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 on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Let's pivot now to another Washington, DC centric story, that is the dead ceiling. There's a potentially the fault and kind of where are we in the negotiations and what does it mean for the greenback here? So we're gonna bring Audrey Child Friedman Freeman. She is the chief G ten FX strategist with Bloomberg Intelligence, and Dwayne Wright senior
government analyst with Bloomberg Intelligence. So, Dwayne, you do this policy stuff full time for Bloomberg Intelligence here. I think the assumption for all of us up here in Wall Street is that they'll work it out at the end. Is that an okay assumption? Or is there a material risk here of a bad outcome?
Well, it's above zero. I wouldn't say it's above three or five percent, but there's always a risk. I think the general mood right now is the meeting that Kevin McCarthy, the President, and the Ford leaders had was a positive first step. You can't have a second step without making that first step. And so we've already heard discussions about
as second meeting, which is tomorrow. But in between the last meeting and this coming meeting, we know that staff for both sides are now beginning to have those conversations what is the universe of policy items that we can talk about that will move the ball forward to avoid a default. And we kind of knew this was where we were going, but we just had to have that
first step. And so I think we'll see a bit more progress over the next couple of days where we'll begin to see what the universe of policies that can be included in a debt ceiling bill. So I think there's still a lot more confidence that this will happen. I just I would put aside what we see publicly and hear publicly from the leaders and start to think more about what's happening behind the scenes, what we're not hearing about. And there seems to be a lot of positive conversations.
Hey, Audrey, when we talk about this debt sealing stuff. The budget boy, I think right about the currency market here, what do we sing in the currency market? What do we sing with the US dollar visa the other major currencies as we kind of fumble along towards trying to fund our government.
Well, surprisingly, you may think surprisingly not a lot in a sense that there's a lot of talk about this problem and this issue, but there's no sign of stress in a sense that the effects volatility environment remains very low. And the dollar happened till very recently, has been trading very much in a range.
So no strong conviction.
And certainly no sign of stress with regard to the that that limit situation. And I think it's just because the view is that, uh, it will get solved in the end and we will get some kind of a compromise. And we've been there many times. And if you try every time you try to trade the dollar on the back of this topic, you kind of go around circle and finish very very much where you started.
Audrey, to follow up on that, CRETI GROUPDA in New York, by the way, just crashed Paulsueni's party here in the Interact Broker studio, Audrey, I want to ask you a follow on the dollar question, if only for a while the dollar trade was dictated mostly by interest rate differentials as a function of the ECB and the hawkishency you were still seeing on in Europe. Where as the Federal Reserve is ending their tiny cycle, or at least expected to. Does the bawl case for the dollar change as we
get closer to a potential debt default? Do people then buy the dollar as the only safety around?
Yeah, I think that's a very valid question because there's an element. I mean, we all know if there was to be any kind of default. Let's assume there was to be a default situation, even though this is not our working assumption, of course, but let's assume. So, I mean, the long term consequences, it's pretty easy in a sense that it would be negative for the dollar. It would accelerate the de loyrialization theme that we've been talking about,
and that's pretty pretty straightforward. In the short term. The other point that the other conclusion that straightforward is that it would trigger a risk of market move across all asset classes, and I think actually that would be supportive
for the dollar. If you think about what the dollar usually do in terms of risk of market move But there is a flip side this time around, in the sense that you know, against currencies such as the euro, the yen, or the Swiss frank low better currency effects currencies, you could actually argue that the market sees this as you know, it's very much a US specific problem, even
though the consequences are global. But it's just negative for the dollar against those currencies, and therefore, you know, it's debatable, there's an element of uncertainty as to what extent it's it's negative for the dollar or positive in the very
near terms. So there's way around this, you know, in terms of trading and in terms of use, because if you just accept the fact that a default situation would trigger a risk of movement, right then you just you think about bullish low better effects and erish high better effects. And that's that's a thing, a very valid way to think about it.
Dwine hopp on in here in our last thirty seconds or so and talk to us about this dollar story, because it felt like when the dollar was just rising and rising and strengthening and strengthening, there was a lot of I want to say a lot, but there was some pressure on the White House on the government to say, is currency intervention something we need to explore in the kind of doomsday scenario of some sort of debt default. Is that a conversation you see perhaps returning.
That remains to be seen. I think at the end of the day we will see a deal, and it will likely be at the last hour, maybe the last minute. But I think at the end of the day we'll see some low hanging fruit, potentially in the last couple of hours, where it's a short term spending deal or very short term raise, and maybe some repealing or taking back of some unspent COVID money. That kind of pushes off the conversations of these other pieces that the White
House and some other policymakers want to discuss. But I think that these conversations are probably likely going down happen after June as we get to our long term deal.
All right, very good stuff.
Really appreciate that Dwayne Wright, senior government analysts with Bloomberg Intelligence, he's down in our Washington, DC office. And Audrey Child Freeman, chief G ten FX strategist with Bloomberg Intelligence, she is in our London office. I appreciate getting the update from both of them.
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Let's get the latest, you know, I just need to get craty. We need to, I think, just to get a little bit smarter here with just the bigger picture what's going on with these markets, because I've seen over the last several months not a lot of direction, maybe not a lot of volume. I think the markets is trying to figure this stuff out. There's a lot of cross currents out there. So let's bring around tailor some really smart people that we have at our.
You know, within our reach, our disposal.
