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 moven news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. All right, let's talk about the global energy space. I'm looking at WTI coude oil a little bit higher today, about six to nine dollars about. There's a lot going on there. We got some deals going on there. We got Netherlands closing a gas field when there rushes at a war with Ukraine. I have no idea what's going on.
Scott Levine does, and Fernando vli He also does. They both cover the energy space for Bloomberg Intelligence. Fernando joins us via Zoom and Scott Levine is here in our Bloomberg Interactive Brokers studio. So Scott, let's start with you here. We've got an m and a deal in the energy space, in the shale space. Talk to us about what's happening today, Yes.
Paul, So basically what we have is Patterson Uti, which is the number two land driller in the US buying or merging with you look at it a company called Next Tier oil Field Solutions, which is a top four player in pressure pumping. And you know, basically Patterson has been rumored to be disinterested in fracking over the years and will effectively be the number two player in both spaces and really the only major player in both fracking
and pressure pumping. So this is probably the largest deal that we've seen since twenty twenty, and you know, raises a lot of interesting questions about what we're looking at in a potentially slowing shale market.
Fernando, I want to bring you into this conversation. What's your take on oil demand growth moving forward?
Well, I think there are two paradigms. The short term, where you know, as aviate I was saying about interest rates and impacting demand that ultimately will translate into lower oil them in because of lower consumption. Oil still used in the majority of our transportation, especially for industrials and for all of our retails.
So if that.
Is at a lower level because of higher interest rates globally, then oil demand should also falter. But then in the longer term. You know, we saw the E I E I should say, coming out with their prediction that peak oil demand is within the decade.
We're a little slower on that.
We think there's still a lot of hurdles to clear before we can start weaning off of oil. You know, as a reminder of five billion people in the emergent market still consume a very small amount of still consume a very small amount of energy, and oil will be critical in improving their standard of living and continuing to grow.
Hey, Scott, when we see an m and a deal of this size and this magnitude in the shale space, what does it tell you about kind of where we are in the cycle, where the next several years of the shale business looks like because it's been such a growth area for domestic US energy.
Yeah, no, I think it clearly suggests that we're heading in the wrong direction here. Really, the rig coount has fallen close to ten percent this year. I think the messaging initially was that it was due almost entirely to pull back in natural gas drilling resulting from the collapse seventy five percent collapse in Henry hub prices. You know, the messaging was that we'd see a strengthen the oil side compensating for the weakness and the gas side, but
we've yet to see that in the rig counts. Recounts have gone down by almost fifty rigs in the last month or so, and so the appeal here, you know, more than anything else, seems to be the two hundred mill and synergies that Patterson will realize on this deal.
And so while seventy dollars oil is not the worst thing in the world for the industry, given some of the broader macro concerns that are out there, this suggests to me that we're heading through a slow patch at a minimum, and that you know, this is more of a defensive deal than an offensive one.
Do you have a particular target, Scott when it comes to if you're looking at US CREUD prices versus BRIN at year end versus what those could be at the end of twenty twenty four.
Yeah, No, I think the expectation, you know, would be that we're about at and Fernando probably can elaborate on this a little bit more as well on the oil side, that maybe we're looking at stability, maybe some slight improvement potentially, but I can definitely say that what we've seen so far this year in the US has been weaker than we would have expected, and I think anybody would have expected. And you know, I would turn it over to Fernando, you know, to elaborate further on oil price.
Specific Yeah, Fernando, what are your thoughts as far as the trajectory when you're looking at US versus Brent?
And we think, you know, you can't fight the FED right now. And we we along with Mike mcglowane, we have talked a lot about how we think it's lower at first, because the demand side of the equation is going to be the most important. We think opex cuts are lowering the supply of Brent. That's widened the differential
between WTI and Brent. And then now we've had a small amount of acquisitions in the strategic Patrol and reserve boosting that wt I demand a little bit, So that's widened that gap, and we think we could go above five dollars a barrow, maybe five point fifty in the discount between WTI and Brent for the remainder of the year.
Hey, hey, Fernando, I see in a news here that our good friends in Holland are closing Europe's biggest gas field. What's going on there? Don't they know? There's war in Ukraine and gases short? I mean, what's going on there?
They do?
It's long been planning a plan to close the Groningen field, as you said, the Europe's largest field, because of earth tremors in the Netherlands. They actually were supposed to close last year and they've extended it because of the war. But now with the inventory is refilled, they feel more comfortable closing that closing that field, you know, it's probably
not the greatest decision from an energy security standpoint. Perhaps a little bit of security again false sense of security because we had such a mild winter this past year, and it definitely makes Europe lean more on USLNG imports.
Hey Scott, just real quick thirty seconds. Are we going to see more emine activity and kind of your space the energy space?
Yeah?
Now for services, I think we may see some more activity, particularly in the US. All you know, this is again the first survey, This is deal that we've seen in recent memory of a public to public as opposed to the EMP space where has put a ton of deal making. So particularly if the outlook continues to deteriorate and rigganfraccounts move lower, I think you could look for an increase an M and A activity from here.
All right, guys, thanks so much for joining us. Love getting that roundtable on global energy. We've got some M and A going on there in the services side in the US, and we've of course got the global supply and demand for energy. Scott Levine and Fernando Valle, both senior analysts covering the energy space for Bloomberg Intelligence, joining us here, so we appreciate getting their thoughts.
