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Bloomberg Terminal and the Bloomberg Business app. Fulston Slock of Apollo writing a trade war is a stagflation shark, Torson Slock to understand for more. Torston good Morning Monday morning, is firing the FED chair a stagflation shark.
Well, so, a stagflation shark is by definition that inflation will go up and GDP growth will go down. But if you fire the fiture, as we saw yesterday, the dollar will likely go down, and at the same time long race will be going up, and the dollar going down is certainly inflationary. But rates going up is of course holding back growth. So firing the FT chair will probably mainly mean a decline in the dollar and an increase in long rates.
Let's talk about the snack versus the FLA shed. Do you expect to see that flation for very long?
Well, so so far.
There's a number of here from c members when they talk about this, that they discuss what is the persistence of the stackflation shug in other words, when tariffs start to be more visible in the data. And I absolutely believe the data we just got this week it is the case that we're now seeing lift off in inflation in goods. Because we are seeing goods inflation, which makes up forty percent of the CPI basket, seeing on a number of different categories tools, toys, apparel, furniture, we've seen
a fairly decent rise. And if we begin to see that lift off now over the next several months, then the risk is, of course that this becomes the more persistent. And Beth Hammock from the Cleveland Fed has said that in her district, companies that are exposed to tariffs have been raising prices, but even companies that are not exposed to tariffs have for competitive reasons, also been raising prices because hey, if others are doing it, we can also do it. So the fear it is that this does
become more persistent and more sticky. So that's why it's so difficult for the FED to go out and the clear victory and say, oh, this is just temporary. They need to wait to see the peak, and we have really only at the takeoff stage, so we have not seen the peak. The consensus expect that later this year, by probably in November or December. But the bottom line is, before we could see that peak in site, it is not clear that the FED will say that now we're going to cut rates more meaningful.
How do we explain what's handling with services prices?
Well, so, of course, when something has a weight of forty percent and we know very well that that's now going up, of course the issue is, well, what about the sixty percent? Is that also going up? The sixty percent consists to a last degree also of wages and what we know from deportations. Of course, at a run rate around a million people in twenty twenty five, that means that wage inflation would likely begin to go up in the areas where unauthorized immigrants are working, for example,
in agriculture, construction, leisure, and hospitality. So the fear you can have is that it's not only goods inflation coming from tariffs. Is also the upside risk to services inflation coming from wages, especially because of deportations potentially beginning to play a more significant role Turstan.
Is the consumer able to absorb this well?
On the retail sales data today, It's quite interesting because the low in consumer has been in trouble for quite some time, because we've seen all the loan the linguaities go up. We've seen credit card the linguagies go up. That's mainly because low income householes generally have more debt that generally have lower FICO scores. And when you have more debt and the FED race race in twenty twenty two, that means the low income houses are having hired debt
interest payments. So therefore, low income houses have been in trouble for some time now. High income houses have been in good shape because stock markets are home prizer up. If you own fixed income, the cash flow you get from private credit, public credit, that's been very very strong.
But the middle income households are now facing the news shock that student loan payments restarted after the monitorium or the pause on paying back your student no ended here in May, So that means that the rating burrows are now being told if I'm not paying my student loan, and that means that we are, unfortunately for the consumer outlook and therefore for retail sales here at eight thirty seeing the risk that is not only low in consumers
that are now facing headwinds, is also the middle income consumers. And there's about eleven million people who are not paying their student loan on time at the moment out of forty five million people who have a student loan. So that means where that twenty five percent delinquity rates on student loans. This is at risk of implying that credit scods are going.
To go down.
According to the New York Fed Lab's This Streek blog post, it could be as much as seventy five points on your FICO scale, So people who have a credit score of seven twenty five goes down to six fifty. That means that middle income households at risk of seeing not an ability to borrow to buy a car, house watch, a dryer, iPhone. So therefore the risk to consumption is that it's going to broaden out the headwinds not only to low end but also.