Gena Martin Adams, chief equity strategists for Bloomberg Intelligence. She's in our Bloomberg Interactor broker studio in New York. And Cameron Christ he's Bloomberg macro strategist. He joins us on the phone. Cameron, let's start with you. There's been if I type an eco go and just look over the last couple of weeks.
Man, there's been a lot of data here, and as.
You synthesize all that, what do you think the market's discounting in terms of growth, in terms of inflation, in terms of the FED.
What's kind of the takeaway do you think?
Well, I think the market's primary conclusion is that the FED is done tightening interest rates, and that's generated I guess the expected reaction in equity and six income markets. Sixth income has been rallying. Interest rates sensitive portions of the equity market have been rallying. If you look at the short term registrate market, there is this ongoing concern about the director of the economy. We are racing rate cuts starting sometime early in the second half of the year.
And it really what it comes down to is the soft survey based data, which ostensibly is forward looking, is pretty bad frickly on the business side, which kind of feeds through or is a natural consequence I think of these concerns about a credit crunch, the so called hard data, which is more backward looking, has been relatively better. And so the big, the big question that everyone's trying to
figure out is which which will capitulate. Will the hard data sort of come down to the to the the growth concerns implied by the soft data, or will the hard data remain resilient and eventually the soft data sentiment type stuff will will will improve.
Well, Gina, this is where I want to bring you in. He's talking about the soft data the hard data, this divergence that the FED is at the end of the day done with hiking, yet we're still looking at inflation at four point nine percent. If the carnage of the equity market is kind of in the rare view mirror, what are we missing here? The fanstun tightening, earnings recession is in the rare view mirror.
Why are we not seeing more green on the screen?
Yeah? I think that's a really good point, and I think it really comes down to the differences between the inflation indicators and the growth indicators. The inflation indicators are coming off of a peak, and that's enabling some perception of margin stability finally emerging in the index. Remember, we got into this mess not because growth was slowing down, but because inflation was spiking, and that created the downdraft in earnings results over the course of the last year.
Really through the S and P five hundred anyway into a pretty profound earnings recession because growth held up. Nobody seemed to notice that earnings recession, but the market absolutely noticed the earnings recession, and it was really perpetuated by spiking inflation. Now that inflation has started to ease off, even though it's still hot, as you correctly note, it is still trending in the right direction. That's enabling this sort of margin stability to emerge. PPI is rising at
a slower pace than CPI. Finally that's creating some stability. But at the same time, the market is now saying, Okay, the inflation monster is starting to look somewhat contained, but what does the growth monster look like going forward? And how much of that acceleration and growth has actually been priced in the market. And I think that's why you have this natural constraint on upside that has emerged. Is Yes, inflation does appear to be somewhat more contained than we
were thinking. Yes, we do think the FED has likely gone to a pause state. But will we actually see gross accelerate now and what will that mean for earnings going into twenty twenty four?
Cameron, you know, I don't know about this inflation story, but I just paid sixty dollars for New York strip stake in Midtown Manhattan on Tuesday night.
That's inflation to me. But be that as it may.
Are you in get camp that thinks is fed, like it's tamed inflation or is it the point of taming inflation and in fact can start cutting race later in the year.
I think, I mean taming inflation is I mean maybe a bit of a bit of a push. I think the trend is towards less inflation looking forward than we've had in the past. In the CPI report we had this week, for example, the so called super core, which is core services excluding housing, that road is only point one percent on the month. And yeah, you can always say, well, yes, if you strip out everything that goes up, then of
course there's no inflation, and I'm cognizant of that. But this is still one of the lowest readings we've had
over the last eighteen months. And ultimately, what it comes down to is if interest rates do bite, and they tend to bite in a non linear fashion, i e. Historically, the impact of a tightening cycle is very very gradual until it becomes not gradual, and then it becomes very very substantial, very very quickly, and I think what we've seen in the banking sector certainly risks that same thing happening again this time around, and if and as that
does materialize, and I think the arguments in favor of interest rate cuts by the end of the year will be reasonably persuasive. And certainly, if you look at a panoply of economic and market indicators, they are consistent with the FED cutting rates within the next six months.
Okay, Well, if the FED hypothetically doesn't cut rates within the six months, which, as Cam pointed out, is something that is still expected in the markets, GENA, I'm still confused about where the bare case for equities really lies at the end of the day.
To me, what I think is so striking is that.
If we're talking about a decelerating growth environment from an economic perspective, as Cam just laid out, isn't that the ideal time to hop into growth stocks.
Isn't that when they thrive most.
Yeah, I think you make a really very good point, because whether or not the FED is able to reverse is reverse rates is a very controversial topic in the equity market right now, mostly because we have seen valuation expansion in some of those growthy type names, or another way to think about it as the longer duration stocks that are most sensitive to interest rates specifically in the US have outperformed Intriguingly. That's not been the case globally, so this is more of a US specific risk than
it is a global risk. But nonetheless, the stocks that are most sensitive to that reversal have led the rally so far this year, in many cases, in particular in tech and communication stocks, which are you know, have had a magnificent year so far this year coming off of
a really rough year last year. I think whether or not the FED reverses is also intermingled with how deep the recession is or how how much the slowdown becomes, and that is consequential for equity markets because not only is it the FED that drives equity markets, but it's also earnings trends. So if the FED is unable to reverse policy simply because growth is still quite strong, that's
not necessarily a bad environment for equities. If the earning sort of cycle is working in favor of equities later this year and into twenty twenty four, and the FED is keeping interest rates stable because economic growth is somewhat stable. I don't think that's a terrible environment for stocks, but you're right, Is it a great environment for stocks? No, because stocks are accustomed to these big swings in the cycle, and stocks tend to get their greatest momentum surges on
major disruptions. And so far, the only major disruption we had was inflation. We have not had a major disruption to growth. Will we get it still seems likely for most investors, and that's creating a headwind in and of itself. But if we don't get it and growth turns out to be better than expected, then we could continue to see these relatively modest gains in the equity market continue.
