there's a huge wall of debt maturities that are taking place, and that's a bigger impact than just what's happening just across you know, again, you have some secular distress in office, but outside of that, most of the other asset classes are doing well.
So, Greg, you mentioned that there's some opportunities still in the hotel space, and I have to talk to you then about a story that Paul and I love so much, which is the bankruptcy filing of Jimmy Buffett's Margeritaville hotel. In Times Square. Okay, they had a refinance about three hundred million dollars of debt that was tied to the project. If a hotel like Margaritaville in Times Square can't make it these days, who can, right?
And I think that's you know, that's a classic case where there's a lot of debt on that property that's facing that balance sheet distress with loan maturities, higher interest costs at floating rate debt, and so you know, that's more of a balance sheet issue per se. I don't think it necessarily represents what's happening at the asset level
and the performance. And that's a I would say it's more of a one off, you know, scenario than what's happening across on a macro scale, what's happening across the hospitality space. So there's you know, there's definitely that balance sheet distress. But ultimately, the way I look at the real estate space today, to me, the better place to be investing is in the credit side of the business because there's a huge trade there where you can go
out and directly lend to groups. Because you know, the banking market's pulled back and a lot of cases you can lend and be getting equity like returns where you're you know, leveraging, you know, closer to you know, call it fifty to seventy percent of the acquisition costs.
Talk to us about your hotel holdings, your businesses there. What kind of hotels do you own, where are they and how are they performing?
Yeah?
Sure, so you know our assets. You know, we own a lot of hotels across the US, so it's pretty diversified. We do have a heavy presence in the Southeast. We have a lot of you know, hotels across the you know, the Midwest, the you know, in Texas as well as out in the West coast in Arizona and so forth. But you know, most of our assets are in the Southeast, as well as some in the mid Atlantic. But we own a bunch of hotels on.
The equity side.
But we also have a huge portfolio of assets that we have invested on the debt side, where we have first mortgage loans where we've originated most of these loans,
where we bought loans during the pandemic. You know, we were one of the biggest buyers of debt during the pandemic, where we bought over one hundred and eighty loans from different financial institutions, primarily banks, and we also did a lot of direct lending obviously throughout the pandemic as well as even today on hotels, and we also finance other commercial real state assets on the debt side too today.
What is the customer demographic looking like for most of your hotels? Would you say more middle to low income?
What's the range?
Yes, So most of our hotels, you know, are really catering towards you know, a balance of corporate travelers as well as you know where we have a fair amount of leisure travelers as well. It's mostly mid scale hotels, so it's really, you know, really catering towards the I would say more the you know, mid scale traveler that's traveling across the US.
So, then, are you feeling any impact of the decline and popularity of Airbnb in terms of occupancy or is that something that you're not anticipating feeling just yet.
Yeah, it's a great question. So we've seen, you know, just across because Airbnb has been a discussion over the last you know, six seven years. Yeah, and it really hasn't impacted our hotels as much, there's been an impact on the ability to drive rates on these on these sellout nights. So when there's you know, say there's the super Bowl or there's some type of one time event in a market, there's this phantom amount of supply that comes in the market through Airbnb that ends up impacting
our ability to drive rates. But given the type of hotels in our customer mix, you know, most of our customers like staying at our hotels because they have you know, they have a consistency of service, they know exactly the products as well as you know, we own a lot of Marriotte Hilton branded hotels and they like to get.
Their points all right, So what do you think or how bad do you think the credit side.
Of commercial real estate is going to be?
We've heard a lot about it from It's going to be a real problem for a lot of banks at some point in time. You tend there be a bunch of this debt coming do and sure it's gonna be tough to refinance it at these higher rates, and and the value of your underlying property is much lower than it was. You have loan to value issues. How bad is that going to and when do you think that's going to really hit the system.
Yeah, I think it's it's going to be personally, I think there's going to be this wave of you know, debt maturities that are going to create a lot of challenges. So, I mean, I think, you know how bad it's going to be, It's hard to tell at this point. I think there's there's no question forty percent of the liquidity in the market for debt typically comes from you know, national banks, the regional and the community banks. They're just not able to lend because a lot of them are
trying to shore up their balance sheets. And so ultimately, I think, you know, there is going to be you know, I think there's a lot of opportunities for private lenders like us to fill that void. I think that's gonna put a lot of pressure on different real estate owners
because they're gonna have to pay higher spreads. They're gonna have to pay higher there, you know, ultimate interest rate costs because interest rates, you know, the index rates have moved up so much, they're going to have to pay higher expenses there as well. And so, you know, I do think there's gonna be a lot of challenges. And today you look at the market. There's like one point five trillion dollars of loans that are maturing between now
and the end of twenty twenty five. And so I think you're going to see you know, the you know, over the next twelve months, you're going to start seeing a lot, you know, a lot more situations like the Margueritaville situation in Times Square.