To middle income when you look at tariffs as a headwind. If the President is about to potentially settle on ten to fifteen percent across the board for one hundred and fifty countries, while it's an active negotiations with some of the biggest trading partners, is that enough for the FED to then start to model out what that could mean and cut rates. What's the timeline between getting the final tariff rates and the FED being willing to cut That.
Is really important because they excuse my picture, pick is coming through the pie here in terms of terrorists and what it means our company is going to raise prices for consumers and that's the way we pay for tariffs. All our company is going to take it in earnings. So there are various simulations from the Yeald Budget lab the pen One budget Model, the Tax Foundation. We try to look at what are the implications of different levels of the effective arid seriff rate, and those show indeed
that it does take time. So the FAI will not have clarity on this issue, maybe not even this year, which is exactly WHYMC members are so reluctant to come up with the answers how do we even quantify what the impact is? And the final point in your world is, of course, also what about the hearings for the IPA on July thirty first, that's now several weeks away. With that all deemed that there is a risk that this could all turn out to be not legal, what does
that then mean for the August one deadline? So in the near term, the FED is certainly going into the July meeting in my view, thinking we cannot just even signal that there is any rate catch coming because we just don't know yet the persistence, the magnitude, and therefore overall, what are the implications of tariffs at this point?
Can I just stay with that word for how many people make up that word way? And how many people Joria hand up and say, you know what, actually we should cut and we should count this month.
Yeah.
Of course, both Chris Waller and Miki Bowman have been turning more towards talking about cuts but potentially being something that should be likely. But the answer is to your question, at least the vast majority of comedia at this point is certainly at least in the reading. If you need to look at the dot plot weighing towards saying, well, there is probably a good argument for waiting.
Median dot Steele projects implies two cuts, Morgan Stanley, no cuts, Bank for America, no cuts for twenty twenty five. What's your base case given what we know? Now, what's your basically?
We have one cut in December. But I do think that the market is way way too eager to price in cuts. Again, the risks are and not only we talk about tariffs as upward pressure on inflation, we also talk about immigration restrictions and deportations as upward pressure inflation.
But let's also not forget that if you take purpose, the FETs model of the ER's economy, and you ask the question, what does the fat itself think is the implication of a ten percent depreciation in the trade weighted dollar, and the answer out of purpose is that inflation will go up over the next four call us by zero point three. So now we certainly don't only have the uncertainty about terrrists putting up by pressure on inflation. We
also have immigration restrictions putting up by pressure inflation. And then we also have that depreciating dollar for the last six months is also putting up by pressure on inflation, So all that argues for rates higher for longer, and on top of that, in the long end, we're also fiscal issues putting up by pressure on inflation. So the whole Yel curve is likely to stay elevated for a much more extended period than what the market is appreciating.
The Federal Reserve is projecting transit three. It's just implied by the forecasts core PC for twenty five three point one, twenty six two point four, then down to two point one and twenty seven.
That's the glide path. Do you project transits? Well?
That is also if I type ECFC go on Bloomberg, I see exactly that profile where inflation will peak at three point three by Q four this year, and then it will begin to come down. But noteworthy is it including in the Fed forecast that we will only buy then of next year have inflation is still at two and a half. That's still way above the FETs two
percent target. So you could begin to argue if you begin to cut rates when inflation is two point eight nine, or if we get basic the situation where inflation sets out to about more sticky. The risk is of course
that they will be cutting prematurely. And that's what literally every airform cemener worries about, namely, did we cut too quickly and are we therefore then creating more boom in the economy, including with the one big beautiful bill lifting GDP next year, we could have a fairly strong economy going into twenty twenty six, and with that backdroup, it becomes very difficult to argue that you should see a lot of FED cuts next year.
Do you think the one hundred basis points of cuts in the run up to the election was premature?