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Jess Man, Paul Sweene here in the Bloomberg Interactor Brokers a studio, want to get right for our next guest, Eric Lynch. He's a managing director part of the investment committee at Sharf Investments are based out there in the West Coast in the Bay Area. Eric Joins is live here on a Bloomberg and Active Brookers studio, Eric, thanks so much for joining us here, boy, twenty four hours. We've had a lot of ego data, a lot of central banks to Federal Reserve yesterday, the ECB today, they're
both talking tough here. How do you guys in Shriff Investments put it all together and think about what you want to do for your clients.
Yeah, it's a great question. Thanks for having me, Paul. You know, I think this is a great reminder that as investors, it's important to remember to follow this signal, not the noise, and signals earnings. Right, we're already in a three quarter kind of tracking earnings recession. And so even if the FED is going to go higher for longer interest rates, and I think FED made it quite I think the FED made it quite clear yesterday that they will slow things down. So we think earnings are
going to be restricted going forward. So, you know, I think it's time for an earnings playbook, if you will.
So I'm glad you brought that up, because especially if you looked at the S and P five hundred last year excluding earnings, or the energy sector in particular, when you were looking at that, the Arenas recession actually began in the second quarter of last year, So you kind of the flip side of that, where energy sort of masking some of the brighter times that other industries are
seeing there. So even when you were looking at that, there's an expectation when you're excluding energy that we're going to see double digit growth again for those other sectors. Where are you in particular when it comes to some of these sectors looking that sees more bright spots?
Yeah, no, good question. I think there's three ways to kind of play this. One is to play this transition of spending consumption from goods to services, right. I think it's really interesting that investors are still a little slow to the draw on this. Last month flash PMI came out for services and manufacturing, and services blew it away.
Manufacturing was in a contraction, so as a leading indicator, we're seeing that also on the ground level, right with travel companies blowing away earnings and then meanwhile home depot target goods companies reducing guidance. So this kind of revenge travel, revenge servicing, elective surgeries. You saw the medical loss ratios increasing for the insurance under riders yesterday because the older folks are having revenge surgeries. And so that's a way
to get some writings growth for sure. Another way is I think just stick to defensive companies with low GDP correlation. The average lag between a recession and when the FED pauses since nineteen eighty nine four instrate cycles has been one year, and so I think it's a little premature to bake in forecast for a big earnings ramp going forward. And so I think it's still time to be kind of defensive.
Interesting because then your recession take would be you're expecting one to happen later this year.
It's hard to say. I think it's a full zerrand to time it, as we've all been reminded this year, right as we've been constantly looking around the corner for this recession to occur.
But where would it be driven by? I mean, I would think it have to be consumer spending, but we're not necessarily seeing that happen yet. Even retail sales this morning came in stronger than expected.
Yeah, no, they were very strong, and so that's definitely the boldcase. I think the baarcase would be, you know, I think the operative words in Howe's presser yesterday, where people are suffering, right, and I think we need to remind ourself that only I think the top ten percent of wealth in this country owns eighty percent of stocks. And so if you look at the FEDS mandates clearly
full employment or inflation, we're fully employed. So I think power made it clear that price inflation they're going to squash it. Historically, to answer your question, the only way to do that is to increase you know, unemployment slow things down, which obviously creates a slow down in consumption. So historically, yeah, employment is what precipitates a recession. And really the last general standing are in fact GDP growth and employment.
All right, So in terms of a recession or earning's playbook here earnings recession playbook, I kind of feel like there still may be some earnings risk left in this market. We still get the S and P five hundred. Earnings are two hundred and twenty bucks roughly for this year. Some people are saying it could be two hundred, maybe even below that. So how do you guys think about earnings recession and kind of how that influence is kind of what stocks you look at.
Yeah, I think we're still think there's risks to the downside to that two twenty five number. As you mentioned, you know, the issue there is that baked into that consensus is nine percent year via growth for Q four. It just seems a little unrealistic. It's possible, for sure, to your point, things were hanging in there, consumption wising that today's consumer spending numbers where we tell the sales numbers,
were interesting. But nevertheless, you know, we're a little worried about the impact the lagged effect of the monetary tightening, the credit tightening specifically, is probably going to in our opinion, starts going things down further as year progresses. The other thing that I don't think is giving enough play and investor kind of discussions is that the net profit margins seysm P five hundred are still at all time highs, and so there's been a structural increase the last twenty years.
It's been it's accounted for over half of ANNUIPS growth, and so if you look at that, it was low financial expenses, a global arbitrage of labor and supply chains, low transportation. All those tailwes are now headwinds. And then you had companies passing on price during the pandemic. So we topped out at thirteen percent on net profit margins
during the pandemic. They're down to eleven baked in that consensus number for next year is twelve percent, which should still be twenty percent higher than the level they were before the pandemic. So I think even independent of the economy, what you're seeing on a micro level with companies guidance is they keep referring to margins margins being kind of constricted going forward.
So I think that that's the real issue as far as especially when it comes to margins. Geenamoorton Adams at Bloomberg Intelligence was saying, some of the pain may have already been passed and potentially troughing in that first quarter moving forward. I mean, what are you seeing and what are you hearing from your clients on that end?
Yeah, I mean, just anecdotally, as investment managers managing a portfolio, we're still seeing margin kind of compression or discussions with our companies that are reporting on Q one, and none of them are really saying, hey, you know, it looks better at Q two Q three. Even wages. You know, if you look at labor as percentage of GDP, it really troughed a couple of years ago in terms of a fifty year low, and it's still a point or
two percentage points lower than average. And so you see that with the bargaining power of employees with low unemployment. So I think, I think this wage pressure is still there, and I think therefore that's what sixty percent or something of operating expenses. So I don't think we're done.
