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Dot com and obviously fed and bond related. Now, walk us through the latest that what we've been seeing in the treasury market, and especially ahead of a number of key data reports that are coming up as we know when it comes to obviously the jobs report later this week, as well as that PCE indicator that's coming on Thursday.
Yeah.
So obviously, like you said, we have these key data points in a reasonably a liquid market time right now. You look at this morning's data and obviously you had the Jolts data Uh myss to the downside, which is you know, FED friendly for sure. Uh, you had consumer confidence lower, and now you have two year yields rallying
by thirteen bases points. That's you know, that that's not showing that that the market is is liking this data and certainly pricing out at least a little bit of the hikes that we had the hike in November that was starting to be priced into the market. So I think the market's still looking for some direction. It's still looking for exactly, you know, what the what the path of the US economic environment is going to be and how that might influence the Fed Reserve and their actions
on a going forward basis. So so I think you're are going to see a lot of volatility, you know, ten basis point moves in the five and ten year sectors of it would not be complete surprise depending on you know, how weak or how strong the data is compared to expectations.
Now we have jobs numbers coming out at the end of the week. Is is that the ultimate decisive bit of data or you know, is it CPI?
What?
What? What do we what's your like top data point that you're considering as we look ahead to kind of mid September, next FED meeting.
Yeah, so, so next month's CPI report, I think is going to be the really the key to whether or not the market is going to price for a November hike. I mean, so September I think at this point is off the table. You keep seeing very mixed data and that's not going to entice the Federal Reserve to need
to increase interest rates again. But I think as we get toward towards the September meeting, where you get a new summary of economic projections, you'd get a new dot plot, you know, will the what will the Fed members think they're going to hike rates to or cut rates to in twenty twenty four based on changes in their economic outlook. That's where the data from now until the next meeting
I think will be more impactful. So the two data points from this later this week is the month over month PC numbers, particularly those core PC numbers that Jay Powell has mentioned on several occasions as being important to their outlook. So if we do get an expectator, if we do get as expected zero point two percent on the core PC deflator, I think that's actually a good thing because that's implying that inflation on a trend basis is coming down.
And then it's not so much.
The headline payrolls number, you know, unless it really goes gets crazy one way or the other. But the wage data I think is the most important piece of Friday's payroll report that I'll be focused on. So, so it's aggregate labor income. So we do we continue to see you know, point four month over month increases in wages. That that's I think going to be key, because wages are one of the things that's keeping spending his eyes,
it is number one and number two. It's also companies are trying to at least pass some of the higher labor costs along to consumers in the services sector. And because of that, you know that is there is a little bit of a wage push inflation, regardless of whether or not members of the FED will admit it or not.
AIRA What about something else that's going on in the background when we're talking about the balance sheet and the runoff there because we talk so much about when it comes to interest rates, but what about that aspect of it and when investors are concerned about lack of liquidity in the marketplace.
Yes, so I don't think that the lack of liquidity right now is really an issue. There's still a lot of reserves above what the banking sector needs for liquidity purposes and to meet capital requirements. So the way that I look at the Fed's balance sheet and how small it needs to get or can get, really has to do with how banks are complying with different vasal capital regulations.
So the single biggest one is the liquidity coverage ratio, and assuming that banks get down to just above their minimum requirements for those capital ratios, we estimate that the balance sheet that the Fed balancee could decline about another six hundred billion, seven hundred billion dollars or so. You know,
others use aggregate data. We don't think that that's the best way to look at it because the challenge with liquidity in the bond market and the repurchase agreement market and all of the things that created the repo hiccup in September of twenty nineteen, a single institution that doesn't have enough liquidity that winds up switching us over the tipping point and requiring more reserves to be added to the system. And that's what you saw in September of
twenty nineteen. So you know, once that gets tripped, I think that's a signal that the Federal Reserve is probably going to think about reducing its balance or reducing quantitative tightening, or even ending it and allowing the market to kind of catch up to the new liquidity environment that we have.
I want to get your take on how housing prices are going to play into the Federal reserves calculus. Jpewell was talking about how he sees shelter costs coming down. But you know, we got data out this morning the FHFA House Price Index rising again zero point three percent. Mitally, this was a little bit less than anticipated, but you know, prices across all twenty major market areas surveyed by S and B. Dow Jones in Disease says prices are going up.
Does this play into the calculus or is this such a structural problem that the Fed just kind of puts it aside.
Yeah, well, I think the Federal Reserve is, you know, certainly looking at you know, the cost of everything.
I think housing.