Well, of course at this point that we had only all got to talk about our star as we have done now for a long long time. And this was the strong, strong argument at the time that monetary polsy was restrictive, that even still in the footnotes of aform CE member speeches talks about well, monastery pols is still today restrictive. But if you look at it that way, well, if monetary pols is so restrictive, why is the economic
data and still doing so well? So that suggests that maybe this whole discussion has interestingly enough completely faded into the backseat of the car. We're no longer talk about our star and restrictive now we are so eager instead to talk about the inflation or impulse coming from in particular teriffs, but also the dollar going down. So I think that the debate around why are we at these levels of interest rates and where should we be? That
debate seems to be almost yesterday's debates. So that's why I take a lot of the impulse and the discussions on there from seeing now is all about what's coming ahead of us, and what we know is coming ahead of us is exactly what the forecast from the Fed is saying amy higher inflation. J Pile said himself, we expect a meaningful increase in inflation over the coming months.
That's a very strong statement from the Fetchure. So I think that we should in market take that very seriously when the Feture is taking a lot of credibility on saying we expect a meaningful increase in inflation over the coming months.
Tustan, it's going to say, as always, thank you, sir, Tolston Snock that of Apollo. Jim Demarth, Bank for America writing volatility is whipsord global markets. That's been good for the markets. Businesses Bank of America. Jim joins a snaff of more. Jim, good morning, good morning.
It's going to see you. Great to see you.
It's going to catch out masses of volatility. Yes, you can have the good kind and the bad kind. Why was this the good kind?
You know, the we'd like to think about everything in terms of channels. You know, when there are channels of price action, channels of volatility, those tend to be better opportunities for investors to put money to work. You know, if we were sitting here ten years ago, the bigger conversation was financial repression, right, and if you look at realized volatility in both the equity markets and in the rates markets, let's focus on the US, those that realize
volatility is considerably higher than where we were then. And you see a lot of investors, you know, macro strategies are becoming much more popular today than they were ten years ago, when it was just difficult with suppressed volatility to deliver alpha.
And so I think, you know, volatilities here.
We're in a.
Different you know, political and economic environment than we were ten years ago. So you know, my my suggestion, will we get used to to a higher degree of volatility.
Do you think this is an ongoing feature of this regime.
I think just where we are in the economic cycle, I mean, things are just very different. Right We're going to have increased uh, you know, there's increased pending happening in infrastructure, in technology, in defense. We've got high levels of debt in the developed world. That becomes you know, more topical depending on what other actions are taking place. Our headlines are hitting during you know, during a given day, a lot of focus on Japan, you know, for the
last month to month and a half. You know, in April we were talking more about the US markets and concerns about you know, a failed treasury auction, which I
think was extreme, you know, to say the least. But you know, in the end, some of these larger structural issues remain, and I think we'll go through periods of Yes, there's obviously concern about out you know, fed independence and what could happen there, you know, and I think you've had pretty much everybody on the show talk about it for the last the last you know, twenty four hours, Please get the last twenty four hours. Fed independence is good.
I'll leave it that. If it starts to be threatened. What does it mean.
I think people are going to I think people are going to wait to see what happens. I don't think anybody is going to be uh is going to exit the markets on concerns that that that is a certainty. I think with many things that have transpired over the
last ninety days, there's a there's a test period. You know, theories are tested in the markets, markets respond, that information is filtered back into the decisioning process, and we're going to continue, you know, we're going to continue on that path.
But I do think, you know, when.
You think about the sovereign debt levels in developed you know economies across the across the globe, that is a real concern. It's going to you know, it's going to keep popping its head up or rearing its head until you know, there's some resolution. There was a lot more talk about it until the bill was passed. Now it's again a focus on Japan, and I'm sure there'll be talks about you know, other countries in Western Europe and you know, and in the UK as we as we
continue on that path. So now I think betting against volatility is not a good strategy for the near and midterm.
When it comes to volatility right now, what makes this environment potentially different or I guess you can mirror it to Trump one point. Oh, is it's politics and policy that is driving this in financial market?
Yes?
