Supply Chain, Interest Rates, And Trading Sentiment (Podcast)

at Bloomberg dot com slash podcast. Matt and I have really been focusing on during this whole pandemic, the global supply chain issue, because that affects so many companies in so many industries on a global scale, and weekend we still don't. We heard about it again today from Targets, so huge issue. The New York Federal Reserve Bank is weighing in now and they've got what I'm what they're calling today the New York Federal New York Fed Global

Supply Chain Pressure Index. That's what we need. I need a picture, I need some numbers, and Dr John grown joins us here. He is Economic Research Advisor for the Federal Reserve Bank of New York. Dr Groan, thanks so much for joining us here. Supply cham I'm looking at your graph. Tell me what your index is. What it tries to measure and what it's telling you, sure, good morning,

and thank you for having me on. So what we're launching you to this this morning is what we've denoted as the Global Supply Chain Pressure Index or g s c p I, and it's a it's a single measure of global supply chain pressures, uh, and it's it's can be used to gauge the importance of the disruptions to global supply chains and how they infect economic conditions and how they these constrains uh evolve over time. Basically, all right,

so I'm looking for the folks on radio. I'm looking at a graph here and it just kind of shows the standard deviations from the average supply chain time goes back to it's usually plus one minus one. We're up like plus three, four or five. I mean, give us a sense of kind of the the magnitude of the supply chain shock we're experiencing right now. Yeah, So basically what we've seen since to e twenties, essentially precious has been like at the peak, it was like five times

as high as the average level of the whole sample. Right, so starting from to twenty two, uh so before twenty

really we haven't seen anything even closer that. I mean, what what what has been closes was what happened during twenty eleven, you know, when we had the Fukushima earthquake that hit a lot of the Japanese supply chains, and then later that year the flow floodings in Thailands, which which had hit a lot of like companies that you know were supplying electric components to you know, electronic electronic

producers and auto producers. So this is like completely unprecedented. Uh, and yeah, that's it's it's a new unique phase in the global economy. So what is it taking into account? Exactly? Is these transportation cost is this raw input coast um? What are we looking at in terms of the contributors

to this index? Right, So basically the index summarizes developments in twenty seven series and basically there are two main categories of global transportation costs and then regional surveys about the state of manufacturing in in in seven inter linked economy. So in terms of the transportation cost you know, they're looking we're looking at you know, the b d I for example, which is a measure of just war war raw good shipping transportation, and we're also looking at the

container shipping rates. And then in terms of you know, the manufacturing data, we we we really heavily rely on p m I surveys and especially data about you know, supply supply delivery times, backlogs and inventories of manufacturing firms in UH in the US, in China and Taiwan, South Korea, Japan, the Ara area, and in the UK. So DR going a lot of investors, you know, I think as they think about inflation, they want to get a sense of has it peaked to what extent and what you know,

kind of rate will it decline? What is has your data indicated to you that perhaps the supply chain bottlenecks have peaked, well, so what the what the index really shows that the peak up to now was kind of reach in December, So then we reased you know a level of like five times higher disruptions than than the average. And between December and basically April, we've seen a steady decline I mean at the motor pace, but quite steady,

but still well made that historically historically high level. So it still was about you know, less than three three times the average level. What we've seen having in April is kind of a little bit of a resurgence in disruptions. So pastures went up again on the back of you know, the geopolitical tensions in Europe due to the Ukraine Russia conflict as well as the COVID lockdowns in China. So it went back up to just over three times the

average levels. So yes, we speak, but it seems to do at the moment, seems to botton out and maybe become a little bit worse again. I mean going forward. This measure is not a forecasting measure for future supply chain pressures. I mean it's more like where we are now at the moment. But it would be interesting to see,

you know how how it involved going forward. Alright, good stuff, very interesting that to young grown economic research advisor for the Federal Reserve Bank of New York, the New York Fed releasing today a brand new index that tries to measure the supply chain is called the New York Fed