Housing obviously is important to the Federal Reserve, but it's only one component. It's it's really the cost of housing. So things like rent rents and owner's equivalent rent that make up the measures that we look at for for
how much housing's going up. And interestingly, if you think about even if house prices had stayed constant and you wound up with mortgage rates going up towards seven percent, which Erica Adelberg, who's our mortgage strategist here at Bloomberg Intelligence, looks at every day, you'd still have higher rents right, So it would still cost more to rent a house because you know the new mortgages that you receive are are going to be higher, But that takes a long
time to filter into the overall economy. I think the bigger issue with what's going on now in the housing market is it's lack of supply, right, people with very low mortgage rates. People with mortgage rates well below four percent, they're not going to be refinancing and looking for a new home unless they have to relocate for their jobs.
So because of.
That, you just don't have a lot of supply on the market, and that's one of the things that's driving home prices a bit higher, although that has stabilized quite a lot when you look at the month on month.
All right, Ira, it's great always getting your perspective on all things, Ira Jersey, Chief US Interest Rate Strategies for Bloomberg Intelligence.
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I know this is something you've been watching very closely smoon when it comes to what's been happening with these pharmaceutical giants and the ruling when it does come to President Biden's push to bargain with these drug makers to lower the cost of medicare. So I want to get straight to Dwayne and Bright, senior government analysts with Bloomberg Intelligence joining us to talk the drug pricing negotiations. Duane, thanks so much for joining us. We knew some of
this was coming. Walk us through what the latest news is when it comes to this.
Yes, we knew this was coming.
The IRA passed twenty twenty two and the government had a deadline of September one to release the list of ten high expenditure drugs. Those drugs would be subject to government negotiation. In other words, the government would negotiate prices for those drugs that would be anywhere from twenty five to sixty percent lower than they are now, and those prices would become effective beginning January one, twenty twenty six.
We're starting with a list of ten.
That number of drugs will go up from ten to fifteen in twenty twenty seven, in twenty twenty eight, and there'll be twenty drugs per year.
Thereafter point, why these specific drugs.
Do you think.
The law requires that Medicare focuses on these drugs, So we're not focused on price alone. We're focused on those drugs that have high expenditures. So you may see some drugs on this list that are low cost drugs, but they're used by quite a number of people, so Eloquists, for example, the data CMS provided this morning shows that three million people used Eloquists. But you have another drug, Stallara from Johnson and Johnson. Twenty two thousand people use
the drug, but it's very expensive. So Democrats when they came up with a spill, really wanted to focus on those drugs that are really high cost, high expenditure drugs, not just those that are high priced drugs.
When you're looking across the spectrum, especially in Washington, was this more of a broad based issue when you're talking about Republicans and Democrats or was it more geared toward the Democratic side.
This has been a Democratic goal since the Clinton administration, So for the last twenty years, UH, Democrats UH were longer Democrats have been trying to find a way to inject the government or provide a government role in price setting for these drugs. Now they've failed, and in fact, UH when the Party law passed in two thousand three, there was a an explicit prohibition against the government UH
dictating or setting prices. And that's largely because when that law passed, it was passed by a Republican Congress and signed by a Republican president.
Now, granted, Democrats voted.
For that bill, UH, but it did set up the framework, but it also included UH more of a free market uh approach to price setting. Over the past couple of years, Democrats tried to advance similar legislation but failed because they didn't have enough control. Now that they had uh the full control of Congress and the White House, they were able to pass some version of what they wanted to do in terms of injecting government a government role for price setting.
Well, the argument from pharmaceutical companies against call it negotiations clent price setting has always been, you know, they spend a lot of money developing these drugs. They feel that they deserve them monopoly that they get in terms of selling these drugs to consumers. Does this really put a weight on the kind of innovation that they will do?
Do you think that's a long term shift or is this something that these former companies are going to complain about for a while, but you know, it's not really going to affect their overall behavior.
I think there's some weight to their argument. It's definitely going to change the way they pursue drugs moving forward. They're going to think about what kind of indications they come forward with.
First. They're gonna look at some.
Of those uh uh, those those areas where commercial commercialization prospects are better. They'll maybe slow down those indications where the commercializa commercialization aspects are probably lower.
Uh.
Keep in mind though, that these drugs, uh that the administration released today, the list released today. These are a list of ten drugs that have been on the market for at least seven years.
Uh.
They don't have a generic competition or a bisimilar competition, and and so, uh, we're really talking about those high cost drugs where there isn't an alternative, and so there will still be an opportunity for these manufacturers to perhaps raise the prices when they go to the market for that first year. In fact, the govern Congressional Budget Office, which scores legislation, in other words, how much is it gonna cost.
