Bloomberg Surveillance: Inflation Accelerates

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Well, CEOs are already complaining about inflation. They're saying the cost of doing businesses higher, from wage increases to higher interest rates, all of it's really weighing on CEOs right now. So I think some of this probably will feed through to the CPI and the PCEE over time.

We will it do to fed PALAIC. I mean, it's unfair question. Mike's only on page six of a forty two page report. But Dana Peterson, do you see enough of a movement here to adjust the parlor game of March and beyond June.

Well, we think that the FED probably won't start cutting rates until around June, and the key thing will be the course of inflation. The good news is that core inflation is still slowing, but the Fed also cares about the headline, and certainly, when we look in the core, if home prices are still rising month on month, that doesn't bode.

Well for year on year.

But the good news is that we are seeing some cooling and wage inflation overall. And when you look at home prices, or at least the existing home prices year on year, they're slowing and that's showing up certainly in the rental components of both the CPI and the PCE.

Danny, can we get a little bit more detail there and just how high or low is the bar do you think to reduce interest rates Feder reserve? And is it because you think it takes longer to get to that bar or ultimately it's a bit higher than this market thinks it is.

Well, I think the bar really is inflation, but it's also going to be the labor market. Does a labor market continue to cool if you take away government leisure and hospitality and healthcare, you see no gains in employment. So once those three industries run out of steam, what do you have? And also the economy in general, does the consumer stop spending and really slow? So I think if the economy slows a lot, labor market continues to slow,

Is that one we'd expect to sit in jobless claims as well, because Danna, it's not just about CPI. This morning we've got jobless claims at two oh two, two hundred and two thousand. It's just absolutely incredible. What would you expect to see that start to inflect higher?

Sure?

Well, the reason why initial jobs claims are so low is that our own data say that CEOs of large companies are not looking to let people go. They're hoarding workers, holding on to people. But certainly when people are let go, it's taking them longer to find a job. So continuing claims are ticking up a little, and we do think that's going to show up more so in the unemployment rate.

Are you modeling out a wage growth that sustains above inflation, and so America sees a legitimate real wage growth.

Well, it is possible that wages will remain above two percent. Certainly, when we look at the gains over the last few years, yes, they were really outsized. We are seeing slowing, but you do have some industries that wages are rising, certainly in construction, in particular non residential construction, where there's a lot of impetus to build infrastructure and factories at home due to industrial policies, So you could see wages settle out at a rate that's above two percent.

I looked dan at the inflation data, and I want to go back to it. You know this, John, this used to be religion. Thirty even forty years ago. PPI was just as important as CPI. That all went away. But in tomorrow's PPI report, I know it's re Jegra McKee's explained it to me three times. I flunked the quiz, the McKee quiz three times. Data final business inflation. Is it legitimate? Sure?

It is absolutely. It's everything that businesses are looking at, and certainly that includes transportation costs and which are a big thing, and also services which are quite material. So even though the PPI is different now than it was, you know, ten years ago, it's still very relevant.

This ties John directly into what Linda Dissel said it federated. It's about margins. If you've got that inflation impute down the income statement. What does do not forget about Apple and all that it a real American a company. I mean, what's it mean for my church and Dwight They make toothpaste?

I suppose not a real American accountany it was not.

A real American company. It's a luxury stock thing. But to the rest of America out there making four percent revenue growth, I'm sorry, margin erosion could be tangible.

Daniel, This was brilliant.

Thanks for your time to break this down with a standard pedis and there of the conference board. Erica Ajerian of UBS warning quote. Given the fourth quarter rally in the BKX and a sharp turning sentiment heading into this year, we think jender earning season may present a speed bump to the sector's recent momentum. Erica on pleace to say, joined us right now, Erica, great to catch up with you.

I think it's really, to use James term, rude awakening for earnings. So it's not necessarily about the abs price level, and it's not necessarily about the absolute multiple on earnings, but it's that earnings aren't going to go up. You know, as a reminder to everybody, what happened in the rally is we've priced out a negative and that negative was the unrealized bond losses on bond portfolios. As treasury yields we're shooting higher, and so now we've removed that negative.

But keep in mind.

