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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie 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. Loura Rang of FS
Investments is with us alongside SoC Gen's Savanter Rishappa. Laura, let's start with you your reaction to this date. You've had five minutes to chew over it. What stands out for you?
So you know, we've had now sort of four months of unfriendly inflation data and growth really continuing to surprise with the outside. Today's got to be a huge relief because some of the early numbers for April will really con firmed by this broader look and this broader data. So you know, this is a more Davis report. I feel like you have to acknowledge that I do notice
the slow down and spending, especially the real spending. We're starting to get data for Q two, and you know, you tease that going into this.
But we had a you know, still.
Peeling back the headline number of Q one. The underlying data was fairly strong. I think we're now waiting to see how Q two shapes up. So far looks like it's also going to be a little bit slower. I think the landing maybe really sort of orchestrated in Q two.
Sabatra is that landing insight.
We think that the Fed's going to stay on hold for the for the domain of the year, and this data point doesn't really push this. No sense of urgency I think from the Fed with the inflation starting to ease up, you know, growth is starting to come down. But we heard from Williams yesterday and he's expecting growth in the context of two to two and a half percent for this year. Inflation core PC heading towards two and a half percent of the end of the year.
There's really no urgency for the FED to cut rates anytime this year. We see the earliest had Web looking for the Fed to cut rates is after the elections of the December meeting if the data requires them to do so, but.
Subadra on the margins, given the fact that this isn't necessarily a game changer, but it does confirm this idea that maybe the this inflationary trend is back on track. Does that give you more conviction actually with some of your closely held beliefs, this idea that you should buy bonds, particularly the longer end, and then inflation will come down and then essentially we will essentially normalize.
You know, you can buy bonds in the long end, but it's really much more attracted to hold front end treasuries because the yields are way more attractive.
And that's exactly what you're seeing investors.
I mean, you're seeing AUMs in money market funds at six trillion. Money is going into the very front end of the yeal curve just because returns look very, very attractive, and the yeal curve is in and I think that that trend is here to stay until we know that the Fed is going to be cutting rates aggressively. And this is really when it gets a little bit tricky for me, because you look at the policy path that's
priced in the markets. You're looking at very few cuts between now and the middle of next year, So you're looking at less than one hundred basis points of cuts by the middle of next year. So that still argues for investors to continue to plow money into the very front under the yolk of not so much in the long.
End, Laura, this raises this sort of larger question, which is doesn't really matter if the Fed cuts rates once, right, I mean, it's sort of this is the issue that we have with the ECV as well. Are people looking for evidence of a real slowdown that it could lead to a protracted rate cutting cycle based on what we're seeing now? Does this data go anywhere near beginning to move us in that direction?
Yeah, and maybe I'll take that question a slightly different direction, because I agree, you know, twenty five basis points, especially given where we are at over five and a quarter, is not going to move the needle tremendously on interest rate sensitive sectors of the economy. I think the question to me is, you know, we're probably not focused enough on growth, which has been so strong at three percent, Expectations of higher growth are now so built into markets.
Nominal GDPP growth of.
Six percent turns out is enough to power equities higher, even though rate cut expectations have been ratcheted very far back. So going forward, if that slows to five percent, you know, this isn't a big slowdown. But I think, you know, we need to pay attention to the fact that so much growth is priced into earnings expectations, and there's so much optimism price in to markets. The two way risk on growth numbers are now really significant. We haven't seen that in a year and a half.
Laura, before we run away with the conversation about growth, can we just sit on inflation just for one beat longer. You've been saying for a while that we'd get stuck around three percent, you're rethinking that.
Not.
I still think that at the end of the year, we're going to see rent for inflation pressures continue to creep back up, and I think we're going to see the inflationary process really stuck around three percent. I don't think that stops the FED from cutting it. The economy slows a lot, but I think it makes it very hard to maneuver in a place where we're still growing at two two and a half percent.
Mohammed dal Erin has been on this program and he talks about stackflation rewins. Lara, are you thinking about stackflation rewins at the back end of this year?
You know, today the economy looks really solid. I'm not too worried about it because business investment is going to ratchet back up again. I think we're in a good place for the economy. I'm trying not to overthink it too much.
It's about you we overthinking it when you say no rate cuts this year and you're looking at inflation. What does growth look like at the backhand of twenty four.
Probably going to gradually slow down as we progress through the remainder of the year.
We're not overthinking it.
I think the simplest path is for the Fed to stay on hold for the remainder of the year, instead of kind of the conundrum that the ECBs and right now, where you know, the market's pricing in for a June cut and then the debate on whether they're going to cut again in July, whether they're going to cut again in September. So the sort of volatility of expectations is really what's confusing investors.