Global Supply Chain Pressure Index. Fascinating stuff because again it is an issue that really has come to the fore and made all of us, i think, kind of experts at logistics and supply chain and all that type of stuff. Because Curtty we hear about it from all different types of companies. Yeah, we really do. I mean we're talking about retailers heavily in focus right now. But wasn't this

the story for Tactics a couple of weeks earlier. I mean, some of these chip shortages that we've been talking about for going on two years now, they are still there. That chip shortage is still there. You hear it in automakers even trying to get their hands on metals. So this isn't a a right now story. But I think he made a very apt point in the nine o'clock is we've been talking about this for ages, why is

the market still not pricing it in? Yeah, it's interesting, and um, you know, part of it is China and getting those factories open on a consistent basis. And we're starting to hear some news that parts of China are starting to reopen, and most notably in the Shanghai region, So maybe that will help things. And we had the head of the l A Ports on yesterday he sees the backlog of ships off the port coming down. You've got gasoline prices at the pump uh at or near

a record high. I think about Matt having to flow up that twenty three gallon. I don't know what is it, Chevy Silverado pickup truck, gas tank that's gonna be You're gonna take out a mortgage to do that? All right, Let's check in on the consumer here. We've had a lot of retail sales numbers, We've had a lot of

retailers report quarterly earnings. Uh, A mixed back here, but inflation is the number one story we had earlier President of Chicago FED, President Charles Evanson with Michael McKee talking about the offensibility to impact and lower inflation. Let's check in with Jennifer Leasing, your economist and managing director for BMO Capital Markets. Uh. Jennifer, again, the Federal Reserve seems

to be laser focused on inflation. In reality, how much can they impact inflation when some of the inflation we're seeing is just kind of commodity driven, whether it's gasoline or food prices. How do you think about its ability to impact and good morning? UM. I think they have a pretty good way of a pretty as strong UM handle. I think on on what they or their tools of what they can do to UM to to curb inflation or to rein up back to the two percent a target.

But it's going to be painful as that share Powell has has said, and you know, it's just going to be using higher rates and they're going to keep going higher. And it's like you just said that they're almost very much laser focused now it was. It's kind of funny. It's like last year it was almost like they were looking for a reason to tighten, and now it's almost

like they're looking for a reason to stop. You know, they're going to keep going faster and higher, and they're just going to go beyond neutral before they stop and take a break. Jennifer, there's a difference between an outright recession, a contraction of the economy and to slow down. And it feels like, if you are listening to the market commentary, we've gone very quickly from a deceleration and growth to an outright recession. Is that justify? So this is where

it gets a little dicey, Okay. So in in you know, your textbook term of recession is two consecutive quarters of decline, and we've already had one quarter on the headline drop in GP at one point four percent annualized. Again in Q one and um, you know Q two's I don't think it's gonna be a decline, but I mean it certainly does feel like a recession. But again I'm just gonna focus now on the first quarter, Like what dropped,

what caused GDP to slow down? It was all imports, like a huge surgeon imports, which speaks to very strong domestic demand and less or slower inventory accumulation. Businesses are still trying to you know, stock the shelves, but they're doing it at a slower pace because they can't get enough stuff to stuff to to stock their shelves with. So you know, again the headline figure is because suggest that there is recession, but again I don't think it's

the true true definition. Um. And I'm going to point to, you know, the fact that we still had a really solid retail sales figure for April, which do you guys are all talking about yesterday? Um, And even though it's a nominal terms, you know, in real terms, it was sort of flat from ugal levels. But the still fact that consumers are still well, they're buying, I think speaks volumes.

In the fact that there's still a very strong labor market for now, and that guarantees that you know if you have ever wage, if you sort off, you have a job, then that means you're going to get a study paycheck, which I think is um the key factor to all of this. You mentioned inventories. That's a really key piece. I wanted to kind of harp on and on.

In Target earnings today, you heard that one of the costs from or when the margin pressures was coming not from headcount of compensation in their stores, but in their distribution centers. And I've actually chart this. You can do this folks on the terminal and chart the inventory to sales spread of a lot of these major retailers. It's essentially spiking to a twenty year high, which I believe

is as far as the data goes. Jennifer, I have to ask you if you see this inventory build up doesn't create more reasons for the economy to slow down. The idea being that if you see demand slow down, even demand increase for that matter, and you have this inventory build up, there's less incentive to produce more things or even import more things. Does that add to the slowdown? Well,

right now, it's um. The fact that you're adding to their inventories you know, um, you know, from on a trend basis, I guess that is actually adding um to growth and that's not potentially slowing it down. But you know, of course you've got it's like you just pointed out, you just have to look at the the demand side, and so far there is still and I'm going to say, there's still a lot of strong demand. There's still a lot of people, a lot of businesses waiting for items

