P&L: Fed Won't Be in a Position to Raise Rates in February

S economy. Uh, and and I want to get a sense of how much reflation we're actually seeing on the ground. I want to bring in Ward McCarthy, chief economist at Jeffreys. We got some data this morning, more signs that retail sales are accelerating, that we are seeing uh, inflation keeping keeping up in Europe. Word, do you think that people are at a quickly pricing in just how much inflation

is going to increase this year? Well, I think that people are coming to the realization that the deflationary period is over. UM. I've been expecting inflation to accelerate really for the past year or so, and one of the key developments on that front was when the commodity markets bottomed in February. So as far as the CPI is concerned, I think we could see a three percent print them by the third quarter of this year. What does that mean that precious metals such as gold might benefit, Well,

that historically has been the case. I'm not a gold bug myself, so I tend to focus really more on the implications for um, you know, the bond market especially you know it also the stock market. Um. But let's see bad for the bond market, good for the stock market. Well, I think it would be good for the stock market because it would be an indication that businesses are finally getting some pricing flexibility that that they have not had

for quite some time. And of course the bond market's going to price that end, especially at the long end

of the curve because of rising inflation and expectations. Where there's a big debate that's raging among people who I talked to, which is, at what point do you benchmark bond yields rise to such a degree that it no longer works to go to stocks to sort of there is an alternative wage, or in other words, at what point do people say, look, I'm going to go back to bonds at least I'm gonna get three percent three and a half percent yields and going to get my

money back. And will the rising yields start to actually hurt stocks, Well, I think we're are ways off from that actually happening. I think we're at the early stages of a rising rate environment. So even though rates right now might look attractive relative to what we've had um over you know, a recent past, UM, the reality is that you would probably lose is um in a longer run because the bond prices are going to be falling and um. So it's I think a ways off before

that's that's going to happen. What I think will somewhat moderate at least the pace at which interest rates rise is the fact that we still live in a quey world. Um. But the b o J and the ECB SO US rates are still very attractive relative to overseas rates. So we'll continue to see institutional investors willing to buy the US bond market even though prices are falling, just because

the rates are attractive to them. Uh. And that's especially the case for life insurance companies that are really kind of a box right now. With the liability streams going forward that really are not a good match for their asset streams. So there's sort of seems like they're competing factors. Here. You have people who are sort of looking ahead seeing inflation, saying yields over the longer term are going up from here, and others like the life insurers that are saying we

need income. It looks more attractive in the US and the rest of the world we're going to come in. Uh. Now, given these sort of competing factors, where do you see ten year US yields ending the year and where do you see them in eighteen months from now? Well, I think the direction is higher. So a year from now, I don't think it's unreasonable to think that there'll be

a hundred a hundred basis points higher UM. But a lot of the magnitude of the increase is going to depend on what the new administration actually gets done on its very ambitious fiscal plan. Uh. And I say that not only because the fiscal plan has the potential to significantly yet to growth UM, but it also has potential suits significantly add to debt supply, both on the treasury side and potentially on the private sexes. Um side as well.

So I think the direction is a lot clearer than the magnitude, But we'll get a better handle on that after the first hundred and two hundred days of this new government. Basis points that would take us to three point on the tenure. Well, you know, just before we get to these hundred days of the new administration, is a possible we're going to get a rate hiding early February. Oh,

I don't think so. I think that the Fed is sending us two messages, both at the December fo m C meeting and more importantly, in the minutes that we've seen since then. Uh, they made it clear that for the first time they could see the potential for upside risk to both growth and inflation, and as a consequence, they may have to accelerate the normalization process, both of raising rates and of shrinking the balance sheet. Now we're

beginning to see a debate, public debate. Yesterday President's Kaplan and Harker, for example, talking about how the FED should shrink the balance sheet. Next week we'll hear from more doverage members like President's Dudley and Governor brainerd um So there's going to be I think a lengthy debate both within the UM, the walls of the f O m C and also for public consumption about how the FED is going to go about this. And I don't think there'll be in a position to either raise rates or