So to me, a very straightforward.
Path is for the Fed to stay on hold for as long as they possibly can, and then embark on maybe a cut a quarter or some sort of a very steady path of rate cuts from then on.
As opposed to this back.
And forth, Laura really raised this two pronged idea of both inflation and then this idea of growth.
And what happens if you.
Start moving out of the inflation being offset by strong growth to maybe not ciflation, but inflation not being offset as much subadri Does that make you, if there is clear slowing in growth, clear growing and spending, a little less sanguine about riskier securities within fixed income just because you both have rates on hold still enough inflation to make the Fed nervous, but it economily just doesn't have the same kind of juice in it.
Yeah.
Because of that, That's one of the reasons why we think that that across the yield curve, yields are going to struggle to get about that five percent level.
Two year above five percent is.
Going to require a much more, you know, different stance from policy. The Fed either has to hike or not cut for the next couple of years, and for the tenure to get about five percent, the market is always going to be looking towards growth slowing down in the second half, and that's really going to cap the rise
and yields. So even though we've had these discussions about our star and whether our start is a lot higher and whether you know, debt and deficits start to matter, I really think that the focus at LEEDS for the second half is going to be on the slowdown and growth, and that's going to really cap the rize and yields. Ten yearls are going to struggle to get to five percent this time around.
Where are you on the our star debate?
You know, there's a case to be made a very sympathetic to the comments we've had from both Bill Dudley as well as Lori Logan that maybe our star is a lot higher at least a short term our star might be higher than what we're hearing from FED President Williams.
But the question is how can.
The FED actually act on that, because what they really need to see is the data support a higher our star. So we'll find out in maybe three to four years where our star is today. It's really hard to know where it is right now as it stands.
And Laura, this sort of goes to this framework of it's hard to know where the end zone is going to be. Also, just in inflation, as Jean was mentioning, you think inflation is going to.
Remain stuck at around three percent? What would you have to see to rethink that.
We have Neil data coming out this morning with a note after this data came out just saying every month this year, see month of a month core inflation lower than the same month and twenty twenty three. What happens if this patterns holds into the summer, is that something that could make you rethink this idea of three percent is sort of the sticky for inflation.
I think to me, the problem is that we really are don't We don't remember how much everything had to go perfectly to get inflation at two percent. You know, today we've got commodity prices really moving higher. I think rents are going to reaccelerate. Ironically, high FED you know, really restrictive FED policy has stopped home construction, which is what's needed to help, you know, unravel this whole real estate sort of stagnation and stuck at higher prices environment
that we're in. You know, long story short, when you put it all together, we may well you know, see inflation dip a little bit lower.
But I think my forecast is a.
Longer run problem of stubborn inflation above two percent. Kind of the mirror image of where we were for the five years before COVID stuck below two percent.
I always feel like it was regulating us. Thank you. They always feel personal. Those ails totally sent amounts of client. I'm just saying, yeah, I feel like the census directly, it feels like.
He watches us and then scripes the screen when I speak. You have no idea what you're talking about, Primo.
Just saying, which is basically what he's done on this program before.
That's right, that's our friends.
Apparently, I kind of believe that. Let's look ahead to next week ECP next Thursday. Then we get the payrolls report in our survey right now, keep giving you a sneak peek. Here's the latest. One eighty one hundred and eighty thousand is the meeting estimate in our survey. Previous number one seventy five. So Patrick, can we talk about next week both the ECP and a payrolls report, And let's start with payrolls and we'll finish on the European
Central Bank in a couple of minutes. What are you looking for from that report next Friday.
So our economists actually have a slightly higher forecast, if you will, for apparerolls than the consensus. So I wouldn't be surprised if you get a two hundred thousand inch number. The unemployment rate is going to stay below four percent for perhaps the remainder of the year. So very strong employment report is again what we're expecting for next week. But if there's any missus, that's when the market's going to react. The market's going to shrug off an upside surprise, I think, Laura.
Do you agree, Yeah, I agree.
The market seems to have happy ears right now. They want the rake huts. That's the news that they react to you more than you know, anything that would sort of push those back, you know, at the end of the day, when we look ahead to rate cuts and when that could happen, we're starting to push up against the election calendar. I think we're just going to kind of give up the gost slowly on a rate cut before the election and really focus on those December you know, maybe November meeting.
