Markets, Inflation, And Volkswagen (Podcast)

I think it's gonna be kind of important this Wednesday to hear we uh, you know, see where we're gonna get from our federal reserve. In the markets is certainly paying attention as they are to earnings as we get into the real meat of earning season this week. Rebecca Felton, senior market strategist for Riverfront Investment Group, Richmond, Virginia. She is a like myself, an alumnus. Are alumni alumni from the University of Richmond And Matt, do you know what

the University of Richmond mascot is? Sorry, University of Richmond mascot. I don't know, like a like a uh Southern soldier spider a spider. Oh yeah, I should have known that, right, Rebecca, people out there, we don't have to share a mascot, do we, Rebecca, No, do not? All right, Rebecca, what are you telling your clients? Uh? You know, as we kind of get into this earning season, get its more color from the frontal reserve, what are you telling your

clients about these markets? We've had a little bit of a lift off the bottom, but I'm not sure what to make of it. Well, thank you all so much for for having me this morning. We're a little more cautious than the last time that I spoke with you all. We've actually the only asset class that we are overweight right now in our balance strategies is cash because we

are cautious. Um at this juncture, you know this, This is a busy week with the f o MC Durable Goods g d P and a hundred and seventy companies or so or reporting earnings. So there's a lot to digest, and we think it's going to be volatile and potentially to the downside. It's interesting. Um, So this meeting, we all expect seventy five, right, and the question is how far does the FED go and when, if at any point,

do they turn around. I heard Stephen Englander on surveillance this morning, say he thinks three percent is going to be the terminal rate and then they'll hold for five or six quarters, which is an outlier forecast obviously, but um.

We also quote Vince Reinhardt in our Bloomberg story he thinks the Fed's gonna go over five percent UM and then turn around at the end of what do you think and how important is that, Rebecca Well, I think those expectations are are very important as it relates to folks forward, you know, projections for what the market should be valued at. We believe that the Fed is going to keep their foot on the accelerator given what their

inflation target is. UM. We know that they are looking for a number of four or better in terms of four or lower. And here our last uh you know, the last print was nine percent, So there's a long ways to go between nine and four, and we just don't season letting up on the tightening anytime soon. Rebecca. You mentioned that this is a busy, busy earnings week.

We got some big tech companies as well as General motors tomorrow that Matt pays close attention to because he's still waiting for his Chevy, I don't pick up trust Silverado, Silverado pickup truck. Whatever. What are you looking for, Rebecca from earnings here? What do you and your team is

really focusing on. Well, the headwinds that we are particularly looking at this week, you know, from big Tech with almost six of their revenues coming from overseas, we expect to hear a lot of worries about the strength of the dollar and how that's going to hit earnings. Uh, the inflationary pressures are still the big buzzwords. You're seeing more and more companies talk about layoffs, hiring freezes, were sending job offers. So there's a lot to be worried

about in terms of what the tone is now. Earnings themselves have been coming in a little better than expected, but the energy sectors is the one that seems to be driving that poplin headline number for earnings growth year over year. You have about six sectors in the SMPS.

There are forecasts to have lower year over year numbers than last So that is problematic when you think about the fact that net net earnings are still pretty much where they were at the beginning of the year, in that eight percent range for consensus and we think that that is vulnerable at this point. Yeah, too high. What what do you need to see to get less cautious, Rebecca, I mean in terms of earnings outlooks, in terms of valuations,

in terms of the federal reserve. What what do you what kind of picture do you need to have before you can put more of that cash to use? Well, we need um. The one thing that we need to go down is inflation, right, But some of the other economic indicators that have been following we'd like to season stabilize. Right. You're seeing the housing numbers start to turn over, some of the most recent employment week to week numbers. Even though that unemployment rate has come down, we're seeing some

of those unemployment numbers continuing to pick up. Um. So there's a lot that needs to stabilize to the good before we're going to get more more positive on our outlook for equities at this point. Hey, Rebecca, When you and I were in the Robin School of Business at the University of Richmond, doctor Earl did not teach us that bonds could have double digit declines in the first six months of a year. But here we are, is that time to just say I just gotta buy credit here,

I gotta buy bonds. I gotta go along. Well, we have actually, for the first time in a while, increased our allocation two fixed income. We're more neutral there than we were um and we've kind of spread out the allocations. We've got some treasuries, We've obviously got some investment grade, but we've added back some high yield because we think that it sort of pays to wait here and we are not concerned at this juncture about you know, credit quality and that sort of thing in terms of defaults.

