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big issue. Stocks get their big Dubvish pivot, as fed shared. J Powell sets the stage for September Jason Thomas of Carlisle saying this, the case for a September raker is very simple. As inflation fools, policy becomes tighter if base rates remain unchanged, with cooler labor markets and a modest slowdown in nominal growth. There is no reason for tighter policy today. Jason joins us now for more. To catch up with you once again, Let's talk about that base
case September. Like seventy people, it's what happens next. Weather seems to be some division and confusion the ultimate destination here. Jason, what do you think of the pricing beyond September for the next eighteen months or so, Well.
I think it's very aggressive. I think the big lesson that we've learned over the last year is that policy has not been as tight as many suspected. Entering the year. There was, of course, expectations for six or seven rate cuts. That was predicated on the idea that a real interest rate of two percent would absolutely smother economic activity. Of course, that's not what we've observed, and I think learning from this experience would suggest that the fat is going to
behave very cautiously. I think, in general, the less certain you are of the destination the terminal rate in this case, the more slowly, the more cautiously you're going to proceed in that direction.
You put a comment out in your recent commentary, Jason, and I'm still trying to wrap my head around it, so I'd like your help. You wrote, it may be a time for investors to hold two seemingly contradictory thoughts in their head simultaneously. The time for rate cuts has arrived, but financial conditions are too accommodative for the FED to deliver the scale of easing anticipated by some market participants. Can you explain what the Fed should do with that and what that exactly means.
Well, So, since the start of the year, policy is effectively tightened by fifty basis points, that's just the decline in core PC inflation observed in the first six months.
Of the year.
So I think there's a very strong case for two cuts September and December. Thereafter things get much murkier, and so really that's what I'm suggesting. You heard a lot of talk yesterday at the press conference about normalization. Are you just cutting rates once or are you normalizing policy? And I found this odd because we don't really know what normal is in the new environment. Have massive budget deficits.
I don't mean to catastrophize those, but we do have to appreciate that right now, the after tax incomes of households and the corporate sector are about one trillion dollars larger than they would be if you had a fiscal policy that was stabilizing debt to GDP ratios at reasonable levels. Secondly, you have the largest concentrated kapex boom we've seen in this country since the telecom boom of the late nineteen nineties. You just mentioned the quote yesterday from Alphabet about the
risk of underinvesting. This seems to be something that's going to persist. Finally, you have deglobalization, or at least the presumption that more of what we consume in the US is going to be produced here, which is of course going to lead to potentially some upward pressure on prices,
the potential for supply shocks, more volatile inflation. If you put all of this together, it sets up for, on the one hand, some rate cuts coming at the end of this year September again probably December, but then thereafter you could have rates that essentially settle in at four six, five, four and a half somewhere.
In that range.
Are you saying that that's a more likely neutral rate at this point and that the market has gotten way ahead of itself in terms of estimating that it's something closer to four or even three and a half percent.
I think you have to ignore the experience of this year, of the last eighteen months to think that the neutral rate is still five fifty basis points in real terms. And so again, this is a situation where there's a lot of uncertainty. To be so wetted to a neutral rate at these low levels, at levels that persisted between the global financial crisis and the pandemic is to ignore recent experience. I think that would be very unwise for the FED to take that sort of approach.
Well, Jason, this goes to a deeper question really, which is essentially a lot of people are betting that rate cuts are going to support the next leg of growth in the US economy. Are you saying that that's not a lever that they can really pull in the same kind of way that maybe some of those inflation sensitive strategies look better and some of the ones that rely on inflation coming off and the FED cutting rates are maybe a little fraudy.