All right, Eric, great stuff. I appreciate you stopping by.
Eric Lynch.
He's a managing director on the investment community of Sharf. Sharf Investments based in Los Gatos, California, also the home of Netflix, little stock out there. So neighbors there in Los Gatos and kind of in the Bay are very very cool area out there.
Appreciate it.
Looking at the markets right here, S and P five hundred and a half of one percent, the NASDAK, I'm sorry, the Nasdaq is up about half and one percent as well.
SMB five hundred on track for six consecutive days of games. It beats longest streak since November twenty twenty one.
Running out a little bit too, it some of the market folks are telling us, which is good news. It's not just Apple and Amazon right pushing this.
Higher you're listening to the tape cans are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the 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 playing Bloomberg eleven thirty.
Just men.
Paul Swene here in the Bloomberg Interactive Brokers a studio. Want to get right to our next guest, Eric Lynch. He's a managing director, part of the investment community. It's Sharf Investments are based out there in the West Coast in the Bay Area. Eric Joins is live here in on our Bloomberg Active Brokers studio. Eric, thanks so much for joining us here. Boy, twenty four hours. We've had a lot of EGO data, a lot of Central banks to Federal Reserve yesterday, the ECB today. They're both talking
tough here. How do you guys in Sharf Investments put it all together and think about what you want to do for your clients.
Yeah, it's a great question. Thanks for having me, Paul. You know, I think this is a great reminder that as investors it's important to remember to follow this signal, not the noise, and signals earnings. Right, We're already in a three quarter kind of tracking earnings recession. And so even if the FED is going to go higher for longer interest rates, and I think FED made it quite I think the FED made it quite clear yesterday that they will slow things down. So we think earnings are
going to be restrict did going forward. So you know, I think it's time for an earnings playbook, if you will.
So I'm glad you brought that up, because, especially if you looked at the S and P five hundred last year excluding earnings or the energy sector in particular, when you were looking at that, the aarians recession actually began in the second quarter of last year, so you kind of the flip side of that, where energy sort of masking some of the brighter times that other industries are
seeing there. So even when you were looking at that, there's an expectation when you're excluding energy that we're going to see double digit growth again for those other sectors. Where are you in particular when it comes to some of these sectors looking that sees more bright spots?
Yeah, no, good question. I think there's three ways to kind of play this. One is to play this transition of spending consumption from goods to services, right. I think it's really interesting that investors are still a little slow to the draw on this last month flash PMI came out for services and manufacturing, and you know, services blew
it away. Manufacturing was in a contraction. So as a leading indicator, we're seeing that also on the ground level, right with travel companies blowing away earnings and then meanwhile home depot target goods companies reducing guidance. So this kind
of revenge travel, revenge servicing, elective surgeries. You saw the medical loss ratios increasing for the insurance under riders yesterday because the older folks are having revenge surgeries, and so that's the way to get some writings growth for sure. Another way is I think just stick to defensive companies
with low GDP correlation. The average lag between a recession and when the Fed pauses since nineteen eighty nine four interest rate cycles has been one year, and so I think it's a little premature to bake in forecasts for a big earnings ramp going forward, and so I think it's still time to be kind of defensive.
Interesting because then your recession take would be you're expecting one to happen later this year.
It's hard to say. I think it's a full Zerran to time it, as we've all been reminded this year, right, as we've been constantly looking around the corner for this recession to occur.
But where would it be driven by? I mean, I would think it have to be consumer spending, but we're not necessarily seeing that happen yet. Even retail sales this morning came in stronger than expected.
Yeah, no, they were very strong, and so that's definitely the boldcase. I think the baarcase would be. You know, I think the operative words in Pale's presser yesterday where people are suffering, right, and I think we need to remind ourselves that only I think the top ten percent of wealth in this country owns eighty percent of stocks. And so if you look at the FEDS mandates clearly
full employment or inflation, we're fully employed. So I think power made it clear that price inflation they're going to squash it. And historically, to answer your question, the only way to do that is to increase, you know, unemployment slow things down, which obviously creates a slow down in consumption. So historically, yeah, employment is what precipitates a recession, and really the last general standing are in fact GDP growth and employment.
All right, So in terms of a recession or earnings playbook here earnings recession playbook, I kind of feel like there still may be some earnings risk left in this market. We still get the S and P five hundred earnings are two hundred and twenty bucks roughly for this year. Some people are saying it could be two hundred, maybe even below that. So how do you guys think about earnings recession and kind of how that influence is kind of what stocks you look at.
Yeah, I think we're still thinking there's risks to the downside to that two twenty five number. As you mentioned, you know, the issue there is that baked into that consensus is nine percent year of VIA growth for Q four.
It just seems a little unrealistic. It's possible, for sure, to your point, things were hanging in there, consumption wising that today's consumer spending numbers where we tell the sales numbers were interesting, but nevertheless, you know, we're a little wororried about the impact the lagged effect of the monetary tightening. The credit tightening specifically, is probably going to, in our opinion,
start slowing things down further as year progresses. The other thing that I don't think is given enough play and investor kind of discussions is that the net profit margins stetsm F five hundred are still at all time highs, and so there's been a structural increase the last twenty years. It's been it's accounted for over half of ANNOIPS growth, and so if you look at that, it was low financial expenses, a global arbitrage of labor and supply chains,
low transportation. All those tailwes are now headwinds. And then you had companies passing on price during the pandemic. So we topped out at thirteen percent on net profit margins during the pandemic. They're down two eleven baked in that consensus number for next year is twelve percent, which should still be twenty percent higher than the level they were
before the pandemic. So I think even independent of the economy, what you're seeing in on a micro level with companies guidance is they keep referring to margins margins being kind of constricted going forward. So I think that's the real issue as.