So we we've added back and were neutral, and it is it is more tractive now than it's been in quite some time. All right, Rebecca, good stuff is always we always appreciate getting your perspective. Rebecca Felton, Senior market strategist. River Front Investment Group And what river does it front? The James River, The James River in Richmond, Virginia. And if you haven't been to Richmond, I have noted down.

I would like to check that out. It's very cool, lots of history, lots of really nice I've never been to Richmond, I've never been to Charlotte, I've never Inville. I've never been to Chapel Hill. No, I'm just thinking of all these sort of southern supposedly beautiful places that I still have to check it. I've never been to Savannah, another good one, Charleston, all down there in our beautiful southeast.

Ho was Rebecca Felton from river Front Investment Group. Al Right, I'm looking at i end go the index browser on the Bloomberg terminal. Total corporate bond returns year to date minus twelve percent, just extraord on the high yield side, uh minus ten and a half percent in the US corporate So a lot of work to be done there from our fixing. Wait wait, wait, global high yield. I'm looking I'm looking at US Okay, because I'm seeing bigger

drops globally right alright. Bloomber of Markets today is brought to you by Commonwealth, supporting more than two thousand independent financial advisors with the solutions they need to grow with thriving business. Commonwealth Go where you grow. Visit Commonwealth dot com to learn more. So again, tough tough sledding year to date in the fixed income markets. What are those folks doing here? How are they positioning themselves for the second half? Stephen O Global head of fixed Income at

Pinebridge Investment, joins us Steven. Have you ever seen the first six months of a year like we had this year. Well, it's certainly been in an extraordinary year, not only in fixed income, but I would say across all ethic class markets. Although in many respects I don't know that it was completely unanticipated, but I think the magnitude has been surprising to everyone. And what's you think people expected this um maybe got on the right side of the trade short

I think I think they expected. Component was the fact that if you go back to prior several years post COVID, I even pre COVID, you know, asset prices from the risk asset standpoint have been buoyed by central bank liquidity injection into financial markets. And so you know, unlike traditional cycles where if the key driving impact of asset prices is to push by central banks globally to add liquidity into the system, at some point, if the conditions existed

were by they would withdraw that liquidity. Then you had conditions set up entering this year whereby you would get both a sell off in risk assets as well as in risk free government bond assets overall, so you you had synchronized to the downside as a reversal from what we had seen, which was synchronized to the upside. All right, even we're gonna hear from our federal reserve this Tuesday. I'm sorry with this Wednesday, two pm Wall Street time,

we'll get a press conference at two thirty. What do you expect to hear from your federal reserve? You know, the Fed is not going to make any surprises, and I think the market is not focused on what they're going to do with respect to rate hike. I think what the market is watching for is house or tone potentially shifting in terms of the level of aggressiveness going forward.

Uh and in particularly whether there will be much in the way of acknowledgement of recent data indications that appeared to indicate that the impact of the rate hikes is starting to filter through into a demand withdrawal and the rising risk of a recessionary type of bus scenario which would pull back their pace of rate hikes overall. And and that's in part what's been driving the market to

rally recently. It's sort of this adage that slightly bad news it's good news because that would result in the FED slowing down. So where do you see the FED um stopping and turning around? Because it seems like forecasts are all over the map. Although the shape that's generally expected is, you know, hitting the terminal rate at some point next year or at the end of this year and then coming down before you know, there's sort of the near term. What do we think is the FED

is going to do in this cycle? And what do we think is the longer term policy path that may diverge from this cycle overall? And as you note that there is a quite a divergent set of predictions forward and I think you said that there's some strategies that are talking about four or five type of level policy rates. We think that is a such an incredibly unlikely scenario.

And in fact, if that scenario played out, you know, I would say the tenure is going to trade below two percent because I think there would be an expectation of a very very hard landing, which we're not going to get to. Overall. You know, our base case expectation is that the FED is going to continue its path, but after this rate hike, they are going to flattle down, uh and toward a glide path towards somewhere in the

low three percent type of level. But that's for this cycle. Uh, And I think longer term, the FED is not going to be maintaining a average new tol rate with a three handle on it. But we will be back into the tubes. I will say, I was quoting vent tryinhard earlier. He thinks that the FED is going to raise to five percent or higher and that unemployment UM could rise to six percent. So that's pretty worried s outlied to me. Yeah, but that's nice to note though. Stephen Oh, global head

of fixed income at pine Bridge Investments joining us. We appreciate that um that is undergrad from Wharton. That's pretty good, NBA from Northwestern, everybody I know we got there in Bay for Northwestern's pretty darn smart. And Stevenough it kind of falls into a camp. Speaking of Volkswagen, this has been a story that has been blowing my mind all weekend long. Christoph ralpha Al joins us out of Frankfurt.