to come through. Um. You know, I I love to look at the I s M surveys not for the headlines, but for the comments, and for these are the people that are directly working you know, Um, they're they're they're are you know, in the factories, and they're the ones who are counting all the widgets that are coming in. And all the comments still point to the fact that they are running low on materials and that which is driving costs higher. Um. And still you know, there's still

a lot of demand. But the interesting thing to all of this is that businesses are actually turning down orders still because you know, it's like it's almost like your money is don't go here, right you um, uh, your orders are coming in, but sorry, we can't fulfill it out of reasonable time, so you know, we we can't take your order right now, which is a very weird place to be at right now. But I still think

that there is demand out there. As long as there is demand, the inventory levels, you know, they're just trying to build it up in order to meet that, all right. Jennifer Lee, thank you so much for joining us giving your thoughts here on these markets, on this federal reserve, and on inflation that is rife in this economy. Jennifer Lee,

Senior economist and Managing director for BMO Capita Markets. Looking at the markets here, rolling over yet again, we're down about two percent here on the SMP five, a little more than two percent on nastack. Looking at the tenure treasury, Uh, there's a bit out there for the tenure treasure. Yields are coming back. We have the tenure yielding two point nine three percent. We were about three percent uh this morning,

so yields really coming in. Oil. Crew to oil was up a little bit earlier, but the off just slegged off about a half percent for w t I crude oil that's called twelve dollars a barrel, still way elevated. Do we have a bottom in this market. I don't think so, and not by today's trading hill off another one point eight percent on the smp UH five hundred. But let's talk to somebody who does this for a

living and talks to traders for a living. Barry metzger managing director and head of Trading and Education at Charles Schwab, joins us here in our Bloomberg in our actor Broker studio Live. He's in town in the Bloomberg headquarters for a Bloomberg Intelligence Investor conference today. Barry, thanks so much for joining us here. You know, I think the question that I started hearing more and more in the last week or two is are we at the bottom? How

do I identify a bottom? When you talk to your traders, when you do your surveys, our traders thinking about calling a bottom anytime soon? Well, first of all, Paul, it's great to be here live, so thanks for having me. You know, our traders are very vocal, and you know, when it comes to calling a bottom, that's always tough. But certainly what we seen in this recent survey as clients are very bearish. They are definitely bearish given the UH,

given the events inflation is absolutely on their mind. I would say issues one, two, and three are inflation, inflation, inflation. So when you take that into account, and we listened to the survey from our clients, you know that inflation issues the biggest one. And I would say from the data, a third of our clients stint inflation is going to

stick around for a little bit. But um, excuse me, a third of them think it's gonna last until so based on that sunament, that's that could be quite well too. Thirds thinks it's a little bit more of a shorter term. But um, certainly our clients are looking at what we're calling a Russian Bear Russian Bear meeting. All the three major industries are down in Bear territory by the end of two a Russian Bear, a Russian Bear tie to Ukraine. Of course. Um, you know it's interesting. I camera christ

our Macroman strategist. Always he was when my teachers used to tell me find the historical precedents that I've been obset with the nineteen sixty two President Cuban missile crisis, the market just slid for nine months straight and didn't recover until the Cuban missile crisis was over. So I have to ask, we're painting a lot of the sell off on inflation, We're painting it on supply chain issues, even COVID. The minute the war in Ukraine ends, whenever

that might be, is that when we see a complete turnaround. Yeah, certainly our clients are very much looking at the geopolitical roosts in Ukraine. So, as I mentioned, inflation is number one, Ukraine is absolutely number two. So could you see a bump based on what our clients are saying once that ends, and what does that look like? It depends, But I would certainly think there would be positive news based on what we're seeing, But a lot more goes into it

as well. You know, it is inflation, it is Ukraine, but it is you know, obviously the prices that they're seeing. And frankly, the question I get after often a lot is, Okay, if if I were to hand you ten thousand dollars, what would you do with that? You know, that decision was pretty easy a couple of years ago. You could put in your megacap socks and be happy. Now all of a sudden, you gotta pause, you have to think

about it. And our clients are actually looking more towards real estate, um oil, gold, and even crypto as potential other investments besides the typical ones that we've seen. Yeah, it's interesting. I mean the we had the Chicago FED President Charles Evans on Bloomberg Radio television earlier this morning, and you know, he was saying, as you were saying,

