Yield Curve Front And Center For Fed Chair Powell: BI’s Jersey

blogger at M live go on the Bloomberg. Remember to send Dave an email at d Wilson at Bloomberg dot net, sign up for his daily free email newsletter, and follow Dave on Twitter at the One Dave. Alright, the one, Dave. What are you looking at today? I was looking at cruise line operators. Yeah, it's a good day for transportation stocks in general. You can put the cruise lines together with the airlines and uh, I'm sure because of the United Continental reports exactly, I'm sure you were looking at

Norwegian cruise lines. Uh. As far as focusing on that industry, they expect to raise their earnings forecast for this year, talking about booming demand in their main markets around the world. And that's saying something when you know there's so much of a focus on, you know, whether economies outside the US are doing as well or perhaps headed for some

weakness and relative to the US. And yet you know you've got all these stocks moving up in Norwegian Cruise Lines has the second biggest game in the S and people I'm under now it's up more than eight percent. You know, but you know where the demand is coming from China? That would make sense. You know, you've got people who have more wealth, uh, that are more able to travel, and so it stands to reason that you'd

be getting the demand from China. You know, United Continental, I mean they're talking about raising their earnings forecast for this year at a time when fuel prices are going up and we've seeing other companies cutting their projections. So you know that that's the positive surprise there. Uh. You know, you've got United up seven and a half percent, American Delta Southwest all higher. We should point out to that Royal Caribbean and Carnival are following Norwegian Cruise Lines leads.

So those are a couple of areas that definitely get your attention to this market alright. One area that's getting my attention is the underperformance of tech stocks to the naztacs, certainly underperforming the SMP and down Jones. What's behind that, Well, it doesn't help matters that Alphabets down, you know, the

owner of Google. This five billion dollar fine imposed by the European Union, I should point out though, I mean those two classes of shares that are in the SMP five hundred, the uh the voting class A, which is the ticker g O O G L, and the non voting class C, which is g O G they're only down about a quarter at this point. That exact what I was gonna say. I mean, this is the biggest fine ever of its hype. It certainly is a big headline.

The reaction is to Minimus exactly. I mean, people anticipating that the EU was going to weigh in. That this has been playing out for some time, so it's not like it's snuck up on anyone. And just looking at you know, Alphabet's performance, I mean you see just in terms of how much they earn in a quarter. Yeah, well, I mean you're talking about nine billion dollars. They could pay it off with a month and a half worth

of earnings. Let's get a little bit more insight on exactly what this fine was and why stock investors just really don't care share over a joint us. Now, she's a technology columnist with bloom Bloomberg Opinion. UM, we're talking about this five billion dollar fine by the European Union. Can you just give us why Google was fined this

way and why shareholders are just shrugging it off? Sure? So, Basically, what the European regulators said was that Google has been illegally abusing its power over Android, which is the operating system that powers something like eight five percent of smartphones in the world. And the Europeans basically said Google um illegally compelled the companies that make devices that run Android software, so that would be companies like Samsung and hp C

an LG that makes phones. Google compelled them to install other Google apps on those Android phones, including things like the Google Search app, the Chrome web browser. UM and the Europeans said that this was sort of an illegal abuse of Google's power over Android. And as for why UM investors don't care, look, as you guys said, this

has been telegraphed for a long time. This investigation has been ongoing and it's a little bit hard to know exactly how this might crimp Google's revenue and profits that you know, we're now in a world where Google has become the de facto um you know, starting point for a lot of people on their phones, whether that's YouTube

or the Chrome browser or Search. Certainly, and no matter what regulators do, the question is, um has will will the rule changes or will Google behavior changes do anything to change the status quo of Google's power in the smart home world. And you have to bear in mind too, we've seen this movie before. Go back a couple of decades, the EU regulators told Microsoft they had to break up in essence, the Internet Explore browser from the Windows operating system.