Far as especially when it comes to margins. Genomorton Adams at Bloomberg Intelligence was saying, some of the pain may have already been passed and potentially troughing in that first quarter moving forward. I mean, what are you seeing and what are you hearing from your clients on that end?
Yeah, I mean, just anecdotally, as investment managers managing a portfolio, we're still seeing margin kind of compression or discussions with our companies that are reporting on Q one, and none of them are really saying, hey, you know, it looks better at Q two Q three.
Even wages.
You know, if you look at labor as a percentage of GDP, it really troughed a couple of years ago in terms of a fifty year low, and it's still a point or two percentage points lower than average. And so you see that with the bargaining power of employees with low unemployment. So I think this wage pressure is still there, and I think therefore that's what sixty percent or something of operating expenses. So I don't think we're done.
All right, Eric, great stuff, appreciate you stopping buy Eric Lynch. He's a managing director on the investment community of Sharf. Sharf Investments based in Los Gatos, California, also the home of Netflix, little stock out there. So neighbors there in Los Gatos and kind of in the Bay are very very cool area out there.
Appreciate it.
Looking at the markets right here, S and P five hundred and a half of one percent the NASDAK, I'm sorry, the Nasdaq is up about a half a one percent as well.
SMB five hundred on track for six consecutive days of games. It beats longest streak since November twenty twenty one.
Running out a little bit too with some of the market folks are telling us, which is good news. It's not just Apple and Amazon right pushing this higher.
You're listening to the Team Can't Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app and the Bloomberg Business app.
Or listen on demand wherever you get your podcast.
All right, let's get back to kind of what's been the story for markets earlier the last twenty four thirty six hours.
Decisions exactly, and then keep coming.
You mentioned we have the big Japan overnight.
Okay, so we'll keep an eye on that. But of course we have that PBOCC ECB, lots of initials out there, but we know what they are mean, and so does our next guest, doctor Vania Starvrakeva. She is a professor of economics at the London Business School. Professor, thanks so much for joining us here. I mean again, can you put in the context for us kind of how you frame out what we've heard from the US Federal Reserve and the European Central Bank over the last twenty four hours.
How does that impact your view?
So thank you so much for having me. It's always a pleasure to participate. So I think what might happen in the future is we might see an interesting divergence potentially between the US and Europe. So we often tend to see the US being the leader in terms of like the beginning of the hiking cycle, the the word the first to move, followed by banking and an ECB. Now, usually you might expect that the US is going to be the leader in terms of when they're going to
stop hiking. So the FED of course decided to pose for essentially one round, and then there's quite a lot of speculation that this is a bit unusual because there were positive surprises regarding real GDP growth and unvariable, so no one expected them to pose given that actually the data on economic performance was better than expected. My opinion is that actually what might be happening is we're seeing potentially the beginning of the FAT preparing us for a
higher inflation target. So that is not something that I here discussed a lot, but all central banks acknowledging that is going to take at least two years to go back to the inflation target. I don't believe that necessarily they would actually want to go back to two percent. I think the FED might be preparing markets to probably a higher inflation target. Now it will be interesting because easy b if ecipit decides to change the inflation target,
it will be significantly harder. Given the history of Germany, we all know that Germany hates inflation, so we might see interesting divergence in policymaking, which is quite unusual these days across the large central banks, and I think that's something that one should keep an eye on.
Is the diversion also because of the way that our economy is structured quite differently when you think of it more services driven than say, how economies in Europe are.
Also the majority of the economies in Europe are also serve is driven as well. Now what's different, of course, is that with ECB we have many different business cycles. So what we're seeing is that inflation, for example, is falling faster in some parts of Europe where the label markets are essentially less tight. So Germany, the course topr
inflation is still higher than many southern European economies. Now what was interesting is that, you know, during the zero or bound period, effectively some people blame the CIP that they're putting too high of a weight on the German economy relative to the rest of the year arozone, the thing might be happening now, So essentially it might be the case that sat in Europe and other parts of
the Eurozone now don't necessarily need as much tightening. But we might see that ECB prioritizes Germany more, not just because of the size of the country. So I think it will be interesting to see to what extent ECB is going to continue with its stands on we're really tough on inflation, we have to go back down to two percent or they might become a little bit more lineent and consider high inflation target.
As zone and professor to the extent that the Fed does, you know, maybe lift their inflation target going forward. That would be a big change for them. Is that would that be an incredibility issue for them?
It will, But to be honest, they haven't delivered the target in a very long time, right, So here the trade off is we keep promising something that we haven't delivered for for many years. So even during the zero or bound, inflation was below the target. Yep, that's why they moved towards average inflation targeting. I think there are I mean, we know that there are a lot of
theoretical reasons why high inflation target is beneficial. So for example, we knew that during the zero Laura bound, a lot of economists, including only via blanchepe Call, the chief economist of the kind of essentially was pushing towards the inflation target of four percent. The reason why that's the case is because if you stucky the zero Laura bound, this is going to give you real rates of minus four percent, right,
so it could really help stimulate growth. So there are many big benefits to high inflation target, and I think actually, if there is a time to change the inflation target, it might be better than pretending that we're going down to two percent and being above two percent for two three years. I think it's more dangerous in terms of what we're seeing. We're already worried about wage inflation expectations getting un anchored. Actually the UK is the worst in
terms of wage inflation expectations. So as you saw the private sector, wage inflation was particularly high in the UK. So I feel markets are starting not to believe the story that we're going to die to two percent. So I believe that actually it might be a good time to adjust the target to something more reasonable.