that the Fed is absolutely laser focused on inflation. Um. That kind of goes to the point they're going to be aggressive here and they've already shown to be aggressive. And it kind of begs a question, what risk assets can perform well in that type of environment. Yeah, great question. And in fact, when we looked at the survey, clients did address this. And you know, when the survey was taken, I think most of our clients were thinking twenty five

basis point increase was kind of the norm. If we had that survey taken today, they would probably be more a half or even you know, three quarters, So maybe even a different pump um. You know, it's it's hard to say. I think this speaks to having a diversified portfolio. I think this gets back to some of the basics of having a financial plan, understand your goals. Look, I leave the trading business. But I'm still a believer in your wealth management principles of having a plan tied your

goals and objectives, having an asset allocated portfolio. And there's times when you need to ignore the noise um. And we've heard that many, many times, and so this, you know, for many investors, I think it is playing a little bit of the long game versus trying to get you know, swept up in some of these short term markets, which

I think is really really important. I'm glad you mentioned a short term markets because you also said the conversation on where you spend your ten thousand dollars is really easy two years ago, but not so easy now. So let's put this to you. You have ten thousand dollars, You've got a three month time horizon. Where do you put it? So I'm not going to leave it in bank in the bank, I'm not going to leave it

in cash. Listen. I still go to the the the philosophy of you know, if you walk past the store and you see an item that you wanted me to buy that was thirty or off, you're gonna buy it right away, like wow, such a deal. But when it's the market um for some reason, people are hesitant to take advantage that. So I would still look for opportunities

that are tied to my objectives. Do a little dollar cost averaging, maybe not all once, but look at different sectors that I believe in more for the long term and start buying them on a discount. So that could be you know, your typical large cap sectors as well.

And but I think there are opportunities for alternative investments, like I said earlier, and I do think there's some other opportunities specifically in rates, just like our clients are suggesting that do look opportunistic, you know, we're you know. There's one of the stock stories of the day today. Barry was a target reported some numbers with some disappointing guidance, citing the cost inflation impacting their business and their consumers.

Started the day a hundred billion dollar market cap. It's off twenty five percent. It is rare in my experience to see such a large company very liquidly traded. Thirty one analysts follow the stock, widely held by some of the smartest institutional investors. What does it tell you about when when you see the price action in a big cap stock like that today. Yeah, I mean we're we're

seeing the in lots of different places. I think this again, ghost e fact, you certainly don't want to have all your eggs in one basket, um, because you never know what could happen with that basket. I mean, the markets can be unpredictable. I think the important thing in all sincerity is not to panic and not to make grass decisions. Uh, it's to stick to your fundamental plans and recognize that markets move, and markets can move quickly, and it always

seems like, man, they fall so much quicker than they rise. Um. And so maybe a good day for those of you invest in that To turn off the screens, that's okay, but take a long view approach versus getting whipsawed by the news on a day to day basis. Are you still seeing I mean your schwab, you've got the you know, you get the greatest view on individual traders and retail

What are the retail folks doing these days? Yah? So retail folks are certainly still engaged in what we see in a lot of our more active traders is um. Even though there's more volatility, more unpredictability in the markets, and maybe certain sectors that they had to invest in. They're still using this time time to stay educated. I think that's really important. In my role, it's trading and education, and education, in my opinion, has never been more important.

So let's say the example you said about ten dollars, maybe I don't investor right away. Maybe I spend more time researching, spend more time understanding different strategies that I could be utilizing, maybe looking at more risk, defying strategies, utilizing options, and other areas that potentially can help my portfolio or had some risk. So I would say, by and by and large, our clients are actively staying engage, utilizing more education, and trying to get more knowledgeable about

the markets. All right, verty great stuff. Really appreciate you coming into the Bloomberg studio. Barry Metzger, He's managing director and head of Trading an Education at Charles Schwab. All right, I'm looking at d X Y index here, the dollar index on a trailing twelve month basis. We started about a year ago down around ninety. The index today's one h three spots six. Just a steady, steady move higher for the green back. Is there a bear case out there?