How much is it going to save?
Anticipates that pharmaceutical companies will pursue higher launch prices to make up for the fact that in some of those outer years later years, they won't be able to charge the prices that they would otherwise charge.
What other potential legislation could be on the horizon.
In the drug pricing space. I think we're looking less at legislation targeting drug manufacturers, potentially targeting pharmacy benefit managers, and they were left out of the Inflation Reduction Act for a handful of policy and technical reasons when Democrats passed the bill. We could see as part of that how PBMs are profiting from rebate dollars rebase they get from manufacturers that are supposed to go to health plans or even the employees in the individuals.
We could see some additional.
Regulatory efforts by this administration as it leads to TRUK pricing. They Dibinding administration released a white paper earlier this year focused on some other avenues which it can use to lower the price of some drugs. They're targeting those drugs approved through an Accelerated Approval pathway, which is a pathway that allows manufacturers to get drugs on the market faster and a level of safety and efficacy data. But in many cases these acceleratate approval drugs still go through some
additional confirmatory trials. They actually work, so we could see some more regulatory efforts.
There, right, Jane, thanks so much for joining us. That's doing Wright, senior government analysts at Bloomberg Intelligence.
Perce.
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You want to get straight to our next guest, Elliott Stein, senior litigation analyst with Bloomberg Intelligence. As someone you know, we were talking about the US court paving the way for the first bitcoin ETF and this gray scale ruling. If you're looking at the reaction in ETFs, here are actually if you're just looking specifically in bitcoin, it's up almost six percent, so now it's trading above the twenty seven thousand level. I want to bring in Elliott Stein.
So Elliott walk us through the latest news that we got from this. What do we know so far?
Yeah, So this morning we got a decision from the DC Circuit Court of Appeals, which is the court that was hearing gray Scale's challenge to the SEC's rejection of gray Scale's application for a spot bitcoin ETF. The SEC rejected it last year, they rejected that application. Gray Scale sued the case was arguing to march. You know, people on Twitter in particular, and vestors, crypto investors interested in
bitcoin and GBTC, the Great Scale Bitcoin traice. So they have been waiting for this decision anxiously for some time, and we finally got it today and the court vacated the SEC's rejection, saying that the SEC's decision to reject the application was arbitrary and caprecious and wasn't well reasoned and sort of left it there. So next steps are a little unclear, and I haven't even read the decision yet, but that's where we are right now.
Elliott. We're broadly speaking, I mean, what's the thinking on the part of the judges. You know, they had grilled I believe the SEC about its decision back and hearing in the case on marsh what's their thinking. What's the rationale do you think?
Yeah, oh sorry, didn't mean to cut you off, but yeah, the rationale is that the SEC previously approved too bitcoin futures et F and so so you know, Gray Scales argument was that the SEC was treating similar products differently and arbitrarily because the risk of manipulation and fraud is essentially the same in both the futures bitcoin market and the spot bitcoin market, and so if the SEC was concerned about fraud in the spot bitcoin market, that didn't
really make much sense because it had already approved these futures bitcoin ETFs, and so as a result, to treat similar products similarly, they had to after having already approved the futures bitcoin ETFs, they had to then approve the spot bitcoin ETF.
And when we're looking at bitcoin, we did mention up five percent. What do you think the reaction to investors to this, because this is something that has been really highly anticipated for months now.
Yeah, I mean, you know, that reaction seems to make sense, right, I mean this, you know, this does seem like it's another step on the path to getting spot bitcoin ETFs approved, which will just make it eat here for investors both retail and institutional, I think, to get exposure to bitcoin. And another interesting number to look at is the discount
for GBTC. You know, the discount meaning that the shares in GBTC were trading at the time the case was argued roughly forty percent lower than the value of the underlying bitcoin that's the trust held Right now, I'm looking at that number and it's about ten point six percent, So that discount has dropped dramatically.
Yeah, it dropped dramatically just in the past couple since the last close. It looks like I want to bring in here. We have Matt Siegel, the head of digital assets research at Van Eck. Matt, give me your thoughts as well. We've just been discussing this with Elliott Stein from Bloomberg Intelligence. What's the broader impact that we expect to see from this decision moving forward? Does this just become the first ETF of many?
I think the broader impact is that the government has brought a range of lawsuits against this industry and using their enforcement stick to try to chill activity stateside. And now we've seen the second major court case that the SEC has lost in as many months ripple and now
this great go. So we think the tide is turning that when the facts play out in court, the law is more ambiguous than the SEC is making it that their logic and denying these applications was haphazard illogical, and the judge was very clear in rejecting that logic.