That banks are actually positively rate sensitive. What that means to what's that means Jonathan, is that you know, if the FED is cut in rates, then you actually will have pressure on net interest income, especially in the front half half of the cuts.

Eric, I'm looking at your coverage of the big banks, and I want to ask you about bank you don't cover, which I know is out of bounds, but I think it's really germane right now. Do you perceive the divide between twenty or thirty big banks and everybody else out there and the concern that the smaller banks of America are not in rude good health.

They may not be as strong as the top twenty banks, but I think if the forward curve pans out, they will get a lot of relief in two ways.

One, they'll get relief.

In deposit costs, and I think what you have seen in twenty twenty three is a nice run up in deposit costs as the Fed Titan, and so they'll get relief on the funding side. The other piece of relief that those smaller banks will get is.

On commercial real estate.

So commercial real estate is more widely held at those smaller banks than they are those larger banks that you mentioned, Tom, and as such, you know, if interest rates are coming down, that could actually narrow the subset of potential problems as we deal with commercial real estate maturities ahead.

And so to translate this to the rescue will be a lower money market yield where billions flows out of money market funds back to a more normal banking economy. Is that right correct?

So I love that you hit on that.

Not only will you get relief and deposit costs, but you also get that deposit flow back, so you're no longer having to as an alternative, you know, either you know, borrow wholesale at you know, pretty much fed funds, or really ratchet up what you're offering your deposit customers.

Rika, what is your tel pic right now? Got into NX season. I know you think it might be a difficult moment, a difficult rocky patch, But ultimately what is the top pick?

So in a difficult moment, in a rocky patch, who does the market turn to?

JP? Morgan?

So, as I think about the expectations that are now into the market, and as I think about the enthusiasm about, you know, having these cuts without a recession, the bank that can deliver on earnings, the bank where we're most confident those earnings expectations can be delivered is JP Morgan.

JP Morgan's out. What's it up? It's like Nvidia, It's like the video.

Questions relatively speaking, competitive reason.

You're telling me that after massive double digit return here complete out performance, that vector just keeps on going. Erica for mister Diamond.

I think so.

So a couple of other data points, so from the October bottom and the b k X, JP Morgan has actually underperformed by eight percentage points. And remember what I said at the top of this segment. I said, it's not really about the you know, absolute price, It's not about the pe, it's about the E. I think that the you know, involvement in the space today is in hedge funds and.

In macro funds.

You know, how long onlies will actually step in and move their weight in banks is they feel more confident that the E is not just bottom but there is good news, upside potential to the E. And again, just going back to JP Morgan, I think they're just in best position to deliver that, you know, and so their performance can absolutely continue from here.

Do we see mergers this year? I've been waiting twenty five years for the roll up here, not to get to where Canada is. But you know, we got what's the number, four thousand banks? Five thousand banks? How do we cut that in half? This is the year that happens.

I don't think so, because it's an election year. So there is there's a little bit of a mentality here, the seller's mentality that oh wow, I got the bomb losses back in my capital as raids have come down, and now they're thinking about what the forward curve is implying and saying, Okay, my book value recovery is going to be x x higher at the end of the year, and so I want a multiple off of that. Meanwhile,

US Bank Corp.

Will tell you about that consternation. And so I think that you know, smart buyers may wait until we get more clarity on leadership before they think about waiting into m and A.

Went a weigh in on the politics.

If you can, you alluded to it that it's twenty twenty four, it's election season. A client's asking about the regulatory backdrop going into next year off the back of who may or may not win the election this year. Is it still too early or is that something that considering already.

So it's something that they're saying it's too early to price in given the many variables.

That could happen between now and November. You know that being.

Said, they're thinking about, you know, the banks in a positive light. If we did have a republican administration of course, a lot of investors are asking me.

About the regulatory.

Environment, and the thought process here is similar to twenty sixteen in that a change in administration from Democratic to Republican could potentially lead to regulatory easing, particularly now.

That we do have a proposal.

Out there that everybody is hoping could be at least delayed, if not softened significantly. And so if you have an administration change and you don't have those capital rules finalized yet, there's a lot of hope of not just a significant delay, you know, but also potential for reissuing.

You know that that proposal it with much much, much less.

Bite, and so that gives excuse me, that gives a market hope that all this capital that the banks are building up will be returned back to shareholders.