So it sounds like a little bit more kind of more of the same maybe, So we have to see Gina Martin Adams, a chief equity strategist with Bloomberg Intelligence and Bloomberg Micro Strategies.
Camera Christ thanks so much for jordanus.
Appreciate getting the collective wisdom of you two as we try to make sense of this market.
Again.
The S and P five hundred off five tenths of one percent, the dial off a little bit more of a solid one percent on the Dow Jones industrials. Just looking at the yields here coming in a little bit to ten year treasuries off six basis points three point three seven on your ten year treasure.
I'm gonna also call out.
We've been calling out and focusing on energy for the past couple of weeks.
Seen some big swings there. WTI crude oil.
Down two point three percent today WTI crude oil just under seventy one dollars a hour, So we'll keep an eye on that.
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I want to get over to real estate because if you walk around Midtown Manhattan, like I want to do as I walk back to Penn Station from the East Side, a lot of empty office buildings around Midtown. I don't know how you fix this. They're talking about people living in them. I don't know how it's going to work. But Natalie Wong she's a real estate reporter of Bloomberg New She's got a very interesting story. Some of these empty buildings are starting to attract some buyers, but not
the institutional buyers that we're used to. Natalie, who's stepping in and taking a look at some of this New York City empty office space.
Hi, thanks for having me.
We're seeing big interest coming in from the smaller companies, smaller developers, family offices even and family around firms who are really seeing that New York City is going to come back in the long term and have some belief that there will be use for office space. Even though right now, as you mentioned, but all the empty buildings record high vacancies.
It seems like it's a risky bet to make.
Yeah, what is the evidence Natalie that they are using to justify that bet?
You know, a lot of them are really looking at this remote work as something that will bounce back. Companies will need to use offices to bring people back to the office, and so far, the offices that they're targeting aren't necessarily the dilapidated, distressed offices. They're more the middle class buildings that you might see well located streets. Madison Avenue of Fifth Avenue, and for those who don't know New York, you know, those are streets that people come to for retail.
They're well known.
Office districts, and they just kind of want to be able to own a slice of that market that they might otherwise never have had the opportunity to because you know, in previous years, during times even just two years ago, the buyers that were bidding for those sites were the big real estate investment trusts.
They wear the big institutions like.
The brook Fields, like PIMCO owned companies, and these guys would have never had the opportunity to even compete. And now you're seeing prices down twenty six percent in Manhattan from the peak valleys of twenty seventeen, and no one
else wants these buildings right now. So you have these individuals that are sitting on huge piles of cash that are looking for longer term return investments and are seeing these assets as potential properties that they could get into the market now and figure it out as you know, the market ships.
So, Natalie, one of the challenges I know in the commercial real estate real estate space here in New York City is that we don't really know what the values are. Because we haven't had a lot of transactions. The expectations are that the values have come down pretty substantially, but we don't know. Are we seeing any activity from some of these you know, new buyers.
Yes, we are. So we looked at the second half of last year and saw.
That of the few transactions there were eleven over fifty million dollars. Of the eleven, seven involved smaller companies, smaller developers, family run firms.
Some were backed by institutional.
Capital, but these deals were really driven by these smaller guys, which is a huge difference from just the first half of last year and the past two years. Most of those deals were dominated by the big reeds, the big institutions, and the big New York City developers. And if we dive deeper into those seven deals that these folks were involved in, quite a few of them involved offices that had pretty high vacancies and that were a big discount
from sales in previous quarters. So, for example, there was a consortium of family run businesses that bought thirteen thirty sixth Avenue Avenue of the America. They bought this office building from RXR and Blackstone, and they bought it for roughly three hundred and twenty million dollars last year, and that's a discount from what RXR and investors paid for more than a Day to Go in twenty ten at four hundred million dollars. So you're seeing these icing discounts
already happen. Another example that I can point out is this February, a consumer's products firm, an Chante Accessories, not a big consumers products firm, bottom Madison Avenue building that a PIMCO owned company purchased back in twenty seventeen at the peak of the market.
They purchased it.
At an eleven eleven million dollar discount from what the Pimco owned company had purchased it for back in twenty seventeen. At that point, they had leased it out entirely. Do we Work shortly after we saw what happened with we Work. The building basically sat vacant for the past two years during the pandemic, and this consumer products company just decided to come in buy the entire building and they're going
to lease part of it to themselves. The rest is yet to be seen, but you're seeing them really see these deals, and I think the biggest question is is that enough of a discount to really show how much office values we are going to Some institutions think it's going to fall a bit further, so they're on the sidelines waiting to see when that'll happen before they come in.
But there's a lot of dry powder waiting for these distressed deals, and you have some of these smaller guys going like, Okay, you know what, we can make this deal work for us right now.
We don't know when the international money and the institutional.
Capital is going to come flowing back to the market, so we might not have to call the bottom.