So it's a vindication for the industry. Matt.
We do know the SEC has cited its opposition when it comes to these prior proposals for bigcnytfs and for the spot price crypto exchanges. What other moves could the SEC have from here?
Well, it's important to note that the judge in this case cannot approve the bitcoin ETF. So the judge has sent the case back to the SEC to revise their logic. So we'll see, you know, if they capitulate or if they present new logic. But you know, the best case, here's the base case here, is that the chances of a spot bitcoin ETF have risen quite substantially. It will take a fair bit of logistics to get all these
applications in order. We'll see if they are all allowed to go effective at the same time or if there is some privileged positions that are that are given.
Now is the thinking that there really would be a substantial amount of inflows into these sort of ETFs it provided that they can move forward, that that this would suddenly bring in the retail investors that we've been missing.
I don't think just retail, I think institutional like the the ETF structure is time proven way to get exposure in a cost effective and liquid manner to all types of commodities and security. So you know, this could be the biggest ETF launch ever. We think both institutions and retail investors will like the exposure to regulated custodians that it will provide at good spreads.
Lots of different entities will want to hold this product, we think.
Ellie, I want to bring you back into this conversation and get your thoughts on what the timetable could potentially be if this does come back into the SEC's hands and where this could move forward, because obviously, like you mentioned earlier, there's still a lot of uncertainty here, right.
Yeah, it's a great question, and you know, before we even get there, the SEC, if they want, can ask the full DC Circuit Court of appeals called called an on bunk proceeding. They can ask for that that that's up to the court to grant it. It's not automatic, it's discretionary. But you know, that would be like in terms of the litigation, the first step for the SEC. They would have I believe sixty days to ask for that.
Uh.
And then you know, beyond that, they could also ask for a Supreme Court review, although I doubt that, you know, I really doubt it's going to go to the Supreme Court. But then you know, put in the court aside. Yeah, then it's like I said, you know, it's it's a little unclear what happens next because the court you know, didn't order the SEC right to do anything beyond vacating the previous rejection. It is a court can't and didn't order the SEC to approve an application. So it's a
little unclear what happens next. Interestingly, you know, I think Grayscale sent a letter at some points of the SEC asking the SEC to sort of just approve all the various applications at once. I think I think, you know, knowing that this kind of decision was going to come down, and fearing that it might sort of be at the end of the line at this point in terms of, you know, having to go through the application process again, whereas up until this decision it was sort of at the front of the line.
Matt, your thoughts, I mean, do you think the SEC will just sort of throw in the towel here? Say, okay, bitgoing, yeah, let's basically deah, let's go.
It's a tough call.
This is political set at the very hot top of the administration with the President's executive order to use all for the agencies, to use all tools to crack down on this industry. So like be curious to see what type of logic they would employ, because we haven't found any of it particularly compelling. You know, it could end with Barry Gensler out of the SEC. That is not uncommon for chair persons to leave after they've faced embarrassing losses.
They've now been two and two months, so.
We only have about a minute left. But I wanted to get both of y'all's final thoughts here. I'll start off with you, Elliott. As far as the next immediate thing that you're going to be watching for on this, a.
Couple of things, I guess, well, first of all. I think there's a bunch of other bitcoin ETF applications that's sort of not you know, in the courts, right, that's
with the SEC. So we'll see if the SEC punts on those further or if they grant them, and if they grant them, you know, if they grant a whole bunch of mass or just do them one at a time, and then I'll be interesting to see any statements from the SEC as to whether they're going to ask for on block review and also sort of like what the next steps would be just in terms of the grayscale application if they go back to the SEC.
Right, yeah, Matt, very quickly, Yeah, what do you what do you watch?
Like twenty seconds left?
Well, let's watch ethereum now, right, because the SEC is poised to approve ethereum futures ETFs according to this ruling, they would then have to prove SPOT So I'm sure you're tend to be on the lookout for those filings, all right.
Matt Siegel from Vanik along with Elliott Stein's senior litigation analysts with Bloomberg Intelligence, walking us through what's going on with this US core paving the way for the first bitcoin ETF.
You're listening to the Team Can't Live program Bloomberg Markets weekdays at ten am eastering on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
Well, I want to talk about a name. Well, I'll just give you a sense of what's happened to these shares in the past. Couple of wild wild Ride. Okay, last Tuesday, up over one hundred percent, up over thirty percent on Thursday, forty on Friday. Now we're down just about thirty percent today. The name then fast Auto and unprofitable, thinly traded and yes, it went, just went, just made its debut as a spacklisting on August fifteenth, and now
is the world's third most valuable car company. I don't know if that holds up given the fall today, but it's something like that.