He's the bureau chief UM for that office, and he's also my go to guy when it comes to Volkswagen anything I want to know, my go to guys, So he's your go to He's he's the top guy. Christoph is the man, Um christop When when I saw this news, I was on the subway heading heading downtown, and I almost fell off the bench. Um. I know that there's been a lot of uh friction between Die and the workers unions and the state of Saxony, but that seems like that's what that's what you're supposed to have in

that job, right. Um. What I didn't know was that he was failing at execution in terms of delivering software for important new product like the Porsche mccan, the electric version of the mccan. Is that what finally drove them out? Yeah? Hi, Well, first, first of all, thanks so much for the very kind introduction that that's that's in crete, the kind of you you're You're totally right that that story did come on broke on Friday evening, pretty much out of the blue Friday,

even in European time. We knew there have been quite a bit of friction about like how the how the the way how he runs the company. They have been facing software issues, uh for for for a number of months or already, but we weren't quite aware that the problems would create so much internal unease basically within the group that would that he would actually be pushed out,

because that's essentially what happened. Basically, the keys takeholders decided we need a fresh start under a new leadership, and therefore Mr ds, who has been credited with Folkswagen strategic realignment towards electric mobility with effectively UH yeah outs it. So let's talk about what this means for the company, because you have over the past few years done such

incredible reporting on what Herbert Deece was building. Their investments planned of more than ninety billion dollars to change this internal combustion car maker into an electric sort of software engine um and battery maker. Is that going to continue? Is that going to go forward? Or is his successor Oliver Bloomer, going to have to put together a whole new plan. No. I think we can definitely expect that

the strategic direction will continue. The will basically stick to their goals to sell far more fully and partly electric vehicles in incoming years. They're building six battery cell factories in Europe alone, plus looking for a partner to build a bettery sell factory for the US factory UH in Chattanooga, Tennessee h and other projects in China. So it's it's basically a pretty wide range of different initiatives and investment programs.

Those we can expect to remain unchanged. What will change, though, I think, is that there's going to be a much stronger focus and and and sort of like an improvement in terms of like tracking the operational progress of these individual efforts rather than saying we need to do this, we decide on like the strategic direction, but then sort of like not following up and making sure that these that these projects actually come to life on the assembly

line or in the respect of factory. Is it basically I'm I'm assuming that some Porsche and Peach family members were like, damn it, he's not delivering the macan. All right, Let's take the CEO of Porsche, Oliver Bloomer, and put him in charge of the whole thing. Then he'll produce

an electric Macon. Is that the idea? Yeah? The problem there was that basically under the new structure that these has initiated, Porsche was sort of dependent on a centralized initiative to the develop car software for all all different brands within Volkswagen Group, which included and still includes portion, and that I think was was one big point of criticism that to sort of like take the autonomy to develop their individual software away from the brands and expect

that one unified division within the company can serve all the individual brands that did not work out. You mentioned the fully electric Macan which is being delayed. Audikaras are delayed.

Folkswagon cars face delays and that's something that they can't afford going forward, and I think that's basically why they decided to make a change in the leadership position, Right Christoph, I'm reading some of the reports coming out of Wall Street on this news, Bernstein saying, and I think they're kind of mixed generally speaking, Bernstein saying, Volkswagen is making a bad governance situation even worse. What do they mean

by that? Yeah, they as as you know, Volkswagen has been planning to do a an I p O apart listing of the Porsche sports car brand on the frankfort Stock Exchange in the fourth quarter this year. So the goal to go ahead with this plan was basically to give Porsche more autonomy within the Volkswagen group. Now that that's a slightly different or complicated narrative to deliver when in fact the guy who runs Porsche will going forward

also run the mothership. Uh, that that's probably needs some more explaining to do so that all the analysts and investors actually get on board and at the moment, because I mean the development is still pretty fresh. It was decided on Friday. Took many people by surprise, including some of the Supervisor Revolt members. But that's definitely something that they need to iron out and and explain to external

investors as well. Yeah, why would you want to buy Porsche shares if the guy is going to be distracted by also running Folkswagen, Bentley and Ducardi Gooda. Uh, you know, it goes on and on and on. Um and they have I thought we're a thousand employees. They have six hundred and sixty eight thousand people working there. Kristof, that's

way too many. Can they reduce headcount? That has been a traditionally very difficult for a company like folks bark and they've actually added more headcount rather than cutting it down. They've done more sort of components and parts in house than some of the other car parts maker car makers who have like outsource some of the manufacturing two car parts suppliers. Folks One does a lot of a lot of things and a lot of operations in the house.