We might think it's just a good idea to step in down in.
Our final minute here, Natalie, what are you anticipating. The potential upside is let's say that these guys are right and they're gonna, you know when on this Can you talk to me about what some of the potential upside might look like in terms of dollars here?
Great, I mean, a lot of these guys really bought the building at such a low basis that for them they just really have to bet on the fact that there will be some kind of tenant that will want to come back to the office. And we're already seeing that start to happen in certain cases, right. I mean, in New York, most of the leases that had happened that were widely publicized were the big skyscrapers and huts and yards by Grand Central, the big finance and tech firms.
But you know, three years into the pandemic or post pandemic, we're seeing that some firms do want to bring people back. It might not be in a full time basis, but they still need an office space. So these guys are betting that you know, it may not be the most expensive rents that they'll command, but they'll be able to capture the middle market people that want to be near transit stations, people that will still eventually want a space for their workers.
Thirty seconds here, Natalie, where are they getting the money from it?
Are they using any debt capital or is this all just equity?
That's the biggest question, right, because people can't really access debt, and banks certainly do not want to expose themselves more to offices, let alone older offices that these people are buying.
And so a lot of these guys are really.
Getting it from big cash pills that they're getting from generational wealth they've built up from their businesses, or they're also getting family offices that are investing in them and buying it. So some of these guys are able to come in and buy all cash in certain instances because of how big their private businesses are. They do have those deep banking relationships with lenders who are able to trust them as a borrower. And then in some cases they're even exploring U seller financing.
Wow.
Interesting, really fascinating story, because again, you walk around Midtown Manhattan and the tourists are back, You've got to ask yourself, when are the employees coming back, if at all, and to what degree? And what does that mean for the real estate and all the local businesses around those office buildings that are impacted by the lower or fewer workers in Natalie Wong, real estate reporter for Bloomberg News, and folks, what you just heard was some really seasoned, well researched
reporting right there. That's about as good as it gets with all the details there. So we appreciate getting a few minutes from Natalie talking about this real estate business here in New York. Other parts of the country doing a lot better, some still, some challenges here, particularly in midtown.
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You know, Madison and I were just talking about it, like you know, during my thirty years on Wall Street, one of the most amazing I think developments it has been the development of the private credit business. The private debt market has been really just fascinating. People I think have a general understanding of private equity, but I think that's so clear understanding of the private debt market. So let's get an expert on here to kind of give us
the latest. Anthony Foeble. He's the CEO of Arkmont Asset Management. He's got a lot of experience on the on the street in the city of London working in this side of the business. Anthony, again, it's been such a great growth story of the development and evolution of this market. Tell me about Arkmont Asset Manager. How do you guys play in this space? How do you view the private debt market?
Yeah, well, thank you for having me on and Yes, it's been an extraordinary period of growth, particularly actually in Europe, because although private dead existed in the US before the Global Financial Crisis, it really only came about following the financial crisis in Europe because for historical reasons, all lending was done by banks, and we know all about the problem for banks had after the GFC, and we've seen
many of those issues starting to repeat again. And essentially, what private debt firms did is they attracted institutional capital to step into that significant financing gap that was left by the banks, and it's been a tremendous growth story as banks have retreated from mid market lending in Europe. It's something that happened many years ago in the US
but is really only a tenure phenomenon in Europe. This created a significant void, and private debt firms have been more than happy as of their investors to fill that void.
So does that mean, given what you just said about the growth being better today than even following eight where are you seeing that in Europe specifically? And why do you think Europe is a better bet for private debt than the US?
Yeah, so there are I have to say, it's very positive in both the US and Europe, but the fundamental trends are are the same, although somewhat accentuated in Europe.
The trends are sort of banks retreating from lending. But as we've seen over the last three to four years, particularly in Europe, there's been tremendous volatility in the liquid markets, taking the leverage, loan and high yield markets, and it's remarkable to think that that really the liquid markets in Europe have effectively been shut since February twenty twenty two
for new issues. And what that's meant is leading private equity firms with plenty of dry powder are struggling to finance those deals in now both the bank market and the liquid markets, and that's presented a tremendous oportuy unity, particularly I think in Europe, for private debt firms to step in. And as the asset class has grown, firms
such as Arkman have gotten larger and larger. We now manage about twenty five billion dollars in assets under management, and that's given us the firepower to do not just the historic bank substitution deals, but now increasingly liquid market substitution deals.
So yeah, go.
Ahead, Anthony, I was just going to ask where are you seeing deal activity across Europe these days? Given kind of boy are the uncertainly we see out there, and particularly in Europe where you guys deal on a more close basis with the uncertainty in Ukraine.