And again I think that's why it's a materially different environment than we had, you know, post a financial crisis up through COVID. While we had different administrations, the policy path was still pretty consistent regardless of democratic or Republican administrations, and the FED policy was very consistent. And you know, it was q E for a large part of it, and that was a you know, repression in volatility, and that environment is no longer here.
What's the number one question client to ask you?
Wow, that's a that's a really great question. I think the biggest focus remains on whether we're getting cuts this year, you know or not. And there's some pretty strong views on on either side, you know, And that's really a bigger question on what do we think inflation looks like as a transitory you know, or is it going to s remain at a higher elevated rate. I would say the second largest question, if you get out of the bond markets for a second, is you know, the AI investment period.
That we're in today, is it a bubble?
Is it a high correlation to what we saw you know in the late nineties going into two thousand and you know there's stories written on that that every day. I think what's very clear is that the investment is going to continue for the for the near to medium term, whether it's a result of corporations or sovereign uh sovereign you know, governments being focused on uh AI being critical to economic growth and safety, and so you see that regardless all around the world.
You know, governments are.
Making it one of their top mandates to be to be a leader in.
AI drive an equity markets in a massive way, basically at all time high still on the s and P five hundred very close, and credit spreads a super time. How it spreads up very very tight. Do you see that as justified or a sign of complacency? There is a manner another banking beliefs that maybe it's a sign of complacency. Don't have to name it today, want your opinion on that.
Yeah, I mean we go through periods of you know, when the market's down, nobody wants to buy and everybody gives fifteen reasons why it's going to go lower, and it goes up, and then people give you reasons why it's not going to go you know, it's not going
to go any higher. I think the markets in general and people were you know, as humans, we have a certain degree of fear in US and we're worried about what could happen and what could be life threatening, and that's just human psychology, and post a financial crisis, we look at it and say, Okay, we know what are we missing. I think a lot of what the issues are that could result in a repricing in assets across the markets, they're all out there. The question is are
the markets reflecting that in their current price? To me, that's really the question that you always have. And you know, the debate is today. You could sit with people today and they'll tell you that, you know, the real level of rates in the US market and the long end is too high based on what their expectations are.
You know.
The converse of that is people saying that we're concerned about long term debt because.
Of structural budget deficits. You know. Flip it over to the equity markets.
There's many people that are excited in saying AI is real, it's going.
To drive productivity. We're going to see a.
Boost in earnings across you know, across industries and across sectors. And then there are others that say, wow, you know, this is just another bubble and we've seen this, We've seen this play through. It's a good opportunity for us. We have a lot of clients that are thinking about things differently, and obviously, you know, our strength is intermediating risk, lending to them as they pursue these opportunities, and that's what we're that's what done.
What I sense from you is that now there is a bus to act. In early April, it felt like a lot of people were just paralyzed by the bank drop. Yes, where's the buyas to act coming from? Are they just moving on from this policy story in Washington or have they got the clarity they want at least enough clarity to just move on.
I think the first that's a really great question, and I think it's difficult to answer, but I would answer it this way. You know, you start with framing what are the extremes that could happen, and then getting comfort within that. And I think at the time when the tariffs were announced, the concerns were, how you know, this could be a material negative impact on global GDP okay,
and that was reverberating. And at the same time, we just happened to have treasury auctions, you know, within a week's time.
And then so you had this.
Period of disruption in the equity markets, uncertainty. You get to the bond markets, we're having large auctions. Someone starts to focus on and proliferated in the market. What the participation rate was of you know, foreign investors in the three year note, which you know, if you go back and look at the numbers, yes, that was a high single digit participation at the time, but that's not the first time it's been a high single digit participation relative
to participation, you know, in double digits. But you know, if you wanted to find negative dots to connect to come up with a very negative story, we provide, you know, the markets provided it.
So a few months ago, twenty year real shit, Yes, nobody in fixed income cares about a twenty year treasury nobody nobody, And then all of a sudden you have a SOLF twenty year and all of a sudden, that's a reason to sell everything.