But of course from a head compuspective, it's it's it's a very very big company and they will definitely need to streamline some of the operations, especially in the whole like combustion engine world. All right, Chris, thank you. You're the go to person on voltswanking socios Matt Miller and I thought he was the go to person, so you must really be the go to Personally appreciate gett your thoughts. Kristof Rovald Bureau chief frankfort and Munich bringing Annawa, chief

US economists for Bloombrick Economics. And you've got an inflation call you guys at Bloombrick Economics. I'm gonna blame you as an entire group. Uh, you've got a high inflation outlook.

Talk to us about how you're thinking about inflation, right, so, um, you know, And for for forecasts this year, we usually use a bottom up approach where we're looking at the price trajector of cars and uh clothes and housing rents um and using that approach, it will tell us that um inflation CPI headline will likely be hovering around eight percent or or slightly more than that until October this year.

So UM, and then looking forward to next year, then it's harder for everybody, right, because it's hard to know what's gonna happen to oil price or even car prices next year. And then we use a model based based approach. Then UM. You know, one of the problems of inflation forecasting is that there's a lot of uncertainty over it, particular lea since the pandemic, and even the way that the Fed look Fed looks at it, they consider this

risk to inflation. Right, So our model takes into account this uncertainty and this risk, and we forecast basically the entire distribution, like what is likely going to happen? Instead of asking what is the inflation rate going to be next year, we ask what is going to be the

likely distribution of inflation rate next year? And using as input oil prices, on employment rate, federal funds rate, we forecast the distribution, and that is telling us that the chance of inflation falling below four percent is very very splint slim to minimal. Get the most importantly because I have a bet with Critty Gupta that last month's headline cp I print was the peak. Am I going to win that bet? Or will we see anything higher than

nine point in the next couple of months? Well, you know, this is an interesting things. If you look at the mean forecast right now for headline CPI, it looks like that's the peak. You seem to have one. But if you look at the distribution of risk and think about the past year, we're half the surprises can to be, is it? So what we see is that the monthly inflation rate in the next two months has to be perfect, meaning that I cannot be lower than where the consensus

is there cannot be more shocked supply shocks. If that's the case, then you you are winning the bet. But if not, we could easily see another peak around our August or September. What do you expect from the Federal Reserve this weekend? We expect seventy five fits. But um if again in the Fed has switched to a risk management way of looking at the world, and that's what our inflation model of you know, modeling the entire distribution of inflation, which suggests that yeah, it's likely that that

that the peak has arrived. But you just given the kind of risk that and uncertain we have seen over the past years, just not wise to assume that that baseline would be the short thing. So will they give us? Will J. Powell give us any hint as to what's coming? I means is whatever he expects for this meeting, The important thing is what happens at the next meeting he will I think he will stay on the message, which

is that the said will be data and data dependent. Um. And there seems to be some progress on inflation front. We are seeing commodity price coming down, but we cannot assume that that is for sure it's gonna happen, and that the FED will continue to tighten until he sees a string of inflation decelerating report. We do have at least two months though, are about two months until the

meeting after right, because they skip August. The um that's intelligent, by the way, everyone in the world should be that civilized. And then they don't come back for a meeting until September. I think, Um, will they have a clearer picture? By the way, then then then they don't come back until November. Will they have a clearer picture by September you think of of the inflation risk. Yeah, so there will be

two CPI report before the September meeting. There will also be two jobs report before that meeting, and one of those CPI report will be weak because we know the July print is going to be soft. So then it depends on whether the August print would be um, you know, uh,

it would be soft as well. And it seems like based on the behavior of commodity prices and where you know, the the economy is cooling really rapidly, there's a good chance that August would be you know, not like one percent monthly run right, rather would be around points you know, five or point four even um monthly rape. So I think that that you have a good chance of winning your bet. But but I still think that anything could happen.

And you know what if we have a hurricane again, because assuming that the hurricane season usually begins late in the summer in the US, and if you get a refinery Sorry sorry, I was just well, the weather people are actually expecting a very active season hurricane season this year, and if you have a refinery point hit by another hurricane in August, then I would say, yeah, all bets are off on map. Go is when you need that map. Go yeah, and see where the refineries are. You know,

coming hurricanes. All right, Anna Long, Chief US economist Bloomberg Economics. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Put on false Sweeney I'm on Twitter at pt Sweeney before the podcast. You can always catch us worldwide at Bloomberg Radio