What do you think would be more reasonable?
So four percent between three percent I think probably is more realistic.
That's for the US better reserve, So.
Yes, so for the US, but technically the UK has a bigger problem, right, So in terms of the data, the UK is the worst than the furthest away from the target. So I wouldn't be surprised that the UK is going to also potentially entertain the idea of high inflation target, but they're going to wait for the US. I don't believe that any country is going to even entertain the idea of phrasing the inflation target unless the US does it.
So, Professor, We've spoken to some European and UK fund managers and strategists this morning about the ECB's action and a lot of folks are just kind of exacerbated, exacerbated with the ec being to the extent that they feel like the ECB is pushing the euro Zone into recession or a deeper recession or more prolonged recession. How do you view that risk?
But the problem again is coming from the heterogenetica across countries and what we mentioned that Germany receives the higher weight Germany, So the history of CB is effectively it stands on the shoulders of the Deutsche Bundesbank that is known to be very tough on inflation, which is coming from the World Wars in Germany where they had when they had higher inflation, so their political economy reasons why it would be hard for CIP not to be tough
on inflation. And Germany receives a very high weight here and core CPI inflation is high for Germany. Well, of course you're correct that if you take the overall performance numbers of the Eurozone, that might appear that the economy doesn't need as much tightening, but here is seeing political economy issues also at playing.
I feel when it comes to some of these Southern European countries that are highly indebted, which ones in particular stand out to you as far as having a tough time moving forward when it comes to that growth.
I think the usual corporate right now is Italy again primarily for sovereign that sustainability were in a very uncomfortable situation, whereas it be is still purchasing Italian debt while selling German debt right doing quantitative titling with respect to the German sovereign that but quantitative vision with respect to the Italian that I feel that it's a very uncomfortable situation
the sovereign. The sustainability issue is not resolved with respect to Italy, and I feel this is still an elephant in the room with respect to the Eurozone that there has to be a solution for because we can't have easy b be the marginal order of Italian government debt and there is still one hundred and fifty percent of the two GDP, so the number is very large, and I think it is itb is still struggling with that, and I don't believe they have found a proper solution for it.
Professor back here in the US, are you of the opinion that this federal Reserve will raise interest rates? And if this year? And if so, but maybe how many times and what degree?
So I think they post in order also to see what is going to happen to create a contraction. So we saw that the banking sect that lost about one trillion of deposits, and in total there's about seventeen trillion in the whole banking industry. So given that these primarily regional small banks that lend a lot to small and medium enterprises, they want to see what the impact on
employment will be. So small and medium enterprises are the main employer effectively in the US, so to the extent that there might be a create contraction in terms of small and medium enterprises, they want to see how it's going to play out at this point. Now, again looking at the numbers, they technically shouldn't have posed if truly they were data driven, right, so they discussed that their
data driven. So the action was a bit surprising to me to be honest, The only way I can explain it is that they might be tinkering with the idea of moving the inflation target and just admitting that they will not be easily be able to go down to two percent or come up with a regime that is much more flexible rather than just a well different target.
All Right, doctor, thank you very much for giving us some of your time. We really appreciate it. Doctor Vanya rick stop Rakava, professor of economics at the London Business School, joining us. We really appreciate getting some of her time talking about kind of the action we've seen over the last twenty four hours with the first of Federal Reserve and now the ECB.
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Let's look retail sales. We get some retail sales reported today. You know they were less than the prior month, but a little bit better than the market.
Was looking for a strong consumer I think so.
I mean, it still seems pretty solid out there. But our next guest is a real expert on this, Marie Driscoll, luxury retail analyst at Core Site Research. Marie, what's your takeaway from the retail sales data we got today and then maybe extrapolate that out there to what you're hearing and seeing from some of the other retailers.
Sure.
Sure, thank you for having me.
It's great to be here.
The numbers were were great. Really, they came in line with expectations. The consumer is feeling constrained. We really didn't see any surprise. Clothing was flat or you know, off off to twenty basis points versus a year ago. Department stores pulled down general merchandise general merchandise stores grew up two percent. The real winner this this month and really year to date has been health and beauty that showed a solid seven point eight percent game year over year.
And this just goes to really, there's the lipstick effect if you want to look at look at it.
That as an economic indicator.
I love that one.
So, but beauty is self care, it's an accessible luxury. It changes how we feel, and it has great utility.
You use it daily, So think of that as a staple instead of a discretionary.
Well, you know, I think that the way we define discretionary and staple is a lot in the eyes of the user. When I look at teen retailers, it's like you and I might say this is discretionary. For them, it's an absolute must have. There's just no discretion about it. So it really depends on whose money it is, you know. But you know, beauty shares a lot of the same qualities as luxury, excepts it's at a much lower price point.
So beauty did really well.
You know, clothing, when you look at what people are spending on there, they're really reducing on clothing, Furniture down dramatically at six point four percent year over year, and electronics, no surprise, down five percent. Consumers had really spent on those items during the pandemic and are looking to do are really looking to be more social and out there. Food and services, which are in did in this retail sales report. We're up to the strongest year over year
at eight percent. A lot of that's inflation, but people continued, people want experiences, want to be out, want to be social, they're spending there. Another call out Worth mentioned like general merchandise stores up two percent year over year. We think it was, you know, really stronger than that at companies like Walmart, which are benefiting from all the essentials that they sell, the food that they sell along with selected merchandise. The fact that more people are coming into their stores
than pre COVID because they captured more mind share during COVID. Frankly, can they hold on to that higher income customer in a post COVID world?