You know.

Additionally, the banks are trading at a forty eight percent relative pe to the broad market.

Which I think is part of the current broad appeal.

And as a reminder that the quote Trump monk between four four sixty and four seventeen seventy five percent, I think that's part of the thought process. You know, that the bulls are thinking about as they think about, you know, rate cards.

And then a potential administration change.

That's the big one to watch. The brilliant Erica Nigerian of Ubs Erica.

Thank you.

Michael Collins brief snow senior portfolio manager DEBT at PGIM. He watched every minute of Prudentials coverage of the Rose Bowl in the Michigan victory there a few days ago. Michael Collins, I'm going to look at the Rose Bowl here at the bond market. How will yield react off the CPI today? If we reaffirm disinflation, We're across the yield curve where we see the biggest adjustment.

Yeah, Tom, Jonathan, good morning. I'm a big football fan, but I'm probably more excited about today's CPI print than I am the NFL playoff games this weekend. So, to be honest with you, tells you what a bond geek I am. But I actually think that this inflation is

So do you monelog? I haven't answered this question in the ages, but you know I agree with you, and more importantly ed your Denny agrees with you on the surprises we may see in how disinflation? What does it do to the two's ten vanilla yield curve? I mean, right now, we've been inverted since time began, and you know, what do we do? How does that react off of today's report?

Yeah, I mean the playbook, as you know, Tom, is that the curve, you know, bull steepens the front end rallies more than the rest of the curve. That's I think what's in the cards over the intermediate term, meaning

Michael, This is a little bit of a subtle shift from you. I have been following you for a long long time. You know that you haven't been super bearish ennything, but you've been constructed on certain parts of credit. I've noticed you've lightened up recently on credit exposure. Michael, Can you tell us just exactly why and what's changed over the last few months. Is it price, is it fundamentals?

What is it?

You know, it's more price than fundamentals, right, if you look at the fundamentals, I mean, economy is actually doing great. It continues to surprise in terms of its resilience. I mean, it seems like the whole soft landing is happening, right. I mean, if you do have a recession, and we have a twenty five percent recession probability, which is elevated relative to historical averages, but it's not going to be hard landing.

Right.

The probability of this big, you know, existential credit crisis where the fault spike and you know, consumer consumers the fault and businesses go.

Out, is really really low.

You just don't have the leverage in the private sector to cause that impetus, right, So I think that bodes well for fundamentals. I mean, but but credit fundamentals are deteriorating on the margin, they're definitely not not improving. But

C So that is, does that mean clip the coupon as a general statement after a fairly robust twenty twenty.

Three, yeah, I think you clipped coup and fixed income, you know, and I think you're still earning attractive yields. I think interest rates across all sectors of fixed income are going to be lower in a couple of years from now than they are today. So I think you clipped a coupon for now. Look for opportunities. If rates back up, you buy them. If credit spreads widen, you buy them. I think that's the world we're in. You have this fed backstop which you haven't had in a long time, with a men's.

Respect for pgeum and all the awards you've won for total return. How do you and the team there frame the tobacco of the last three years? Do you frame that someday we'll get back to where the Bloomberg Total Return Index was in bond, that we will see true appreciation or is that a time long gone?

Now it's a we're back right to where we were twenty years ago. Tom. You know, we look at you know, beginning yields, and you know the big index everybody in fixed income uses is your Bloomberg Aggregate bond index, which is yielding you know, four point six person and we are trying to beat that, right by by one to

Michael Collins, you are one of the absolute best over at PAGEM. I love catching up with you, Mike Collins there of PAGEM. Thanks for being with a sir. The big container shipping giants, the merchant ship Stone are not using the Red st as they were a month of Sawagank.

Let's have a delicate conversation on this right now, and it's a conversation of geography and technology. Norman Rule, Senior non Resident Advisor for Transnational Threats Project at CSIS and working for America as a former senior US intelligence official. Norman I got eight ways to go. But when I look through the literature and the zeitgeist, it's not like from Butch Cassidy, who are these guys? It's more where are these guys? Where are the drones coming from? Where

Good morning HOOTHI Forces and control is generally in the western portion of Yemen, which focuses on the Red Sea and the Gulf of Aden. There are not only missiles, drones, explosive boats, and mine capabilities. They must be monitored, but the Some of these capabilities are mobile. Missile launchers are mobile. Drone sites can be trucks or or barren fields, so this requires intensive and dynamic intelligence collection. If one is to look at targeting these facilities for military action.

