CPI, The Economy, And Energy (Podcast)

continue to rip. The SMP five up about one point five percent, NASDAC even stronger, up point one point nine per cents on the back of that better than expected inflation data. Let's check in with Vince Signarolla, global macro strategist with Bloomberg News. Vince, I mean, you know, we had really good jobs numbers last week. We got better than expected inflation here. The White House is rightfully so taking victory lapse here. What do you make of it

and what do you make of the markets response? Well, I think the market response is somewhat appropriate. We're seeing a couple of things. We're always been seeing a bit of risk with seeing energy prices coming off as inflation balls over. Interesting thing is I'm talking to some traders this morning. They're a little confused about the treasury market

move is selling in the in the back end. But what that represents is there's been such a big trade on inflation being sort of just here for the next six maybe twelve months, and so there's been a lot of selling in the front end um buying in the back end. The traders now reversing that trade, and so we're seeing some widening, uh narrowing of the inversion in

the two tents. And that's what's driving that I would like to point out, and you know, I've been beating this room for a while now about how the FITS forecasts been terrible and that this is a transient situation and they're just just rushing into something and not giving the economy a chance to catch up from the pandemic confusion of a huge amount of money and keeping weights basically far too well for too long with a higher

balance sheet. The ft is actually operating. If you look at this situation eight to this to the Fed being like a Fortune five hundred company. They're trying to match quarterly estimates to what the market is expecting and they keep missing the mark. And for the Fed, it's an even worst case basis, because they're being held accountable for monthly numbers, and so we keep hearing from them. Don't watch monthly numbers. Don't watch monthly numbers. We've got a

high jobs report. What do they do? Oh, we have to say higher for longer because of higher jobs. They they're just not incredible. I I honestly just don't know why people keep trying to trade what the FED says and losing money by by that. For for example, when it's it's insane. I mean, there are academics who've never said the word done but bence. So you don't expect the FED to stick to a vulcal like um rate rise regime. You think at some point this Fed is

going to turn around and start cutting rates. I don't know that they're going to cut rates per se, because we still have inflation a long long way away from where they want to see it, so there's no real reason to cut rates. But they really need to stop and give the monetary policy a chance to work its way through the system. Monetary policy. But we're only at two and a half percent, like that's still still nothing, of course, But why is everybody in such a hurry

to get rates to five percent. Monetary policy doesn't react on a daily basis. I saw a tweet from someone today who said, oh, my cup of coffee went down for me. I mean prices to come I mean to expect prices to come down. Paul checks the gas prices every single day, plus he checks regular and we all know that he tanks premium. So yeah, like see that's I feel sorry for those out there on the premium scale.

But but but but so so that we've heard a lot of FED speakers talk about the importance of front loading. I don't personally know what it is why they want to, but because they think that inflation is going to go to and stay there, they could not be more dead along. And I'll tell you exactly why and why this isn't the seventies. And if I hear at one boy thought, I'm gonna throw a textbook at so much. If you have wage games that are not above capital letters above

the inflation rate, you cannot have sustaining inflation. The consumer will pull back. They have absolutely no choice. I can't spend what you don't have. Savings of creator disposable income is creator wages are to keep your place with inflation revolving. Credit is the highest that's been in two thousand eight, and that's credit card. That where does the Fed think this money is coming from. It's certainly ain't coming to

my next pay hike from Bloomberg. Well, I mean, well, yesterday we watched the President sign a bill that's going to give fifty two billion dollars in subsidies to chip makers. Those are private companies, you know, owned by shareholders, not government companies. Um, so he's gonna give them the biggest subsidy boost we've ever seen the federal government hand out.