start drinking the balance sheet by February. You know, there's been some talk about the potential FED choices by President elect Trump who would come in in two thousand and eighteen, particularly for FED Chair Jenny Yellen. What have you gleaned so far from some of the names that have been floated, Well, they relatively high profile names. Uh, you know, John Taylor was probably the first one to be circulated, but there

have been others since that time. I think the general UM gist of the type of person that they will be looking for as someone who's somewhat more rules based, uh than we have seen UM in recent years. What I think that no matter who comes in, they're going to find out that, UM, you can be rules based, but you're still going to want to have UM a lot of flexibility and how you conduct policy. So I

expect Jenny Hillen is going to serve out this term. UM. She has uh, you know, really done a great job of taking the baton from Ben Bernake, and I think she'll want to see her task through to fruition. Whether or not, you know, she is appointed next year or not, I think to a large degree will depend on how the economy does this year and frankly, what actually has done on the fiscal side. Thank you very much for

spending time with us. Ward McCarthy is the chief financial economist for Jefferies and Company, speaking about the US economy and the potential for interest rate increases. Lisa Bramwitz, do you know what a medical village is? Well, we're going to find out from John Lawerman. He is our healthcare and hospital's reporter for Bloomberg News and he joins us now from Boston to home to Bloomberg. You know, John,

thanks for being with us and a wonderful story. And what if you just maybe begin by telling the anecdote that leads the story, because I think that really kind of sets the scene for the details. Well, I went to a hospital, Um, good morning. I went to a hospital out in Kingston, New York. That's uh, that has an operating room that was built I think about five years ago for I believe it was five million dollars um and it's never been used and they're actually not

going to use it. Um It's going to be renovated and the space, the entire hospital space, which I believe is now hospital it only has about fift occupancy rate, and it's going to be renovated into what they call a medical village, and it was I had never heard the term before either, so I was really interested in going out there and finding out what it all means.

And basically, this hospital, uh, the the parent that owns it, they've decided that they're going to make it into an outpatient center and they're doing that for a variety of reasons, but it's mainly because they want to figure out ways that they can continue to serve patients. A lot of patients actually who come through their emergency room where they're very they're very expensive to take care of, and they

want to UM care for those patients. And an outpatient setting is opposed to inpatient, So impatient that somebody spent a night in the hospital. Outpatient that somebody walks into like say an office, something gets caring, that goes home usually the same day, not always, but almost always the same day. That's what outpatient U usually refers to and UM. So they're uh, they're converting this hospital there there, it's

no longer going to be a hospital. They're moving its services into another facility that's just a couple of blocks away. And it's really a part of a trend that's going on all of the country where hospitals UM are are closing UM and UH. But even more than that, services and hospitals are moving out of hospitals into other settings. Well, okay, John, this has been going on for more than a decade, right where you've had this consolidation of hospitals and this

sort of move to UH. As procedures are done in an outpatient way, people are taking care of for less time. People's hospital stays have been shortened by better technology. UM. Is this sort of closure of some of the hospitals problematic or is this just the natural evolution in medicine. Well, it depends on you know, you talk about evolution. UM. Sometimes evolution has UH, it can have a very tough

impact on you know, particular populations. And UM. I'm not saying that this is the case in in in in the community that I've visited, but in many communities where hospitals closed uh, there aren't hospitals nearby to take care of people. UM. Rural hospitals are the most vulnerable to being closed. They're smaller, they uh, they draw in smaller patient populations. UM, they have a less uh diverse suite

of services to offer. So there their patients more likely to be sent to big city hospitals UM for uh more complicated procedures. Procedures might that might provide more money to hospitals, UM might provide more revenue. And so these are the ones that are most um vulnerable to you know, to uh to to having tough financials and to closing and UM. But it but it's it's it's not just these. I mean there are hospitals as well in big cities

that are consolidating getting smaller. There's hospital uh that we wrote about in the story UM in New York. Actually that's the Mount Sinai exactly right right. UM they've decided to really scale down the size of one of their facilities and uh really ramp up the procedures that they're providing. That doesn't mean that people in New York City are gonna have enough hospital beds. Obviously, there's hospitals everywhere in

New York. But but it it but it does UM in many communities, it does remove the nexus of the local healthcare system. Thank you so much. It's really a fascinating story. John Lawerman, healthcare reporter for Bloomberg, talking about the dwindling number of hospitals. To learn more about today's earnings results from major banks, I want to bring in Allison Williams, Senior financial research analyst for Bloomberg Intelligence. Allison, thanks for being with us. I'm looking at JP Morgan's.

