Peter Kenny Says Underperforming Sectors Will Catch Up to Tech

I want to bring in Simon Ballard, a global credit strategist here at Bloomberg. He is based in London, and Simon, I really want to talk to you about the apparent debate that's heating up at the e c B, which is do they have to wind down their purchases first under the quantitative easing program that they have going on right now or can they start by using interest rates from the negative deposit rate area that it is in now. I feel like this is this is crucial and has

the potential to really shake markets. Can you give us a sense of what the debate is? No, absolutely so, And I think you know the key point here is, well you know, they're looking towards the normalization of policy over time. I think there's a very different and a very distinct definition to be made between normalization of policy

and raising interest rates. Um. And I think the rhetoric, the statement, the language that comes from the ECB over the course of the coming months is going to be how they approach withdrawing in terms of their their their stimulus. As we've seen with the CBS Corporate Sector Purchase Program data. The latest numbers came out this afternoon, delayed because of

the holiday in Europe yesterday. As at the end of last week, they own just over ninety billion dollars now of corporate bonds, so they're continuing to buy, they're continuing to stimulate the credit markets. UM. So that's almost a hundred billion dollars of corporate bonds in the past year. Absolutely, that's corporate bonds plus all the all the agency debt

that they've been buying as well. So that is purely just the corporate bonds that they've been trying to sort of reflate the you know, the corporate sector with should I say so, Yeah, the language going forward is gonna be very key to how they sort of address moving

towards that tightening bus um. But while the you know, the Federal Reserve is expected to increase again next next month, this month, um and then possibly again before the end of the year, I think you know it's gonna be about the the the CBS language rather than the actions in terms of interest rates. Simon, Yes, that the Federal Reserve meeting, I guess the thirteenth and the fourteenth of June.

But I'm wondering has the investment community in Europe been satisfied with the purchase program of the European Central Bank? Inasmuch as if there's always a bid, you're always going to find something to sell the central bank. What happens when the central bank stops buying whatever it is you're selling, Well, there in lies the there in lies the long term problem, Pim And you know you've hit the nail exactly on the head. Is the Is the market happy with what

the ECB is doing? It depends which side of the trade you're looking at. If you're looking at it from an investor's perspective wanting to buy reasonably placed, high yielding assets for your portfolio, then no, you're not going to be happy. Because we've seen the compression of spreads, we've seen the erosion of yield through the crowding out effect of central banks, not just the ECB, the Bank of England,

the Federal Reserved through their commentative policies as well. But the stimulation has brought down yields and returns for to the investor. Alternatively, for those guys that have been along their portfolio over the last several years, they've just watched valuations go through the go through the roof as spreads of compressed and and and quality curves are flattened, as investors have been as we say, crowded out into high

into the high yielding space, taken all riskier assets. So, simon, I'm looking at a ten year German yield of about a quarter of a percentage point. This is nothing for ten years. Basically, you are giving Germany free money for ten years to do whatever they want. That is how desirous people are of this debt. People do not seemed to be expecting that the ECB will come up with any planned to extricate itself from the simulus program that

they have in place any time soon. So is this just an intellectual argument as far as how they might approach uh, some kind of withdrawal from the stimulus, or is there actually going to be a timetable put in place as well? Well, I think, you know, again, we'll look for the language from the c B, as we do from the Federal Reserve in time in terms of

their proposed or they're intended time frame. But it's the pace at which that withdrawal happens that could potentially spook the markets, could scare investors away from the from the from the higher yielding assets that they've been crowded out into over the course of the over the course of the last couple of years. Um, you know, we have a quarter of percent on the ten year Bund. That is a lot better than the negative yielding front end of the German curve, which has been negative out to

eight nine years in recent months. And again that really reflects the the underlying uncertainty of the investor base. If you wish wanting to be in these assets which are being bought by the central banks, but at the same time still wanting to hold old Treasury, still wanted to hold German government bonds against the backdrop of an uncertain macro environment, so they need that haven cover versus the yield and the riskier assets that they're holding on the

other side of the hands. Simon, is it worthy asking what lessons the European Central Bank, the Bank of Japan and the Bank of England, what lessons they have learned,