Yeah, it's bigger than the market cap. If you're combining GM and Forward.
It's nuts, a little nuts. Well, to sort this out for us, we have Stephanie Brindley. She's Associate director of Research and Analysis at SMP Global's gonna tell us what is going on with this company? And the wild ride that we have seen in stocks over the past or in the stock over the past couple of days.
Good morning, how are you guys today, Good?
Thank you, thanks for joining us.
Good thanks, thanks for having me. Vin Fast is a really interesting company to watch. They've just started to launch in the US and Canada. What if you kind of look at the background of that company. The founder has has a mission of creating a manufacturing base out of Vietnam and and becoming growing their own auto company. Part of doing that includes manufacturing targets for the US and for being in the US and Europe and in China as well. It's a it's a very very long term
look for him. And what you're seeing too from that company is is somebody with a with a will and a mission that that kind of goes beyond what happens in the next two or three years. So this is a really one build.
Right, This is a Vietnamese ev maker. Give us some context into the space of how this company. Obviously, when you're thinking about the context you were just talking about this, Simona and I're having a market cap larger than GM and Ford. But when you're looking at this particular industry where it sits at and how it's been able to sort of get to where it is at this point.
It's it's interesting looking at market caps, which isn't ast one hundred percent in my area. But electric vehicles, aside from from Tesla, and it took them ten or ten or fifteen years to get there, aren't profitable. So we've got we've got market caps that are that are betting.
That ultimately these vehicles will be because today they're not yet.
And is that wrong? Is it wrong?
Oh jeez, that's a good question.
We're really talking long term, really long term, because for the vehicles ebs to be profitable, they will be eventually. Part of it is scale, part of it is a broader piece of the market. Part of it is all the regulations that are driving various markets to push thev's internal combustion engines. But we're talking about a ten to fifteen to twenty year transition. We aren't talking about something that's happening in our.
Five so a couple decades. We'll see a lot more growth in.
Five but we aren't going to get to an ev dominant world. It's a long, long term vision for electric vehicles being profitable and being transitioning froms or from internal combustion engines to electric vehicles, and then Fast is in this space trying to make a name for itself and trying to build an industry for its country as well.
Yeah, I guess the distinguishing factor that you know, so much of the exposure is to Asia. You know, admittedly there are players in China that could potentially get in the way. I suppose. I mean, we had Neo out with its earnings today, but just I guess the idea that it's in Vietnam is something a little bit special.
It's a little bit special.
I mean, they're younger as a company, they're younger, they're learning as they go, and you see that in changes that they've made and how they're going to market in the US and in other places. They initially they were talking about a battery leasing process where you would basically lease by the vehicle, but lease the battery, and how many miles a year that you drove would impact that
lease price. And the idea was that after the battery got to maybe seventy percent usage, you would swap it out and take away the concern from a consumer about how long your battery is going to last because you'd lease it and they would put a new one in and you would pay your lease and it would go. That concept is proving a little bit difficult for American consumers to kind of get their heads around, and so
they've stepped away from that. Initially, the pricing was going to be a little bit lower, so the idea is you had luxury at a at A at a more affordable price. But their prices that came out for the for the VF nine are really on par with with sort of the premium and.
Lower lower luxury, and so they're not really coming in at at A at.
A more accessible price point. They're really in the mix with everybody else that's out there.
So they keep making.
Changes as they go and as they learn how they're going to come to market. Initially they were focusing on direct selling. Now they're talking about having distributors and dealers
in the US and Canada. So that all of those changes really reflect a company that's willing to evolve and find its way because there's there's a kind of a map and there isn't really They have to they have to find their own space, and I think that's going to make it complicated and it's going to make it a rough ride for some points, but also it's what they're going to need to do in order to find their space.
I think it'd be challenging. You know, this is such a cash flow intensive sort of business to just be kind of changing tune all the time.
It is, and they haven't changed as much about the product in and of itself. It's more about how they're taking it to market, and the product is the investment. Theres is improving it and making it better. The first the first reviews from US media weren't fantastic on the car and needed some more work.
To get there. But relative to their funding and their ability, they are.
They're still related to group, and Vin Group has money, and the founder has access to money. So I believe that he's put sort of a cap and said this is as far as I'm going to go for the moment in terms of investing. But that's one of the strengths that it has is one way or another, the Vin Group can find a way to give infest and more money if this is what they're really dedicated to achieving.
And again, you know, when you have a company that has that kind of will and that kind of mission, different things happen.
That's where Tesla sort of started. Tesla had a mission more than yeah, of course you want to make money.
