Fed Watchers Will Look For Clues On Hikes, Wages, Trade War

I really want to start with bank earnings. We've got Goldman Sachs as results. Uh. Interestingly, the reaction has been decidedly mixed, even though they beat by quite a bit on the top line revenues. Yeah, some concern with what's going on with their equity trading business. That was a weak spot in terms of revenue. Of course, you got a management transition. It's understatement of the year management transition. Yeah, Boss, Well, it's a process, okay, I mean it's not going to

happen right away. We know that Lloyd blank Find will remain CEO and chairman until October one. We'll give up the CEO job to President David Solomon. Then by Rand will step down as chairman. Solomon will take that job. So yeah, it's a transition that it's in something that's been talked about for a few months. So it's not

surprised that, you know, it's like anything else. It's you know, it's change coming to Goldman and you know people tend not to like change very much, and that would explain at least in part the stocks slide in early trading. Also a big big mover today Netflix They were portty disappointing earnings after the bell yesterday and they are just getting hammered and bringing the nasdack down. UH shares? What it? What's the latest with the shares? They were down, well,

they're down a bit more than ten percent. But what's interesting, though, is if you go back and look at the history of Netflix's move was after earnings reports, this is not a surprise at all because you know, on average the stock up or downcent going all the way back to two thousand seven h the day after earnings, and you know, today we were down at the low's fourteen percent and change, and Netflix is actually making some of that back and

now the stock's only up eighty seven percent. For the year, which really tells you, you know, what's happening here as much as anything is a bit of a buy. The rumors sell the news, even when the news isn't something. I'm just gonna get you what's going on in the bond market, which is basically nothing. Uh the ten year at two point eight five percent, though the uh, well,

the two year at the two point six percent. I want to bring in Carl Rickadonna, our chief US economist for Bloomberg Economics, and Matt Posler are Bloomberg News reporter who covers the Federal Reserve, And of course we are awaiting Jerome Powell, Chair of the Federal Reserve, and his testimony before a Congress. Um, Matt, what do you expect him to say when we've got the prepared marks? But I mean, is it really going to say anything that's

gonna be market moving? Well, that's a good question, you know, I think, Um, maybe if they start getting into some more detailed questions about the Fed's plans for interest rates this year and next year, you know, there's a big question about Um, the Fed kind of sees there's this neutral interest rate that they think once they get to that neutral rate, then um, you know, they will no

longer be stimulating the economy. And so the big question for next year is once they get to that neutral rate, which will probably happen next year they think it's around two, then do they keep going and actually starting to outright restrict economic growth because they're worried about unemployment being too low,

um and maybe inflation you know, going higher. So we don't really see any indication that j. Powell and these prepared remarks really feels like that's you know, going to be necessary because it's going to be asked about the trade war. Yeah, so that's uh, that's also something that you know, could could definitely have implications. He kind of, you know, very briefly touches on it in these prepared remarks, but doesn't really say anything you know, about what it

means in particular. So that could be interesting line of questions as well. Carl, come on in here. We're going to be a lot of questions also about the labor market, which is sort of confusing. We have this very low unemployment rate and really muted wage gains. How could he be surprising on this? I mean, do you think that he's going to say anything of note here well, in the prepared remarks, he says moderate wages, say the job

market is not causing high inflation. So I think he's going to echo this theme that maybe there still is more slack in the labor market than what the three point eight or four point zero percent unemployment rate, that what otherwise have you believe? And I suspect he'll play the role of economic cheerleader in terms of indicating that death through the fence policy and maybe also tipping his

hat to tax reforms. We're actually seeing labor force participation potentially at least leveling out, if not the edging higher as a strong economy, as coaxing workers back in office sideline in plain English, the participation rate. One thing that people talk about is why has the unemployment rate for working age men in particular remained higher than it was right before the last downturn, and particularly the prime working age men in the US. And people are wondering, you know,

is this because of the opioid epidemic? Is this because of the high incarceration rates? Is because because of discrimination childcare costs? Um do you expect him to to sort of weigh in on that at all? I mean, does that matter from economic perspective, certainly from a social perspective it does. I think those are all factors, but I think even more importantly as the dynamics of what has been driving the economy. Uh. And so what you certainly