Yes, So to that point, I think that framing and then bringing it in and as some of those outliers or the extremes of those risks are framed and framed narrower and narrower, that's when you get that, you know, you get positive sentiment.
When you talk about those extremes.
Do you also think that the president has set red lines what he's willing and not willing to do this idea of a Trump put Do you think investors have taken that on board.
I think that.
He's a very smart man and he's very connected to what's happening in the markets. I don't think that that's the only driver of his decisions, clearly based on what the statements have come from him in the administration. But that being said, you know, we are one of the most powerful economies in the world, and you need to be cognizant of that. But I do think that there's if you're being objective and independent, you can frame things, I think, and get to a.
Point where you know where the extremes could be.
And those extremes have been coming in and I think that's giving people more comfort to make some of these decisions. I mean you know, sector trends that are happening in equities. The investment's happening. It's happening with people that have the capital to make the investments. It's clear that the need is there. Now, whether it's going to result in the productivity or cost saves, you know, that's going to take you know, more two three, four years to see that.
So I think for that sector. But then you have it an energy investment that's happening, defense, which is you know globally that's becoming a thing. So I think if you look at those sectors in the equity markets, people feel comfortable that there are strong fundamentals and technicals and it gives them the kind of strength and optimism to carry on. I think the bond markets are going to keep, you know, the volatility up, and you know, Brian mentioned it,
you know yesterday. You know, we went through a historical period of low front end rates that was unprecedented, and I don't think those times are coming back. I think there are people that run certain investment strategies and certain people in the real economy that would really like zero interest rates, and I think that's why you're seeing some of the corrections continue in the real estate market, just because interest rates are normalizing higher and we're going to
continue to see, you know, challenges for those industries. And I'm not you know, highlighting just the real estate industry. If you were a highly lever comp and you were used to borrowing short term, that's no longer a viable strategy.
Can we finish at the long end of the curve?
Yes, it's the character of developed markets, sovereign debt markets beginning to change. Typically by definition, when bad things happened to DM, you bought the bonds, you bought treasuries. It just feels like that story starting to turn. And we have these moments of stress where we see equities and bonds trade in tandem together. It's not just the US we see in Europe. We're seeing in other countries too. What's happening and how investors changing.
Well, I think it's I think, I mean, you hit it.
And that was one of the big concerns, you know, for smart investors that saw that price action, you know, stocks down, bonds down. That's not a good sign for health of the markets from a historical perspective. And with that being said, and with the concerns about the deficit. I still think, I mean the markets are telling me. I think that there's still optimism that there's going to be you know, a better uh deficit environment on a
go forward basis. I mean, if you think about it, meaning maybe we're going to get growth its higher than that's projected, and perhaps the deficit, the structural deficit that we have won't remain as large as what's been feared. I mean, if you think about it, the bill was passed, the information is now clearly out there, this is what everybody was worried about, and there hasn't been a consistence.
There hasn't been a significant sell off. I'm not saying that there hasn't been ten to fifteen basis points moves, but you know, people are talking about a six percent long bonds as a given, not as a possibility, you know, just months ago. So I do think that the calmer heads are prevailing and people are just want to see this data flow through the system and see this policy flow through the system.
Let's hope to stays that way. Let's do it against this great great to see if thank you, sir Jim Demanda, I thankful market. We've seen the reports, we've heard the denials. Let's get into it with the former sen Lewis FED President Jim Pula. Jim, welcome back to this program, Sir. I want to get some monetary policy and economics before we get to the politics of it all. Do you think this is a credible argument for lower interest rates at this month's meeting.
I do think that the FACT could resume its normalization process, which was interrupted in the first six months of this year. So I do think that that is the baseline plan at this point. September would be a natural focal point for that, and then maybe follow that up at a subsequent meeting. But I don't think that the committee is considering the sort of wholesale reductions in the policy rate because inflation is still somewhat above the target and they want to see the effects of tariffs.