And I think that they're doing their best to try and do that.
It's interesting. I was speaking with a portfolio manager recently who was talking about how stocks like stay Lauder he wasn't going to get rid of because he felt like they were recessioned for you knew, his daughters, his wife, We're still going to buy those products. I wanted to pick your brain about the latest retail earning season, especially since we just got this retail sales data. I mean, we had companies like Macy's that cut their outlook just
because of what they were seeing with the demandrens. But then you look at Lululemon, which is very niche at leisure and a bit expensive if you were thinking about some of their products, and they still had an opposite kind of take, and we're seeing consumers go in. So what exactly does that tell us about the economy right now?
So Lululemon is a retailer, but it's a brand, and it's a life style and it's the kind of like in the last twenty years, it has become increasingly okay to wear yoga pants and the comfortable pants that.
They that they make with the pandemic all day long, right and.
We're wearing them from the workout routine, to the coffee in the afternoon to make you put on a nice top, and to the theater at night.
So like Lulu Lemon has become a backbone of many people's closets.
And frankly, it's not just an American brand, it's a global brand. There's incredible pent up demand in China for Lululemon, so there's legs for that company.
But again, it's partly lifestyle. And Macy's is very much you know, it's the middle of the mall the middle.
It's a mass it's not mass market, it's a department store, but but it's for Middle America where there where there is constraint, Lulu Lemon might be that little bit of a higher income consumer.
Frankly, though, across the board, everybody is.
You know, from the data, we're seeing people are impacted by inflation, and they're being choiceful as they.
Make their spending choice, as they make their purchase choices.
Hey, Marie can talk to us about kind of just the state of luxury right now. I'm just guessing that the inflation that we're all feeling out there, it's probably not impacting our good friends up at the luxury level. What are you seeing and hearing from those companies?
You know, it's mixed.
Some luxury companies cannot meet their demand, and that would be an Armez and a Louis Vuitton, but many other brands are struggling with this. The American consumer who was shopping poor luxury during COVID attracted new consumers, younger consumers. People luxury provides an experience, and when there were no experiences to be had, many people bought a hand egg to feel better, an Armez cuff, and you got new people into luxury brands, and they're feeling a pinch this year with inflation.
You'd like to think that luxury is sticky and people will continue to want it.
I don't think that you're going to see the kind of growth that we experienced in twenty one and twenty two domestically, and you are seeing as people return to travel, luxury spending will diversify. Americans spent a lot on luxury in Europe last summer because they were able to travel again and the strength of the dollar. So luxury continues to better benefit from the one percent, the top ten percent across the board. Except for that top one percent,
people are impacted by inflation. It's changing their luxury spend. Some brands are not impacted at all, but in the aggregate, luxury is impacting all right, Marie.
Thank you so much for joining us. Always appreciate getting the lay of the retail land with You've got great experience in the space and great insights. Marie Driscoll, she's a luxury retail analyst at Coresites Research and she's been doing that for a long time.
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I about this.
Were good friends up in Connecticut. Connecticut just agreed to a budget signing the largest marginal tax cut rate in Connecticut history and the first tax cut for Connecticut in three decades. I'm sure my buddies up there are happy about that. Let's get the latest on all things the state of the state in Connecticut with Ned Lamont. He's the governor of the State of Connecticut. Governor, thanks so
much for joining us. Talk to us about this budget and kind of the tax cuts you're getting across in Connecticut.
Yeah, I can have to do the ball Look, I come out of the business world. People like a little bit of certainty. They don't want to know where your state's going to be done us now, But for the next five years, we've had five ballanced budgets in a row, and this year we've gotten place the biggest middle class
tax cut in the history of the state. It's about five hundred million dollars, say folks, about ten or fifteen percent on their tax bills, and a lot of our neighboring streets have been raising taxes where we held the line. Now reducing them a little bit. I hope it sends a signal it's a good place to live, a good place to grow your business.
Who qualifies for these tax cuts? Come again, jess, who qualifies for these tax cuts.
Family's up to about three hundred thousand dollars in annual income.
So Governor also saw for the state of Connecticut, you guys have this unique bond program. We like talking about the bond market here on Bloomberg Radio. Municipal bonds. We're big fans of that. Here talk to us about kind of these baby bonds program in the state of Connecticut.
Yeah, I'm working with Treasurer Eric Russell. We got that passed this last cycle. Got that funded. More importantly, so, any kid born into poverty, born I'm under Medicaid, We'll get a thirty two hundred dollars set aside for that little baby. And at the age of eighteen or twenty five up the age thirty, you've got to cash in that bond and that could be used for education or down payment in the house, help you start a business, help you with job training expenses. It's aspirational, gives our
kids a reason to stay in Connecticut. They know, at the age of eighteen or as soon they're after they're going to have the opportunity to use that money.
It looks like President Biden is actually supposed to be headed to Connecticut on Friday to talk about the state's leadership when it comes to gun safety. What do you expect to discuss with the President?