if anything, from the federal reserves efforts with quantitative easing. Well, I think you know, the lesson they're learning is the the sceptibility of the market to react negatively and positively to to to incorrectly timed you know, headlines and statements, and I think you know, as we go through the process of normalization in the US, you know, the impact that this could have on the back end of the quality curve, on the high yielding assets within Europe could

be It could be quite severe as we as we pull away the you know, the purse strings and the support mechanism, then you know, looking at how we know, how we found how we finance some of these weaker corporates that people have been buying into for the for the incremental yield could could be could be very difficult. So sim and given this backdrop of seemingly endless central

bank money, can anything shake it up? Like for example, say, the UK election that's happening this week, that could potentially pose somewhat of a surprising element to the markets should Prime Minister Theresa May not win re election. Do you

think that this could actually shake things? I think more importantly it would be Prime Minister Corbin that would shake things if we did get the surprise, And as the polls have been moving over the last couple of weeks from a from a twenty basis point lead for the Conservatives over the Labor Party down to some polls would now suggest sort of just a one basis point to

lead between them. The implications of a labor socialist government coming into the UK with their tax policies and their their thoughts on sort of trying to reflate and nationalize the economy I think could be a big trigger for for for an unwind of risk appetite in Europe. But we're certainly starting within the UK, but that would feed very quickly across Europe as the as questions around Brexit and more sort of the global recovery come into questions.

I want to thank you very much for joining us Simon Ballard as our global credit strategist for Bloomberg. He is based in London. The yield curve is contracting. We have seen a steady decline in the gap between thirty year and two year treasury yields. Now it's down to fifty one basis points. That's basically lowest levels since September. This is at a time when the U S economy is supposedly growing. We're supposedly having a good time, a good uh sort of head. We got a good you

know what we got today? We've got a good rallying bonds. If you take a little at the long bond, it is up twenty three thirty seconds. It is now yielding two point eight percent. And as you said, contrast that with the tenure right, take a look two point one three Well, basically, basically the rallying bonds means that people typically are irish. Peter Kenny is here with us to help,

but makes sense of what is going on. Senior market strategist with Global Markets Advisory Group, and Peter, you serve on a lot of corporate boards. You've been in this market for decades. Try to help us understand the mixed signals is the yield curve telling us that if the Fed continues on its path of more aggressively raising rates this year, that it is making a policy mistake. We're at a pivot point here in this narrative where we're

seeing compression and yields. UH. That compression yields is dramatic, and as you pointed out, we haven't seen yields aliis in September, so well before the presidential election. That's telling us there's a lot of risk off in terms of the global investor mindset. There is tremendous compression, and that compression is in the face of the FED projecting three more rate moves this year, which I don't think it's

going to be the case. We may see June, but after June it's fairly pretty much off the table anything from that point on. And the reason why I say that is because even though we're seeing equities that at or near all time high high, as we're seeing economic data this underwhelming. Last month's employment report was a classic

example of that. Not only did we get a miss of meaningful size, we saw revisions that were significant for previous two months, and we saw nothing inside that way a report that spoke to any sort of robust growth, wage inflation, average week labor force participation. None of that data spoke to any sort of robust growth. So I think that as much as the FED wants to project higher rates and wants the markets to believe that our rates are going to move higher, markets are towing the Fed.

We don't think so. And since the bond market leads the equity market, I think it spells potential headwinds for the equity market as well. So what are you telling your investors? I mean, if you're taking a look right now at the thirty year as I said, two point eight percent for a thirty year, I don't get it. One year is one point one percent. I mean, how do you make sense of this? Well, it's telling us

two things. First of all, it's telling us that the market does not believe that the FED is going to raise rates three times this year from here at the end of the year. So does that mean that if they do, then we've got a real problem? Uh? Him. I don't think it's going to get there. I don't think it's going to get there because it's just the

flattening of the curve is indicating that the Fed. I don't want to say can't, but I just think it would be very unwise unless we see something in Q two that speaks to something that we didn't see in Q one, which I would argue, we're not seeing I don't I just don't see it yet. Okay, well, here can you can you solve this paradox for me because a lot of people have said something is a miss. You have bond yields going down, typically as barrish, You've