It's the same thing, only it's playing out now with mobile phones and Microsoft seems to have survived just fine in the last couple of decades. And so here we are. It's the same situation you know that that Google's facing. And you know, at least we have a press the suggest that may not be the end of the world. Well, Shira, I just want to understand Android as the operating system. It's a Google product, right, is a Google product? Yes? So they don't make money directly from Android. But yes,

it is a product that Google makes and distributes. They got two billion monthly active users. That's the largest installed base of any operating system, and that fits into the Google Play Store. So you've got what three million plus apps on the Play Store. What would be the technical consequences of separating Google from the actual operating system of

mobile phones. Yes, fair question. Um, I think the most honest answer is we don't know exactly what will be the consequence of this you crackdown on Google and how Android operates. Um, what it could mean is in the future, if you buy an Android phone, whether it's a Samsung phone or an HBC phone or somebody else's phone, Um, maybe it won't have the Google Search app installed on it automatically. Maybe it won't have the Chrome web browser

installed on it automatically. Right, And look, those kinds of default do matter. That is why companies make deals so their phones come pre installed with all those apps, because people tend to use whatever is already on their phone rather than seeking out those apps or internet services on

their own. All Right, So you know, we started out talking about the under performance of NAZA of the Nasdaq index, and so it seems like it's pretty clear that this is a slap on the risk for Google with the fine, it's not going to materially alter their outlook. Netflix perhaps is in a different situation. You are seeing those shares continue declining today after yesterday's de clim which wasn't as bad as it could have been. And I guess I'm trying to figure out, is this sort of the moment

of truth? Do you think shia for Netflix, just with respect to they actually start to face some challenges with their business model of raising money and then burning it.

I think probably not yet. Um. Look, the thing about Netflix is it's pretty easy to argue that one quarter or even two quarters um of soft subscriber growth or subscriber numbers um is a blip that if you look at Netflix's track record over the long term, it is a pretty amazing story of a company that has managed to gain a huge number of users in a short period of time and for the most part, is still adding to its user base, even in a country like

the United States where something like half of all households with internet access or Netflix subscribers. It's pretty impressive. Um. You know, but the thing about Netflix, right is that it's a self fulfilling prophecy that people's investors belief that Netflix will keep growing gives it the money both from the debt markets and exequity value, gives Netflix the money to keep spending on programming so that it can gain

more users. And if one part of that virtuous circle starts to uh kind of collapse a little bit of people believe it might start to collapse, then the whole cycle doesn't work. Right. That is, investors believe, Okay, maybe Netflix isn't going to grow to the moon, or at least to have to grow as quickly as we thought in terms of subscriber numbers. Maybe they're less willing to um loan money to Netflix to fund its programming costs.

And if that's the case, then maybe Netflix can't spend as much as it has been, and then maybe it doesn't get as many subscribers as people thought, and then the whole thing starts to come unraveled. So we don't know the impact. It's only one quarter, but remember that Netflix basically live or dies based based on the kind of faith of investors, and that faith could be tested. Now, sure, Netflix has what a hundred and thirty million subscribers paying

every month. Correct, that's a lot of cash flow, isn't it. Well, it's a lot of cash flow in theory, but if you look at Netflix's cash flow, it's negative to the tune of several billion dollars a year um and they've said that the free cash flow is going to be

negative three to four billion dollars this year. And the reason for that is, Yeah, there's a lot of customers coming in the door paying their bills every month, but there's even more money going out the door for Netflix to pay for Oranges, the new Black and Stranger things than all the other literally hundreds of new shows and movies that it airs on a yearly basis. So it's spending more than it's it's taking in. I think they're

supposed to be about seven hundred programs on Netflix Original programming. Dave, you're shaking your head. The shares and Netflix are down about nine That's a lot to watch, no question. Yeah, Netflix shares it back to where they were a little more than a month ago. So we mean, yeah, you saw the reaction. Uh, late Monday, early yesterday, stock bounced back close with a loss of a little more than

five percent after falling as much as four percent. Yeah, it's lower today, but two thirds of repersent at the moment, so it's not like things are falling apart, at least in the eyes of investors when they look at Netflix. Yeah. Netflix shares now trading about three hundred and seventy five dollars a share. Thanks very much. Sara over Day Bloomberg Opinion,