Beneath the headline, Jim, as you know, in the details, it's very much good versus services the moment, how concern value by what's developing in services.
I still think that the overall inflation rate is going to continue to either stay where it is or decline slightly, and I think that's pretty good policy. I think you want to bring the inflation rate back to two percent, but not too fast. And I think they've got about the right policy to do that. But they do have some room to lower the policy rate, and I think we'll see that in the second half the year.
Jim, you've been on the committee, You've got plenty of experience. Experience also if the pressure coming from the White House. At the same time, the pressure coming from the White House and the president's second term is much higher, much more powerful, stronger than we saw in the first term. When you're on the committee and you hear these kind of threats, does it change the way you go about your business in any way, shape or form.
No, it doesn't accept that.
What's happening is that this will induce inflation risk premium in the ten year and so you'll get how ten year yields than you would otherwise have.
If this wasn't going on, and then the committee has to take that into account. I don't know why you want to whip up an inflation risk premium, but obviously investors want to be careful. You know how much inflation is the new administration willing to tolerate going forward? And that's the thing that the bond investors have to price in, So unfortunately this is going in the wrong direction. That's also going to push up financing costs for the government.
That depends on the weighted average maturity of the treasury debt and some of that's longer term, so some of that is going to be influenced also by the inflation risk premium that will now start to develop. So unfortunately it's going a little bit in the wrong direction I think from probably where the administration really wants to go.
That's the market impact.
When it comes to the political theater of this, all JP Morgan's Equity Derivatives team is that with a note saying, what's currently unfolding before our eyes has been happening for decades behind closed doors.
Is this idea FED independence a myth?
You know, we've talked about it before, but I don't use the phrase. I try not to use the phrase FED independence. I would say it's designed to be arms length from politics, which would mean that the FED chair is not a cabinet position like the Treasury secretary that you get to a point as soon as you take office.
But you do get to.
Appoint the FED chair about one year into a new term, and you know, that's to give a little bit of political installation and so that things aren't moving, you know, quite so rapidly and are smooth out a little bit. Otherwise, you would have a lot of back and forth as administrations come and go with monetary policy, and that would be probably counter productive.
Again, you get a lot of uncertainty.
In markets that would have to be priced in, you get a higher level of rates, so that would be unnecessary. So I think arms length from politics is the way to think about this. I mean, you do have political appointees at the Fed, so obviously there's a political element to it, but it's designed to smooth out the ups and downs compared to what you would get for a cabinet level position, Jim.
As you know, each leader at the Federal Reserve has a different style. There is a theory on Wall Street, which I'm sure you've heard that if someone is nominated by this president that the rest of the committee believes it's just a political puppet, the rest of the committee will gang up against them, and maybe they'll just be a chairman in name only. Can you describe the dynamic on the FMC whether that's conceivable from your point of view, Yeah, you did.
Have the example of Gay Miller during the Carter administration, and he did not have the support of the committee or Paul Volker in particular, who is then the head of the New York FED. The story that I remember that your viewers might appreciate is that there was no smoking in the room. There was a no smoking sign and Volker lit up his cigar and.
Started smoking his cigar.
So I think that shows you what can happen if you nominate somebody and have somebody come into the job that doesn't have the respect of the institution. And by law, this is all done by committee, and really a chair has to navigate the committee and win friends and influence people.
So that's a key element of the FED chair's role.
Jim, I've only thirty seconds left, so forgive me. But Governor Waller was your director of research at a smile was fed. What kind of fetchad would he make?
I think you'd be very good.
I think he's a very strong candidate.
I don't know if you'll win this, but he's certainly got a lot of background in macroeconomics and monitoria economics. But he's also been on the board for quite a while now and has a lot of sense of.
Washington interface, so I think he'd probably be a good choice here.
Jim.
I appreciate your time as always, the Fulma San libis fed President Jimpilot.