got stock prices going up. You have a yield curve flattening, which typically means slower growth. The head stocks to not care. Other people say, no, this all works out just fine because it's a Goldilaw scenario. The Fed will keep rates low. You're going to have growth kind of chuggle on good job openings from the Jolt report today. Where do you stand on this? Okay, So, if you look at the equity markets versus versus the debt markets, the equity markets

are at or in your all time highs. However, keep in mind that they're trading at a pe that is well above a historical standard. Um. The Dow Jones is trading at a pe currently of eighteen sixty one UH, the SMP trading at at a pe of a nineteen thirty four, the nastac is off the charts. Of course, much of this move higher in prices that we've seen in equities was largely predicated upon the Trump bump, which

we've seen largely wash away in the debt markets. However, in the equity markets were still seeing these elevated, elevated evaluations, and I think that that is largely due to the large cap tech space. So if you look at retail, the retail sector, the energy sector, the financial sector, these are large sectors of the spid. All of them are down meaningfully. Yeah, but I mean, in fairness, you could

say that they all have some idiosyncratic issues. Right. Energy prices have come down quite a bit, the retail sect sector is being decimated by all sorts of trends. Uh. And then that you have financials, which are directly affected by the yield curve. Yes, but they may have idiosyncratic issues that are very vertical specific, but they still have to participate in any meaningful move higher in the market, and they're not going to well. I'm just looking for example,

Exxon Mobile. The shares of Exxon Mobile down ten and a half percent so far this year, perfectly shares of Macy's a down thirty seven percent so far this year. But guess what if you'd like to buy shares in Tesla, which has got a market value I believe greater than forward. Uh, you're buying into a stock that is up more than sixty so far this year. Yes, So it's very much a question of software. Test was really it's a manufacturing company,

but it's really a software company. Software companies stand to gain the most from this move higher that we've seen over the last three or four months because of some accounting changes that are coming into play in July, which will force them to recognize software revenues in a way that has never been recognized before. It was just gonna help earnings. It's going to help their revenue numbers. It's going to help their PE salesforce, dot com up so

coac case. Well, so, do you think that overall there's enough headwind, enough of a headwind to cause a market correction or is there so much bifurcation that it's going to kind of just study itself exactly so the latter, and I think that there is enough bifurcation, there's enough dissimilarity within the market for there to be a bit of A four for equities. So let's say we see the SMP five pull in over the next month and

a half to two months, maybe five point five. Let's say it settles in and find support of that would be meaningful and very really, very very positive because we give the sectors of the market that have underperformed an opportunity to catch up. You're you're assuming that there's some rational thought process behind this, right, I mean it's a little hard to to do that. You know, when you're looking at let's say a company like Tesla and this knock is up sixt and you know it is still on,

you know, it is still a hope story there. It definitely is very much a hope story, and it's extremely elevated in terms of its valuations. It's it's in that space, and it's that's that's part of the DNA of that company, and it's got sales. Well, there's the other companies, software companies that are in that space that get that merit, that valuation. Thanks very much for being with us as always.

Peter Kennedy, Senior market strategist at Global Market Advisory and independent market strategist for Kenny and Co. Well, there's been a ton of speculation about the slowdown in vehicle sales in the US and what this means for automakers. So luckily we have someone to really help us understand just how big of a slowdown this really is going to be. Mark Lenieve is vice president of US Marketing, Sales and Service for Ford Motor Company, and he joins us by

phone from Dearborn, Michigan. Mark, thank you so much for joining us. Uh. Ford actually had a monthly victory over General Motors last month with respect to sales. You came out with sales numbers that were ahead of GMS and better than expected. That's the good news. The bad news was it seems like there was quite a bit of support that Ford received from some of the fleet sales and still saw materials slowdown in sales by retailers. How concerned are you about this and have we already seen

the worst of the sales declines? Well, first of all, I appreciate being on with you guys, and um, you know, the the year so far as been really interesting from a vehicle sales standpoint, where it's portant to remember that we're operating in a in an industry believe is going to be seventeen point five seventeen point six million units