a columnist all Things Technology. We encourage you to follow her on Twitter at Shara over Day and to read all of her opinion columns at Bloomberg dot com slash Opinions. I want to bring an Ira Jersey, Chief US Interest rate strategist for Bloomberg Intelligence. Ira, Yesterday's Q and A session, in my opinion, didn't really guild much. It was a lot of grand standing on the part of politicians, and there wasn't much with respect to monetary policy. What are

you expecting from today? Yeah, so I think the Senate you tend to get higher brow questions, and you do in the House of Representatives, you'll still get a little bit of grandstanding, and certainly some members um trying to trying to goad Chair Powell into coming to their point with their point of view. So things like things like growth, why the FEDS growth forecast or what they are m

I'm sure we'll be asked about the balance sheet. We'll be looking with that, and I wouldn't be surprised at all. And something that I'll be looking and listening for is any comments about how concerned about the shape of the yield curve that the FED is. That's been brought up in almost re every time we look at the minutes. That seems to be one of the highlights that that some members are really concerned about about the shape of the curve. But but Fitcher Powell actually got asked that

yesterday and he didn't seem overly concerned. He also did indicate, uh that for now they're going to continue with their gradual rate hikes. For the market took this as it's still all guns blazing, Uh, let's go because to your yields and made a new high yesterday, although they are

off the high that we saw yesterday. Yeah, So so you know, some of the some of the reaction I think about the curve is people are concerned that if the if the FED hikes faster than the market currently expects, that's really the real risk to the curve at this point because it's it's well known that that or at least the markets pricing that that said, it's gonna hike, you know, three more times or so before the end

of next year. Um. So so things about the curve that that we're gonna I'll be listening for that might be different than yesterday. Are you know, when the curve gets to zero, are you going to stop? Or how many more hikes are there going to be? Uh, we don't know. You're still see slacking the economy, so maybe why are you still talking about the s gradule hiking like all of those things are um, any change in

tune with what we're gonna be looking for. Now that being said, I think Terry Powell has done a great job staying on message, sticking exactly to where, um, where he was at the last press conference in June, as well as what we've seen in the minutes and and

the statements since he became chair. Um. You know, he tends to be not quite as verbose as Cherry Yellen was, and I think that that's maybe part of his legal background where uh, you know, he doesn't want to give away too much at at these at these hearings, but at the same time, he also needs to answer the

questions that are asked as him. So I think things like about the growth trajectory and and maybe a little bit more on the labor side of things that he was asked about yesterday before the House of Representatives, the head of the committee talked about how the economy is performing.

Do you think that that is a way to support the policy sees of the Federal Reserve And as much as they have sort of telegraphed these rate increases, yeah, you know, I think that when when we talk about the rate increases and the pace of rate increases, I think one of the things that that I think members of Congress don't want. They don't want the Federal Reserve to kind of derail the economy, and especially now at a time when you're talking about midterm elections coming up

in just a few months. Um, you know, you're gonna have Republicans in particular who seem to be a little bit on the back foot when it comes to um some elections, particularly in the Senate, that they're um, they're likely to ask him, you know, to to stay slow and yeah, you know, you've just had some members of the House of Representatives also saying like, hey, you you know you shouldn't we we want high interest rates because we have a lot of savers and retirees, but at

the same time, we don't want the economy to falter. So I think he'll be asked about some policies as well. UM, So we'll be asked about things like, you know, what are the tax increases or the tax the tax decreases and the additional federal spending. What does that do to growth? And you know, they'll try and highlight their their kind of campaign pledge on the on the Republican side, I think on the Democratic side, they're going to highlight the risks of those policies and and want Jay Powell to

say something. You know this. You know, the thing with testimony these days, particularly the last couple of years, is that UM people do try and have been trying to get whether it was his Chairman Nankee, Chair Yell and now Chair Powell, to kind of take a stand on their side of the issue. So there's some sound bite that they can use, um, you know, for for their own political gain. Well, as I was mentioning Jeb Henseling,

he's the committee chairman. He also maintenance. His opening remarks a little bit of comments having to do with the FEDS balance sheet and the draw down of the Fed's balance sheet. Do you think that's going to be a focus. Yeah, I think he'll he'll he'll be asked about that. You know, you know that the chair always is. I think on the Republican side in particular, they think that the Fed's

balance sheet is far too big. They I think some of them is a lack of understanding of exactly, um, you know, what the FEDS balance sheet is and how it's been used. Um. But but it's also an important question because the FED could, like, like one of the things that the Federal Reserve could potentially do, it's in their tool kit. I don't think that they'll do it. I think that they don't want to do. It would be to sell some assets that are on their portfolio.