All right, thirty seconds, how because you're lending business versus your portfolio of really.
Sure, so right now our lending business, you know, so our debt investments make up about sixty percent of our au M, and so that's a big part of our investment book today.
And you guys are private, right We are a private when you go in public.
We have no desire to go public anytime soon. So we are very much focused on staying a private, privately held company.
How do you get funded? Where do you get your funding from?
So we you know, we sponsor you know, different investment vehicles and we typically have you know, just internal capital along with a lot of you know capital that just comes in from you know, different investors that invest in these vehicles, which is.
Hard to go public. And I would have taken a public all right, So appreciate it. Greg, really really helpful to us today. We really appreciate getting your perspective here, Greg Freeman. He's the CEO of peach Tree. It was Peachtree Hotel Group, now it's Peachtree Peachtre Group.
We're just going Peachtree Group.
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All right, we had what the market's interpreting.
It's a pretty good inflation print today came in a little bit tamer than expected, I guess as a way to say, and we're seeing some risk assets kind of move on the news, although stock market off.
It's high of the day. But what does it mean going forward?
John Authors has got an opinion because we pay him to have opinions. John Authurs is our senior editor for Bloomberg Opinion. Joining us here in our Bloomberg Interactive Brokers studio.
What do you make of this John, I mean it seemed pretty good to me.
Well, I would be stronger than that, so I feel it was very good. And I say that having gone on record or predicting that expectations for a low print were dangerously strong and that people were running for a hawkish surprise. So you know, I can only say that I am very startled and impressed by how strong the numbers are. As the morning has gone on. The more you look at the numbers, the better from the point of view of the Fed they get. So if you look at if you break it down month by month,
energy prices actually contributed positively to inflation again. Last month, food inflation and goods disappeared literally zero, and services.
Inflation came down a lot.
I mean, that's really fantastically exactly what the FED wanted to see. If you look at the Cleveland Fed trim to me all these cunning measures of inflation we all now learned to to use. Over the last three months, it's been running at less than two percent when you trim out the outliers on either side. So there are very few flies on this number. That it's a genuinely very encouraging number. And I guess the other thing I would I would say which personally surprises me a little.
I mean, you've seen the dollar seems to have taken the decisive which is absolutely what you'd expect from a really surprisingly good inflation report. Actual expectations for the fair really haven't moved very much at all. Nobody seriously still doubts that they're going to hike in July, and people
are still reckoning. I mean, if you look at contracts going through to the beginning of twenty twenty five, yes they've come down, but not even by twenty five basis points from the spike last week, So it doesn't basically change. People are delighted to have this confirmed, but in terms of what they're expecting from the Fed, the notion that they will have to stay higher for longer to make sure this risk of inflation is thoroughly put to bed
lives on it. It hasn't changed things as much as I thought a print like this might have done well.
Even if we've hit peak inflation. If we're past that point and you've written so beautifully about this, John, when does the consumers start to feel that and when will companies, restaurants, small businesses start to decrease their prices in a way that is tangible for customers like us.
That's interesting if you looked if you looked at the NFIBAL Federation of Independent Business numbers earlier this week, the proportion that is complaining that they're finding it hard to find people. So you know, obviously with restaurants, some of the waiting service I remember getting in twenty twenty one when they reopened was almost hilariously bad. It's your faulty towers.
They are much less concerned about the difficulty of hiring people than they were, and their complaints about prices paid have absolutely you know, shot down in exactly the way that you see some of the lines on course CPI. It looks to me as though you should expect some of that to start to show through in the prices
that they actually charged people. So, you know, the politically, this is a point I've I think some people haven't quite taken on board, and which I haven't really taken terribly seriously because I've been a hawk thinking inflation is worse than people think it is for a while. If we're really heading for a soft landing and inflation is going to come to heal without any more pain. That would probably mean Joe Biden gets back in a landslide
next year. It's very, very, very difficult to beat an incumbent who has a good and economic record, as markets implicitly expect. I don't think anybody is actually braced for the Democrats to get back in a landslide. It does have and I can't quite believe it. I say it in the same way I still can't quite believe that that the economy is going to work out as positively as.
Some of these You think November or yeah, let's say months leading into November twenty twenty four, the economy is going to be total soft landing mode for Biden.
I find that hard to imagine.
That's what I'm saying.
But the implicit market forecasts at the moment are that he will get to November twenty twenty four having brought down slaid the inflation created by his breed decessor, and it created all these jobs.
