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What you do when you have a jumble of a day like yesterday, as you call somebody that can synthesize it across economics at Market's David Rosenberg coming up later, but right now, Michael Darter with us from Roth MKM. They're chief economist and market strategists as well. Michael, we haven't done it yet this morning. Let's dive into the
inflation statistic. Do you leave as I heard others Robin Brooks, I thought was outstanding on Twitter last night that some of this is a January effect where you could jump conditions in certain service sector inflation subsets.
Hi Tom thanks for having me on. Look, this was not a good report for the January CPI. The core number accelerated pretty dramatically, and you know, even if you're stripping there's been a lot of talk about, you know, housing and the rental inflation. Even if you take that out, the FED looks at a gauge of non energy services prices excluding housing, and that accelerated pretty dramatically. So the
markets did not take this well. When your price for profession and you have a set back, then you see a dumplake we had yesterday. All of that said, you know, let's not go into a complete panic over one number. The FED does focus on the PCE deflator, which is a different index, and there's been a pretty big gap between the two. So if you look at the core inflation readings from the PCE deflator over the last seven months, they're, you know, basically in line with the Fed's target one
point nine percent average annualized growth. But the CPI core CPI readings have been much higher, and the divergence is about triple the historical average. Usually the CPI runs thirty to fifty basis points above the PCE deflator, and you know, we're we're seeing a gap about three times is wide now. So if we take a step back, you know, I think that the you know, the the CPI data could
be overstating the inflation problem here. Nominal spending. If you look at nominal final sales to the private sector, over the course of time that we've had these better PCE core PCEE readings, we've essentially slowed to trend. So if aggregate demand total spending in the economy has slowed to trend, then that's going to take the inflation pressure off over time. So let's not completely go into a full blown panic over one number here.
And Michael, you know, I'm looking at the kind of how the market traded yesterday. I mean, the indexes were off, you know, kind of one and a half percent ish, volume was kind of in line. It seemed like a reasonable kind of market response after kind of the big rips we've seen in November, December and strengthen. Maybe it's just a healthy day in the market yesterday.
Oh, no doubt about it, Paul, no doubt about it. I mean, you know, the run that we've seen, especially in the S and P five hundred, led by infotech and consumer discretionary basically at seven stocks dominating the index. I mean, these valuations have really become stretched and we have a momentum market. It doesn't take much. It just needs to be some change of the narrative, whether it's sustained or not. And you see what we saw yesterday,
so you just can't have a straight up market. We're starting to move into pretty unhealthy territory where you start to get worried about what could be on the other side. I mean, these kinds of valuations tend to be rarely seen in history and never sustained. So we're at levels now where your price to perfection and you do have to worry about threats to the you know, the perfect narrative unfolding.
So part of that part of that narrative, Michael, is kind of the Federal Reserve obviously, and I think the uh, you know, the markets expectation is that that march is clearly off the table. FED Chairman j pob is pretty clear about that on those recent comments. But now the I guess the focus has shifted to May or June for the initiation of some rate cuts. Did yesterday's data kind of change your view? Where do you think the Fed's going to come out here.
It's interesting. I mean, our thought was that the FED was probably going to push back on the timing and both the timing and magnitude of the easing expectations that were in the market, even if you think the economy is going to underperform this year. I mean, the Fed's framework is to look at SLACK and the labor market.
You know, we've had you know, we have haven't really had a material increase in SELAC in the labor market yet, just very just very and they're watching things like financial conditions, which you know, based on our market discussion, have eased pretty dramatically. So I wasn't surprised to see Powell push back. And then if you get data like we saw, you know, with the with the CPI readings for January, then that
genally enforces it. So I do think they're going to be pretty cautious in terms of when they start this process. And you know, we'll see you know, obviously we'll have more data before we get to the May meeting, but yes, for sure, March looks.
Like I'm going to go walk right now. You can do this with Michael data.
I'm doing an event and Michael data Kid comes up to me and on his phone he has his email from when he was an intern at Bloomberg and we were talking about the ambiguity of Hixe and and Slutsky and income distribution and substitution effect.
We're not going to go over this on Valentine's Day.
Thank you.