Of course you want to be profitable and successful, but the mission was about getting people off fossil fuels. Vin Fast has a mission of creating an automotive manufacturing industry within Vietnam and growing and becoming.
A global player. So you've got a mission driven company and along the way they make some different choices.
Could you consider to be some of their main rivals in competitors, It really it's I mean.
It's everyone right now.
Are so unknown around for US customers, and they've brought over a few thousand vehicles, mostly there in California right now, so they really have to break through kind of everyone. Really, they should be more going as kind of a Volkswagen brands, maybe a Buick brand, Chevrolet would be more of the brands that they should be going against.
But right now, it's really anyone. It's everyone just to get and we're having the conversation now.
They're popping up in the news a lot more, but there's a distance between this conversation and a consumer trying to go find one on the street.
Through I believe June they only had one hundred and thirty seven registered in the United States. Right, that speaks to availability and awareness.
With respect to awareness, I mean, does it hurt a company to be identified, you know, with these sort of wild swings in the stock price or is that something that you know, investors can kind of look as scancer, sorry, look aside from and just quickly here because we only have about thirty seconds, you know.
For car buyers, I'm not sure how much of a difference it makes for investors. They're looking at things a little bit differently and I'm not going to predict what they're going to do.
So a car buyer, I'm not sure that it makes.
A huge difference. They need to have faith that the company is going to be there. That's probably what the car buyer needs most from a new car company.
That's so interesting. Seventy Thank you so much for taking us through. I'll be honest, I've seen the major swings in this company share price. They've been wild, they've been exciting, but I haven't known exactly what they do or why or why someone would buy a van fast vehicle, nor less that it's part of much a much larger conglomerate.
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I'll go straight to our next guest, Fernando Valley. He's a senior analyst with Bloomberg Intelligence. He's joining us in studio, which is exciting. Always great to have people here with us to talk with us about the impact of possible strikes at Chevron in Australia and obviously other global energy markets and pressures and issues. Let's start off with what's going on with Chevron kind of set the scene for us about what's happening here and what we need to know.
Sure, so, there are two big projects that Chevron is the operator in Western Australia, Gorgon and Wheatstone. They are very large projects. They contribute about call it fifteen billion dollars in total revenues a year at today's prices for LNG. Chevron has call it about half of that in ownership
between those two projects. So they're very significant projects and they contribute a lot to the overall energy security, and they are exploited to both Asia and excess cargoes can be exploited to Europe as well.
Well.
We've seen some weird moves in gas prices back and forth essentially reacting to this. You know, the thing that I wonder given that we had all these concerns about a potential energy crisis in Europe last year, but supplies like storage facilities are pretty close to full at this point, if not completely full. How does how do energy issues in Australia factor in. We're still at the end of summer,
you know, we're not in the key heating season. How does that play into what we may see given these production challeges.
Yes, sure, I think it's you know, if you know the story of the cicada that prepares for winter, this is what we do now, and this is the filling season when we prepare for the winter ahead of time, and we are, as you mentioned, close to the technical limits on inventories in Europe. The issue is that those technical inventories don't get us through the winter if it is a normal to cold winter, so the if we have demand for that, we will drain them and then
the prices will impact that. So if there's a shortage on LNG, that will affect it, because we can't rely on those storage alone, especially considering Belgium has closed all their nuclear, Germany has closed all their nuclear, and we no longer have supply coming from Europe from Russia rather even in the case of a dire need.
So it's my understanding that a potential strike could begin as early as September seventh, I believe, or is it maybe the September seventh, but you know there is time between which between now and when Europe needs to start drawing down it supplies. I mean, if you didn't okay, if you saw a strike, for example, it goes on for a week, how much of an impact is that to Europe's energy situation.
To Europe will be nearly none. It will be more of an impact to the owners of those projects. You can't really store l and g DAD easily, so it needs to be regassified and as we said, near technical limits. So it's not important as of now. What I think it gives you is two factors First, you're seeing cost inflation, and cost inflation is here to stay and that will impact not just energy, but that will impact everything that depends on energy, i e. The whole world and all
of our economy. And the second part is the frailty of our supply chain on the energy side. So again the strikes, they are also going to keep the assets running. It doesn't require a lot of people to do it. But the strikes show that a energy costs are still going to go up because our lifting costs, the costs to get it off the ground, are going up as well as labor. And then b we are we have lost a lot of the redundancy that gives us the energy security and stability that we require.
When you talk about energy costs going up, obviously my ears are going to prick up because covering a reserve and macro and all things. When it comes to obviously inflation, what that could impact for the economy, how much when you're looking at your space with energy, do you think that could translate into maybe some more broader issues when you're talking about inflation and what obviously central banks are trying to fight at this point.