Yeah, I mean it's certainly there has been a slow down in deal activity, particularly by private equity firms, and it's been a global phenomenon. But may no mistake about it, there's still tremendous deal activity taking place and the sort of levels of M and A activity we're seeing are really back to the twenty eighteen nineteen level, so you know, still pretty active markets. What's been really interesting for private debt, however, is that we are pretty much the only game in
town to be able to finance those deals. So ironically, while you've seen overall deal volumes drop, the deal volumes that the likes of Arkmont and other European managers have
seen has actually skyrocketed. And it really is for us, I mean our touch on your your macro point, but for us it has been the perfect market because we've seen volumes up for the reasons I just said, we've seen significant price improvements as a result of really uryball rates going from north percent and now over four percent. Spreads have widened as well, so we're sort of generating twelve percent type yields on senior debt loans, which is
which is phenomenal. We've also seen lower level multiples and because we're doing these liquid market substitution deals, much higher quality companies, which leads me on directly to the point you raised about the macro picture. You know, we as an industry have tended to focus on non cyclical businesses anyway, so typically this industry in Europe is very much skewed towards it services, very steady, stable businesses, healthcare, education, and
steered away from some of the more cyclical sectors. And of course those are the deals that are still being done. And I do have to say that, you know, compared to perhaps even four months ago, the economic picture in Europe has improved very markedly, right, you know, the key three issues around rising inflation, high energy costs, that energy prices are now back to where they were before the Ukraine crisis, and you're seeing inflation fall as you are
seeing in Europe. We're seeing supply chains ease up as China dropped to zero curbent policy and a lot of the type labor markets that we've experienced both in Europe and have similarly used. So you know, whereas once people were talking about European recessions, no one's talking about that at the moment. It's very much European growth, not stellar growth, right, you know that's.
Fine, So, Anthony, from the perspective of raising capital, capital being allocated to this asset class, you know, I remember when interest rates were so low, you guys offered a pretty nice return.
How how is it now that rates have risen.
So it's a very good point.
You know.
The way we always positioned ourselves is offering a premium return to the liquid markets, which, as you correctly say, wasn't difficult when, particularly in Europe, the liquid markets were generating practically nothing. One of the great attractions of the asset class, though, is that all of our loans are floating rate loans. So as we've seen interest rates go up in response toizing inflation, that translates directly into higher
returns investors. And as I said, you know, if you look at euro ball rates plus the margin we're generating plus fees, you know, we're generating twelve percent yields on very safe senior debt and that that is a pretty unprecedented situation in my experience.
Yeah, that is.
I mean, you know that's the top percent will stick up when you're looking at the ten year treasury at three point three eight percent. Anthony, thank you so much for giving us a few minutes of your time. We know you're very busy there, Anthony Foble, he's the CEO
of Arkmont Asset Management. As he mentioned, twenty five billion in assets under management, and that is just another example of the growth of the private credit business, the private debt business really since, as mister fobl said, since really the end of the Great Financial Crisis. So glad we could get a few minutes of Anthony's time.
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We do want to go to Ira Jersey covers all the interest rate stuff for Bloomberg in Intelligence so Ira again, Eco go I type that into my Bloomberg terminal manager. A lot of stuff out there for markets to digest. Give me your takeaway of the PPI data that we saw today. How important is that for you and all your fellow kind of interest rate geeks.
Well, so, most of the data that we've seen does suggest that the inflation continues to slow right in. This morning's numbers certainly suggest that that's continuing to be the case. And I think PPI being a little bit better, you know, is certainly going to be something that you know, policymakers are going to take into account. And when you look at things like PPI final demand being up only two point three percent year on year, now you know that
doesn't seem so bad. The issue is is how much of this is going to wind up coming out of prices that we already see in on the shelves, right so, so, so the good thing about this PPI number is it tends to have a pretty good relationship with UH with with with margins, with corporate margins. So if you take core CPI and core pp I and you map that the margins, it means that that margins actually could not go down as quickly as some people are thinking they might.
So markets are pricing in those rate cuts. IRA. Where in the data this week are you seeing evidence that the Fed may not be ready to cut rates at least until you know, the end of this year.
Well, I think the CPI numbers yesterday were pretty clear on that point. You know, it's funny that the market rallied as much as it did on numbers that basically came in as expected. I think people were just fearful that the numbers were going to come in a little
bit better. But when you look at yesterday's CPI data, one of you know, if you think about what is zero point four percent month on month print, is if we were to get that for the entire year, that would be almost a five percent year on year CPI. So if that's the case, and it doesn't seem like that's necessarily going to slow down significantly because looking at some of the details, then the Federal Reserve is not
going to be cutting interest rates later this year. And what's interesting is, you know, when you look at WRP, you look at Fed Fund's futures, you look at SOFA futures, those are the new liboard based futures they're called SOFA on the secured overnight financing rate. It's saying, yes, the
Fed's going to cut. But if you look under the hood and you look at the options markets and what options markets are pricing, they're actually pricing an unchanged FED or a FED that's going to cut one hundred and fifty basis points by the end of the year, nothing
in between. So the interesting thing about that is the market's either saying, hey, there might be a disaster credit crunch of full on financial crisis, or inflation is going to remain pretty high and the Fed's not going to do any So so we have to keep in mind that this doesn't always happen. But right now there's what I call bimodal distribution, where it's basically unchanged or deep cuts. It's not really two or three cuts this year as the market's currently pricing.
Well, I mean, I felt so proud of myself Ira when I learned the WORP function, and I kind of understand what it means. Now you're telling me that it's not that representative.
Well, it's representative of the of It's basically the weighted average of the potential outcomes. So it's not the base case outcome that that's kind of what I'm saying is that there's basically two base cases, and one is for
massive cuts and the other one is for unchanged. So the WRP function is, remember, it's going to tell you and this is what FED Fund's futures are going to do, or a lot of the other short term instruments we use to judge what the market's thinking for for monetary policy, and that's that's you know, what's the average now normally it's it's normally just usually I should say it's normally distributed.
And you know that that's what happened on the way up, like most people thought, oh, they're going to hike you know, to four and a half percent to five and a half percent with the average being five percent. You know, that was kind of where what we were pricing on.