for the year. That's that's an historically high number, you know, going back you know, twenty thirty years and some of the heydays of the early early part of the two thousand. So we have leveled off plateau as we uh as we say back here in Dearborn from last year's record level, but it's still a very healthy pace. Retail is relatively

flat with a year ago. Our fleet business overall fleet business and industry about the same and and Fords tract and right with those numbers, albeit at a much higher transaction pricing due to sell on a very rich mix

of of our new pickup, van and suv lineup. Mark, could you speak a little bit about the company's efforts to create a core of electric or hybrid vehicles and why that is so important for the future of the company if you look to the future and some of the obviously regulatory standards that we're gonna have to meet as well as meeting as meeting customer customer expectations. Um, we're putting electrified uh technology, what be it's mild hybrids all the way to full plug in electrics across much

of our lineup. We don't feel like the business should be such a it's just small specialized vehicles that carry

this technology. So we're looking at technology broadly across our car, SUV and even truck and van lineups, and and we want to have to man sure that the consumers have choice where they can they can make economic decisions based on vehicle usage or using the car for just you know, for work or for or for just leisure activity, and they can make a logical decision and have a lot of choice that they want to full plug in versus a mould hybrid or eco boost engines that also get

great fuel economy. You know, Mark, you're talking about the volume of sales, and then hinted at the price point and that basically prices are going up. That consumers are buying more expensive cars even and trucks, so even if they're buying fewer of them, the actual revenues are are bigger.

I'm wondering how long you see prices rising to the degree that they have, given the fact that we are seeing deterioration in auto loans, in the quality uh in a consumers appetite to incur more debt, and the lending standards on behalf of big banks, from JP Morgan to

City Group. Well, the trend that we're seeing in pricing, which is large largely driven by what we call segmentation, which is people moving from passenger cars into utilities and trucks, has really been going there's steadily since two thousand nine, really coming out of the out of the big recession. So we've seen your on your increased not only in unit volume, but almost all the industry growth in that window has been in the suv and truck lineup, and

within those numbers. Within SUVs and trucks, customers are electing for electing and choosing much higher trim levels, higher technology packages. The vehicles themselves are getting more expensive as as we add we I meant technology, safety equipment to the vehicles. So in some in some regards it's tended to defy gravity um in terms of prices. The price increases that

we've seen facilitated by incentives and cheap credit. Yeah, but as a percent of as a percent of selling price, incentives are really relatively stable over the last seven or eight years because because you're spending somewhat higher per union incentive spent against you know, a much higher selling price now credit has entered into it. Over the last seven years,

nominal interest rates have gone down. Fuel you know, fuel which goes into the average consumers cost of vehicle usage in the months, has come down in and payment terms have extended out, although not much more so than we've seen over twenty twenty. Your trend line and leasing is relatively stable to where it was six seven, eight years ago as a percent of the overall market. So it's something that we keep an eye on, but it's it's certainly not what we would consider any kind of an

alarming factor at this time. Inventory levels speak to those that are on lots all across the United States, when does that back up make it more difficult for you to get the next year's model out to those dealers. You've got some spot accesses and a couple you know, you can look across a competitive landscape on a couple of segments from a couple of competitors. But at Ford, we feel we're in ideal position. Sitting at roughly seventy

days heating in an important summer selling season. The industry is in in relatively good shape. You can point to, you know, a given competitor in a in a in a segment or two that would be considered somewhat high. Many have reasons for doing it. They might have planned downtime for plant changeovers and things of that sort. But overall the industry is not what I would call stock affected. Where that's been where you've got an unmanageable level of stock in the industry. I want to thank you very

much for joining us today. Mark le Nave is the vice president of Marketing and sales and Service at the Ford Motor Company, joining us from bint in Michigan. We're gonna take a look now at labor, but not just any labor, people who want to come to work in the United States on H one B visas. And here to tell us more is Caitlin Webber, government analyst Global trade policy for Bloomberg Intelligence, joining us from Washington. Caitlin,

a pleasure to have you with us. UM. I was looking at the number of applicants for these eighty five thousand UH spots that are available for the H one B visa program, and last year right two hundred and thirty thousand people applied for just eighty five thousand visas. Is that accurate? Yeah, that's right. UM and I don't think we have the numbers out yes this year for this current filing season which just ended back in April. But um, the the level was probably right up right

up there with the demand. UM. I think that the U s c I, s U S and Citizenship Immigration Services had to actually stop applications after five days because there was just so much demand. So how does the program work? Because I know that there's their time limits involved, but then there are also exemptions that can be made.