Great to be here in Chicago and thank you so much. I am here with Scott Kirby, the CEO of United Airlines, after earnings came out. He really echoed what we heard from Delta, which was a first reporter, which is stability, solidness, a sense of recovery. You said the world is less uncertain today than it was during the first six months of twenty twenty five. What was the inflection point where you saw that certainty come into play.
You know, this year a lot of uncertainty in the first half of the year at Macro insert and that led to an impact on bookings and demand at United
and across the whole industry. But it felt like there was a turning point at the end of June where the tax bill passed and the situation in the Middle East was calmer and tariffs, while not certain, yet narrowing the range, and it really felt like people felt enough confidence or enough lower level of uncertainty that they kind of came off the sidelines and were unfrozen, and particularly for business demand, I mean, you can't stay on the
sidelines forever, and that was enough of a trigger. It really was like a light switch flipped at the end of June, particularly for business demand. Double digit acceleration in business demand as we ended June, and that's continued through yesterday.
We've talked a lot about the K shaped recovery and the idea that high end consumers have really been driving the economy. Corporations kind of dropped off with business travel, as you said.
They picked back up. What about the.
Rest of the travelers, the main cabin How much have they rebounded back to where they would have been had there not been some of the headline volatility.
So you sort of separate into those three pieces. Business demand dropped off at the start of the year. That seems like it's bounced back to what we were expecting it to be as we moved into July. Premium and higher end leisure sort of stayed consistent throughout. It never really dropped off, and the biggest impact for the consumer was in low end leisure. That's come back some in July,
but not as much. I'd say that's sort of fifty percent recovered to what we were expecting at the start of the year, So business back to mostly a full recovery and low end leisure kind of fifty percent recover. Premium leisure never never fell off.
We've seen sort of one entrance into the CPI report. The idea of inflation has been airline tickets have actually prices have been coming down, and there's this question of whether discounting is required to bring some of the main cabin back and whether that's going to be a persistent trend that competing on price is going to be really important. How much do you see that as persisting into the second.
Half of the year.
The airline industry is always good value, it always has as attractive prices, but I think it's more of a supply demand imbalance that there are a number of airlines. You know, there are two brand loyal airlines in the United States who are now generating the bulk of the industry's profits. Because those customers that care about quality, care about service, that care about technology, are We're just better, and they're choosing us, And you can see it in
the data. You can see it in the numbers for the more commoditized part of the business. You know, there's simply more seats available. There's been more seats available than there is demand. But encouragingly, there's a big change coming in mid August. Well, we've talked about demand, and I see an inflection demand. There's also an inflection coming in supply as by the time we get to mid August,
there are a lot of seats. The same thing happened last year, a lot of seats coming out of the industry, particularly from the low end carriers who've been struggling. Those seats are coming out. So my guess is that's going to lead to a firmer pricing environment as we move into mid August and one, and actually we can already see that in our numbers for later in the year.
Are you expecting to take any capacity out?
You know, continue to prune, but there's not going to be any structural changes to our capacity. And you know, we are encouraged by the environment. In fact, just in the last couple of weeks for US at least, the yields have turned positive on domestics. They've been down, you know, for several months as we started the year, but yields have now turned positive for forward bookings at least, So why have.
You not gone with the more bullish potential estimates then for your forecast, given that you sound incredibly positive and you have seen this ongoing rebound.
Yeah, you know, it has been it's been a good year. I mean, it's actually pretty remarkable that we've grown earnings and margins for the first half of the year despite everything that's happened. But a lot has happened this year, and we like to have a policy of being conservative on our guidance because stuff does happen, and we want to be able to absorb some unexpected events in our guidance. We intentionally build it conservatively. We did that's we do
that all the time. But so really what happened this time is we've been able to build that conservativesm back. So you know, if nothing else happens this year, which is a big if, and if demand stays as strong booking demand stays as strong as it is right now, there's probably upside. But we'd rather be conservative than than get out two four out over our skis.