I mean, good luck getting Walmart to decrease the prices.
Well, well, you know what I'm saying.
Sure, but it's one of the messages they give you a business school once you've finished your DCF or what if once you've done your spreadsheet, then look at what it implies.
I did an MBA back in two thousand. We valued a storage company. We reverse engineered it to try to make it worth what the market said at the time it was worth. This is two thousands. And then you're supposed to work out what does that imply. What does your valuation imply about the future. And it implied that it was going to make a return on equity of
one hundred percent in perpetuity. And I think that's that's the kind of exercise that people need to do here, Like, if the market is right, then j Powell and Joe Biden will go down in history for one of the
most brilliant pieces of economic management ever. All Right, that's not if the market is right, which I still obviously don't believe, but that's I think that's an important thing to start to start thinking now that if it is, the economy stupid politics is going to be quite different over the next eighteen months than people have been expecting.
All right, John, you and your colleague Isabelle Lee out of the column yesterday and in it you say the FED is staying a course on its two percent inflation target. Yes but wage earners will pay the price.
What do you mean there at this point.
The single biggest contributor to wage inflation. We were just discussing it with sorry to inflation overall, so we were just discussing his services and services businesses obviously are absolutely
preponderantly about wage races yep. So I think I mean, if you look at what FED governors and mostly controversially the Bank of England back home have been saying, They've been very careful to say companies need to take tighter profit margins and workers need to accept sub inflation pay rises, which both of them in isolation will help inflation come down.
Whether they're sacrifices that are work it or another matter, but at this point wage inflation, it's what Another positive point if you're if you're a strategist for Biden, is that real wages are now increasing very nicely thanks to this sudden drop in there in CPI. That is good for everybody, apart from those those at the fair who
are particularly concerned to get inflation down. So that becomes a critical issue, and we still need to see whether the kind of expectations that have been jol by two years of very real inflation that really does affect people's lives. Whether that is going to create the kind of extra extra motivation to push for higher wages. I expect Bloomberg to pay me. Well, I'm not. There's nothing wrong with people asking for more money. They've got families to look after, etcetera, etcetera.
The key point is if our baseline expectations, our psychology is now that inflation is something we need to worry about, that we need to protect against, does that mean that there will be a bigger baseline And if the FED is worried about that, which I think they are, that implies being nastier than you, I would hope.
All right, John, thank you so much. We appreciated John Author, senior editor for Bloomberg Opinion. And somehow he's a diehard Red Sox fan and I don't get it because his accent is unique, but it is not a boss and accent.
We'll have to say that for I have to say that for another day.
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I'm looking at the bankbreak dot com US bloom mortgage thirty year fixed national average seven point three two percent. It reached a low of sub three percent back in early twenty twenty one.
So what a move.
I think Matt Miller scored his mortgage then, so good for him. He's always targeting this market. So just an amazing, amazing move high. What does that mean for the housing market, residential housing market? Well, Salma HEP's canna help us there. Somea is chief economist for core Logic and she joins us here, SOMEA. I see that big leap and mortgage rates. What's that doing to the residential real estate market in the US.
Well, it's definitely putting a significant damper on home sales activity. Home sales activity start off on a pretty good note earlier this year. We talked about that a few months back, and since mortgage rates started declining, increasing back to seven percent, we've seen slowing, significant slowing, and home sales activities. So at this point we're looking at about thirty percent lower total year to date a number of home sales than we did at this time in totality for twenty twenty two.
And when you look at the housing market in particular, I'm looking at some data from our friends over at Bloomberg Intelligence, which Paul knows very well, housing becoming so unaffordable that over seventy five percent of homes on the market are two expensive for middle income buyers. What do you make of that in terms of the impact that's going to have over the next the course of the rest of the year.
Well, I think really that is the biggest problem. Affordability is a huge, huge problem, and we had this problem even going into the pandemic, but now with home prices forty percent higher than they were at the onset of the pandemic, typical mortgage payment is now at the highest level on record, and so a lot of folks are spending significant portion of their household income on mortgage payment, and it's up to about thirty six percent of households
median income being spent on a mortgage payment. I mean, this is really huge, and this is the in terms of historically looking at lowest level affordability, we're at the lowest we've been in almost forty years now.
So how does this historically play out? You just have to wait for interest rates to come down. How does this work in the housing market?
Do they do?
You see home.
Builders, you know, giving breaks on maybe buying down some of the mortgage payment for buyers.
How does this work?
Right?
Yeah, on one hand, you know, home prices are playing a role. The other contributor is income growth. So many times you need income growth to catch up to that home price appreciation. And so at this point, unfortunately, we're seeing home prices reigniting again. They're they're gaining speed again.