So under the hn B visa, a highly skilled worker can be brought in to work in the US for a specific company for a period of up to six years three years UM with another three year UM a three year extension. The program isn't intended to UM only bring in workers whose skill set UM you know, are scarce supply in the US. UM. US companies are supposed to attest that they have made efforts to hire American

workers that they couldn't fire. They couldn't they couldn't find American workers to fill these slots, and so they have to make those at test stations when they're when they're filing to bring in workers on these visas. Right, Well, President Trump has been a big critic of these visas and said that they're very bad for US workers because companies give foreign workers a priority and ostensibly will be more willing to hire overseas if it means paying less.

What's the status on President Trump's efforts to clamp down on this program and what are some of the rebuttals that some of these companies have made to some of the criticisms. So right around when the filing season was opening a couple of months ago, the Trump administration put out a couple of warnings to companies telling them not

to discriminate against US workers. They put on another warning saying that they were going to step up work site enforcement visits um and they were going to target specifically I T outsourcing companies who are particularly dependent on these

visas for those site visits. There was also an executive order that came out late April, after the filing season was already closed, where the administration ordered a multi agency review of the program with a goal that eventually there will be new rules or guidance that could change the

way that the visas are allocated. Right now, they're allocated randomly, just in a random lottery but increasingly there's been calls from inside the administration and outside the administration to allocate those visas based on pay or based on skills that are UM and scarce supply. What do you hear from the companies that would be most affected by this infosis? For example, they're based in India, Tata Consultancy Services also based in India. You have Cognizant based in the United

States as well as Accenture, they're based in Dublin. They're all big users of H one B VISs. It's interesting, you know, of course these companies UM. They say that the current rhetoric around the program is really unfortunate. That they bring in these workers to do you know, to do good work and they're important part of the economy. At the same time, these companies are really trying to

increase local hiring in the United States. They UM on a lot of their earnings calls, they're sort of UM, you know, boasting about the fact that they are hiring thousands and thousands more Americans, more U S workers UM than and they're and they're they're trying to bring down their H one B visas. Now there's there's questions about what that might mean for their margins UM, but you know they are trying to sort of balance this line between saying that this is a this is a good program, UM.

You know, these workers are important and we in the United States economy needs them, at the same time saying we're trying to respond to this rhetoric and and this potential reform by increasing our local hiring. What effect would this have, if any, on the educational system in the United States Because university such as University of Michigan, of Illinois, Chicago, University of Pennsylvania, Johns Hopkins, so on, all the way down the line, they also have our home to recipients

of H one B visas. Yeah, and it's interesting because UM nonprofits and and universities are actually exempt from the cap. So right now the there's an eighty thousand visa limit every year in universities and nonprofits are sent from that cap. There has been an effort UM within the administration to clamp down on I guess, for lack of a better term,

what diploma mills UM. So there has been increasingly calls for rules that would require UM universities bringing in h ONMB workers to be accredited before they're able to file those cap exempt applications. Caitlyn, real quick, is there any teeth behind some of the criticisms that President Trump have put out there. I'm gonna cure a lot of review and warnings, but I don't really hear much by way of law or changing policies formally. Yeah, that's that's exactly right.

A lot of tough talk, not a lot of action yet. UM the review, there's actually no deadline for that review. I think it's probably likely we'll see some results at least before the filing season opens in April. UM. I also think that there's probably a decent likelihood that there could be a company, you know, potentially prosecuted for alleged abuse UM of the program as a result of these

work site visits. That would be a really interesting case to try to set the precedent through just prosecution of some violation or flagrant uh misallocation of the resources. Caitlin Webber, thank you so much for joining us. Caitlin Webber is a government analyst and global trade policy expert for Bloomberg Intelligence, and she's based in Washington, d C. Thanks for listening to the Bloomberg p m L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever

podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa abramoits one before the podcast, you can always catch us worldwide on Bloomberg Radio