The shares are up about one and a half percent. Let's go over the details of JP Morgan. What stood out to you, uh in the in the report? So I think for JP Morgan just in general solid quarter and UM you know, costs basically right on target. That's the key thing that investors look for UM from a go forward rate thick trading, which tends to be a little bit more fleeting, uh coming in also better than expected.

And so while that can be volatile, it can be important because it is UM you know, a decent chunk of their revenue and in looking for sort of optimism for earnings estimates to help sort of justify share UM. The share price moves analysts are going to be looking for what is the run rate for revenue going into next year. So JP Morgan beat analysts expectations with debt trading. Bank of America did not. While they had a pretty

big increase, Uh, they did not. They did not beat Why So I think what's difficult a lot of times with the investment banks. Right as we saw Bank of America miss um you know, sort of a twelve percent gain um I think it was, and then you know JP Morgan having this huge numbers percent gain. And so from just a simplistic perspective, someone might look at that and say, oh that, you know, JP Morgan's gaining share.

But I think a lot of times what it has to do with is how are these banks positions, what are the products that there strong, and then how did those products perform? So JP Morgan, you know, just the biggest and fix the biggest in rates, which was a good business of rising volatility in that business. Bank of America one of the areas that they're very strong in is the municipal bond business, which, as we know, UM

had a very tough quarter. If you look at the outflows in the in in the latter part of the quarter following the election presidential election, you saw those really driving overall bond mutual fun outflows so UM and that really relates to some of the concerns around tax policy. So obviously that's not good for trading, and that may have been one of the areas that was more negative for Bank of America Wells Fargo earnings of a dollar three versus estimates for a dollar what about their mortgage

lending business. So I think for Wells Fargo, you know, they earn more from the mortgage banking business than peers around UM eight percent. And I think one of the things that investors were sort of expecting this quarter is to see UM, you know, what happened with their accounting. We had this huge interest rate move, so we did get some of that, But what people are tend to more focus on is the origination side of the business, right because that's cash, whereas UM you know, the other

part of it is accounting. We did see UM you know, volumes coming in that the gain on sale sort of coming down. I think investors had expected that. Again, what's going in the market. We've seen a Cutton pipeline. Some of that though is season also some of it's the rate rise UH some of its seasonal in that business. UM. I would be remiss if I didn't mention black Rock, the first big S manager that also reported earnings UM.

They reported disappointing revenue gain even as they reported record inflows. This just sort of highlights the difficulty with the E t F industry that is very low cost UM. Do you think that black Rock is going to have to cut more people at this point? So black Rock, UM, you know, they actually did come into the their quarter actually came in a little bit better, helped by the expense side, and they actually did have some UH cuts earlier in the year, which was which was sort of

unique for them. That's just not something UH in general. But you know, they basically they positioned that more as a sort of longer term positioning. As far as the revenue trend that that you're speaking of, I think we did see black Rock kind of come in back in October and make some feed cuts to some of their E t F s and that's really been successful in garnering a lot of flows and to the extent that you know that is a scale business. Black Rock and Vanguard UM just taking in a ton of money in

that business. Uh, and that's not a people intensive business. It is lower margin into a low, lower few revenue margin, but has a huge benefit from scale. Thank you so much, Alison Williams. Always wonderful to hear from you to make sense of all of the earnings that we're getting out. Alison Williams, she uh knows everything there is to know about the finance industry and she'll be busy next week as well, because we have earnings from City Bank and

a variety of other banks. Yeah, it'll be interesting to see whether they beat as well at following in JP morgins footsteps, Alison Williams, Senior Banks analysts for Bloomberg Intelligence. Chrysler plunged more than sixteen percent yesterday. Today it's rebounding a little bit. Shares are up a little bit more than four percent. This is after emissions by elatitions. Accusations were lodged against Chrysler, and traders are trying to figure out what this will mean and how much this will