The way up.
But now there's a lot less certainty about the path of future monetary policy, whether it's you know, when the Fed's going to start cutting, how deep they're going to cut if they do cut. And I think what the market's suggesting and using the options market, and what it's suggesting right now is that you know, if the Fed cuts, it's going to cut very aggressively because there's a crisis.
And that's where you know this couple of you know they're not going to cut twenty five basis points twice, right, They're going to cut fifty basis points several times if they start to cut.
So, Ira, I want to get your take on that big debt ceiling debate while we have you here. You mentioned the instruments you use to look at FED moves. I wonder when you look at the treasury space in particular, is the debt ceiling messing up that instrument for you?
It is? It is a bit yeah. I mean, if you think about where what the market's pricing right now, and you look at short term treasury bills that mature before June, they are one hundred basis points below the FED funds rate, like or on now one hundred and
fifty basis points below the FED fund rate. In some cases, that's not typical, and the reason for that is you have money market mutual funds that need to own those because they don't want to own junior July bills because they're worried that junior July bills might have a delayed payment, and for money market funds that have to ensure daily liquidity, even a one day delay in payment is massively painful
for them. So you look at the June eighth or the June thirteenth T bills trading at five point four five point five percent. That's not saying that the Fed's going to hike interest rates next week, which is what you'd normally think. It's implying it's implying that the market is worried that the that the government is not going to pay its bills early in June.
So going to that point, Ira and Maddie, I'm not sure if you're aware of this, but this is how deep into the weeds Ira and his team are. You guys have a mom that kind of predicts they when the government runs out of money.
I don't.
I don't want to know how this model works. I just want to know kind of a do you have this model and what is it telling you?
Yeah, so it's a it's a daily model where we estimate what government spending and revenue is going to be, and then how much cash at the end of the day the government has, and we show that it is exactly the June sixth and June A t bills that are most at risk of a government default, and the government could squeak by, and we're you know, these sound like big numbers when you say words like billions, but when you have a seven trillion dollar budget, you know,
a couple of billion dollars is a rounding error. But if we get just a couple of billion dollars two billion dollars a week for the next three weeks on the Friday payrolls data and taxes go up a little bit, then suddenly we can make it the June fifteenth. And then June fifteenth, there's a one hundred billion dollars in corporate taxes that are going to occur, and then there's a So there's like this rolling issue with with where
we are in the depth ceialing debate. So people who say, like, you know, they I know Speaker McCarthy said that he didn't believe the June sixth state. He should believe the June sixth state because it's accurate. But if we make it the June fifteenth, then we make it to July thirtieth. And I think that's what some members of Congress are hoping and that's what some people's models are saying. Yeah, my models were pretty good, So I would suggest that there is a risk in early June.
So I what you're telling me is my government, our government lives paycheck to paycheck kind of.
They're living there, your paycheck to paycheck because they need you to pay a little bit more in taxes over the next couple of weeks in order to make it to the June fifteenth corporate tax date.
That is truly how the sausage is made in terms of financing this government. Right there and Iron his team, they have a model, a financial model, like a spreadsheet kind of thing that kind of does it for them on a daily basis.
And that's how good their work is. Ira Jersey.
He covers all the rates and stuff and keeps an eye on the US you know, checkbook and wallet and stuff like that.
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Lots of inflation data coming out this week, giving more food for thought for our federal Reserve. Let's check in with an economist who thinks about this stuff too, Lydia bhussor senior economists e Y Parthion joins us here. So Lydia, CPI data, PPI data, what's your inflation called? Given kind of some of the data we got this.
Week, Hi, thanks for having me. So the inflation data that we got this week confirmed that that the inflation process is well underway and is continuing. And it's not just about you know, the CPI report we saw this morning. Producer price inflation is pointing to some of this inflation happening. Import price inflation is also showing some outright deflation, and so it does look like all the pieces are falling into place for that this inflation process to accelerate in
the second half of the year. We are also seeing a turn in house prices and some loosening in label market conditions, with wage growth also beginning to show some moderation. So we do expect to see this inflation accederating in the second half. We have, you know, headline inflation falling back towards three percent by the end of the year.
A little bit of three percent, we could see a two percent handle by the end of the year, and core inflation a little bit of both three percent, and that you know, still leaves inflation above the FATS two percent target. But that's that's likely to be a faster this inflation that some than some are anticipating right now.
Hey, when you look at the core services shelter, health, insurance, and airfares that you were just touching on a little bit, that moved up a little bit, right, does that concern you at all when it comes to the stickiness question of this inflation.
I mean, in terms of the stickiness we are saying on the core services side of the economy. We know that that is you know, tied to also some of the tightness that we are seeing in the label market. We got the jobs report last week which showed some renewed pressure on the weight growth front and also the unemployment rate remaining remaining historically low. But we also know that, as I said, you know a number of label market indicators are pointing to loosening in label market conditions, and
you know, jobless claims have been trending higher. We saw on a side breakout this morning, and we are also seeing slower libor demand in the label market. We are seeing less churn and less people quitting their jobs on amount basis, and so that should you know, allow for some this inflation to happen in the services sector. And at the same time, we also know that some of that shelter inflation will also turn in the coming months.
We've seen some moderation, will likely past peak, but for that this inflation to fall, you know, with accelerating momentum, we're likely to have to wait, you know, a few more months, and that will likely be a key factory driving services inflation down in the second half of the year.