That's one place the money can come from. Two things about that build Number One, they've got more chips than they know what to do with right now because they frontloaded lovely phrase. They're buying from Taiwan because they thought there was going to be this indefinite shortage. The US companies in the chip industry are are are They still get their chips from Taiwan and then they reperp them through their customers there, so their end units users are

still paying hot crisis. The subsidies are going to be a future situation, which will of course help curb inflation because that will bring prices down. The other part of that bill, which I love, which was the e V makers. Auto analysts are basically saying, hardly any cars are going to meet the standards as the government has put in that bill to meet the credit. Well, I don't I

don't know, Vince. I mean, they're extending a credit or giving a broader credit to automakers or two to consumers rather um to buy e vs that are already sold out with a two year waiting list. So they're just pumping so much money into this system. A lot of people would argue for no reason, and that's what causes inflation. There's a very there's a very good reason. We have mid term elections coming up to November. That's the only

reason for this bill. And it's the only reason why all those credits don't show up until because if they showed up now and no one could buy those cars because they can't either find them or the credit doesn't apply to them, it wouldn't do it. Damn things. So the whole thing was the whole thing is ridiculous, by the way, by the way, you want to hear ridiculous, They're gonna so extend the credit. It's a seventy five hundred dollar federal credit for electric vehicles like the Ford Lightning.

Paul and I are big fans of the Ford Lightning. It's an awesome car. It's a hundred thousand dollar truck, and Ford just raised the price of it by eight thousand five d There you go. I saw that yesterday exactly so. But you're gonna who's who's that? Who's that subsidy for? You know what? The most interesting thing that absolutely no one is talking about. It was a few days ago the New York said, did their consumer expectation surfeit? Do you know of which income group sees the inflation

moderating the most? Those people who make less than fifty dollars, The people most impacted by inflation, who live paycheck to paycheck, expect prices to come down. And why because they're beginning to see it. They wouldn't expect it otherwise. So where is this inflation coming from? You get fed smester saying it's not affecting me. Well, thank you very much. Nice to be in the one person where you can afford

she said. She said, I know prices are going up, and it doesn't bother me because I have enough money. I'll tell you. I'll tell you a truth. When I was trading at US Bank, we replaced the global effex manager with a lawyer who knew nothing about effects and rates. My cousin was training at City Bank to five. I told him what was going on. He said, best you start looking for a job because anyone who's never said the word done is not somebody you want to work

for in a risk market. So we are trying to follow a fet We're the only person who's ever had a real job is Powell. And they keep telling us what's going to happen to the weights and efex and they've never thought a trade in their looks? Why does that make me feel good about these people? Why? Why are they credible to anybody? So just ten ten seconds? What context do you say done as a trader? Done as a trader as you actually do a trade. Somebody says that you make me a price, you do the

deal and say done. You know about that? That's traders speak there, This is what we Why's why we have you on. Vince shot out of a Ken and Vince Cignarella. He does all the strategy stuff. He's traded rates, he's traded FX. God knows what else he's traded, probably, you know, standing in the pitch trading crude oil for all we know. But he's a bloomberg at News. He talks to traders all the time, and we'd love to get his call on these markets, particularly when you got a big, big

move like we do today. It's bringing Lindsay Piegsa. She is the chief economist for stephle Lindsay, you know, I'm not an economist, thank goodness, um, but I do know a good labor market. Last week, I do see the print here on inflation. Today things look pretty good. How do you put it all together? Well, I think from

the standpoint of the labor market. Last friday's job stumpers showed, as the Fed has described, the labor market still solid growth, keeping the FEDS eye on the inflation ball at this point, while we could argue that the recessionary boxes have been checked for the consumer, for manufacturing, for housing, the labor market has really been that silver lining. But from an inflationary standpoint, this morning's number was a little bit mixed. It did give the more dubbish a lean as we

look at some of those numbers. Now the reprieve was very minimal, and for the average American households at lower gas prices, while welcomed, does not offset the painfully high costs on nearly every other component of their monthly expenditures. But still it was a step in the right direction. So looking at investors bets, we do see that being towards a smaller fifty basis point increase as opposed to

seventy five next month. But why but if you're the Fed, um, wouldn't you want to just stay on course regardless of this? You know, one data point does not a trend make Oh absolutely, So this this is the problem. The market is anxious to call a peak in inflation. The market is anxious for the Fed to signal there almost done fighting inflation, they're going to start to decelerate. But the Fed has been very clear that they're keeping their eye

on the ball. They're going to continue to raise rates until they're convinced by several consecutive reports that inflation is on a meaningful and sustainable downward trend back towards that two inflation targets. So right now the market is questioning the Fed's resolved to remain resilient the FED says it will.