see uneven distribution of employment by sectors. UH. For example, the construction sector tends to hire a lot more males and females. And certainly construction activity has been a aggered in this cycle as the housing sector really struggled to recover up from the bust. And so, you know, everything you mentioned is correct, But I think also just the composition of growth is a very relevant He'll probably be asked about this. I don't think that there will be

upmarket moving responses. Uh. You know, as he'll he'll cite many of the factors that I've mentioned. Just now, Matt, what if you could just comment on some of the other FEDER officials, For example, Neil cash Cary recently talking about the yield curve. Do you think that the chairman power will get questions referencing Neil cash Cary. Yeah, you know, I can't imagine the yeld curve is to top of

mine for a lot of these senators. But on the other hand, it is you know, a three hour hearing, right, So, I mean that is something that could come up, um at some point. Certainly it's the talk of the town on Wall Street. Everybody's looking at this yield curve flattening almost flat. Um. Obviously historically, uh, that has sort of been followed by recessions, and so low of people are

worried about that. I mean. The interesting thing about FED officials talking about that so much is, you know, to some extent, they do control not only the short term interest rate, but where that long term interest rate settles as well, because if you think it's sort of the average of you know, expected short term interest rates over the next ten years, then they can kind of affect that.

And so if you look at their long run neutral rate that we were just talking about earlier, that's right between two seventy five and three percent, that's exactly where the ten year yield is as well. So UM, I think the FED, you know, FED officials kind of need to think about the yield curve and and the extent to that to which that is just reflecting what they're telling people they are going to do with interest rates and whether that should really be so concerning to them.

Um that markets seem to be getting the message. All right, Dave come back in here with respect to equity markets, do you expect them to have any reaction to anything that fed Powell could say? For example, if he says, look, uh, we don't necessarily think that the yield curve of a setting the same signals that has in the past. We're gonna keep raising rates at a study uh and slow pace, but we're going to stay on our trajectory. What does

that do to ataquities? Well, I mean, there is certainly the potential for a movement, although let's face it, Uh, you know, the chair power would be perfectly happy if nothing moved. In response to what he was saying that he's simply reinforced where people are going in in terms to in terms of interest rate policy. Here, I mean, just to give you some idea, we so sort of a brief flip up to the highs of the day, and he has some P five hundred after those initial

headlines came out. Uh, and now you're you're seeing stocks and bounce around. Uh. Still not quite higher, though they've made up a lot of their early losses. So you know, if that's the outcome, then I suspect the policy makers would be perfectly happy with that. Matt, just a little bit about inflation. Uh, milk, eggs, bread, You've been following the basics, Yeah, absolutely, so you know that's uh, that's

really good news. Right. So the prices of milk, eggs and bread, as you mentioned, seemed to be coming down a lot, and so that was a really big criticism of the Fed in the early years of this expansion, when we did have a little bit of inflation, it was a lot of that um, you know, uh inflation that was driven by dollar weakness. It was really hitting you know, low end consumers right where it hurt the most,

and the grocery basket. And so while the Fed was saying, oh, you know, we have to keep policy easy, Um, we're not worried about inflation, everybody's looking at their grocery bill and saying, well, you know, how can you kind of be taking this position and build Dudley famously got in trouble when he said, well, you know, look at iPads, right, the price of those has come down a lot. And he said that in twenty eleven and someone at the town hall said, well, you can't eat an iPad, so

that certainly is not the case anymore. It's an interesting kind of Yeah, I mean, Carl coming on the US economy if you can. Industrial production report out today for the month of June. Estimates were for a gain of a half a percent, actually up six it actually top Actually manufacturing was stronger. But we have to really pass through the details here because there was a fire at a part supplier in the auto sector, and so we saw a swoon in May and then a sharp rebound

in June. The moral of the story is the Q two factory output data looks good. Uh. The Q two consumer spending data look great. Uh. And we're looking at a quarter that will probably a register g d P gain of if not in the high threes, maybe even in the low four percent territory. But we shouldn't get too excited about one single quarter because we will see a moderation in the second half of the year. Uh. There's this usual whipsaw between a week Q one and

we have to break in here. A Jerome Palifa draw Reserve chair is now starting his testimony before the House. Let's listen in Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm him Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramowits one before the podcast. You can always catch us worldwide on Blueberg Radio