I'm not sure. Dan investors have happy ears, but I get your point, Lara Rang of FS Investments, Lara, thank you for that. So Bato, I just wanted to give you the final word on the ECP. Big conversation around this table about central bank divergence, the limits of that divergence, how far can this ECP go without a federal reserve.
So I think our European economy is set it best, which is its data independence.
I mean, FED and the ECB is already.
Committed to cutting rates in June, and they're going to do it even though the inflation data that we got, you know, recently, doesn't really justify them to cut rates in June. The question really becomes what happened what comes after that? And to me, what you know really dictates the price action and the bar market is divergence between
the ECB and the freend. I think that that's going to keep rates between the US and Europe diverging as well, because the Fed's going to stay on hold for the remainder of the year and the ECB is going to still be biased towards cutting rates.
We came into this week saying it was going.
To kind of be a sleepy week. You can make your argument about whether it was or wasn't for next week.
It's going to be actually massive when it comes to both the Jolts data the payrolls we've got. Of course, the ECB excise about I'm excited.
Yeah, yeh, I'm excited.
So I just want to know what you're most excited about of all these potential data points, the ISM data we get, manufacturing and services.
So i'd start with JOLTS.
I mean, if you look at the job openings, we really want to see that head towards that pre pandemic level relative to the number of unemployed. So that's a
very important first metric on jobs. Beyond that, i'd be looking to hear from the ECB and what they're thinking about policy, not just for June but beyond for the remainder of the year, and then payrolls PAEROLS is very very important, and whether we keep that momentum that we've had throughout this year is going to inform us on whether the FED is going to look at perhaps cutting rates in July or September, which is not our base case,
but that's something that we'd be looking towards. The FED really wants to see the job market cool off as inflation is coming down as a justification to cut rates, and they want to see that data.
So often we are hitting the grand running in the monthitude Sam stowfull of CFRRA writing this, It's been rumored the between Memorial Day and Labor Day investors focus more on their tands than their portfolios. The S and P five hundred gained and average of only one point six percent in price between these two holidays since nineteen forty five. Instead of experiencing these summertime blues, it frequently enjoys a
summertime snooze. Sam joins us now for more and hopefully Samue'll wake us up a little bit more than that, Sam, what do you rafflicating for?
Then?
For clients through the rest of this summer to sit back, chill and ignore everything.
Well, good morning, Jonathan.
I think certainly there's a lot of reasons why one might say that this Memorial Day through Labor Day period might be quite different from other election years since World War Two. Certainly, now we know that AI has been driving tech and semiconductors, but EI has really been driving the rest of the market. EI being earnings and inflation and now with the worry once again that the FED could be raising interest rates, possibly staying higher for longer,
causing a recession. I think that's what's in a sense, causing cracks to form underneath the confidence of investors today.
So does that mean that Sam, you think that people shouldn't go try to ten and they should actually be in the office actually trading, because otherwise they could lose their shirt.
Very good, Lisa, I like that one.
No. I think that what we typically find is that many of the groups, while they do tend to tread water, investors, do tend to gravitate towards the more defensive areas of the market. I always say that you are much better off rotating than you are retreating in this traditionally sustayed period of the year, and it's usually those areas like staples, healthcare, utilities, etc. That have done well. But I guess this time around, what we're seeing is that since the Dow hit for
twenty thousand, really there's been no place to hide. The market really has been selling off quite a bit, with technology being the only group that's still in positive territory.
And it seems like any kind of miss or even in line that isn't necessarily off the charts. For some of the biggest winners this year have been punished severely in terms of market reaction. I wonder if there's a larger takeaway though, when we were exploring this yesterday with Peter Oppenheimer of Goldman Sachs that at this point, at this level, based on how much yields have moved up, that is going to be the tail wagging the dog
when it comes to the equity markets. It's the further that yields go up, the more punitive it becomes for the stock market.
Do you believe that, Oh, yes.
Because I think that's the real factor that is causing concern. I mean, our expectations had been that we would see a gradual decline in the ten year yield as the year progresses, and so obviously with it going in the opposite direction, that makes us sort of second guess our own opinions, and I think the same as being done
by other investors. So our belief still is that the Fed will be cutting twice this year, September and December, obviously knowing that now September is more like a coin toss.
As to whether that will happen.
We also remind investors that every election year since nineteen ninety two except twenty twelve had the FED either raise or lower eight rates prior to the election, many times occurring in September. So I think the FED would love the opportunity to show that they are a political Should the data allow for that?
Sam?
If September is a toin cost, what does the FED need to see in the data before September to have that confidence to cut just before an election, Well, I.