Whichever blinks first is going to determine the directional momentum of raps from By the way, lindsay, I also am anxious to have seen the peak in inflation, and I'm anxious to see the FED slow down its rate hikes.

But um, does it really Is it really a bad thing for the economy if the Fed keeps raking rate hiking rates so long as inflation continues to come down and we have these you know, five thousand job editions, Well, I suppose it depends if you want to take your medicine now or if you want to kick that down

the road. If the FED decides to take a more benign policy pathway and doesn't root out the inflation dragon, then we may run into the scenario of still elevated prices, but now we have much more a much more prolonged period of very minimal growth, or the conditions lining up for stagflation. If, however, the FED is willing to push us into maybe a temporarily deeper recessionary position but get inflation under control, then we can talk about a more

robust recovery. On the flip side, lindsay, I'm trying to make the case to my boss is that they should send me out to Jackson Hole, Wyoming. Um, tell us what happens in Jackson Hall, Wyoming in the month of August every year, and should we pay attention? Well, Traditionally the FED has used the Jackson Hole meeting to give an increased assessment or an updated assessment of where policy makers are in terms of the longer term view for

the policy pathway. But this time around it's unlikely to warrant much attention, as we've already heard from the Chairman that decisions on policy are not being made on a longer term, a longer term assessment of the economy, but they're being made meeting to meeting. So just like the market is overreacting arguably to one data point, so too is the FED basing next month's decision on the incoming data, the latest incoming data. Alright, So what are your expectations, lindsay,

for the US economy? Um, do we see in inflation cooling back down closer to the two percent level? And do we have recession? Well, that's that's those are some

big questions there. First off, I do think that growth remains very minimal, throughout the year, and I do think that looking backwards, the NBR will eventually acknowledge a recession started either in the first or the second quarter from an inflation from unemployment, absolutely, because I think the three and a half percent unemployment rate is not necessarily capturing the full, the full sense of what's happening in the

labor market. Remember, the growth that we've seen in job creation is less about new jobs being created and more about old jobs being replaced. Remember as of July, that's when we recaptured the full twenty two million jobs lost during the Great Recessions. So over the past eighty months, essentially we've just clawed back to where we were. We're not talking about new job creation above and beyond the

one's loss. So I do think when we look at the loss of real income, the decline and manufacturing, the laws of real spending, top line GDP, and negative territory, even though the employment numbers are giving us an artificial sense of solidity, I think that we are in processionary condition. I don't know my my third of my fourth children actually got a real, real job as they call it. So to me, that is a wicked strong labor market

so nz PA, thanks so much for joining US. Chief econras managing director at Steve giving us her thoughts here. We love talking to Lindsay a nice perspective to the market here. We were just talking to Bloomberg's Bevince Signarolla just earlier this morning and he was making a comment talking about chips, and he sent along some news here.

Demand for chips is collapsing, just as President Biden signs a bill to jump start more US chip making, which is very interesting because we've got some very mixed the bad numbers coming out of some of these chipmakers over the last a few days and kind of just kind of goes to this, you know, strategic importance of having chip manufacturing in the U. Keith Croc joins us. He's a fan of Croc Institute for Tech Diplomacy at Purdue

University West Lafayette, Indiana. Some really good stuff there. They do. It produced some smart engineering geeks that perdue, no question about it. Hey, Cai talked to us about this chip business because at the beginning of the pandemic, when China shut down, we all the whole world shut down. We said, oh boy, we need chips for a lot of stuff, and we don't really make a lot of chips here. So the talk really ramped up of you know, kind

of on shoring some chip manufacturing capability. And I think that's what the Chips Act UH does. How should we think about that? Well, I'll tell you what fellas I'm here in Washington, d C. I was invited yesterday by the White House UH for the for the signing. It was a great deal for America, for national security, for global economic security, and long term prosperity. You know, when you talk about UH these quarterly results for the chip makers, I would not be worried about that at all, because

this chip business is growing so fast. You know, a slowdown from that means in on the average, it goes from growth down to growth. We're under the capacity now, you know. Let me tell you why, UH, this is such an important bipartisan you know, two utter an eighty billion dollar bill. First of all, it's about securing the

semiconductor supply chain that is critical for national security. The second is this investment, which now is going to result in a three fifty billion dollars UH in the in in chip manufacturing in the United States and to help US maintain that lead as well as a two billion dollar investment UH with direct funds in R and D. And what that's gonna drive is jobs, jobs, jobs, and not just any kind of jobs, highly skilled jobs. And