Oh, it's great, he'll be up here at the University of Hartford tomorrow afternoon. I think doing two things. One saluting the fact that Connecticut has really been a leader when it comes to a gun safety and anti crime. We just passed one of the most significant gun safety law in the country in the last few weeks, getting those illegal ghost guns off the street and getting those
repeat offenders off the street. And at the same time, our Senator Chris Murphy has taken a lot of the Connecticut ideas and brought them down to Washington, d c. And about a year ago they passed on a bipartisan basis some significant gun safety laws. So we can work by ourselves as a small state. It's a lot better if we work as a region. Even better if we work as a nation.
Governor, you mentioned you know that you came from the business world. Give us a sense of kind of if I wanted to open a business or relocate a business, talk to me about the advantages and disadvantages of coming to Connecticut.
Yeah, I like that question. I'll tell you first off, we like to move fast in the business world, and I find too often government has a bad case of the slows. So we're really trying to speed up that process. We're one phone call away. You always can get me or the head of you know, DECD, Economic Community Development, white shoe treatment. Make sure we get you through see and get that business started up. I think people should have some confidence with this tax cut. This is a
place where we're getting our fiscal house in order. We're not having to raise taxes, we're not looking at deficits, and we're paying down our unfunded pension liabilities. So from a fiscal stability point of view, I think people feel pretty good. And we kept our schools open when a lot of other places had them closed, so it gives
us sort of signal about where you can be. We kept our manufacturing and construction open all during COVID, so I think people have a sense of them it's a good place to do business.
Since we are in a pre election year, wanted to get your thoughts on Trump's legal issues and what that means to you as far as when we're heading into the election year next year.
Boy, I can't bear going through all that Trump distraction for another six years if he got elected. I like President Biden. I like his infrastructure bill. I like the fact that with the money we got for infrastructure, we're going to be able to speed up your commute by ten, fifteen,
twenty minutes over the next seven or eight years. You know, for a state like Connecticut, where our location is so strategic between New York City, the global capital, financial capital of the world, and Boston with the life sciences, access there is really important. You probably not have to be there five days a week, but able to get in and out is so important. That's part of what the infrastructure bill does.
Governor, you're you know, Connecticut's a unique stake for many, many reasons, one of which is just a geography you mentioned. I mean, half the state's Yankee fans the other half are Red Sox fans. So you know about managing division and diversity in the state. I'd love to get your view just from the macro level kind of in this country, the level of divisiveness has just never been better, and we even have names for it. Red state, Blue state.
However you want to frame, how do you think about that? And is there a way forward to kind of bridge that and kind of minimize some of the differences.
We got to get to know each other better as people, not simply as ideological targets, and Washington is broken in that sense. I'm really pleased that McCarthy and Biden were able to get that debt sealing thing solved on a reasonably bipartisan basis. I thought that was important. You know, here in Connecticut, support for our budget was almost universal, thirty five to one in the state Senate.
Not bad.
And you know, we're a smaller state. We know each other and we know the compromise is not a dirty word.
Any sort of ambitions to run for president.
Look, I was just re elected here as governor, and I'll tell you just I love the job. I mean, if you come out of the business world being a senator or congressman, it's just not the same thing. As being an executive, have a chance to make a difference in your own state, and I love exactly what I'm doing right.
Now governor the Republican nomination, it's you know, there is a presumed leader front runner and president, former President Trump, but there's a lot of other folks getting into the race. How do you view kind of what's shaping up to be a pretty crowded Republican primary season.
I guess the more people in the race, the better it is for Donald Trump. So I'd like to think that the Republicans will sort this out pretty soon, you know, after Super Tuesday, and make it a one on one race and give the Republican primary voters a real and clear choice. There's a guy I know, I know the governor is pretty well. His name is Doug Bergham. He's the governor of North Dakota. I think he's the most substantive on that side of the I R running for president, solid guy and governor.
What would you suggest that, you know, in terms of kind of bridging that divide, What are some of the ways that you would suggest to kind of, you know, go into a red state or blue state and kind of bridge a broader discussion with people. What what do you find could be effective?
I think go to places where you don't think that people necessarily are like you, not necessarily red or blue. Make sure you go where you can have a really frank discussion. Go to places where you can sort of break the stereotype they may have of a Republican or a Democrat. You know, people are willing to listen, people are willing to give you a shot, but sometimes have to go to their place to make your case.
And I know that you just recently signed a voting rights Act into law. Tells more about that.
That was a big deal. I mean, Connecticut is a leader on so many issues, not un early voting. We were one of the slow polks there, and now we pass the law that says you can vote up to two weeks before that general election and also advance voting for primaries as well. Look, in this day and age, you don't have total control over your schedule. Maybe you're commuting, maybe you're out of state part of the day. It
just makes sense. You know, during COVID, we allowed no excuses absentine balloting, and you know a vast majority of our people took advantage of it. I wanted to make it easier for people to vote and vote with integrity.
Hey, Governor, I want to just thank you so much for giving us a few minutes of your time, Ned Lamont, Governor, the State of Connecticut giving us the state of the state, as they say, so I think what the government. One of the messages I think the Governor's been trying to get through over the last period of time is that the state of Connecticut is open for business. And again,
they just passed their budget with substantial tax cuts. And I know a lot of folks in the metro area here have left the metro area, whether it's Connecticut or New York or New Jersey because of the high right tax regime and going to lower tax regimes and.
So middle income tax cuts.
Yeah, so it's important here. So let's see how that plays out for our good friends up in Connecticut. I'm a big fan of Connecticut good stuff. Sometimes I get caught on the Connecticut term bike like all the time on nine to ninety five, But otherwise all good stuff there.