Well, I think that in general, if you look at risk premium in the economy, if you look at where credit spreads are today, they're tighter than they were again at any point since two thousand and seven. If you look at duration risk premium, where's the tenure in relation to the expected path for FED funds over the next ten years, it's effectively zero. If you look at estimates of the equity risk premium, based on consensus forecast for dividend or earnings growth, it also looks very very tight,
very narrow. So you know, I think that this all suggests that you have a market that is really priced for perfection to a large extent, and going forward, if we have some really unfortunate, unforeseen developments in the economy, of course, the fad with base rates at five point three percent has a lot of firepower, could do a lot to stabilize economic activity.
But if things.
Persist as they do today, again, I think base rates that you know, I would use as a baseline nothing that is lower than one hundred basis points from here as a reasonable expectation should growth persist.
Jason, I don't want to put words in your mouth, so I just want to last for your opinion directly. Do you think the Federal Reserve is getting it wrong?
No? Again, I think the case for rate cuts today is very clear.
Not the same time labor Mark and Jason. I just mean in terms of how they think about the economy. Because I'll tell you what I heard in the news conference yesterday and even say this directly, but I think he gave us a lot of clues. He almost frames the inflation shop coming out of the pandemic because due to one of factors that are ultimately finding And what I hear from you is that actually some of these forces to hang around. Do you think he's getting that piece of it wrong.
Well, there was, of course an element of inflation that was transitory, but I'm surprised given that the second and third order effects that we saw that people would still be of this mind. What we learned, I think in the inflation shock is that when you have shortages, you have a response to that. People over order. If they're expecting one hundred units of a component or part and
they fear getting cut back, they order two hundred. You start seeing courting, You start seeing downstream price dynamics that are very difficult to control. And again, I think when we compare today relative to twenty nineteen, we see both with the fiscal deficit, with the kapex boom that certainly was not occurring. Then, I mean, you have fixed industrial investment in the United States right now that's three times
twenty nineteen levels. And then again the shock from the Terra on China in twenty nineteen, most people expected they would be rolled back. Vice President Biden at the time suggested that this policy was unwise, it was harming American consumers and farmers. Now no one is speaking like that. In fact, the direction as it relates to trade frictions,
I think is only in the direction of war. So you know, again, it's very important to when we contextualize the current situation, when we account for all of these massive changes relative to twenty nineteen, I think you're left with much more upside risk to inflation. Should you act more aggressed, should the Fed act more aggressively over the next six to twelve months than perhaps many perceive.
Jason, you said that if growth continues, then this market is somewhat priced to perfection. Which market in particular is price to perfection?
Is it sort of.
A good news is bad news and bad news is bad news type of paradigm that we're entering into.
To be clear, I think that when you look at indexes, if you look at the NASDAC, if you look at the SMP five hundred, because so much of the gains have been concentrated in, of course a very small number of stocks, and you look at the aggregates, and you look at the equity risk premium in the index.
Then you say that.
It's priced to perfection. Now, if you look at the broader US stock market, you see many stocks that look quite reasonably priced because they have not participated to the same extent. Many stocks where you've seen earning's growth fear an excess of price appreciation, of course, implying that valuations have come down in some cases quite materially. So you know, it's a market that I think is gravitating from momentum trades very focused on those stocks that you know actually
quite benefited in many cases from higher rates. Many of these megacap companies, of course have negative net debt, and of course they have large cash piles that are earning floating rate interests that is an excess of their relatively low fixed rate liabilities. They're also, of course, generates so much cash in the near term that you know the
effects of rates isn't so great. So it's quite rational that the market rotated into those stocks and they just the valuations now have reached levels where you know, I think on a perspective expected return basis, people have to start looking elsewhere.
Jason, this was deeply thoughtful one of those conversations I'm going to re listen to a little bit later on this afternoon. Jason salmasa Kala, Jason, thank you.
I want to turn to this story.
Barklay's unvanning a share buyback plan worth more than nine hundred and sixty million US dollars This coming is the British lender reported better than expected second quarter investment banking revenue and boosted its guidance for the full year.
Joining us now is.
The Barklay CEO, CS ven Kada Krishnan Venkatt, it's great to catch up with you, sir. Once again, I will go through the numbers so you could be modest and you don't have to Equity underwriting booming.
Equity is trading up nicely.
The stock is up by something like fifty percent year today, Venkat. There was some weakness in thick trading that I want to get to in just a moment. But let's start with the position of strength you're in Equity is trading. Where did that strength come from, Venkat? And do you expect you to continue through the year.
Well, thank you for asking me to join the program. I'm very grateful to be here.
And as you.
Say, we are in the process of delivering on the investor plan that we laid out in February of this year, which was to have a simpler, better, more balanced bank, a bank that returns twelve percent hour rote and above by twenty twenty six, returning about ten billion pounds to shareholders by twenty twenty six and more, and then rebalancing the bank so that the investment bank goes from around sixty percent of the bank to around fifty percent of the bank. One part of the investment bank is our
market's business and the equity business, which you highlight. We've always had a great strength in equity, and I think as equity markets themselves have gone through the changes that you've seen in this since the start of this year, our traders have been able to capitalize on client demand, on increasing volatility and providing the kind of innovative derivative solutions they seek clients seek from Barclays and I do expect as market volatility keeps the pace for our performance
in equities to continue.
While we're seeing that same strength in Fick trading VENCAT, I wonder what you can do to turn things around in that particular part of the business.
So within FEC we are a very very strong credit house and typically in the top three. One of the reasons in FICK that in the market and for US it affects us maybe a little more, is that credit spreads have been muted and credit volatility has been muted, quite the opposite case from equities. In European rates, which is an area of growth for US, we've improved from the first quarter to the second quarter, and securitized products, which is an important part of fixed income, is growing
from strength to strength. So our fit performance is improved from the first quarter to the second and I could expect to continue to see more of that improvement as the year goes on.
Venkatte, We've been having a debate for several months now. Are rate cuts good or bad for banks? Or rate hikes good or bad for banks? Our rate cuts broadly good or bad for your profitability at a time when a lot of people are expecting them globally.
Than you and Mark.
So what I would say is very special about this rate cycle is that the what we're expecting is not a state of cuts but fine tuning adjustments. So the answer to your question is, I don't think they'll make that much of a difference to a bank like ours or to the large banks.
You know, my colleague A. J.
Raja at Thyaksha, who runs in macro research for US, often says a rate cycle is when you go up in an escalator meaning slow cuts, and come down in an elevator. Slow rises and then fast cut coming down in an elevator. What we've seen this time is we went up in an elevator meaning very fast rate hikes, and we may be coming down by the stairs. So you saw a fine tuning adjustment by the Bank of England this morning. You saw the FED pause, but they're
indicating they may go later this year. All of these things are just trying to adjust interest rates by a small amount because real rates have crept up at a constant inflation which is two percent, which is low. But it's just trying to overcome the slight impediment of rising real rates. So I don't expect this to have much of an effect on the banking sector of any and certainly we are not changing the way we view the world because of this modest rate cut.
In the meantime, you say that you are on track to achieve one billion pounds in cost cuts. There is sort of some swirling questions around where those cost cuts are coming from. Is it simply just being more efficient in certain sectors, is it ongoing job cuts?
What are you executing?
So we did a billion pounds worth of structural cost actions last year. We're seeing a the benefits of some of that. B We're seeing the benefits of a greater focus on productivity and efficiency in the way in which we run the bank. And what we're also seeing is the results of investments which we have made, particularly in markets,
particularly in trading technology. I'm talking to you from our equity trading flow in London and the way we have increased our market share and electronic trading here in Europe and in the US is all a result of past investment. You have to continue to do it, but it's probably at a slower pace than we did in the last couple of years. So it's efficiency and better investment.
Can I ask you about the advisory business with that in mind, how is that going? How's the turnaround going in that unit?
So investment banking we've done, as you've seen the results in the banking side quite strongly. Equity capital markets did very well, advisories improving. We still have a little way to go. We are seeing deal volume pickup, We're seeing our backlog increasing, and I think over time, as some of these ideas fructify, you will see an improvement in the advisory numbers.
I'd love your view, vencoun on how business is going more generally, as you look across Corporate America and corporations across Europe. I can share with you some of the comments we've heard from Corporate America over the last couple of weeks from P ANDNG they're seeing slower price increases. Kimberly Clark also saying the same thing. McDonald's are talking about the first sales slide since twenty twenty, PEPSI saying the consumer is becoming more challenged. You've got a massive
consumer business as well with the barclaycart business. When you look at corporations and the consumer, are you seeing the same kind of slow down VNCAP from your vantage point?
So, what we are seeing, which is good for the credit performance of banks, is we are seeing both consumers and corporates focusing on efficiency and managing their budgets more carefully. So if you are in the concer humer business and if you're a consumer oriented company. What you will see is therefore a lack of pricing power and then people economizing.
We see that in our own customers. What that means though, is that even though employment is still very strong, both in the UK and the US, people are managing their budgets more carefully, which is one of the reasons why buy and large credit impairment costs for banks have been relatively well controlled. So it's good for the consumer to do this and manage their budgets.
It's good for their lenders.
Because they're seeing less signs of consumer distress. It's good however, it's for the economy. However, there are winners and losers, and that's what you're seeing from some of the people you're courting.
Are you seeing a big difference in terms of consumer strength globally depending on the region. We've been talking a lot about how the consumer shows a lot of I guess restraint when it comes to spending, but more so in some of the sector is more leverage to highese consumers. How much you see in Europe in a weaker spot than say the US, well, I.
Think I think the the slow down which we've seen in China is palpable and what Chinese demand has done is affected sectors which were particularly exposed to them. You saw some of it in the fashion goods industry, and tech of course is a different situation because you know the trade with China is being limited in tech for other reasons. But I do think that what you will see as people with that exposure to China being more affected.
You've already seen it in the numbers and that I expect that you'll see that for some time to come.
How much does it affect where you're expanding or where you're not expanding.
Well, Barclay's is a first and foremost a consumer bank in the UK, a global investment bank, and so've got a very strong corporate presence and a wealth presence. But all of that is very highly connected to London, from Europe, from the United States, and then from India, Singapore, Hong Kong. We are not a major presence in mainland China, and so what we think is that the impact of what's happening in China is relatively more muted for US compared to other banks with larger exposures.
It has really a question though about some of the tensions that have been coming to the fore politically internationally in terms of potential tariffs, potential restrictions, changing policies, the elections. How are you trying to get ahead of that at a time where there's a lot of policy uncertainty. And arguably that's one reason why advisory and mergers and acquisitions hasn't been as robust as some people had expected it to be.
It's a very very good point, and I think the big area where all that comes into play is cross border m and A and cross border transactions. You've even seen slowdown of that within Europe itself.
You know, for.
Us it highlight it's one of the things which we've done, which is we decided very early this year when we did our investorday and made the decision towards the end of last year to invest thirty billion pounds.
Of risk created assets in the UK.
The UK has had its election, We've elected a business friendly government. The transition has been smooth and it points to the importance for banks like us to be in places with very clear economic policy, the good rule of law, growth and stable governments and stable economic policies.
Venkat, the year is going well.
Hopefully next time we're in New York we can catch up again here in the studio.
I appreciate your time this morning, sir.
Thank you the Farculey CEO cs ven Kara Krishna. Here's the latest investors turning their attention to the data following yesterday's FED decision. The July payrolls report you out tomorrow and CPI coming in just two weeks time. Fetch JPOW waiting for the numbers before committing to a Rake cup. The former Kansas City FED president as the George right in this I found the chair leaned pretty clearly to
confirm market expectations for a September cup. While September looks like the meeting to take this action, I think this room to be patient as the joined us now for more as the waterfall to catch up with you. It's been far too long. Thanks for being with us. I want to talk about that word you've used, patients. What underpins that patience? Why should we have that patience?
Welcome morning. I think my view on this really comes from the fact that we are looking at an economy that is growing and by the reads of the second quarter, growing well above it's sustainable long run growth. You've got a strong labor market and you still have elevated inflation. And I think that combination reminds me that the FEDS mandate is a long run objective. And just as we saw earlier this year, the market had priced innumber of
cuts only to have to pull back on that. So the central Bank's job is really to pay attention to the data. And as that gets closer, of course, that's going to be more difficult for them, and they recognize that.
How big is the risk that we take that strong labor market for grants it?
Well, I think you're always looking at this because we don't know with any great certainty where that equilibrium rate is for the labor market. Obviously, we came out of the pandemic during that recovery with a very tight labor market, and so as we watch it normalize, the space between normalization and weakening is one that policymakers are going to be very attentive to. So we'll get a report tomorrow.
It will give a clue. I don't expect it'll be definitive and by any means around that, but it is the collection, the aggregate of these reports that begin to give the committee a better sense just where that labor market is right now, Ester, do.
You get the sense that this fuge reserve still embraces the idea of transitory in that basically the inflation was largely due to the pandemic. It's come off the boil, and now some of the ramifications, the ripple effects are just being worked out of the economy.
I think that could have a lot to do with it. Lisa, you did see tremendous supply adjustments, and it had been some time since we'd had to pay attention to the supply side of the economy. So as we watched supply and that was true on the labor side, certainly good on the good side, begin to adjust. That creates a challenge, I think for the Committee and understanding just how restrictive is our policy. How do we understand when the economy
is approaching an equilibrium? And I think, as they've noted they are close, those risks are coming into better balance right now, and now judging how tight their policy is relative to the steady state of the economy, is there real challenge? And we heard that yesterday too soon versus too late and making adjustments to that.
It seems like the market really believes that the risks at this point are greater potentially on some sort of intereration in the labor market than an increase a surge and inflation. I'm wondering if you think that maybe the FED would have been prudent to push back just a little bit on that base on what you're seeing, considering that you believe that maybe there should have been a little bit more patients, kind of a little more discipline imviewed on the market.
Well, I would agree that the labor market again is coming into better balance for this committee, and you will have to look at some of the subtleties that come in underlying that labor market in terms of the levels
of activity and the momentum that you see there. But at the end of the day, committee is faced with an elevated inflation rate relative to the target they've established and the credibility they seek around getting back to that, and in the long run, as we've heard many times from both the chairmen and others, that sets the conditions for a healthy labor market long run. So yes, near term they're going to be watching a lot of those signals.
But the real issue, I think at the end of the day is their inflation mandate.
So I'd like to do two things.
I want to share a quote with you, and then I'd like to lean on your experience on the committee. You've got plenty of experience of understanding how all of this works behind closed doors. The stuff that we don't see this is whatever Core had to say. We think in practice it's not very data dependent, and view the cautious evolution of the statement as intended to carry hawks along and avoid dissents. Esther in your experience when you
hear stuff like that, how true is that? How do things come together on the committee?
Well, it's true. This is a committee that is consensus driven. They must make it decision and the nature of a large committee with differing views is to try to achieve consensus at some point. That doesn't mean you always get unanimity around that decision. And I think anytime you begin to approach what looks like I think, in their words, better balance things coming into balance, the decisions get more difficult.
It's not as clear cut as it was when you know you have to ease, or it's not as clear cut when you see an inflation problem emerging that you have to address. And so I suspect there is challenge within the committee of trying to reconcile views and to try to bring a solid consensus to whatever the decision will be at their next meeting.
As to this was wonderful and hopefully the team gets to see you in Jackson Holle as we used to as the George the formst kinds of City Fed President on the latest Fed Reserve decision from yesterday. This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern.
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