I think that's the central tenet of our case in oil because we think Oatpak is essentially trying to fight the FED by raising prices and by creating the supply shortage and everything. The central banks are trying to fight against the inflation that you mentioned, and we're seeing gasoline prices in the US much higher over three seventy on average a gallon right now, and that all will impact the inflation metrics. Remember, energy is part of the core,
is very central to everything that we do. We think ultimately the demand side will win, which is what the FED wants. And we're seeing things break, especially in China and their real estate, and that will impact oil prices and to us that's the determinating factor for the second half of the year. Over the long term, we see a short fall of supply, but in the meantime, the FED is likely to win. They have a much bigger b balance sheet that OPAC.
Yeah, one point, sorry to cut you. I was just curious as far as when we'll see it translate into some of these CPI numbers. I know analog over at Bloomberg Economics is thinking that potentially if we're looking at the month over month core numbers, obviously it strips out food and energy, but if you're taking some of that in with energy, potentially could take higher here.
Yeah.
I think if you just think about the pass through right, it takes about thirty to forty five days for oil to get to refine products, and then it will take another couple of months, so it could be anywhere between three to six months for if they really have an impact, you can.
Talk about OPEK fighting the FED. One of the ways I guess they're trying to do this is Saudi Arabia has some voluntary cuts in play, but it looks it looks like they're now considering or we're wondering if they're considering extending those for another month. When would we get some sort of decision there. What kind of immediate impact, if any, would it have?
I think limited short term impacts. You're seeing massive draw downs in US inventories and Saudi extend it through September, so they would probably have to give you an update in the next two to three weeks if they're going to extend through October. But ultimately, the price of oil is telling you we don't really care about supply. We care about demand, we care about Evergrande, we care about
US economic activity. We care about Europe and we again that's where we think we'll set oil prices for the remainder of the year.
How much does seasonality also factor into it when you think about the fall. Obviously you have different spectrums within energy, but where you think potentially that pattern can fall there.
Well, on the oil side, mostly gasoline margins tend to come down. There's a seasonal effect because our busy season is during the summer. We're starting to see that now that may help affordability, but crack spreads are less than thirty percent of the overall price of gasoline, so oil is the foremost impact. And then on the natural gas side, it's quite the opposite. We think we're going to the crux of the issue the winter. And as a reminder, this past winter was the warmest in fifty years in
the northern hemisphere. So if we have a normal winter, that could really spell trouble for not just natural gas but diesel. We use a lot of diesel for heating in New England, for example.
Yeah.
Interesting because natural gas prices have been so pressured for such a long time in the United States, whereas the European picture is just a little bit different. And I should mention today oil prices up a little bit on both WTI as well as Brent up about half a percent.
Yeah.
Fernando Valley, senior analysts with Bloomberg Intelligence, join us in studio to talk about the latest impact of possible strikes at Chevron in Australia. Always a pleasure chatting with you, Fernando, so thanks so much for joining Simoon and myself this morning.
You're listening to the tape. Catch our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, to 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.
We have talked so much about the jolt state of this morning consumer confidence, but also according to the latest case Shiller data, US home prices were flat over the twelve months that did just end in June. And then also prices are up at an annualized rate of just over five percent in twenty twenty three. But the catch there, the rate shock of the past year has resulted in just two months of year year home price declined so
far if you can imagine that, simoon. So I want to bring in our next guest, Mollie Basil, principal economists at core Logic, joining us on zoom to discuss the latest findings in core Logic's case Shiller Home price Index. MOLLI, thank you so much for joining us. Walk us through this latest data that you found.
Yeah, so, our case Shiller index in June saw that prices were even from a year ago. But as you alluded to, you know, while as zero change from a year ago doesn't sound like a big deal, it's really signaling a market ship because that comes off of a few months of declines in your over year prices. So we're seeing prices go even and we expect that they'll gain a little bit through the end of the year.
Yeah, where are you seeing this trend most pronounced? I should also should point out, I know we have a radio audience here, but I'm looking at our case show index. We are like almost exactly the same level that we were in June of twenty twenty two, and that was a high on the chart. So where were we seeing most of this strength?
Lie?
Yeah, so places like you might not expect places that hadn't seen large increases in the past, Chicago, Cleveland, though I'm going to throw Miami in there that has seen some large increases, just areas that were had lower increases. But also we're relatively cheaper than the rest of the country.