LYDIA, once again, it appears that the US government is having a little problem with its checkbook, paying its bills, that's sealing all that kind of stuff. This is starting to come to a head here. How is that factoring how's that risk factoring into your economic forecast?
An outlook?
Yeah, I mean the stakes are really high, as you know, given you know, the fact that we're not seeing a lot of willingness to compromise at the moment, and that's putting you know, a risk to the economy and financial more market and adding a layer of complication on top of you know, the stress we have seen in the banking sector, and on top of the fact that we are already in an economy that is slowing down and downshifting. What we're likely to see in the coming weeks is
essentially the pressure you know, rising in financial markets. With rising financial market velatility, we're likely to see a heap to confidence as well on business and consumer confidence. Uh and and all of that is likely to exacerbate the slowdown that we're seeing in the economy right now. So certainly adding some downside race to the economy, we are expecting to see a recession unfolding by the middle of
the year. And you know this, this down shift in economic activity that's already visible in many sectors of the economy could be you know, deeper as a result of this situation.
I wonder then you you talk about the death sealing issue, and you mentioned in there the stress and the bank game sector. What do you think the outlook in terms of the impact is from that stress that were maybe underestimating when we when we look at the economic picture.
I think, you know, in terms of the impact on the banking sector. What we've learned over the past few
weeks is that this is still ongoing. We're still seeing some stress in the banking sector, and that we don't know for sure how much credit tightening is currently in the pipeline, but we know that as a result of these turbulances, banks have become a more worry of lending and we were already seeing that tightening in credit condition in lending standards before this, you know, banking stress emerged.
So what we're likely to see is that credit tightening filtering into the economy in the next six months, in the next twelve month, and that's likely to lead consumers and businesses to be even more cautious with the with
their hiring for businesses and spending as well. So it will weigh on the economy, and we factored that in into our outlook, and we have you know, as I as I mentioned, you know, a recession and folding in the middle of the year and some of that weakness lingering into twenty twenty four.
So one of the areas Lydia that has held up remarkably well, at least to me, it seems like it's this.
This labor market.
You know, three point four percent unemployment, I mean the FED, you know, I think perversely would like to see that number higher. Where do you think unemployment goes? What's your view of the labor market here in the United States.
Yeah, we're definitely getting mixed messages in terms of the label market and mixed signals. I think it's very important to take a step back and look at the broad set of labor market indicators. We got the jobs report last week, and if you take it at the headline level, you saw pretty solid job creation and also the unemployment rate very low, and that renewed pressure on wage growth, which points to a similarly tightened and resilient label market.
But if you dig a little bit deeper in the report, there were some signs that the label market is loosening. If you look at the diffusion of job creation, the breath of job creation, it has declined quite significantly, so job growth has become less broad based. If you look at layoffs, they've been creeping higher as well, and our conversations with businesses as well is pointing to more strategic hiring decisions. We're seeing strategic layoffs as well, and labor
the man has come back down significantly as well. So the down shifting in the label market is happening, and what we're expecting to see is essentially companies pulling back
even further on hiring in the coming months. We're expecting to see the unemployment rate rising towards four point five percent by the end of the year, and we are also expecting to see some layoffs happening, likely around you know, nine hundred thousand to a million jobs lost this year, but it won't be the same kind of environment we were in in two thousand and eight. We're not expecting to see the same kind of broad based layoffs in the label market. Up to a.
Million jobs lost feels like, I know, it's a drop in the bucket when it comes to the population in the US, but that feels like a mildly significant number. Where can we look to see indications of that starting in terms of the layoffs.
Picture, Yeah, we are already seeing some signs that layoffs are creeping up. Jobless claims have been trending up since the beginning of the year. We've heard, you know, if you look at job cut mentions in earnings calls. There was also a rise in these mentions, and if you look at other surveys as well, they are showing that job cuts are also increasing, So we can you know, there are a number of indicators that are already indicating this. These are not broad based layoffs, and that's why it's
not showing up just yet. And and they're not broad based. We've seen pockets of weakness appearing, essentially in the labor market. And some of these pockets of weakness have appeared in those sectors of the economy that had been hiring quite significantly during the pandemic. They've been, you know, facing very strong consumer demand and they've been they really overdid it in some in some of these sectors in terms of hiring, and and they have now had to recalibrate their workforce
with the retail sector is one example in UH. But you know, more generally, I think sectors in general and businesses in general will have to adjust to the slower demain environment and slower economic environment that we will face in the next six months.
All right, Lydia, thank you so much for joining us. Really appreciate getting your thoughts. Lydia Bussor.
She's a senior economist at e Y Parthyon calling for you know, a slow downish economy recession later this year, perhaps into next year, and that seems to be a building consensus. I guess the question really means for a lot of folks, is you know, how prolonged would that recession be? How deep would that recession be? I guess we will certainly find out going forward.
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Eleven thirty.
Todd Lockman joins us. He's a CEO and president of Sovos brand. Sobos is a NASDAC listed stock. Soovo is the ticker. It's hitting a fifty two week high today, so a good time to get out and start chatting about the story.
I guess.
The stock is up thirty four percent year to date. It's got a market cap of just under two billion dollars. Stock's up five percent today.
Todd, thanks so much for joining us here. I know you guys.
Before we get to your earnings, just give us a sense of what you guys do at Sovos brands.
What brands do you own?
Absolutely? Yeah, thanks Paul, great too great to be on the show.