I think I think you fellas understand that. You know, our adversaries pay an a four dimensional game of diplomatic, economic, military, and cultural chess. That's john and they're playing well. And they they're doing it the same way we are. Right they had this centrally controlled economy. They're just passing out money to companies and deciding who are winners and losers. I don't understand this. I don't get why. And you got your mba Harvard, so you probably know better than

I do. Know. He recently got a pH d and some engineering stuff. So why on the economic side, why don't we let the market, the free market decide, or if it's such a national security issue, why don't we take over this industry? Like why are we halfway here between like um state controlled socialism and free market capitalism? What are we doing Keith? These companies already make a lot of money, These shareholders have already gotten very rich. Why are we giving them, you know, billions tens and

ten of billions of dollars in government subsidies. Right, I'll tell you exactly why. So my last role was under Secretary of State for Economic Growth, Energy and the Environment. Before that, I ran three public companies. I've been in Silicon Valley most of my of my career. And here's was happen. We invented the semi conductor business. Here's what happened. Countries, particularly Asian countries, realized how strategic it is, and they

subsidized the semiconductors. So they literally pulled it off our shores. And the investment that goes into these manufacturing facilities is humongous. We did the largest onshore in history when I was under Secretary of State, twelve billion dollars for one of the most sophisticated chip plants ever. And by the way, that has fifteen hundred workers on the production plot and sit super said of them are either master's degrees or PhDs.

And we lost that talent alright, So give us a sense of just how strategic you think ensuring some of this capability is. Because again it became acutely aware even to lay people like myself that uh, you know when China shuts down, Taiwan shuts down for whatever reason. That's a problem. Matt Miller can't get his well for other industries should we be doing exactly It's taking me so long to get this truck from Chevrolet. I'm very excited. It's apparently coming up this month and I cannot wait.

It's the z R two UM, which I'm so pumped about. But you know, if we're doing this for chips, why aren't we doing it for planes or trains or automobiles. Well, this is first of all, semiconductors is the most important industry in the world because it lays the foundation not only for everything in the tech area, but as you guys say, in the in the automotive field, in the energy field, you know, in the aerospace UH field. So the important thing is to secure uh this supply line.

You guys saw what happened during during the pandemic, so uh And and the other thing that is is absolutely killed key is this skill set um you know, UH we lost We've lost it uh here in the United States,

and now this is gonna bring it back. One other great thing about this UH Chips and Science Act, it also is funding UH research in critical national security sectors like quantum computing, like six G, like biotech, and this is this is in the area where you know, the United States used to be number one in R and D.

We were down a number nine. And one last thing is that when we presented we are when we architected this bill, we presented the Senator Schumer and Senator Young and what we showed them is with this level of investment, you're gonna get it three times uh three, full additional investment from the private sector. Keith, let me quickly ask you. We only got thirty seconds here, but what do you think about the e V credits? Is that subsidy also

important for American jobs and carmakers? Well, I can, I can, I can tell you what I think being you know, former CEO Docum signed and the REBA is that these guys are on the ninety days shot clock, right, and so to be this enables you to look long term, and that's key. And by the way, for the for the e V credits is long is that technology is developed in the US. Because Shina owns solar panels, so we've got to do something about that, all right, Keith,

great stuff really appreciate getting your perspective. Keith Croc, founder of the Croc Institute for Tech Diplomacy at Perdue UH. He was also the former US Under Secretary of State for Economic Growth, Energy, and the Environment. Million jobs, million degrees. The guy used to be a VP at General Motors as well. I know, I've got to get him back on. He's done everything you gotta get. We'll get him back on. We'll get him next time he's in a sign, We'll

get him here in the studio again. Some good economic data for the past few days. Let's check in with Jeff Cleveland. He does this for a living. He's a director in chief economist for Peyton and Regal. Hey, Jeff, you put today's CPI data together with you know, a really strong jobs report last week. I don't know what do you take away from that? Well, you know, it's interesting the month to month reading on core cp I, which slowed to point three. It could be just a