You know, we're seeing the strength there, but we're still seeing weaknesses in parts of the country that saw really outsized gains in twenty twenty two, like Denver, Phoenix, and San Francisco and Seattle.
We know that tight inventory was clearly an issue well before the pandemic, which particular regions across the country, or when it comes to home buyers trying to battle it out to try and and find some of these houses or having it harder more so than others.
You know, it's really an asia life phenomenon. And you can think of mortgage rates are really what's driving that. You've got the majority, probably about ninety five or more percent of current owners have a mortgage rate that it's really well below what the current rate is. So they just aren't willing to give up their mortgage rates unless they have to, and they're not putting their homes on the market, So that's really hitting the entire country.
What I'm curious about is how much will that benefit homebuilders, which really we're struggling after the housing crisis. But when you're thinking about especially those stocks have been on a tear this year with those anticipation from poorly managers that
they're going to continue to have to build. There about the dynamic when you're looking at particular builders, say maybe like a deor Horton or Lenar, maybe they're catering to a particular type of income demographic, whereas what about maybe lower income households.
Well, one of the things that the builders have going for them that's that's helping what you said, have their stocks on a tear is they're able to buy down mortgage rates for buyers, so they have some flexibility there and can charge buyers a lower rate where you know resales you're just not going to get that same phenomenon.
Yeah, I think you look at Lenar, d R Horton, they're offering five five and a half percent thirty year fixed rates, I mean, and then and then you look at the average Freddie mac right for a thirty year fix to seven point two three last week, it's just nuney, I mean, I wonder if there is any inconsistency in that sort of data, just because so much of the purchasing is really happening in the new home front rather
than the existing home. You know, should we believe the seven point two three rate that we're we're seeing Molly.
Yeah, I think when they're reporting those rates, that's what they are generally offering.
It's not necessarily what people are taking up.
So that's the rate that's offered out there. And if builders are able to buy that down by one two percentage coins, it sounds like then they're going to gain a relatively a large share of this market.
You know, what also surprises me is just how much household formation there is that these people feel that they need to take advantage of or just need to go and shell out for these seven plus percent fixed mortgage. What do you watch for their any any trends you can tell us about across the people that just are simply making that decision to go buy homes.
Well, the thing is, while we do have these really high mortgage rates, you know what's driving that. That's inflation, and what's helping drive up inflation, but really great job growth. And that's why you see people who are still willing to go out there and buy homes at these mortgage rates. You know, if they're able to find what they want where they want it, they could see that mortgage rates will most likely come down in the next couple of years.
And you know, we keep talking about the thirty year fix rate, but you know they might be opting for an adjustable rate mortgage, which we keep their monthly payments down as well.
What's the level when you're looking at the rates, whether you're looking at fifteen thirty year here as far as when you think it might be a potential breaking point for Americans.
A lot of them are at that breaking point now. I mean we've seen that's part of the reason why home prices were so weak last year through most of twenty twenty two and into twenty twenty three. That has to do with the high martgage rates when somebody's trying to get in. And you know, previously, when rates are around three percent, you know, housing was pretty affordable, even
though you have home prices shooting up. But you know that just all came to a halt last year when margage rates started going up.
You know, it was interesting to hear J Powell talking about how he expects shelter costs to fall. And you know, even though a lot of this is rents, if you have high home prices, you're gonna have higher rents, right or is there something I'm not seeing here?
Well, so that does you know, that does get into a kind of a technical detail of the way inflation's measured, and that is as a lag. Right, That's right, that's right, that's prices exactly. There's about a one year lag. So we we do measure rents as well core logic, and we saw rents coming down about a year ago, and you are now.
Starting to see that shelter index start to come down.
So they know that those those decreases from last year are going to flow in through the inflation numbers this year.
But it's not necessarily good news for people who want to go out and rent an apartment.
No, just because you saw things come down year to year, there's still quite a bit from twenty twenty, so we're not you know, with home prices coming you know, seeing declines last year. Rent saw some declines last year. They're just not going to get down to that level we saw before the pandemic.
So we only have about a minute left. But when you're looking at this latest data that you have with home prices, Chicago still remained in the top spot there. Why is that.
You just have some It's like you see in the ones the places fall off that had the really outsized games last year, and you just seeing the metros on there that just keep plugging away at the kind of relatively moderate rate of fourty five percent. So it's more that everyone else is falling off than they're seeing the resurgence.
All right, Mollie Basil, Principal Economy is at core Logic, joining us on zoom to discuss the latest findings in that Core Logic Key Shuler Home Price Index. It's always a pleasure speaking with you, Molly.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy.
And I'm Fall Sweeney. I'm on Twitter at pt Sweeney.
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