But but Michael, what's great about this is that I identify as a euclidean ambiguity of our micro economics. Right now, we've got macro ambiguity with higher interest rates. Can we have a good economy and a good stock market because we pop nominal GDP and get a better revenue stream than expected?
Well, I think that has been the story, tom right. I mean, we're sitting here talking about an interest rate structure that none of us thought was likely several years ago, right right, And so that's really been driven by the business cycle, the vigorousness of the upswing from the COVID recession, and you know, in the inflationary environment that we've been in.
So you know, if you want to get wonky here, it means that the neutral interest rate, the Viccilian equilibrium rate, is higher setting like we've had then in the last business cycle where we had very slow growth, very low inflation, a lot of deleveraging pressures. Right, So this is you know, this is something that's that's quite different. What makes this tricky going forward is you know, is the FED actually restrictive now or is the FED not restrictive? And there's
a big debate about that. People talking about financial conditions are too loose. So the FED really isn't restrictive. But let's drill into markets. If we look at forward looking measures of inflation expectations, you know, those have reverted to levels that are consistent with price stability. That was not the case when we went into the early evenings of the FED tightening those rights inflation break even spreads or telling the Fed they were really miles behind the curve.
That's not the case now. So the Fed actually does have the real rate if you use forward looking inflation expectations at pretty cyclically high levels. And I do think that is going to mean, you know, the economy is going to continue to slow too, if not below trend. And the trick for the FED will be the timing on starting the rate cuts. If they're too late, then you get a recession. If they're too soon, then you're going to have persistent inflation.
Michael Data, thank you, thank you, thank you. On short notice today after what we saw yesterday. Michael Darter with his spartan emails in it says time get the sequence straight, Paul save them.
Yes, absolutely we can do that right now because I'm people trying to get a sense here giving that sol if we had yesterday kind of what does it all mean here as we think about what the Fed's going to do and what these equity markets are going to do. So we figured it was a good time to check you on.
Geena.
Martin Adam Sheet leads all of our equity strategy for Bloomberg Intelligence. Gina, I guess I was looking at yesterday's trading. It's just a normal, healthy pullback in reaction to a data point that the market wasn't discounting.
Not much more than that. Am I being naive there?
No?
I don't think you're being naive.
I just think there is a degree of volatility and rights markets. It's really difficult for the equity market to absorb on a daily basis. There was nothing in the inflation report, frankly that was terribly damaging for the profits outlook for companies. As a matter of fact, when we look at the long term scheme of things, CPI holding in pretty steady, with PPI decelerating and import prices fallowing, is a great environment for margin growth for the S
and P five hundred. That's been the characteristic that has defined the margin recovery of the last year. So the inflation report in and of itself was not necessarily damaging to the outlook for stocks, but it did clearly create a lot of rate volatility, and the rates market seems to be incredibly frenetic. That is creating some valuation disruption for the equity market, as there is some follow through from rates onto stocks.
Frankly, though, when we just threw.
Past five thousand, we had very strong momentum in the SNP five hundred. A couple bit of a couple near term breadth breakdowns last week would have suggested that we weren't due for some sort of modest consolidation phase in the index anyway.
So here's what I do.
I'm only doing this to pretend g you have to radio gig doesn't work out, YouTube and car plack can go work for GENA carry our.
Coffee and Jana.
What I would do here is I take two standard deviations trading envelope off of the VIX, and the VIX here is at fourteen point six y two, doing better than eighteen at one point yesterday, even with the eighteen spike. Yesterday, I didn't get a Fibonacci across the two standard deviations. The fibonacci was eighteen point six to two center tendency. We didn't even get back to center tendency, and now
we're back down to a twenty three percent Fibonacci. The answer is, we are so far advanced we need a huge pullback to normalize, don't we.
Well, we would, and certainly you would normally see greater than two percent down days start to emerge if we were moving into some sort of bigger, longer term corrective process. You know, these one to two percent days. Anything less than two percent is frankly just a normal trading day in the world of equity. So to have stocks down relatively modestly yesterday, yeah, it's a down day, and we hadn't become terribly accustomed to those down days over the
last several weeks of gains. But it's a normal down day. In the grand scheme of things, really, with the Vics, we don't worry about anything under twenty. Frankly, the long term you usually seeing that spiked to twenty as indicative of underlying volatility weakness emerging.
I mean, I bought my first shares off Triple Lovers Dog cash, Paul, like three days ago, and I'm way underwater.
That's all right. Sorry, you've taken a long term view here, Gina.
We're about seventy five percent of the way through the earning cycle here. I kind of feel like it's not getting much attention. It's all fed this, fed that. What are you taking away in your team in terms of what we've seen in the earning cycle.
Oh, you're absolutely right, Paul. It's been a really fascinating earning season actually, because the S and P five hundred is on track to post greater than six percent earnings growth. The consensus coming into this season was for less than two So we're talking S and P five hundred earning scrat at triple the pace that that was expected by the consensus. Eighty percent of companies have also beat expectations.
That is substantially better than long term average of sixty five and even better than the post COVID average which has been abnormally high. So very strong earnings growth at least relative to expectations when we exclude the energy sector, which remember energy is something we've been watching very carefully because it is a net problem for the rest of
the index. When energy stocks are doing well, excluding the energy sector, you're looking at ten percent earnings growth for the S and P five hundred and stronger breadths stronger recovery emerging for most sectors into the first and second quarter of this year. So it has gone largely unnoticed or at least uncommented on, as the FED has taken a lot of mind share. But frankly, the earnings numbers are are much better than expected and painting a pretty solid backdrop for stocks right now.
And I know you guys on your team gena look at margins and the trends and margins are these quality earnings from what you can tell it to say stage.
Yeah, it's mixed, to be quite honest, it's very mixed by sector, very mixed by industry. When we look at margins, net income margins do a computer improving faster than operating margins, which I don't want to call it a red flag, but it's something to watch for for pervasiveness. You really want to see both net income margins and operating margins improving. We're not yet there on the operating margin line, which does suggest that there may be some income statement of
manipulations that are helping to improve margins. So we want to watch pretty carefully. That's said, certain sectors are improving very significantly, namely tech and communications, while other sectors like energy and materials are big drugs. That to me is not necessarily a bad sign. Energy and materials are commodity
sensitive sectors. They are cost inputs for a lot of the other groups in the S and P, so the index can sustain improving fundamental conditions if these two sectors are the weak spots.
Gina Martin Adams, thank you so much.
I want to call it this because I think it's generational. As we go to Alex Webb in London on technology, You're a kid from you know, like pretty basic means, you play hockey, You end up Paul at the Rhode Island School of Design, and then you invent this strange thing where you have an apartment and you can rent it out and it's another playstory. Of course, it's Airbnb, and this is Brian Cheske we're talking about. And what's fascinating to me is, all of a sudden, he's a
grown up six billion dollars sure buy back Uber. All of a sudden, they're a grown up with a generational and Alex Webb is so wise he can, you know, do the generational tilt. Alex Webb is Silicon Valley in a broad sense.
Is tech growing up?
Yeah, I mean Facebook's kind of like prime example of that as well. Meta you know, they doing massive buybacks as well. Actually wrote a piece just last week where they're really becoming a.
Lot more like Apple.
They're realizing that that shareholders care about cash at the moment in a way that they perhaps didn't in those heady years a few years ago when it was all about growth. They obviously not they're not exactly value stocks, but there's a massive pivot, which you know, is sensible giving the market dynamics.
And we actually saw better initiade a you know, token dividend, but kind of a dividend in line with a yield that's in line with Apple.
So maybe that's a little bit of a trend there, Alex.
It certainly looks that way.
And you know, you think also about all the the increased focus on efficiency, which you know, unfortunately euphemism in many works in many cases for job cuts.
When you look at the sort of average.
Revenue per employee at a company like like Mester or like Amazon, it fell massively actually in the years up to the pandemic because they were just hiring with such gusto. What we've seen in the past sort of six eight, twelve months is that there seems to be an increased focus on that number, that they have realized that their employees are not that they're working less efficiently essentially because they have too many of them. So we've seen massive reductions in headcounts of consequence.
So, Alex, we did get Uber, another one of those names, one of those gig economy companies that's really come into its own with maybe some some new management with Derekkaswashahi.
Now they've got to buy back here.
That seems to validate them, as I guess adults in the room kind of thing.
Yeah, And it's like, you know, ultimately it's not a company that's growing anywhere near at the pace it was you know, if you think about back in twenty twenty two when you had like of course they did some acquisitions as well, which turbo charge it. But you know, revenue almost doubled in a twelve month period. Now it's the market's looking for a sort of fifteen sixteen percent
growth rate this year. But crucially it is now profitable, right That was not the case for the most of its existence throughout fifteen years or something of its existence only a decade it was not a profitable company. Now that's why it's interesting as well with Lift at the moment, because you know they are expected to post a profit at least an operating basis for the first time this year.
That's meaningful.
Shouldn't be probably given the way we've used to companies, but in the world of tech it isn't. It hasn't been a given.
Alex Web with us in London here on Technology Alex. One of our emailers thank you for emailing in huge alex webfan and they say, Tom, cut the chat on these rich guys, alex webber you returning your vision bro?
Are you just saying enough it doesn't work?
If I was a rich guy, I might have a vision bro. I am not.
I don't know.
I mean, it's it was quite interesting.
There was a video of Mark Zuckerberg basically giving his in a heavily verted commerce review of the Vision Pro. Surprise surprise, he says, our product is a lot better. I mean, the case I've made before is that actually Apple doesn't need the vision Pro to be a hit, right, It just needs to make sure that whatever Meta comes up with is not a hit, because if it sacrifices the next you know, vector of computing to a competitor,
then it's got a big problems in its hands. If if like smart glasses, you know, virtuality or mental reality, mixed reality, whatever you want to call it, if that doesn't take off as a category, that's not really the end of the world for Apple. The problem is that if it does and Apple's not in there.
Is a non financial guy.
When the financial people say Apple has an ecosystem of what is a two point two billion pall ye something like that?
Do you see that growing out ginormous to like three billion people?
Is there just an endless Apple universe out there?
Hard to see how that happens without really going down into more affordable devices, right, Like, you know, The reason that Apple has managed to continue growing earnings for share at a feral clip even as its top line growth is slow or in fact last year's shrunk, is because it's able to sell more of the top of the range devices, devices where you're selling two hundred and fifty six gigabytes of memory at a at an eighty five percent gross margin, right, whereas the smaller, cheaper devices do
not have those sort of margins. So, you know, the if you're going to get to that next whatever market of another billion people, you probably need to be in the one hundred two hundred less than three hundred dollars range.
And I think most Apple typically played well.
And when we talked to analyst Alex it doesn't sound like just let's just take it. In India, for example, you could make the case that point if they come in with a cheaper phone, man, they can get huge market share there, and analysts kind of say them, they're going to stick with their high end products and wait for the middle class to grow out, you know, similar to what they did in China.
I guess that's the way they're going to go there.
It's really fascinating India because it's such a price sensitive market. If you look at Netflix, it's experience in that market where you know, you think of it, Oh, we could have four hundred million customers there. Well, you know, actually, are you going to get four hundred million people to pay you know, something in the order of twelve dollars a month? Almost certainly, not certainly not yet, you know, it might be in a few years time.
Now.
If you if Netflix can't convince people to part with you know, ten dollars a month, what's the likelihood of Apple being able to convince them to then actually download an iPhone, download and iPhone, buy an iPhone, then download a huge number of apps of you know, getting Apple Music, of getting an iCloud, getting all these things which are the flywheel of earnings that that you know, that come off the iPhone.
It's one final question if I can, what's the buzz at the Apple store there?
Where is it? Coven Garden?
I was going to ask, where is the flagship Apple store?
Well?
I think it's is am I right, Alex, I think there is this one on Common Garden.
There's one on Regent Street. Yeah, there are quite quite a few swanky locations around.
What's a swanky coven Garden. Every time I go to London, Pharrell's hanging out in line there. But you know, what's the what what's the buzz at the Covent Garden store?
I mean from social medialy So I've not been down there myself recently, no, but it's like, you know, everybody wants to try the vision pro how you're actually buying it different matter now. It doesn't look like there's a massive amount of supply anyway, so you know people want to try it. There's some suspicion that once people try it, maybe you will get more people buying it. But like again, that's something where the price has to come down.
Alex, Thank you, Alex.
We are brilliant there and use of cash among these young terms.
Paul, to me, this is a huge deal. I've complained for years.
Now.
I'll look at the front pages.
What's making news around the.
World, your daily roundup of today's headlines from major publications.
Today's pictures and catchers.
Headlines, of course, always brought you by Interactive Brokers buying marketplace access. Interactive Brokers vest selection of over one million global fixed income securities. There are no markups or building spread. Some low transparent commissions. Learn more at I b k r dot com slash bonds. I got an email from missus Kean. It's not pictures and Catchers today.
No, it's Valentine.
That's what I hear.
I didn't know that you forget Vale, you too. The first story is about Valentine's control room, and missus Keane is gonna love this one.
Okay.
So the Wall Street Journal is saying self gifting is on the rise. So spouses are tired of getting gifts that they basically don't like, so they're.
Gonna buy what they like.
We're going to the store and we're buying our own gifts. And then you have those.
Who are single, they're treating themselves. You have Gallantine's Day. That's the thing, now, please. My daughter and friends had got a Galentine's Day party. They have parties. It's all the girls, all the single girls. Gullantine's what's Galentines? All the single girls? Gals?
I think gals.
I get a little slowly.
But it's good for retailers, right because people are starting to shop a little bit more.
And you even had to Beer's Jewelry. They're offering right hand ring collection instead of.
Oh, really they have pinky rings.
I'm sure they do.
Okay, I mean every girl needs a pink.
I love this quote in this Wall Wall Street journal story. My husband is amazing, but he has trouble figuring out my taste.
Sometimes that happens.
Yes, Gallantine's day every we learn every day, every day, every day.
Next, Okay, Business Insider has this Apparently wealthy Californians they're ditching the state and they're going to Beverly Hills of Arizona.
Which is Paradise Valley, Arizon. I don't know if any of you, either of you have ever built to Scott's.
I'm sorry we did this for Sweeney. I mean I saw this in it.
You know, I'm Lisa and I would never be looking at this, but you know, Paradise, Paul.
This just says you.
It does, I mean, golf courses, celebrities, perfect.
Yeah, exactly, eight five two five three good more. Yep.
Absolutely, it's it's they want the privacy, they want the luxurious life style, lower taxes also.
And the quality of life.
This is nice, like it's it's outside something Phoenix. I don't think it's too so.
I think it's more like between like Phoenix, Scottsdale, Yeah, Phoenix.
What's it like there in the summer though?
Brutal?
I mean I think it's even worse. I mean one hundred degree days and that. You can talk about dry heat all you want, but you know, one hundred and ten is one hundred and ten.
So like you with like a winter home there and there?
I think so, I think that's what. But a lot of people are out there kind of full time now. I mean, you know, you see you hear the stories about folks leaving California for a variety of reasons, whether going to Idaho or going to Colorado and now Arizona.
You know, so paradise.
Can you see a nice valley?
Is Bloomberg surveillance, Tom Keane with no life in New York City joining us now Paul Sweening.
The golf course.
Golf course?
All right?
Uh this is from the Wall Street Journal. Apparently there's a no fly list for dogs and could be on it.
I don't know if you take the dogs with you when you travel on an airplane, but more people do, Yeah, a lot.
More people, especially since COVID, Yes, when a lot more people were buying the dogs and the carriers are cracking down. Apparently they're biting their they're batting them for different reasons, whether they bite, where they go to the bathroom, where they don't behave right. But they're putting a mark on their record.
So when you check in, there's going to be a big flag there.
That's his dogs.
When Matt Miller relocated, this is years ago, relocated from New York to Berlin, he posted a picture on social media.
His dog, God, I forget the name. It's the worst dog name of all time.
It's a huge dog, had his own first class seat on the plane, right next to the map. So really talk to go over to Germany. So I don't know how that works.
You do you pay like one hundred and twenty five bucks or something?
What do you do on a long flight? I mean, I'm asking for a friend. We're going to take a vet bill and I don't feed to Paris here to see you know. One of the offspring is early. But don't I don't get it.
They have to fit under the seat in front of you, I think is the thing. You have to put them in a little bag.
What do you do four hours in? I don't I simply don't get it.
This is a Bloomberg Surveillance podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.