And in looking at our most recent home price index that was just released a couple of days ago, it showed that in the first four months of this year, or basically from February to May, home prices are up over four percent cumulatively. I mean, that's almost as much as we've see in an entire year. So we are now seeing home prices just really really gaining speed again, meaning that that that affordability is going to be further
declining and a further constraining people's ability to buy a home. So, you know, you mentioned what can we do one again is rise in home price in households incomes. The other one is adjustment in home prices. And you know, while overall I was talking about nationally, we might see in some particularly some smaller markets where you don't have a
lot of folks coming moving in with higher incomes. You know, we talk a lot about out migration from more expensive coastal areas where people have a lot of income, to more affordable areas. That's what's been driving home prices in many of those areas. But when you look at smaller markets, that level of home price appreciation is not sustainable. So we'll definitely see more significant slow down and even potentially some declines in those smaller markets.
All Right, So I got to ask my favorite question, how is this playing through to the rental market.
What is that looking like?
Yeah, well, rental market is slow in too, in terms of home price or in terms of rent prices. We do have a single family rent index that we report on every month, and the rate of growth has continued to slow considerably from where it was last year. I mean, it's very very much in line with what's happening with home prices, but for both on both home prices and rents. What's interesting is that the lower price tiers are actually
continuing to see stronger gains than higher price theres. It's higher price theers that have slowed down more considerably since you know, people start started going back to the offices and sort of that pressure in these amenities markets has slowed. But the lower really the types of homes that are in need where people are not doing it out of luxury, right, That's those are the prices and rents where we do see continued pressure.
Some how About in terms of new home construction, where are we in building new homes and what kind of homes are getting built, because it seems like we talk about the affordability issue. You know, the average town America doesn't need another McMansion. What they need is, you know, more affordable.
Kind of single family homes. Is that being built?
Well, yeah, we do see. You know, we are seeing overall an increase in home building activity. Unfortunately it is kewed towards more multifamily type housing, but nevertheless it's adding to the housing inventory at this point. I mean, we just need overall more inventory, any type of inventory that we can get. But we are seeing an increase in single family as well, and we are seeing a tilt towards smaller sized home which are generally priced more favorably.
So you know, I think builders are moving in that direction. They are responding to market needs at the moment, and particularly given how much affordability has been constrained at this point with higher mortgage rates.
So it's more inventory good regardless of what that inventory looks like right now, I think so.
I mean, when you look at the you know CPI, when you look at the work FED is thinking about going. Housing component is a huge component of our inflation measure, right thirty percent is is housing and and a lot of that comes from rents, rents and and you know household how owners equivalent rents, so the homeownership type component. But in both of those we do need less increases so in conscious that we we're currently seeing in the
housing market. So with more inventory out there, whether that's a high density multi family housing or single family housing, I think all of those will help UH slow inflation or UH the lead to the celeration of that inflation, which will help with federal reserves action and hopefully bring mortgage rates lower, which again that in the end helps with affordability.
All right, So some at core logic, What are you guys forecasting for mortgage rates going forward?
Well, unfortunately, the mortgage rates forecasts have gone up, particularly given what we just saw today with mortgage it's going over seven percent. So at this point I think we are more well this declining, but not declining as much as we hoped to less than six percent. I think we are now looking at slightly over six percent mortgage rates by the end of this year.
Okay, So what should someone who wants to buy a home eventually be thinking right now? Should they be holding off for a long time or is it just that they always get more expensive? So if you're gonna do it, you might as well do it now.
Well, the truth is, yeah, historically when you look at home prices in the US that they have been going up pretty steadily, you know, if you take out the Great Recession period. But you know, one action that people have been relying on is doing locking in a mortgage right now, buying a home right now because there's much less competition out there, and then hoping to refight down
the road. So, you know, I think that is not a bad way to go about it, especially given that inventory is a concern and it's going to remain concerned. I mean, it will take a few years, more than a handful of years for us to catch up if we continue to build at the rate that we're building right now for inventory to sort of balance with the demand.
But so you know, whenever we have mortgage it's coming down and all the folks that didn't buy during the pandemic, and there is a lot of them, because there is this huge millennial group that is coming off for some home buying age, competition intensifies and that leads to more bidding wars, that leads to home selling over the asking price and spedier home price appreciation. So I think now, given that it's not as a competitive in the market, is not a bad time.
All right, Sama, thank you so much for joining us yet again some a hep chief economists for Core Logic.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews on Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller, I'm on Twitter at Matt Miller nineteen seventy three, and I'm fall Sweeney.
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