One reason why I was really excited to speak with you is say you have a real time view of not only the consumer and the appetite there, but also international demand and whether there has been any damage to the brand Americana, the idea of foreign travelers coming to the United States for tourism, etc. You've said that there has been a drop off at European travelers. How sustained do you expect that to be? Are you seeing any permanent shifts in that international inbound landscape?
You know, there has been a drop off in in inbound Your demand of Europe is one but it's a single digit decline, so and US point of sale has more than made up for it. It's eighty percent of our business. I don't think it'll be permanent. You know, the the United States is the greatest country on earth. It's a great place for people to come, a great place for people to visit. Demand is affected by all
kinds of things. That we have fewer students coming to the US right now, you know, not surprisingly that's a big point. You are quite a bit fewer. I mean enough, you know, it's a small, relatively small percentage of the business. But when you're talking about one, two, three percent changes in demand, you can see it. When you're talking about small changes, But those my guess is that we will
get back to normal. And you know, people's desire to travel see the world, whether you're an American or European or a Canadian, is strong. This is a great place to visit. And my guess is it will get back to normal.
And if you're a senior and you're applying to colleges right now in the US, you probably are pretty good shape.
That's all I can say.
There's also a question about the further uncertainty, and tariffs are almost a certainty at this point.
How do you expect to absorb them? Are you planning or do you have.
A base case for whether you'll increase prices or whether we'll just hit margins more significantly.
You know, for United we're fortunate that most of our aircraft come from Boeing so here in the US, and even in the airbus deliveries we have are mostly used here in the United States, so tariffs don't have as big of a direct impact on US as they do perhaps on our competitors. The bigger issue for US is the impact that has on the macro economy. And you know, I feel really good you were right earlier you said
we have a real time indication of the economy. We're a very good real time indicator of what's going on with the company. Not always advanced, but good real time. And it really does feel like something changed at the end of the jewe the level of confidence, at least less uncertainty. People are moving forward, and I think on tariffs there's a narrower range of outcomes, like probably not going to be one hundred and forty five percent on time.
There's a narrow range of outcomes, and people have had six months to sort of figure out how to deal with it and have some contingency planning. Whatever the reasons are, it does feel like there's more certainty with Boeing.
Do you expect the deliveries to be on time or do you expect there to be more competition with all the other countries that are making deals to buy gooing plans.
You know, that will be an interesting point of what happens with tariff's. I guess his aviation ultimately will wind up excluded. It's the one industry. US exports six times more aviation products than we import, so the big trade surplus on that side, So my guess is those will wind up excluded. But Boeing, you know, is back on track. You know, if narrow bodies are actually ahead of schedule for US, wide bodies are still behind. I think that's a less a Boeing issue, probably more engine issue and
the supply chain for engines. I think that's a longer term, multi year challenge to get the wide body back on track. But Boeing seems to have turned the corner on production.
I just want to finish on Newark and whether Newark's turned the corner.
I do know that we could go for an hour.
About the delays and some of the drama around that airport. You guys have a huge presence there. You have made this partnership with Jeff Blue and move to JFK. Do you expect to expand more in the Tri state area to try to diversify your presence away from you at first?
I'm really pleased with what Secretary Toughy and the Department Transportation FA have done. My entire career at United have been trying to get Newark on an equal footing with the Guardian JFK. That's essentially putting slide controls. Have the number of flights at the airport equal to the capacity of the airport, and we've finally done that and you can already see the results. In June, Newark was the most reliable of the three New York Area airports. It's
and the future looks really good. So we feel really good about Newark and it's a crown jewel and we're going to grow it and you know, it's always going to be a crown jewel for United But from the first day I got here to United I wanted us to get back into JFK. Our goal is to be the premier flag carrier of the United States and we
need to be in JFK to do that. So the Jet Blue partnership is a great way for us to have a partner who cared has the same sort of culture on DNA, for customers to get back, you know, and have a presence on both sides of the river.
Scott Kirby, thank you so much for taking the time today.
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Mm hmm