fake out. We had a similar slow down back in the I guess was the March data that we got in April, so and then we saw core cp I re accelerate. So for my money, I think it's too soon to claim victory mission accomplished on on core inflation could be still moving higher and point three months of months isn't. Then I don't think that's enough to change the FEDS view here and then as it regards to you think the FEDS still gonna go seventy five at

the next meeting. Yeah, we're gonna get another CPI report, We're gonna get another jobs report. So as of now, we're sticking with the seventy The reason being, I think you have to put on your central banker hat and you have to think, Okay, how do they think that policy effects inflation? And the way they look at it is that they need to get interest rates up enough to push up the unemployment rate. That's their goal. Once the unemployment rate starts a rise, then wage pressure comes off,

and then inflation core inflation slows. We haven't had that happen yet. We had a really strong jobs report, the unemployment rate moved to cycle low. So if you're a central banker, you I think you're still keeping your your foot on the break in terms of monetary policy, not slowing down it and definitely not on a a welcome But it could just be one month of soft CPI data. Isn't it enough if they just keep wage increases below the level of inflation? Or do they really have to

do we really have to see jobs losses? Well, I think they're gonna be really unhappy with five and a half percent UH average hourly earnings, frauductivity at zero or even falling. UM that situation and the implication for unit labor costs we saw yesterday, I think that's a really really bad mix. Is going to be very unhappy with that. So I do I do think they want they don't want to admit it in public, but they want to see the unemployment rate right that. They want to see

wage growth slow back down somewhere. Maybe. I think closer to two to three percent is a good ballpark. Damn. I want a raise that that's equal to or greater than headline cp I. Yeah, you didn't get that. You know, well, I still have the request in and I feel like American workers are gonna want that too. I'm always sending that requested. It keeps getting rejected. So I I hear you. I think that's the that's the that's the correct thinking. I just, um, I don't know how realistic that is

for me or for you? All right, Jeff, again, I asked our guests here, should we expect anything from jackson Hole? Uh? This month? Should I make my book my trip out there? Well? Sometimes jackson Hole is sort of s O Terek Rite some fringe kind of topics, maybe not really mainline monetary policy topics. But I feel like this year, maybe this

year is different. Maybe this year is is surrounding the question that we're going to talk about here, which is how much does the unemployment rate need to rise to get to get inflation back down? Sort of I don't know bread and butter monetary policy questions, so it might actually be more more central to markets then maybe it has been in the last couple of years. So this

FED seems less esoteric. I mean they seem to care about headline inflation, not just core PC right, um, at least it seems important to to to Powell, well, headline is tied to gas prices, and gas prices are tied to consumer inflation expectations, So that's I think they're right to care about that. They care about inflation of expectations. The question for me is still Okay, where is inflation?

Where is the underlying trend of inflation, and I still think looking at headline month to month does not help you with that. You gotta look um later this morning, look at media and CPI from the Sleeveland Fed. Look at the trim mean, look at the underlying sticky measures, and you're still seeing pretty strong. I look at gasoline and that is it. I'm an equity He's gotta keep it nice and simple and coming down. So that's good stuff.

Jeff Cleveland, Director and chief Economists at paid In in the Regal joining us right now in our Bloomberg Interactive Broker studios. Rob Barnett, he's the senior anals. He leads our energy coverage in Europe. He's based in London, but we got him here in New York. He's with Bloomberg Intelligence. Uh. Rob, a story that I think it just fascinates me because I think it's gonna get really, really bad. So I'd

love to get your perspective. We talk a lot about global energy and we know that in Europe, primarily due to the war in Ukraine, Europeans and folks in the UK, you guys are preparing for a really tough winter. Give just framed that out for us. Yeah, so for anyone who's not following the gas market, gas in Europe is over sixty dollars per mmbtu right now, and where does

it typically trade? Fractions of that? I mean, and the US is at around eight dollars per mm btu, so we're eight x where the US is at the moment today. A this is going to be a very challenging winter. Now, tariffs are actually regulated by the government, so consumers haven't really had to mark to market what they're paying yet, so it's going to be tough as the government's phase

