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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and am Marie 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. Ana Stagia joins us now for more, Anna Stagia, Can we start by talking about the setup going into next week with some big data points on deck, including CPI and retail sales. Can you walk us through that?
Sure?
Well, good morning, John, and first of all, I want to comment on those bad news conversation going into next week. I don't actually think we have much in terms of bad news. You know, we had slightly weaker G to Pree report, but if you look underneath the hood, we actually have a very strong core demand in the economy.
When you look at the real time consumer data, it's actually improving from earlier in the year, and then if you look at the manufacturing SURVEYCE, maybe they disappoint a little bit on a one month basis, but I still look at the inventory levels and I think they're low enough to start to jump start a restocking cycle. So I think the setup going into next week, the CPI report next week, and then Nvidia the week after, I think the setup is fairly strong from the growth perspective.
And you know, in terms of inflation, you know, we were waiting for the last mile of inflation. Guess what it's here, it's upon us. We've managed to go from five point eight percent CPI a year ago to now hopefully three point eight percent or below this year, So that's almost two percent points of improvement. And you know, if you look at the core PC metric, it's two
point eight percent, so that's a two handle. So I think we are in that last mile and that's actually positive development and a sage.
You sound like someone who would be very comfortable being a bull in this equity market right now we're past fifty two hundred. Can you keep buying?
Yes?
I can't. And obviously the risk reward was better when we were closer to five thousand, and that's why we were saying that we should be adding to allocations if you're underweight relative strategic ones.
But still, if.
I look ahead, and if I look at the current multiple, which I think can be sustained as long as this economic environment is sustained, and if I apply that to two hundred and seventy eight dollars in SMP five hundred earnings for next year, that gets me to an imply
price target of fifty four hundred on the SMP. I think that's the base case scenario, and so I do think stocks are worth being in and we're staying for and you know, maybe the upside to fifty four hundred is not all that great, but that's for the SMP. And I think you can find pockets of opportunity within the market that should be able to outperform and stage.
It's Jim Bianco.
I want to ask you about the bond market. We started the year at the tenure yield at around three point nine percent. We got as high as four point seven percent a couple of weeks ago. We're around four and a half now. Set uptrend going to continue. Do you think or do you think we're kind of finding a high yield.
For the year.
Yeah, I think thanks for the question, Jim, and I think for now we have sufficiently priced in the new reality, which is growth that is remaining pretty robust, which is inflation expectations that have picked up, and of course the central bank policy which apparently may not have much in terms of rate cuts this year. So I think Jim Thatapp moved to four point seven that sufficiently reflected that.
And when we look at the imply fair value in a ten year based on some of the models out there, relative to where the ten year is today, it is trading above some of those fair value models. So I do actually think that that's what gives me more optimism on the equity market, is if the tenure can pause around these current levels, then that's less drag on valuations for equities.
Do you think that the FED is going to move this year and would that change your outlook a lot if they were to move.
Look, I do think the FED will likely move once, maybe twice this year, and obviously that has to be later in the year. Look, the FED, I think realizes that they solve what they could solve, which is slowing down demand in the interest rates sensitive parts of the economy. What the FED cannot solve is the supply of labor and the supply of housing. And when you look at inflation today, what's really making it sticky. It's the fact that wages are still rising and the fact that there's
a shortage of workers. And I'm in Miami this week and apparently the unemployment rate in Miami is one point nine percent. So talk about a lot of demand and lack of lack of labor. The FED can't really solve that. You know, the FED can't also solve the shortage of housing and the underbuilding that we've had in the economy of housing over the last ten years. They could slowed the demand, and they have done that, but they can't
quickly turn on the supply spicket. So I think having this realization is the reason why the FED will likely cut interest rates, because they've done a lot and certain parts of the economy, certain pockets are certainly feeling the strain, which is commercial real estate, especially in office and of
course that relates to the regional banks as well. So I do think, you know, if inflation continues to be somewhere in the two to three percent range, as we move through the year, they should cut rates.
Anastacia, you've been constructive for a while. You've had a bus to buy. I remember you called the pull back in April a better entry point. Clearly, based on the last few weeks, you've been right. Could you tell us how independent your market call is from your FED code.
It's fairly independent, Jonathan. When we wrote the outlook for this year, we did expect rate cuts, but at the same time, we said, what if the FED doesn't cut interest rates? And the conclusion was, it is still the equity market that's worth staying in and worth being in. And the reason we said that was because of the growth resilience that we were expecting. You know, there's this notion of the US exceptionalism, of the US economic exceptionalism, and it is so true because this economy is not
all that it interest rates sensitive. And in fact, when you look at the consumer, what we pay in terms of mortgage has not actually reset higher because only five percent of mortgages are a floating rate, and yet the amount of income that we earn by parking the cash that we had in a money market account is quite significant. It's a significant pickup. So this is why, you know, we thought that the consumer can handle five percent interest
rates as they have supporting the economy. And that's why, even if the FAT doesn't cut rates, the economic backdrop should support equity valuations and equity earnings, of course.