Do we do this alone, or do we collect intelligence, particularly with who these great adversaries Saudi Arabia.

The nature of US intelligence collection for military operations in this scenario would likely be done by US and British and allied forces who would be involved in any potential kinetic action. The Saudis would not be playing a role in kinetic action, so their involvement would be limited.

If any and.

Norman, this is causing a massive disruption. I'm just wondering how cheap it is to cause this disruption. How sophisticated is the military arsenal of say, the Houthi rebels, How sophisticated, How cheap is it?

The military capabilities of the Huthis are relatively sophisticated in terms of missiles, but this is an older technology. Iran has provided it. Iran has provided the training in Yemen and in Iran itself, and in essence, I think when the military tends to look at these targets, there is the issue of a missile that costs so many thousands of dollars, or drones so many tens of dollars versus a two million dollar anti ballistic missile. But the idea

The Norman, US forces and allies the presence in the Red Sea is meant to act as a deterrent.

It's not.

They're now intercepting missiles. What happens if they fail to intercept one of those missiles? Have we given thought, Norman? I'm sure you have as to what would happen next as a consequence.

So I think it is fair to say that the US and partner presence to include the United Kingdom has shaped hoothy behavior and likely deterred some scale of their of their action. This said, if a hoothy missile were to strike, say the ridge of a container ship, and it were to sit in flames in the Gulf, or to strike the bridge of a tanker, or worse yet, to cause significant damage on an oil tanker, that would be dramatic significant, a significant oil leak in the Red Sea which shut down all shipping.

I mean, I really, native, questioned Norman. But I've got to go there. So a drone goes up in the air and does a pro like you go, oh, well, knock it down? I mean, is it like skeet shooting on a Sunday, or you know the clay pigeons up there and you just nail that puppy. Or is it sort of blind luckish that we're knocking down these drones? Which is it?

Well, I'm not a pro and I've not been involved in those angles, but it is not blind luck This involves precision weaponry and a tremendous amount of training, and are nas sent and sent on personnel go through a tremendous amount of training for the sort of event throughout the year.

So when we bring this forward, and let's take it back to the Secretary of State doing shuttle diplomacy, who does he want to talk to to have a change agent for the hutis? Does does the Secretary need to go to Tehran and begin a dialogue with people that we don't want to have a dialogue with.

Such a dialogue, which would be unadvised and judicious, would have no impact on Iran's behavior, Iron's proxies throughout the region or following a consistent pattern of aggression against the United States and Israel. The United States does send messages indirectly to Iran through a variety of partners. People who have diplomatic relations with Tehran, but it has no effect and it's not anticipated to have any impact.

Norman. Ultimately, what we're getting out here is what is the risk the potential that this war could spread? As we know in the last week, and you and I talked about it, top Hamas official killed in Lebanon that potentially was a source of escalation, it hasn't been so far. How do you think that is contained at the moment? How contained is the risk of a a conflict?

Will there continue to be no strategic drivers for Iran or its proxies to engage in a conventional conflict or risk a wide range formal conflict because that threatens many of their domestic political and economic initiatives. At the same time, there are multiple reasons for Iran and its proxies to maintain the current level of violence and even escalate that level of violence as they've crossed red lines and some of the violence is normal.

Norman. One final question, and you know, we are thrilled to your commitment to surveillance. You've really come on since day one year and given this perspective, this seems to be deteriorating away from the media coverage, the immediacy of images and Gazi and all. Is that correct in Washington among institutions including your CIA. Is this a deteriorating situation?

I would say it's an evolving situation, and it's evolving somewhat predictably. In the absence of deterrent action against you and it's proxies, they're continuing to maintain some sort of an approach to upset the regional security. Here's your worry. If we undertake a two state solution diplomatic effort, do we expect Yourn and its proxies to stand by while

So true, Norman, Thank you, Sir firimput this morning. Norman Rolle that of CSI, a former senior US intelligence official.

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