cost the company. I want to bring in Jamie Butter's who covers autos for us at Bloomberg News. He is speaking to us from Detroit. Jamie can you make sense of this. Why are people kind of going back to Fiat Chrysler. Well, they're really trying to sort out what's

going on because it is so unusual. Um, you know, the automakers can modify, you know, it requires a lot of programming for anything as complicated as you know, a diesel engine and uh uh filtering that has to go with it and how they operate and extreme heat and cold and various environments. So sometimes they put the software pieces on and sometimes the e p A UH has questions about them, and typically they argue them out and

then get it solved. And according to the FCA's view is that we're still trying to sort out whether this is okay or not. And you're calling a press conference. And so when you see the press conference as an investor, you're thinking, oh my god, this is serious. This is like Volkswagen. But in the Volkswagen case in September, I mean, the regulators had already extracted a confession out of Volkswagen.

You know, it took eleven meetings between the California Air Resources Board and VW before they finally came back and said, we don't have any more explanations. You caught us with the defeat device, and uh, you know, christs are saying this is in no way a defeat device. These are just regular things that we're trying to discuss and make sure that we're all on the same page about. And so they're the company is very frustrated, and investors, of course,

they're kind of in the dark. They see this initial signal that makes them think, you know, this could be as terrible as Volkswagen. Uh, and then they hear the company saying this is really nothing. Uh. You know, some skepticism about companies saying that that an issue involving maybe the Justice Department as well as the e p A

is nothing. But you know, certainly, with the being the final days of the Obama administration, there's some sense that, like with the p A ruling on mileage today, there's some efforts to put the Trump administration into a difficult position or or for the e p A to demonstrate

their value and their necessity to the incoming administration. Well, Jamie, and this is serious stuff because not just the VW executives have been the target of the Justice Department, but we've learned today that three Takata executives have been charged in the United States as part of that criminal case to uh mislead federal regulators over the manufacture of those

faulty air backs. So there are potentially serious consequences. Yeah. Absolutely, we're seeing you know, really aggressive enforcement out of Washington. And some of it is a backlash to the financial crisis, where you know, the overall health of the U. S economy in the world economy was put in danger and and you know, and no one was really prosecuted. No, none of nobody who UH led to the financial meltdown

was prosecuted for that. And so there's been this greater effort to you know, go after the bad guys and make sure you get the executives are held accountable the same as as other people might be. But in but in some of these cases it's uh, I mean, it definitely raises mistakes for what maybe, to Mr Marconi's view, would have been just an administrative, you know, set of meetings in a normal circumstance. Jamie, Um, you flicked at this.

The Environmental Protection Agency they announced that it's keeping vehicle efficiency standards intact through the model year. How significant is this for automakers? It's huge. You know so if you you know, the Obama administration set out these long term goals, but they agreed to a mid term review presumably would

hit the middle of the term. Would be kind of when he's seventeen, and the standards get much steeper, much quicker from for vehicles that are categorized as light trucks, which is predominantly pick ups, SUVs, and minivans, which happened to be where the Chrysler makes all their money and then some so you know, they make jeeps, they make ram trucks, they make they used to make the town and country and now they have a new minivan called

the PACIFICA. You know, it's hugely important to the Chrysler, but also to afford Chevy uh you know, GM, Jams, brands and others. So uh, you know, they were looking forward to a mid term review where they could state their case and explain that while they've been able to produce sufficient vehicles for the last four years, uh, you know, getting that much more efficient would be very difficult and

very costly, that's the industry's view, and regulate. The E p A and and others say, you've done just find so far and there's really nothing to worry about it, no reason not to lock in these rules. And so you know, Mr Marconi spoke at length about this on Sunday saying, you know, this was supposed to be a

regulatory review and instead we got an adjudication. You know, they didn't feel like they got to make their case, and the e p A just uh rammed it through and and try to put this in place, and it'll told it will be much more difficult for the Trump administration to have a review. I know you're gonna be following this for us. Jamie Butters is our US autos reporter Bloomberg News, joining us from our bureau in Detroit.

Thanks for listening to the Bloomberg pan L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radi