in those higher prices. And yeah, I'm stocking up on sweaters, just getting ready for colder showers, sweaters, everything that we can do to Uh, you're in England, right, I mean you're You're in London, so it's not gonna get that bad for you. In Berlin, which is basically in Poland, it's going to be really really cold this winter. And the Germans, I'm gonna ask you why decided to put all of their eggs in Vladimir Putin's basket? Why did angel A miracle Um make her nations so reliant on

this Russian dictator? Well, I think as as many of you may know, Germany has had a long history with nuclear power, and they've actually phased most of their nuclear power plan out at this point. Despite Angela Merkel's history. She she was a nuclear engineer by training, right, So it's interesting choice he made. But the decisions all got

made post Fukushima. Everyone got scared about nuclear a little over a decade ago, and that really drove a lot of the decision making around the reliance on gas because Europe's got a very strong green angle, particularly in Germany, so they wanted to get off coal. They were concerned about nuclear, and they hitched themselves to gas, and it's turning around. It's going to bite them hard, even though you know, the problem in Fukushima was an earthquake, yes,

what do you call that? Giant waves tsunami right, which is so unlikely from the Bowden's a right, if that's not going to happen in Germany. And yet they ran straight to Moscow for all of their energy needs. I used to talk to Dan Burriette a lot when he was Energy Secretary, and he would come to Berlin every time he was there trying to pedal um l en G terminals because he wanted to sell more US gas and they turned him away, and and they are trying

to make amends for that. Now. Germany and other parts of Europe are sprinting to get l en G import terminals built, but those things take a while. So this is a multi year process with no easy solutions in the next twelve to twenty four months, right, and in which time period we could see the Rhine River completely dry up. We were told that um the level on the Rhine could drop to sixteen inches by Friday, making it virtually impassable for the big coal and diesel barges

that need to normally deliver energy through those roots. What's gonna happen, Yes, so there's stockpiles for a little bit of short duration disruption, but if we see this continue, it's just one more factor that's really putting pressure on that gas price that we talked about at the beginning here, and there really aren't easy alternatives in the near term. So you know, how bad does it get? I mean

the reasonable there there's terminology they're they're talking about. The reasonable worst case scenario includes mandated power outages and things like that in many of the economies, So we'll see cities go dark already seeing that? Are you already seeing that? In Germany? Oh? Yeah, I mean Berlin was pretty much dark at night to begin with because they don't have enough money to pay for power before the surge in prices.

Now they've got the big boom in prices. Plus all the rivers are drying up, those that are cooling nuclear plants are are too hot to do, so, I mean they've just got hit by it like a triple whammy, right, And we've just taken all of this for granted. I think in the West, we've just always been able to flip the switch and assume that the power is going to work. I think a lot of folks in society clearly took their eye off the ball. And it's gonna take a lot of time to figure this out. And

renewables are great. I'm I'm very pro renewable energy. It's gonna but this stuff is a multidecade kind of solutions, and they're obviously intermittent. You've got to figure out hydrogen and battery storage and all of these things that we know are on the horizon, but none of them are kind of really here for prime time today. So the reality is today you've got to have some gas supply solutions,

you've got to have coal in the mix. And you know, for better or worse, Germany should be doing everything it can to keep the nukes that they still have remaining running. They still have the potential to uh, they have some plants I think three that are running and they have the possibility of stretching it out. They're supposed to face them out by the end of the year, and the question, well,

I don't think they can. By the way, Rob, have you seen there's a Norwegian drama called Occupied, which is really fantastic. It's about like, the premise is that Norway decides to stop exporting gas and oil, and so the EU allows Russia to occupy Norway, which sounds crazy, but or it did at the time. Now it sounds so realistic that you politics of energy in Europe are just absolutely fascinating, and you're right to point out Norway is

so important to the gas equation. One of our analysts who covers Equinore, he had a focus idea in them earlier this year because they were really poised to benefit because of being the number two gas supplier into Europe. And you've got all these high prices, so some people are actually printing money because of where we are today, Larry putin up into all right, Rob, thanks so much for joining. Rob Barnett senior analysts covering energy out of our London office. He joins us live here on our

Bloomberg Interactive Broker studio. He's a Bloomberg Intelligence. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller. Pet On Ball Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio