This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com,
the Bloomberg Terminal, and the Bloomberg Business app. This is a joy, and it's particularly a Matthew joy because Carl Ricadatta of the Aerospace Engineering Persuasion knows the glide paths that are out there. The glide pass and economics are usually described through adverbs. In a paragraph in his recent report, he really nails this. He's a BMP Perry Boner, chief US Economists. You nail this strange word sufficiently. We are
sufficient We are getting there. Inflation is now sufficiently entrant. Describe this sufficiently that your own power has to confront Wednesday.
Sure, well, there's a tension there, but on the sufficiently side, we're seeing evidence of sufficiently restrictive monetary policy and that we're not just seeing disinflation or deflation. Important distinction. You drew earlier on the program, not just seeing it in energy prices. We've seen that spread into goods prices, which
tells us a little bit about supply chain healing. But now importantly we're seeing it where it really counts, and that means we're seeing it on the service side of the CPI, both in rents and finally, just in the last couple of months, we're seeing this in what now has been called super core inflation, which is core services X, housing and shelter costs.
We yearn for an X and to get out front Fed Belogney, there's no evidence of that since biblical history. Their ex post how far behind are they going to be when they get the sufficient courage up to accommodate.
Well, I don't think they have the courage just yet, and because the factor in the back of their minds that's haunting them is the mistakes made in the nineteen seventies under Arthur Burns, and that was a FED that knew what prescription was needed, but lacked the conviction to keep the bitter medicine in place for long enough. And as the Fed's determining whether policy has been restrictive for
long enough, I think they think that it's sufficiently restrictive. Now, it's just a matter of keeping that policy in place for a sufficiently long time. We'll use those adverbs you highlighted, Tom, And the thing that's haunting them is the fact that wage inflation is not back towards kind of what would
be a two percent consistent level for broader inflation. And whether we look at the ECI or last Friday's average hour of the earnings numbers, we're simply not moving in the right direction swiftly enough to say, sure thing, let's start accommodating policy sooner.
Why didn't j Powell push back more.
Than I think he has pushed back in recent comments. He said it was premature to be thinking about the timing of rate cuts with any amount of conviction. So it was a bit of a diplomatic answer, But I think we'll see those kind of hawkish undertones in both the communicate and also the press conference later this week. You have to think in the back of your mind, Jerome Powell has been someone very focused on financial conditions.
Financial conditions have eased tremendously, and that restricts the amount or the degree to which the Fed can pivot towards a more moderate tone. They have to keep some vestige of this tightening bias or hawkish concerns about inflation in place.
This week, let's get away from predicting what they may or may not say or do and talk about the actual economic backdrop. There is a question about whether they are going to be late and whether this is going to essentially cause a recession. Whether the bias now to not go to the transitory debacle means that we're going to get a recession just by virtue of them not
cutting rates in response to disinflation and to weakness. Is that your base case at this point, just because we are seeing a tightening and financial conditions, we are seeing people start to push back a little bit, and the theory is at this point you could actually start to see higher rates bite in a warming and meaningful way.
We definitely are seeing higher interest rates bite in a more meaningful way as you highlight, and I think we'll see that in the retail sales numbers on Thursday. We're looking for about a zero point five decline at the headline in retail sales.
Now.
Part of that is lower energy prices and whatnot. But if you pay attention to what's happening to consumers. The excess saving story is largely washed out for lower and
middle income households. At the same time, higher rates. We may have come off of the peaks on tenure yields and whatnot, but if you look at what households are diverting towards interest payments, so yes, most households locked in those low mortgage rates during the pandem, But if you look at everything else, whether it's car loans or helocks or credit cards or whatnot, the interest coverage for those
is increasing pretty appreciably. That tells you that FED policy is still kind of working its way through the system and we haven't felt peak restriction now in terms of getting the pivot right. Monetary policy acts with a long and variable lag. That LAG's probably twelve months, and that means it's going to be very hard to kind of stick the landing.
So sounds like he's from Chicago.
Maybe not recession, maybe not recession next year, but I think the landing could be bumpier than people are anticipating.
Bumpier from a GDP basis or bumpier from race because what's in the zeitgeist's weekend is Yeah, they're gonna come down disinflation. Oops, we reverse and we have a reflation.
Well, that's the scenario they want to avoid, and the evidence pointing in that direction would be those sticky wage pressures that haven't improved.
Jet.
I think it's just ali about the job mark.
It's about the job market, but also the inflation numbers, and we've gotten used to this very immaculate disinflation the course of Q three up Q four. I think that the inflation is going to look a lot less immaculate in Q one. In other words, Q one could look a bit like the mirror image of Q three of last year, and that we see slower growth and more persistent inflation pressures. I'm not saying that the trend is reversing.
It's still moving broadly lower. But I think over the last few months it looked more like two percent ish inflation, and I think it'll look more three percent ish over the next few months.
Slow down is sort of the perfect scenario that a lot of people are looking for who are bullish on risk assets. Is that basically what you're pointing to is just a pause to allow things to cool and then everybody can get going again, which is essentially the bull case that we keep hearing from Eddie Ardenny and others.
We need slower growth to continue to rein in those imbalances in the economy and in turn the wage pressure story, and for that to play out perfectly in the first half of the year, I think is a possible scenario, but not necessarily the most plausible, since so I think there will be some tough sledding, some bumpiness there as a FED makes it clear that we're not in the you know, we're not free and clear yet to start reducing interest rates as swiftly as maybe market participants think.
And I think we'll see some imbalances in the labor market, some challenges on the growth front. And as you think about the overall earnings trajectory, right, it's ultimately a function of top line growth and pricing power. And if you're talking about a moderating pace of economic activity and cooling inflation pressures, that's still a challenging dynamic for earnings.
This is a sufficiently good interview, Carl Ricodona, Thank you so much.
Perry.
Body in shock is Sarah Hunt, chief market strategist at Alpine Sex's Woods, but you and I we follow that your Jenny for years and this is what he does with an economics and investment He extends out the X axis. Do you have the visibility to go out pass forth.
Of July next year?
I think it's tough to have the visibility to go out that far, to be honest, I think it really is going to depend a lot on how we start the beginning of next year. The equity markets got very excited at the end of September in the beginning of October, thinking, you know what the Fed has done. Rates are going to come down, and that's going to solve a lot
of problems. I mean, you've got a story in the Bloomberg this morning about how fast rates have to come down because a lot of companies are going to be starting to refinance in twenty four and twenty five. And the question is, even if you started in June, you're not going to start with two percent down. You're going to start if you start a little bit. I'm not sure we're going to start in June. I think that
that's I think that's a big question. And then you get into the political calendar, so the question of timing becomes an issue and you still have all these people waiting for lower rates, and that's been very positive for equities.
Dovetail.
What we heard from Sarah House of Wells Fargo, which is a cautious view on real GDP with the enthusiasm of corporations are going to move forward, move on to a greater bull market. Can you have a greater bull market if you get subdued economical.
I don't think you can. And I think that's the biggest question of twenty twenty four is where growth is going to go? And can earnings really hold up or grow eleven percent or twelve percent? In twenty twenty four when we have that come down of inflation where some of the earnings that were higher were because of higher revenues because of inflation, you had this sort of rolling and rolling global recession or rolling global slow down, rolling
slow down in sectors in the US. Now China's on the slower and if they stimulate, is that going to help? Is it enough to change the process of next year? And can we keep margins where they are? I think all these questions are unanswered, so I think.
That that's it.
It's tough to roll into an idea of where earnings are going to be. When you don't know the answer to questions with.
The outlook that you just put out there, it makes me think maybe you're rotating out of stocks and going more into bonds.
I think there's a real place for bonds, and I think the question of how fast rates come down, I mean a lot of investors are more interested in having more of a balanced portfolio than they were.
You've got this.
This goes back to the tension of are we going back to a pre financial crisis world where rates can have some sort of meaningful aspect in your portfolio.
Where they settle is going to be the question.
But we're not going back to zero. And I think the equity markets are getting excited that rates are coming down, and maybe they're coming down a lot further than people expect them to. I don't really know where that.
Answer is yet.
I don't think anybody does.
One of your highest convictions this year has been the energy stop trade, and right now we're looking at a sort of surprise decline and price, which is particularly surprising given the disruption that we've seen and the Hamas Israel war. How much do you still lean into that? Do you still think that oil companies are goodbye here.
So I think the biggest issue for this year has been much bigger supply than anybody was expecting. I think Paul Sanki did a great job talking about that a couple of days ago. The fact that everybody expected more battles to come off the market, both from Russia and Iran and the fact that they really didn't, and then other people increased supply. Robust demand has been fairly robust. If you get a really big slowdown, that's going to
hit the demand side. So it's tough. But I still think longer term, you've got good dividend yields and you've got a longer tail on hydrocarbons, and that is going to be meaningful.
I look at the hydrocarbons, I'm okay, they had a bad month, they had a bad week. I look at the banks, and I guess we could talk forever about that. All anybody's talking about are these super growers we have with thirty, forty and fifty multiples on them.
That's not the textbooks? Is it?
Do they do?
Year two is the biggest surpriser. They just keep going.
I think it's well, it's those kind of multiples are not in the textbook, No, but they really did have fantastic earnings this year, and Cameron Dawson's been quick to point that out right like how fast they were growing. The question then becomes can they keep that up? And if the delta is negative, if I'm growing, but I'm growing more by delta's negative way to change, if the rate of change is negative, so that I'm growing, but I'm growing less fast. Somebody briefer, I'm growing less fast.
Do I deserve that thirty or fifty multiple? And I don't know the answer to that question because it depends on how fast we grow. I don't see it that fast.
I like that you're just honest about this, and we've seen all these projections about you know, this is what we expect to happen in twenty twenty four, this is what we expect to happen in twenty twenty five. And it's almost the curse of having to come out with a full year's strategy. But if you had to, what would you be looking at towards the end of next year.
I think one of the things that's been surprising is that with the strength of the labor market, you haven't seen wages increasing as fast as people predicted that they would. So when people say the labor market is still is still very strong, yes, but wages aren't increasing that much. If we can keep a labor market with an unemployment rate that's fairly low and I don't want what that number is, and you don't see as much wage acceleration,
then that's going to help on the margin side. It's not going to help on the consumer side, right, because there's attention to that because people aren't getting paid as much and you go look at food. You know, inflation may be coming down, but going to the super market doesn't feel any better for anybody. And so I think that those are the kinds of things that make it difficult to say spending is going to be completely robust on the consumer side next year.
Can I just say thank you because she knows. Sarah knows that I like the smell of pine trees when I walk by, So she got me pine tree.
You didn't get those in pine Tree, Vermont.
This weekend I'm going to share with you and you know, light our candles the general and think about what the head.
Until place they did White Christmas.
This weekend, I heard saw Rosemary Clooney.
So there are you going to.
Unwrap them so we can smell the pine, so the audience can sell the pine. Yes, we'll do that.
Yes that in the next episode.
We can smell it on TV dot Radio. Sarah Hunt, Thank you so much. Elpine, saxon what's here.
In December and onto a new January of Iowa caucuses and New Hampshire primaries. Greg Villier briefs this morning she fires policy strategist at AGF Greg, Lisa wants to talk about the various and sundry wars we're in. I need to talk to you about the war that's coming in the presidential election. Is it that Trump's ahead or is it that Biden's behind.
I think it's more the latter than anything else. Just listening to the sound bites over the weekend, Tom would cringe inducing really from both Biden and Trump. If we're in for another eleven months of this, this is cruel and unusual punishment for the American voter who still thinks there's a chance for somebody else.
There's somebody else out there, but it's not going to be decided, I would believe at the Iowa caucus the New Hampshire primary as well. Where are we in February after those January political events.
Well, Trump will win, obviously in Iowa, but maybe not by quite as much as people had expected. I think that he will be the presumptive nominee by the middle of the spring. That's not a real courageous call on my part. But with the Democrats, I still think there could be a surprise. Maybe this guy from Minnesota, this House member, he's way behind, but he's different, he's new. Even Robert Kennedy, who's pretty exotic in his views, has
attracted some attention. I sense a lot of Democrats, not just David Axelrod, who are desperately looking for someone else.
Greg your language is really colorful, the supporting cruel and unusual punishment for the American people at this has to continue, and the exotic views of a representative Kennedy. I am wondering how much you think the likelihood of President Biden stepping aside for another candidate is tied into some of the military conflicts that the US is currently supporting or involved with.
Well, there's two big stories so that you allude to. Number one is the trouble that Trump will have with his son.
This is going to go on and on, and.
It's an embarrassment. It's a distraction. It's a plus for Trump. But the other big story is who lost Ukraine. I think that could be a devastating story for the Washington in general if we can't get money for Ukraine, and it looks unlikely this week. Maybe they'll get a pittance, maybe they'll get a haircut, but I don't see a huge chunk of money coming for you, and Vladimir Putin has to be very happy.
Vladimir Zelenski is coming to Washington, DC this week, I believe, on Wednesday, to talk directly with Congress members, including how Speaker Johnson, to try to plead his case.
Over the weekend, there.
Was a lot of discussion about how essentially this comes down to funding and if Ukraine doesn't get funded, they're going to lose, and that was what a lot of people were talking about, especially because Russia is putting about forty percent of its budget into the military. Do you agree with that assessment that this is sort of the turning point where if Ukraine doesn't get aid, it kind of ends.
I guess I say it all depends on the definition of lose. I don't think Ukraine is going to lose the war anytime soon, but they're clearly on the defensive. They're backpedaling, They've not had a good winter, they lack supplies. So I would say that the momentum right now is with Russia. And if that's true, what does Vladimir Putin think about Estonia, Lithuania, Latvia? Does he think about other Central European countries that might be next greg The news.
Over the weekend on Gaza was just absolutely grim.
There's no other way to put it.
It's a point where it's almost subsued within the media because of just the weight of the grimness as well. What is the action the administration can do this week?
I don't see a lot. I don't see much that we can do. We could send more aid, but I think if it's tied to Ukraine, that's not going to happen until after the new year begins.
No.
I do think though, that in terms of the Arab street and the world in general, the Israelis maybe only have a few weeks left before they totally lose support. I think the window is starting to close on the Israelis. They've got to wrap this up pretty.
Quickly at least to jump in here. Please.
Well, I'm just curious there was so much discussion over the weekend about the university of presidents, the potential resignation of Harvard's president after what we saw from UPenn. I'm just curious. We're hearing that a lot of conservatives are saying we told you so, and that universities have been constraining freedom of speech for a long time, and that
this is just one example. How much do you actually see Democrats joining with that versus sort of voyeuristic arguments being made around this, and.
Good work voyeuristic. I don't see anything that's going to change the political landscape quickly, but it is an embarrassment for the Ivy League, and I think that will persist for a while. One other thing, really quickly, the abortion fight in Texas has long term implications. I think that more and more people will be looking at this saying this is not right.
Greg. Thank you so much.
Greg Valier with a Monday Eclectic Brief. There are many many different topics here, including what we see in Ukraine joining us now with the biggest shoes to fill on Wall Street. Max Layton with Jeff Curry at Gold and Sachs and now we've had more. It's City Group, global head of Commodity Research, Max. I'm going to cut to the chase. You and mister Morris. Doctor Morris had the call of the year. Everybody was looking for oil resiliency, oil higher.
You guys went south? How far south from Brent seventy five? Can we now head? Sure?
We think overall a lot of the move is done. And you know OPEC plus is doing some work to rebalance the market in the first quarter, and you know our base cases they'll be successful in doing that. The pressure increases for them to roll these cuts forward through the remainder of the year. Actually, we forcussed around a million barrel a day surplus for the second quarter and around an overall surplus of abouzero point six million barrels
a day through the whole of twenty twenty four. So you know, these cuts do need to be maintained to balance the market through the course of next year. In our kind of face case global growth environment.
In the base case, what is the relationship of Saudi Arabia to oil producing Russia in Iran?
Sure, Well, obviously there's a lot of complex factors going on with the political relationships between these countries. Overall, Saudi's taken the brunt of the cuts so far, and Russia is contributing, and we expect them to continue.
To do so.
They've been pretty forthright in what they want to do and in their expectations of countries meeting their quotas through the first quarter, and overall, I think that these you know, when you look at the trade off of the OPEK plus countries, they essentially maintain the existing cuts, have some incremental compliance, and they can balance this market and keep this price at seventy to eighty dollars if they work together.
The alternative is obviously substantial. Spare capacity gets ramped up into and prices could be down thirty, forty, you know, even fifty percent if all of that spare capacity comes back online. So I think the alternative is just so painful that it's most likely you get this kind of half a million barrel a day cut through the through the course of next year at the right price. So well, seventy eighty dollars is the right kind of price levels.
I want to develop that a little bit, max, because you're talking about a potential fifty percent price cut that could be a forty dollars hand doll and Brent crude even thirty five dollars on WTI. And this comes as we heard from Paul Sank last week, there is this risk that as the US ramps up production in as Saudi Arabia loses share market share to the US, the flood the market. They'll just say, look, you guys are
going to do this. Let's go and put all the barrels out there and get prices low enough that people start cutting production. What holds them back from doing that?
Well, I think obviously you know that kind of price decline will hurt everybody's profits and revenues. I think the stick or the stick that Saudi has is quite effective in the sense that they have the ability to raise production by twenty percent themselves, so they could offset, for example, on paper, a twenty percent decline in price with a big increase in their own production. Not many other frankly, very few other Ope plus countries have the ability to
do that. So in the worst case scenario, it's potentially least painful for Saudi Arabia and more painful for everybody else. So I do think that that dynamic makes the stick quite effective. Obviously, if there was a hard landing on the demand side, if non OPEC supply continued to grow extremely strongly. And on that note, we do have a material slowdown sequentially in US growth in our forecast for
the next twelve months. Most of the growth that we have is actually OPEC plus bringing back some barrels and
or ramping up over the next twelve months. So if you take that out of the market, if these cuts were extended, you're actually running a deficit in the first quarter if the quotas are met as well, and overall, if broadly the quotas are met, because we are assuming some slippage to get our balanced small you know, one hundred thousand barrel a day surplus in the first quarter, So it does appear that it's within OPECK plus's grasp
to hold the market together in the baseline. But yeah, look, a hard landing on the demand slide, big surprises on the upside on supply less disruptions and normal perhaps OPECK might break. But look, I just I think you have to get into a pretty dark global growth environment to even think about that.
Which raises this question, are we in a narrow range. You said, you know, there could potentially be some sort of significant downside should production and come back online, but you see that as improbable. So are we in a pretty narrow range after a lot of really massive swings over the past couple of years.
Yeah, I mean certainly, we think so. And positioning is extremely low now the spreads have collapsed, and yet the price is being supported here. It's found some you know base here. We think around seventy five dollars if anything, base cases we bounce back over the next month or two, prices stabilize a little bit.
Here.
We think, you know, China's going to roll out a significant easing package, significant as in to stabilize the ship. Not significant as in a ten percent easing as a share of GDP, but significant enough that the market thinks that China will be fine next year, be able to achieve four and a half five percent GDP growth. And you know, there's been some big builds lately that we expect to stop. Essentially, we expect a reduction in the builds in inventory that we've seen over the last three
weeks over the next couple of months. So we are expecting to stabilization prices from here.
Sure, Max, thank you so much and congratulations. Max Leyton is globalhead of Commodities for City Group. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Easter. I'm Bloomberg dot Com, the iHeartRadio app, tune.
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