For the dollar. Brent Don, president of Spectr Markets, joins us. Brent, I mean the the US dollar has just been marching higher and higher and higher. Is there a bear case for the dollar? Hey, good morning, Paul. Yeah, that's a really interesting thing that's happened. Is the death of the dollar is a popular theme, right It always is a popular theme. Ever since I was a kid. It's been a popular theme. And yet it's just a theme that

doesn't work very well. Um. Currently with two engines of growth, China and Europe are both sputtering and you really see that especially in new orders UM and expectations in Europe. UM. The dollar is kind of the cleanest dirty shirt right now. People thought that with the swift band on Russia that that would be some kind of warning signed to other

central banks to stay away from from US assets. The weaponization of the dollar potentially could have been negative for the dollar, but it hasn't had any impact at all, and in fact, it hasn't even had an impact on gold. Where people thought that was the obvious trade was if central banks are going to move away from US assets, and they certainly don't want European assets because they bend

they made the band as well. Then gold seemed like an obvious beneficiary, and yet there's been no evidence of central banks buying gold either. So what it comes back to is the US is the most liquid capital market in the world, and when people are nervous, even if US equities are underperforming, which they are, when people are nervous, they come and buy the dollar. Brent Donnelly, I was like, this name sounds so familiar in the pole, I realized I have his book on my bookshelf, really the Art

of Currency Trading. Well, he's been all currencies, yeah, HSBC, Lehman Brothers, Nomura, I mean, totally an expert on the dollar. But anyways, it's very cool to speak to an author I know for my bookshelf. But Brent, I have to ask you about stagflation. That seems to be a ward that comes up over and over and over agun Is that a inevitability for the United States or for Europe.

I wouldn't say it's inevitable. Um, you know, forecasting is hard and that's something I say in my book, but I will say that so stagflation, stagflation obviously is stagnation and inflation. I don't think I need to talk about the inflation side, um, But the concern now is that Okay, first of all, you have Europe and China are both problematic. Like I said, new orders, especially which tends to be the most forward looking, is really ugly, especially in Europe.

But the thing is now in the US people focus on on lagging data like the unemployment rate, But if you listen to the conference calls and you look at the more recent anecdotal stuff, those anecdotes add up to a little bit of concern, even on the labor market. So I wouldn't say that it's recessionary type of concern. But if you look at Amazon, Netflix, Facebook, Twitter, cameo Carvon, I mean I could actually make a longer list than that.

There's been a lot of either hiring restraint announcements or outright layoffs, and that kind of stuff doesn't show up in the data for a while. So I think people that are relying on a strong US jobs market to make the case that everything's fine are probably a slightly misguided because that the unemployment rate specifically is a very lagging indicator. And to me, the the drop in unemployment or the freezes and or the freezes and employment are

very reminiscent of two thousand, two thousand one. If you remember that era, stocks dropped about before you saw anything in in the unemployment or initial claims data. UM. So now you have the disruption and work from home stocks all down around and then the exact same pattern plays out where hiring slows because these tech companies know that the financing is drying up right. It's Powell Is is tightening financial conditions and VC and everyone is feeling that.

So anyone that overbuilt, like Carbona being an extreme example, but even Amazon being another example, really have to pull back the reins now, UM, and specifically the tech companies that lose a lot of money are not going to have easy access to free money anymore. So I think that's leading to a drop in confidence, and you see that in the consumer confidence data. Now much of that's driven by inflation, but now you're starting to see a

little bit of concern about employment too. So I think we're on the front edge of the stagnation part um, and we really have to monitor the data and actually, more importantly, I think monitor the conference calls of of the big names because you look at Target and Walmart. UM also kind of concerning right, you're moving out of the tech area and now into the consumer and that's a little bit worrisome too. So I would say people should be worrying about stagflation, all right, Brent, good stuff.

Really appreciate you taking the time talking to us about this economy, talking to us about the currency markets here, focusing on again not just the government information, but UH info and forward forecast, forward looks from a lot of

these companies. Brent Downley, president of Spectr Markets. He spent uh many many years trading currencies across Wall streeted number of firms, so he's got a good feel for here, what moves this U S Dollar relative to other currencies, UM and economic winds that push these currencies, uh, you know, from up and down on a global scale. So I always love talking to f X people just kind of market rolling over here, uh cretty. So a lot of folks not liking what they're seeing, not feeling like we've

seen a bottom in this market. Got some more room to go. We have this fedtle reserve of course raising rates. Uh. And again a little bit of concern coming out of these retailers over the last three or four days as it relates to kind of the inflation impact on not only their business but on the consumers. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer.

I'm Matt Miller. I'm on Twitter at Matt Miller three. On Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast. You can always catch us worldwide at Bloomberg Radio