So for example, if they want to keep on hiking interest rates but they want to steep in the curve, one of the things that they can talk about doing would be to be selling these uh, you know, twenty year and twenty five year securities that they own, and they own about three dred billion of them, so if they were to stort to sell some of them, you'd probably see a significant increase in yields in the back

end of the curve. I think that the Fed doesn't want to do that because they see it as disrupting the market more than than the way that they're letting their balance sheet roll off right now. Um So, I think all of those things have to be taken into um be taken into account. I think j. Powell will probably talk about that that you know that their balance sheet is unwinding and orderly fashion right now? All right?

You know it's It strikes me as we await the Q and a portion of this event withdrawal testifying in front of Congress, it is striking that we're getting more data out of the US, particularly housing data this morning showing the US new home groundbreaking and permits fell in June, so the slowest pace in nine months. This is being taken as another sign of a greater slow down in the housing market the people expected. People are attributing this to higher mortgage rates as well as just the higher

cost of goods and labor. And I'm wondering, you know this, this has to at least weigh a little bit on the federal reserve right now, given the fact that you're not seeing expectations of longer term growth increase. In fact, they're coming down the more the Fed hikes. I mean, how has he responded to that? Is it just a labor market discussion? You know, Well, we're seeing good employment numbers now, so let's just keep on keeping on. Well,

I think he'll use that as an excuse. This is why they need to go gradually, because there are some fragilities potentially in the economy, and you know, things like housing could be on on the front foot. And certainly housing starts is important for or you know, some some economic numbers like like GDP for example, because it's uh, it's housing stares and completions, not existing home sales that go in. And that's the component of GDP UM you know.

And and and it is true that you've seen some somewhat of a slowdown as you've gotten over to about four percent. UH, that the commitment rate for thirty year mortgages is above four percent now, which you haven't seen in over a decade UM. And I think that's something that that is on the back of um of a lot of UH of a lot of FED members minds is you know, if if we continue to hike, will

that push up interest rates significantly more? You know, one of the reasons why you have mortgage rates where they are is not as much from the interest rate hikes as it is from the runoff of the portfolio, because you've seen spread slide in mortgage backed securities. Interesting, I guess all. Another sort of statistics that I think could come up is that real wages haven't increased it all

over the past year once, including inflation. And I'm wondering he had He did talk a bit about that yesterday, but you know, do you think that he could be pressed more on that? Is there something more that he could kind of offer up that would be compelling to you? Yeah, well,

there's not. There's not a lot that I think what he would say to a question about that is that there's not much that the Federal Reserve can do other than keeping monetary policy reasonably accommodative, which they think that they still are um or um at least some members do. And uh. And because of that, it has to be things like fiscal policy or some kind of um uh, you know, government action as opposed to federal reserve action

that would potentially raise raise income. So um no, I'm sure he'll be asked about trade, right, So some people will say, particularly on the Republican side, will likely say that, you know, these trade barriers should increase wages in some

sectors that have been held down because of globalization. Um. I think that, you know, Chair Powell will probably come down on kind of a pretty neutral stance on on that if he's asked about, you know, the wage implications of of any particularly any potential um reduction or increase in trade barriers, and he'll he'll say that like it's dangerous,

it's a dangerous game. And he did come down, you know, reasonably hard against trade barriers last year or yesterday rather and I think that that's something that will probably come up as well. Thank you very much. Ira Jersey is our chief US interest rate strategist for Bloomberg Intelligence. Thanks for listening to the Bloomberg P and 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 Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio