Bloomberg Surveillance TV: August 13, 2024

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.

A growing list of companies are warning of a slowdown, Mariot cutting its full year outlook, expecting weaker demand in North America and China. Mariot International President and CEO Tony Kapawano joins us now, Tony, always wonderful.

To see you.

Thank you for being in the studio. You know, I want to start. I feel like the US consumer and the Chinese consumer are two completely different stories. So I want to start with the US in terms of the greater weakness. Is it across the board or is it this bifurcation that we just keep seeing higher end still spending going nuts, lower end really really crimped.

Well, there is certainly a bifurcation across consumers. The lower end consumer is feeling the pressure of economic headwinds. In fact, while we don't operate in the economy tier, in the economy tier, they actually had negative revenue per available growth in the second quarter. But as you move up the chain scales, we are seeing continued strong RevPAR growth really

Can you give a sense of in the non luxury segment where consumers are pushing back what they're not willing to spend on in the same way that they were, say a year ago.

Yes, So it's really interesting if you look at our Q two numbers, with the exception of Greater China, which I know we'll talk about, we saw strong growth across every geography and across all three segments we operate in, business, transient, group, and leisure. So it's not that we're seeing really a pullback and travel. We are seeing a little bit of a level of caution in some of the related discretionary spend.

Well, Tony, you've been with Marriott for a few cycles, joining in nineteen ninety five. I wonder when you look at the consumer now and some of that concern, that pickiness of what you're seeing, how similar or how far away does it look from past downturns.

I think well, from a macro perspective, not terribly dissimilar other than the trend I just mentioned to Lisa, which is we have great credit card partners in American Express and JP Morgan Chase, and so we have really rich consumer spending data to evaluate and pre pandemic. You saw some of the younger demographics starting that shift away from

I'm just curious about this idea of investing in luxury. How much of this do you say this is just of the moment the split we're seeing, or we want to buy more boats, we want to have Marriott private jets in the sky. What does it mean to either just continue on the trend or double down on it.

Well, the good news is we're not buying any of it. You know, we're an asset light model, so we have terrific partners who are investing meaningfully in luxury, and we want to lengthen the lead that we enjoy in luxury. We've got the industry's largest luxury footprint, we have the industry's largest luxury pipeline, we have the industry's largest luxury branded residential business, and yacht is just a natural extension

On to internationals. So I want to ask you about the Chinese consumer. I want to ask you about Hawaii, and I know you have a lot of concern. You put a lot of effort into rebuilding what was going on in Maui after the wildfires. Is tourism coming back?

It is?

You know, we just passed the one year anniversary of those horrific fires in Lahina. I had my whole leadership team in Maui just last month. The great news is the Army Corps of Engineers is to be applauded. The progress they've made in cleaning up Leahina preparing Lahina for redevelopment is really encouraging. We had the commander who's running the effort give us a tour of Lahina. There's a

It's ever been.

Our people are passionate, they're resilient. They're excited to see tourists coming back. But they're still operating at occupancies in the sixty percent range. And so if your viewers hear nothing else, go to Hawaii. They need the business. It's as attractive as a destination as it's ever been.

So who is traveling right now? We spoke to the four season CEO yesterday who said the Americans are out there and they're traveling, they're seeing weakness with the Chinese consumer. Is that similarly what you're seeing.

Yeah, although interestingly, the high end Chinese consumer is traveling a great deal, but they're not traveling in China. So when we reported our second quarter earnings, the highest sub market we had in terms of year over year RevPAR was Japan. RevPAR in Japan was up twenty one percent, and a lot of that was driven, certainly by American travelers, but by high end Chinese travelers.

Have also how much is that driven by the weakness we've seen in the end and consumers travelers take.

A time on that that's the case, but I think that outbound Chinese traveler was locked down in a really significant way. And you've seen the Chinese government create visa free travel across the APEC region, and so we're seeing strong outbound Chinese travel in Japan, Thailand, those sorts of destinations.

As an American company based in America.

Does it give you pause to keep.

The footprint in the size that you'd have in China given some of the overlay of tensions between the two countries, as well as the lack of appetite to go beyond that Apec region by Chinese wealthy travelers.

Well, I have an expectation eventually they will come back. If you think about pre pandemic, the growing middle class in China and their appetite to explore the world was one of the things that drove a lot of optimism across our sector, and I think that will come back eventually.

So just to tie this all together, I know that Mariett had a subdued kind of outlook going forward in terms of how quickly you can see some normalization or at least reversal of what we've seen, particularly in the lower end consumer. How deep do you think some of the weakness goes the reluctance? I mean, is this just a matter of economic uncertainty or is this something that you're seeing escalate in a more significant way.

Well, I think your term normalization is the right one. Remember, we saw our business drop by more than ninety percent in the early days of the pandemic. So for the last couple of years, you've seen demand come roaring back, the benefit of those really favorable year over year comparisons has faded, and we're settling into a more normalized demand environment. Weakness in the consumer obviously hits our business. We operate

Tony Copano, thank you so much. Always wonderful to have you on the show. Marriott International, President and Chief executive Officer, Tony Copano, thank you. Joining us right now, we've got David Kelly of JP Morgan alongside Steve Rshudo of Mizuho. David, thank you for being on with us. I want to start with you, what's your action to this.

I think it's pretty good news because if you look at what's you know, first of all, it was slightly better than consensus in the headline, I mean very slightly. But if you look at what's still holding CPI up. We got a one point two percent increase in auto insurance,

But everywhere else inflation is nowhere to be seen.

And I think that's really the important point.

Where in the actual transactions markets of the economy, where people are sort of bidding and asking for in terms.

Of prices, inflation is disappearing.

So I think that overall this is this very much confirms the idea that inflation is heading down. I think over the next two months we're going to have some relatively easy comps, so I think that by September de BED may actually hit it's two percent year over year number on consumption to flater inflation. You know, we will see what happens, But overall, I think this is further confirmation that inflation is gradually whittling away.

So inflation problem dead. Steve Rashuddo, your.

Take complete opposite.

Few.

I don't think you should ignore things like what's happening in insurance rates. I don't think you should ignore things like what's happening in the housing market. I think what you're really looking at is an index. You take the index for what it is. You don't parse through the components, throughout what you like. You can keep only what throwout. Well, you don't like keeping only what you like. This is

Of a larger aggregate set of data.

And that aggregate set of data is telling you, A, the unemployment rate is still low. B.

Wage gains are still happening in the economy.

Inflation is not near the FEDS target, it's still one percentage point above it at the CPI level, at the.

Pc level it is lower.

And it's telling me that we have an economy that is still very, very healthy.

So again they want to cut rates.

They're probably going to cut rates in September because they opened the door wide enough to bring a mac truck through it, or should bring the Queen Mary through it, and then net result is they'll get what they want. But at the end of the day, is it going to have much macroeconomic effect.

One way or the other.

To be honest with you, it's going to affect financial market. It's much more show than the underlying bacro economic environment day.

What I just want to give you a chance to respond to that.

Yeah, well, you know, Steve and I have just got a slightly different view of this.

I don't think this is an inflation area economy.

I realize that labor market's tight, even with the unemployer rate up at four point three percent, But what's remarkable is how much wage growth has fallen, very steadily, all the ways since March of twenty twenty two. What that tells me is it doesn't matter how tight the labor market is. American workers are just not demanding huge wage increases.

They're just not doing it.

We're not seeing massive numbers of strikes, we're not seeing massive industrial action to try and get wage increases.

Wages are still rising more than inflation.

But if you look at core goods, if you look at food prices, you look.

At energy prices.

None of it shows inflation picking up, So we're really we're heading back towards two percent inflation is it's cooling slowly.

But I think the greater risk right now is a fit. You know.

I think the economy is in a soft landing. It's in a good place.

But if I'm in the Federal Reserve, I want to try to get back to normal year because the risk of recession, I think, is greater than the risk of any resurgence in inflation.

David, not that this is a competition between you and Steve, but if the market had to vote, it would probably be voting with Steve. Right now, front end fields are moving higher by about five basis points. You're looking at equities giving up on their gains except for small caps. Not to me, seems like a market that is saying, hang on, maybe the Fed can't cut as much as we thought it was going to.

What do you make of that reaction, I think.

Well, the thing is that I do work the details and all these numbers, and I was kind of surprised that consensus was as optimistic as it was in inflation. But I think people are looking for at this stage they want. Okay, if we get a negative surprise and inflation, then then maybe we can price in some more FED rate cuts. If we get something close to expectations, then we'll sort of sell the news.

And I think that's what's probably going on in the bond market.

But it doesn't change my view that things are weakening here on the inflation side. And the really important thing then is where is the economy looking when we get to September, because we'll get another inflation report, but important we're going to get a job support for the month of August, and that's going to be really crucial here because if it looks like the economy is solventing too much.

So Steve David says the risk of recession at this moment is greater where we are than the risk of inflation reacceleration. Do you see that completely different?

Yeah, I don't see a real risk of a recession whatsoever.

When you see risk of reacceleration of inflation if you wind.

Up with an accelerated economy, the answer is yes, and that I think is the risk in this scenario. This economy really hasn't slowed much. You look at the GDP numbers. Yeah, we slowed from last year's three point three percent number, but we continue to exceed expectations in terms of where we're going in the second quarter numbers and what we're looking like eventually. In terms of where we are in

But what would you say to corporate CEOs that continuously say they are seeing this slow down from consumers. They do see consumers differring big spending.

Again, after an environment of three point three percent growth, which is a one percentage point above trend, you're going to see that inflection point.

And that's real inflection point.

By the same token, you have services where spending is doing exceptionally well, and I think that becomes part of the problem.

Again, it's the goods versus the services side of the equation.

Services are doing extremely well. You're seeing that some of the components that people want to throw out of the CPI report. The reality is its services that matter domestically, it's goods that matter globally. Globally, it's a deflation story. Domestically, it's a six inflation story. The currency sits in between the two, and where the currency goes from here will be critical. If we get back to one hundred on your DXY measure from having been as high as what one.

Thirteen, one sixteen.

That's a huge depreciation in the currency, and you could start to see some of these benefits on the good side of the inflation dissipate at the same time that you may see a little weakening in the service side of the inflation, and you wind them stuck at three percent inflation. Now, if the Fed's willing to be stuck at three percent inflation, fine, bonds have to adjust to that.

David, we'll let you respond in just one second. I just want to, if you are just joining us, give you a sense of where we are right now. CPI month of a month coming bang in line, as Mike was saying, with forecasters expectations zero point two percent, up from negative zero point one percent in the prior month.

Well, I think in sure part of this plays into the whole political campaign season that we're in now. Insurance prices are very mixed. We do see motor vehicle insurance prices going up significantly in the You know, if you look at X formerly known as Twitter, I think you said yesterday a lot of complaints about that. But homeowner's insurance is flat on the month, Medical insurance down just a little little bit, so it's not a universal situation. Airfares were down by one point six percent, so if

Bacon was on your Bengo card.

Here you go, thank you.

So much Mike, David Kelly, and Steve Rstudo is still with us. David, I want to go back to you, and there is this real question about the line items and how much they actually matter versus just the overall aggregate index pointing to a certain type of scenario. What gives you confidence that we are not at risk of reacceleration at a time when, as Steve says, the dollar is actually a weakening and as the Fed is likely to cut weakening even still, well, you know, a fooling dollar.

Although frankly, it would be a good idea if the dollar came down in the long world, it wouldn't you know.

I think the dollar has been too high for too long. But that would add a little bit to inflation. But this is not an inflationary economy.

Let's just pick up an airline prices, because I think that it sort of exemplifies the exact nature of the US economy right now. Airline prices are down two point eight percent a year over year, but if you look at the number of people going through TSA checkpoints, it's up over five percent year over year.

It is at an all time record high. Americans have never flown more than they are flying today.

The planes are all packed, and yet the airlines can't actually push up the prices year over year, they have to push them down their prices two point eight percent. So you know, I know Steve is a little more worried about inflation going up. I'm a little bit more worried about the economy is sewing down. As long as we disagree in that way, the truth is the economy is just doing great here. What we're seeing is steady low inflationary growth, inflation gradually coming down, and hopefully the

But overall, this economy is in a pretty good place.

And I hope that Steve and I are similarly disagreeing as vehemently in a few months time, because that'll probably say the economy is straight down the middle doing fine.

I mean, you hear that from the Fed to be fair as well, this idea that the economy is doing fine and they have time and that means that they can just wait for more data. Steve, you look at this data is the weight over Do they have everything they need to cut?

You know, if they could get a unanimous agreement, they will cut interest rates yet and I think you would need something on the labor market to do. And I think, you know we're arguing today over the CPI number. I think they've already taken that out of the equation. I think it's all about the employment numbers, and I you know, the claims numbers. Will see what the retail sales numbers give us. Tomorrow, We'll see what the claims numbers give us.

Ago, and hadn't used up.

The reality of the situation is the transition that's taking place from a very abnormal recovery period to an expansionary period is going to be volatile, and reading through all the tea leaves, trying to look at one or two indicators makes an enormous amount of mistakes. What's important is the breath of the data within the payroll employment report. It's like the breath of the data within the Jiltz data.

But the reality is you.

Can't have it both ways, and that's what they're trying to do, and I think that's what the markets are trying to do. You know, they want the FED to cut rates, and they want FED to cut rates a lot, but we don't want the FED to cut rates too quickly that people begin worrying about a recessionary environment and then the equity market goes down.

So we want to.

Craft an environment where bonds go up in price, equities go up in price, and everybody can go home happy.

Doesn't always work out that way.

To that point, David, of whether or not the FED is we likely they're going to be cutting in September. But now the debate is do they go twenty five or fifty. If you think we're closer than the risk of recession than a risk of reacceleration, the Fed needs to go fifty bases points in September.

I think I.

Would like them to go fifty bass points, but only if they can message this as being part of a normalization, because honesty rates are in the wrong place and they need to get to normal at a reasonably rapid pace. I think that's what they ought to do, but they have to message it that way because the problem is that, you know, as Steve said, if the Fed cuts the fifty basis points and does it because they are scared of the unemployery going up too five, it won't speed up the economy.

It will scare people, will cause.

People to hold business decisions, It will cause people to wait for lower rates before they borrow money. It will reduce the income for people the six trillion dollars in money market funds out there. So the problem is there's a j curb and monetary policy. When you cut rates, it actually hurts the economy before it helps it. And that's why they've got to be very careful here.

Of course, See, the.

Truth is they shouldn't be in the wrong place. They should never have raised rates as high as they did, and they should try to get back to a normal short run interest rate.

Of somewhere in the range of three and a half to four.

Percent and just stay there.

But I do think that that, you know, I think the employment report for August will be crucial here. I do think they ought to do fifty basis points, but I think they ought to try to message that as look, the economy is fine, We're just getting back to normal at a reasonable clip here. We're not going to draw it out over a year and a half. We'll try to get back to normal a little bit more quickly than that. If they do that, I think they're managing the situation.

Well.

I guess what I don't understand then, is if we're fifty basis points and we have more room for that, is that not sort of like an emergency cut. I mean, isn't fifty on its own something you wouldn't do if the economy is healthy.

Well, we didn't really have an accelerating inflation problem at all in twenty twenty two and twenty twenty three. The inflation it was coming down after June and twenty twenty two, and we saw plenty of fifty basis point rate hikes, So I think the Fed has to sort of desensitize the economy a little bit, say, look, you know, just.

Don't freak out here.

I was short.

Big moves in short term interest rates don't seem to have much impact on economic variables anyway, So let's just get back to normal.

But it's a close call.

I mean, you're the thing that I wish they'd started earlier, because then they could have started, based on look inflation instantly heading back towards two percent. We're very confident, well in two percent, we're going to take off the brakes here.

They ought to start doing that earlier because.

I agree that if it looks like they're doing this as an emergency rate cut because the economy's in trouble, that's only going to weaken the economy.

So they have to be very careful in messaging.

I think should starts with expressing some confidence, based in today's numbers, that the inflational situation is on the road to two percent.

Steve Just's final word thirty seconds your view on fifty basis point rate cut in September.

There's no way. Given the dots, they can message that properly. Remember this is a committee that went from several rate cuts before the end of this year to one, one, twenty five basis points, and now we're talking about og in September.

Let's go fifty. What are the dots going to do.

Are we going to get a number of people on the committee to turn around say oh, I'm going to reduce the dots. Are they going to be able to do that. They don't talk about the dots in that direction. So the reality is if they go fifty basis points, then the question is what changed so much that you only had one that now you have two when you're doing it all in one shot, and then what happens

And this is a mistake.

Typically when the Fed is cut rates in the last four cycles, it's because we had a credit crunch. There is no credit crunch unfolding, and therefore there is no real need to move aggressively in monetary policy.

Steep Shudeou of Mizuho, David Kelly of JP Morgan, thank you both. We love having you on, especially together.

This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, antiopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app