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All right, I'm We'll get on a stock on the downside here today. Kroger, the supermarket chain of four percent. They reported some numbers. The profit topped expectations as far as I can tell, but I know the sales come up a little bit shy. So that's causing people to say, uh oh, maybe the consumer's pulling back a little bit. But let's bring on someone who does this stuff for a living. Those the real expert here on the supermarket
business and retail in general. That's Jen Bartasha's senior industry analysts for Bloomberg Intelligence. So Jen, people not buying as much food?
What's going on?
Hi, Paul, So what's really happening. Kroger, by all accounts, had a pretty decent quarter, and there are a lot of things to be optimistic about, but it's really the backdrop of the weaker consumer that's pulling down the stock, and it's really kind of weighing on expectations of how much growth really can they can achieve over the course of the rest of the year.
Were you able to extrapolate from the report what items consumers were pulling back on in which ones they were still buying.
Well, I think one of the interesting takeaways from Kroger's conversation today is that companies that have the capability to segregate their consumer base into different segments is becoming increasingly important. We've all talked about the bifurcation of the consumer, how low income consumers are under a lot of pressure and those that are in hir income households are behaving like
normal and that's playing through with Kroger as well. And so the consumers that are pulling back are the ones who are suffering from you know, dwindling snap payments, increase, pressure from inflation, higher cost of living, and that segment is really what's under a lot of stress and continues to be undertood I'll.
Say what I do, Jess.
I don't know if you do it, but this is for the first time in my life as a shopper. I don't even consider trading down, but I am trading down to the store brands. Yes, I'll do a lot of this stuff.
And because being exactly the same, it's materially.
Cheaper than the brands. So Jen, I mean, boy, if it's happening to me, like I'd never even thought about that stuff before, and.
That is a trend. Private label so far this year has just been on fire across the board for many, many retailers, and it's precisely because there's been a lot of investment in the last few years in improving the quality and the selection of those private label products, and when customers trade into them for need, they're discovering that
they really are very good substitutes for national brands. And so that momentum and private label is really expected to continue through the end of the next year and into twenty twenty four. But it's also good for retailers because those items have much higher margin for the retailers than the national brands do.
Something I'm curious about, too, is when we've continued to see a number of these companies pass on those price increases for the past few quarters, and we're able to successfully do that, but Campbell's Soup actually signaled recently that shoppers are becoming less willing to put up with those price increases, Whereas and then you hear from General Mills.
They had an investor day last week where they started talking about how the raising the cost of its products would likely become more difficult even as inflation is cooling. Are you getting a sense that we're going to hear more of those themes potentially coming up once we get earning season. It's going to be a little bit a while, as you know, because a lot of those retailers were at the tail end of that. But could there be early indications when you hear from like a Campbell's, General Mills.
Yeah, it's a great question. We've been actually warning on this coming for quite a while at Bloomberg Intelligence, and really what we're saying is that even as inflation comes down, the consumer has hopped out and means that they've adjusted their shopping patterns, they're spending where they're spending, and the volume of goods is going to become much more important again because all these companies have enjoyed top top line growth spurred by inflation, so the kind of an artificial
increase in price is driven growth. Now as inflation comes down and prices are starting to come down, it's going to become much more important that they drive volume again and increase the volume of goods sold. What we think is that as inflation comes down, there's going to be a lag. So we could be in for a couple of tough quarters for both the CpG companies and some of the retailers until volume starts to catch up to where inflation comes down.
Jen, just give us an overview of kind of the industry structure these days. I know there's I think there's some M and A. I mean, give us a sense of who the big players are. Will there be more M and A? Is everybody just trying to compete against Walmart?
Where are we?
Well? Walmart is by far the biggest food retailer in the United States coming and over fifty percent of Walmart's revenue comes from food and grocery here. It is a tremendous business.
But also Target recently got moved to Staples because of their percentage of groceries as well. It actually happened to more Target got moved over to the Staples of the S and P five Punt than a Dollar Tree, Dollar General exactly.
So all of these and all of these companies are selling more and more food to consumers. What that means is that it is a very consolidated industry. So in terms of M and A, everyone is really waiting and watching on the fate of the Albertson's and Kroger merger and whether that will successfully go through and if so, how many stores are going to be required to be divested. I don't see a lot of other M and A coming until we get a real sense for where, you know,
where the acceptance level is based on that merger. But it is already a fairly consolidated market. What that means is that there is scale for these companies, and so you know, the good news for consumers is that that scale will translate into prices coming down perhaps faster than they have historically, just by virtue of how big these companies are now can.
They get people to work in these stores house the labor situation for a lot of the big companies you follow.
Labor has been a challenge, but I would say that across the board, retention rates are fairly stable. They haven't gotten worse. These companies have invested a lot ever since since about twenty sixteen. They've invested a lot in wages, They've invested in training and on a comparative basis. You know, people, if they can make a decent wage working in a store, that's pulling some talent away from other big hiring sectors
like restaurants as an example. And so at this point, the labor situation I would say is fairly stable, but it's still expensive and they're going to have to continue to invest in wages to retain people as they go forward.
Well, you were absolutely spot on this one, Jenna, and I never doubt you. But I mean, I just pulled up the p GEO function for Walmart. Man Groceries is just the biggest business. It is amazing how big and you just don't even think about it, or I don't, but the largest grocer in the US and the industry pretty cool stuff. Jen Bartash is senior industry analyst for
Bloomberg Intelligence. He's based at our lovely Princeton campus down there in Princeton, So we appreciate getting a few minutes of Jen's time here.
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