And so far it has. Anaesthice, you've been Great's got to catch up and a station there please to say that joining us now is nil data of renmac neil. I've been looking forward to. This was written a note of yours earlier this week. The labor market rebalancing has been achieved. Can you walk us through just how we've done that?
Well, we've you know, job openings have come down, job openings, remember our measure of excess labor demand with very little upward movement in the unemployment. Right now, the unemployment rate has gone up, but you know it does look for the time being that the FED was kind of able to successfully, you know, trim excess labor demand without driving.
Up unemployment all that much. And I think what's.
Important now, John, is that, yes, the e CI which you mentioned earlier did pop in the first port. But the underlying you know, sort of drivers of that data are the average hourly earnings for non supervisory workers, and we saw in April that that's cooling. Over the last three months, average hourly earnings growth for non supervisory workers
are barely up three percent at an annual rate. And given the growth and productivity that we've seen, even if you assume it's like half that, so let's say one to one and a half percent productivity, you're talking about wage growth that is broadly consistent with the feds underlying inflation objectives, which is why unit labor costs I think have been cooling.
So where's the inflation coming from?
I mean that to me is the big story here is if you ask someone why did inflation perk up in the first quarter, they can't really point to a fundamental reason for that.
Is it because expectations are perking back up?
No?
Is it because the labor markets are reheating.
No?
Is it because the dollars weakening, driving up, you know, pushing up the prices for imported consumer goods. No, the dollars generally stronger all year. So you can point to things like, well, look, financial services inflation picked up, and healthcare services and all motor vehicle insurance. Sort of the idiosyncratic factors I think it's important for people to kind of go to first principles here, and you know, this is why I think the case for weaker inflation is still quite strong.
Well, two things to impact their First of you on the labor market. Let's just build on that for a little bit if we can kneil. So this is the line from City and Andrew Hanhorst and the team. They say evidence is building that the labor market is poised for sharp weakening. You use the word cooling. Can you help us understand the difference between a welcome calling in the labor market and a prospect of an unwelcome deterioration.
Well, what you want to do is look for discontinuities in the data. That's that Alan Greenspan sort of line. Right when you have a bunch of two hundred thousand job numbers and then all of a sudden you have a fifty, then he should be worried. But if you're talking about where we are right now, I mean I
don't really see much evidence for that. You know, you mentioned jobless claims, even if if you assume that number is legit, which it's not because it was mostly driven by one state, New York the break even level was still around two hundred and sixty thousand.
If you look at the.
Separations and hires data from Jolts, you can kind of back out what break even initial claims are. So you're still talking about continued jobs growth, you know, in a reign of one hundred and seventy five to two hundred thousand. So if you see one hundred and seventy five to two hundred thousand jobs and you know, slowing wage growth towards you know, let's say three and a half percent, that would be cooling. If you see significantly worse than that,
then you'd be worried. But jobs are something that come out of growth, right, Jobs don't necessarily go into growth, and if the economy is growing, employment will follow. And we know that the economy is growing. You know, if you look at underlying domestic demand, I mean, it looks like it's close to three percent in the first half of the year, So I think that's that doesn't leave me that concerned about sort of discontinuities in a labor market.
Well, neil to that point, and you know, earnings of backed up everything you've said. We've seen huge capex coming from companies to what could possibly drive a cooling?
Then well, what could drive a cooling in the labor market? Well, I just think it's that turnovers is coming down. I mean, that's that's really what it is. You know, there's there's been a pick up in labor supply and there's been less turnover in the job market, and so I think those things basically.
Tell you and come combined for you know, a moderation. I mean, we're.
Basically hitting equilibrium now in the labor market, and I think that's that's the bigger story.
And at the same time, I mean, the economy isn't getting away from the FED. Yes, you mentioned capex.
Capex could be a big driver of growth this year, but there are other areas that will probably cool.
I mean, for example, residential investment.
I mean, that was a very strong area in Q one, but given the backup in rates that we've seen, it's unlikely that that repeats over the next couple of quarters. And you should see some rebalancing and consumer spending, right because a lot of the up movement in consumption and we have retail sales next week, a lot of that in the last two months has been driven by a decline of the savings rate, It's hard to see that lasting. So I'd expect a better sort of more balanced mix
to growth going forward. So you know, I don't think growth is getting away from us. But you know, again, it's not something I'm lighting my hair on fire for. I mean, it's sort of you're talking about two and a half percent growth, steady job of growth, and an ongoing sort of disinflation trend given the improvement and supply conditions.
Yeah.
Right, But again, your words that you're using neil normalized, more balance, getting back to averages. Is that a good enough reason for the Fed to cut?
Absolutely, because ultimately they believe that they control inflation.
So if inflation slows more.
Quickly than they think over the next several months, then they should be cutting because they wouldn't want to tolerate an even higher rate of real rates. So you have to kind of recalibrate policy just to.
Stay even should So his will what do you think they will do?
I think they will cut. They will cut.
At the end of the year, we will still be talking about how much is the economy growing and how many times has the Fed been cutting.
I think the case for cuts is still quite strong. I think. I put it to you this way. I think they go at least once.
I think two is a good baseline, and I think there's an option for three if we're right about how quickly inflation slows over the next two quarters.
I think there's an argument that that's basically what we're hearing from Fed officials as well. Neil, Now, can you help me with something I'm wrestling with? And that's this supply side story in the labor market. Tons has been said, tons have been said about the amount of immigration that's coming across the southern border. How that's allowed us to have this really strong payrolls growth without the corresponding pickup
in wages. Noil, based on basic communication we've had over the last week or so, apparently border encounters have dropped and dropped by quite a bit. How can we sort of anticipate the data in the months to come based on that?
If it's so, I mean, I don't think that.
I think that that's sort of the immigration story is kind of a rationale.
That people are working back to.
It's like, oh, why why has the labor market slopes cooled off a bit? Well, you know, here's this big pick up in labor force growth. I'm not so sure that's the case.
I mean, I think, you know, unit.
Labor costs have moderated because you know, people are getting a little bit more productive in the jobs that they're they're in. So we've seen a picking up of labor of labor productivity. So I think that's a that's a more important driver. And to your point, I mean, I'm not entirely convinced yet that this is like a big, you know, secular increase in immigration.
I mean, it could just be so sort of one off dynamics related to the.
You know, to the opening up of the visa approval process following the pandemic, right, so you had a lot of people that were kind of on the sidelines, then they got their visas finally approved as things reopened and and that, and that may well slow down. So again, I mean it's something closer to equilibrium. But I think that people are getting more productive in their roles, right, And I think that's what's important. You aren't seeing quits go up as much, and that means that people are
staying in their jobs longer. And if they're staying in their jobs longer, presumably they'll get more productive in those roles.
No one of the things that people use that that immigration piece to say this is an argument that calm pickering uses basically to say that we are in for an inflation spike next year if we get Trump in the White House, because you get more curtailed flow of immigrants. Given what you're saying, given again this idea of what we're seeing as normalization, it was from some of the visa processes opening up. Is that not as relevant of a fear.
Well, Shuretz, I mean, I think worrying about inflation if you have I mean, if you know with respect to the election, I think you know who knows what the outcome is.
Going to be.
But I do think it's fair to say that if Trump were to win, former President Trump or to win, then there's a probably there's a higher.
Likely good then that you have a unified government.
And we know that whenever you have a new unified government coming out of the elections, they're always going to do something.
It's not like they're going to get into office and.
Say, hey, everyone, we're going to raise the retirement age and cut spending. They're going to want to do something that makes people feel good and whether that's uh, you know, I think they'll probably lead with something like that tax cut spending that'll be inflationary, so you know, to the extent that there's a restrictive immigration policy that comes about it, it'll add.
To that even more interested. Neil enjoyed this. Thank you, sir. I know you've got thoughts on Gucci. Will do that another time. No, DA's a Renmac No, thank you. Oliver Shannon TV Cowen joined us. Now for more, Oliver, Let's get into that and then we can get to what you love, which is luxury sert. Don't worry, we will get to that topic in just a moment. Let's look add to home Depot and Walmart. What you and the team looking for next week.
We're excited about Walmart, that's our pick. We're more cautious and optimistic on target. Walmart is a needs retailer, being sixty percent grocery, very helpful in terms of traffic.
They're also managing.
Well through this tough time where the consumer really is looking for value, very sensitive to price.
So we're excited about Walmart.
In addition, Walmart as a technology company, don't forget about digital advertising in the marketplace model, and Walmart's getting a higher household income customer. For example, you can buy Apple Macintosh on the marketplace on the website, as well as fragrances like Burberry Goddess.
So the whole flywheel is working.
Let's sit on Walmart and let's talk about price and pricing power. We've heard from various executives over the last few months and maybe they're losing some and that we're starting to see some disinflation perhaps even deflation in certain places. What do you make of that? What would you expect to hear next week?
That is definitely happening.
What we have with this new consumer is a consumer who's not necessarily very loyal and doesn't want to overpay for national brands. What consumers are doing is what we call customized moderation value hacking, creating down to private label when they want to or need to, and trading up very selectively. So that will continue to be a big issue. The bottom line is Walmart wants every day low prices.
They want suppliers to offer low prices too, so that the consumer has more money to spend on non food and discretionary items. That's still a work in progress in terms of the consumer. What's good about the consumer is that there's low unemployment and they're still spending power given six hundred and seventy billion on the sidelines. What's bad about the consumer is that it's still bifurcated with pressure at the middle and lower end, in part due to inflation.
As we look, fundamentally, inflation is getting less bad. However, consumer confidence and what the consumer feels is still fairly volatile, So mixed signals here. But racing is a hot topic because everybody wants low prices oliver.
Then do you expect, with some of those headwinds you're talking about, for it no longer to have the case shape that at some point, maybe not the upper echelons who will always continue to spend, but for it not to just be the lowest end consumer that starts to get more price conscious.
Yeah, I think everybody's getting somewhat priced conscious. We see this value hacking consumer, this do it yourself consumer, So consumers are looking for newness. Also, what we're seeing in our studies is that there's so much receptivity to private brands and private labels such as Kirklin at Costco and others so that trend should continue.
What we do see at the higher.
End is the wealth effect, some confidence, and some pockets of strength in the US in particular kind of something we're watching that's been very volatile as well.
Can we talk about luxury then, I know you love it, and I promise we talk about that's it. There are some luxury brands that aren't seeing that stability. They're struggling. I'm thinking more specifically about Gucci all but who's getting it right and who's getting it wrong?
Yeah, we're most excited about Louis Baton, given powerhouse brands such as Louis Baton as well as d Or. They also own Sephora, which is a wonderful beauty concept that's global caring. We downgraded the stock that the owner of Gucci. Gucci's a work in progress. They really have to reset this brand. So some of these issues are somewhat specific to the Gucci brand, which needs to return to classic
and timelessness, but also needs to be more elevated. So in this process it's been quite painful and the numbers have been quite sharp. What's been happening in luxury goods is share shifts as well, so big players like Louis Vuitton offer a full range of more quiet, more loud luxury all kinds as well as hard luxury, and that's been working better in terms of their execution.
Gucci is something we're watching.
I do love the brand personally, but it's going through a lot of change and part of that will be de leveraged or losing some customers as well.
Well.
Whose customers are they trying to attract? Can we talk about that a little bit more? When we talk about the high end we're talking about the high end luxury player. We're not necessarily talking about the upper income consumer, because I don't believe the last few years with Gucci has
been about the upper ring income consumer. I think it's been across the board, getting access to its aspirational luxury names, all of it, and I'm trying to work out who the target audience is going to be for that brand.
Yeah, it's a bit of a reset, and you're one hundred percent right. What's happened with the Gucci brand, which had very massive growth, is really broaden the aperture of what luxury means. It was rethinking technology and gender and very very exciting. But on the other side, of this, this aspirational customer has been more under pressure, so that's something the whole industry is facing as well as Gucci, and Gucci has a new designer as well, so.
In rethinking the brand, luxury.
Is always about elevation, that's a big focus, and then timelessness and taking you back to classic items and hearkening back to.
A lot of the heritage of Gucci too.
Somewhat specific to Gucci, but they're definitely losing share to players like er Mez, like Louis Baton and others which have a real anchor on time timelessness as well.
Well.
With all that tension of the aspirational buyer, Oliver, it's even more remarkable that someone like Sephora, all those beauty brands continue to do well because you could say people are going to trade down, go to just a convenience store, a drug store, get their makeup there. But why is that story so enduring? Is it just you know, the thirteen year olds on TikTok looking at influencers then deciding to go to Sephora to buy something.
Yeah, it's all happening. I mean ten year olds too with skincare regimes. What I love about beauty is that it's an essential good. It also gets a bit blurred with health and wellness, but lots of abundant innovation and cosmetics, hair care, skincare. As we think about fragrances, our favorite idea is Cody. We also like Alta, which in many ways is like home depot for women in terms of that routine.
There's a ton of innovation as well.
As social media that fuels new processes for cosmetics, skincare is taking care of yourself and self care. It's been a very resilient industry because a lot of the habits that were picked up during pandemic really stuck in beauty, and beauty is a profitable, growing business globally.
We also see.
You're going to get us in trouble Home deepot for women. Do you want to elaborate on that a little bit more?
Well, The whole Alta experience is really comprehensive in terms of mass plus prestige. You definitely find stuff you didn't know you needed, but you also think about replenishment and really investing in your face and body and skin. And that's a principle that men and women love. But women can be very loyal to certain categories such as hair
care and skincare, and then the cosmetics. There's a lot of newness and innovation, so we're excited about alter, especially on the pullback and the evaluation level.
Here, I'll be at the.
Women's Word Daily Beauty CEO summer talking about the official intelligence means beauty.
That's a very vibrant industry.
We're looking forward to catching up with you again soon. Olivi chen FTD Cowen. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, angiopolitics. 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.