So the brands that we own are the REOs brand, which is pasta soup, frozen entrees, dry pasta, just launching into pizza, we can talk about that, Noosa Yogurt, absolutely delicious, thick, velvety, one of a kind yogurt and yogurt category. And then Michael Angelo's which is premium frozen Italian cuisine and also just launched a mid price sauce brand under the Michael Angelo's.
But we're a high growth food.
Company founded in twenty seventeen, really pioneering a new approach to packaged food that centers on premium, high quality, delicious products and brands with authenticity at their core and really try to drive As you can see that we're delivering growth that's really unique and disproportionate for the category.
So, Todd, as Paul was mentioning, a pretty great year for you, pretty great earnings as well, what is your favorite data point from your all our earnings that you'd like to call out what are you most proud of?
Sure, thanks Mata, saying, well, there's a few, and I'm not sure. I mean, we had, as you saw, we couldn't be more thrilled the Q one results. I mean, the first area that i'd highlight is volume. Volume driven twenty seven percent of organic growth, so sixteen percent volume, eleven percent price.
How did you do that, Todd?
I'm sorry to jump on you here, but that to me, that's what stuck out to me as well. And it seems like volume surging over price in the inflationary environment we're in is really a substantial metric here. What was your secret sauce to that?
No pun intended?
No, well, I think it was probably kind of intended. But it's good.
I do it all the time, but not many and as you pointed out, not many we show we have a slide in an earning stick. If you look at our peers, they're declining in volume averagely four percent. So just as you said, it is very unique for the industry, and we're doing that really driving the Raio megabrand. We part of our philosophy is we acquire under penetrated brands.
Tay Superior already in the category very unique. I apologize for the train here going across the tracks in Berkeley, California, but really, when you take these brands that are underpenetrated, we're driving significant distribution gain. So REOs, for particular, we had the largest quarterly household penetration gain that we have in three years on that brand. So the sauce now thirteen percent on the heels of twenty two percent distribution increases.
So even though we acquired this brand in twenty seventeen, we're still putting distribution points on the board for the sauce business as well as driving significant growth in our dry, pasta, soup and frozen categories. Those combined businesses now are on one hundred and thirty million dollars. Retail sales make up twenty percent of the REOs franchise of forty six percent year on year. The REOs brand Ltm now six hundred and eighteen million dollars of forty percent year on year.
So we're driving volume through distribution awareness gains on a franchise that you know still has lots of headroom and room to grow.
That's right.
I wanted to go here because we think about consumer products coming is I don't think about the growth rates that you guys are putting up.
I think it's a CPI kind of growth business.
So how much more headroom or or how much more room to grow do you have with your existing brands before you need to go out and maybe consider some acquisitions, sure, you know.
Really significant. Let's just take Raos sauce, you know, for example. So if you take you know, the REOs brand, and we did achieve another statistic to some still riding on the heels of your first question, literally, but we achieved the number one share in the food channel. We're the number two brand overall now in sauce. When we acquired the brand, it was number eight and now number two,
number one in the food channel. But Raos, although we're a you know, sixteen to seventeen percent dollar share, we're only a seven percent unit share when the market the other two market leaders, number one and number three, their unit share is sixteen and eighteen. If you look at our penetration of sauce, it's thirteen percent. Our peers are above thirty percent. The awareness of our brand is fifty
eight percent. You have five other sauce brands that have awareness greater than ninety percent, and we have fourteen average items on shelf when you have two other players with over twenty. So you can just see just in sauce alone, there's an enormous headroom. And that's why we talk continually that we're going to get this six hundred million dollar net sales business to one billion and beyond. And that's
just sauce. And we can go over the same statistics for our soup business, which is only a two share, our dry pasta business which is only a one to three share, and our frozen entre business is less than a one share. And again, those three businesses combined are growing forty six percent year on year.
Real quick here, Todd, I know the only one we haven't really mentioned is Neusa the yogurt product as well. I wonder, and you tell me which project product do you have the biggest challenge with in terms of profits? And what is your thinking on when to kind of change things up on the product side given some of those challenges.
Sure, you know, I'd say, honestly, we were driving really would you thirty percent? Eve?
But dog growth in the quarter, you know, as our pricing and productivity and you know volume is more than offsetting the inflationary pressures that we have. I mean, we were public last year that a headwind notably on the noose of business was milk pricing and affected up affected the category. You know, milk prices are coming back down, so we're seeing a nice benefit. So, you know, I think the key headline last year would have been, you know,
the yogurt businesses. We've talked about it. But right now there's a nice tailwind from milk and from resin, and there's also a tailwind and there's some there's still some uh and there are still some headwinds, whether it's tomatoes, olive oil, et cetera. But if you take proteins and you take milk, and you take resin, those are all nice commodity tail winds for us right now.
Todd, thanks so much for joining us. Really appreciate it.
Todd Lackman, he's the CEO and president of Sovo Sprands. Again, the NASDAC symbol so Ovo and A stock is hitting a fifty two weeks high today as we speak. Ipo'd a couple of years ago, and I reported some numbers yesterday which the street like stocks up on the news
of the earning Zone talking about the food business. Now REOs it's a famous restaurant in New York City once and I mean it's impossible to get into, but back in the day, I knew a guy who knew a guy, so that got me in there and it was great, It was good, awesome.
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I'm on Twitter at Matt Miller nineteen seven twenty three.
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