Think they're going to have to see today's PCE and successive PCE indicators show continued downward trend. I think we're likely to see unemployment rate maybe tick up a couple of basis points, and also just that maybe a third the second quarter GDP does not come in as the Atlanta Fed is anticipating at this point well above the three percent level.
So I think the.
Fed is basically going to be sticking to its mandate by saying, can we see inflation come down while not having a material impact unemployment?
Sam, I just want to take the conversation. Finish this conversation somewhere where Lisa has been leaning, and I think it's an important conversation. What's happened with Salesforce in the last twenty four hours, down by about twenty percent. What happened with say doll Dow down by about fifteen percent in pre market? The down numbers, to Lisa's point earlier this morning, they weren't terrible. In fact, they were a beat.
It just wasn't a big enough beat. And you're seeing a monthster move in quite a sizable company, Sam, And I'm wondering for you and the team at CFIRA the kind of signal that you're taken away from this kind of price action.
Well, I think, as Lisa was saying before, that companies are being punished if they don't meet the published numbers or even the whisper numbers. Technology for this first quarter is showing a twenty five percent gain in earnings versus
the earlier anticipated twenty percent rise. Also, we've seen an improvement in not only twenty twenty four but also twenty five estimates now twenty percent for the sector in twenty twenty five, but it continues to bump up against the thirty pe for the sector itself on forward twelve month earnings, which has resulted in pretty much a locked ceiling, if
you will. And so with these numbers really at stretched valuations, I think there is the need for the resetting of the dials at least in the near term.
Sadly saying that has some single names. That's for show. Sen starts with a FCFRA a place aside that blumbag Scott Chalance makes joined by down to Airline CEO ed Bastian in Dubai, guys, Johnson, over to you, John.
Farah, thank you very much. Indeed, yep ed Bastian here in Dubai tonight. He's going to receive the at W twenty twenty four Airline of the Year award. That's why he's here. He's also here as well for the eightieth i artur AGM, which is going to be taking place here at the start of next week. But John, you
bring up you bring up a couple of stories. Actually you bring up what's happening with Boeing, but you also bring up the issue that we had earlier on in the week with the American numbers and the impact that that had on the rest of the sector. Ed great to see you. Congratulations on the award. First of all, Oh, thank you guys.
It's good to be with you, it's good to be in Dubai, and really proud of our team have their ability to continue delivering outstanding results for our customers. This is what makes these wards first of all very humbling to receive, but hungry to continue to win them.
Yep, you've got to keep it up, don't go to keep it up. Let's talk a little bit about kind of what is happening in the market right now and those custom was that you talk about. We did see the American downgrade in terms of its guidance a few days back. I'm not going to ask you to comments on what is happening over an American, but really just to kind of get a comments on whether you're comfortable with your current guidance.
Yeah, the demand has been really strong, and I think that was the issue that were the American numbers and you know the quarter. As we've indicated all along creagers the last several years, that consumer demand and that priority to invest in experience continues to be really really healthy.
June for US is.
Always the largest travel month of the year of the calendar, so we still have to see how June's going to go, but I'm confident it will be a good result for the full quarter, and we'll see how June runs out.
Are you seeing any evidence that inflation and its inflation day? We're going to be watching those numbers that inflation is starting maybe to hit the middle class traveler. The middle class traveler is beginning to rethink maybe the attitude towards travel, which has been really strong over the last few years.
I don't see it.
You know, our consumer tends to be at an upper end of the income scale. Our traveler tends to go internationally. Our consumer is prioritizing travel above things. So while you may be hearing from a number of industrial sectors trade downs occurring, we're not seeing that in our numbers.
Do you think you will see that? At some point? Do we go to a more normal? Is the new normal in terms of what travel is going to look like? Will this continue to persist? The store market continues to do very well, We're obviously seeing an upper end consumer that is still fairly flushed with cash. Is that something that lasts years?
I think it's going to continue for quite a few years to come. One of the factors people don't give enough consideration to is our industry's capacity is lower than it's been given the constraints around OEMs, whether it's Boeing or engine issues. So our economy is a lot larger than we were historically go back pre pandemic. Yet the amount of capacity that we're all able to fly is significantly constrained, and that's what's keeping demand as well as pricing.
Okay, pricing, so fares is still fairly ROBUSTI.
Prefers on balance are about twenty percent higher than they were pre pandemic.
You bring up business travel as well. Is that something that has come back. It's maybe come back significantly more slowly than we've seen in terms of the retail story. But is that coming back and ultimately given that bigger economy, is that a bigger number someway down the road.
Well, Business business travel this year, particularly in twenty twenty four, has really stepped up. As we went through the return from the pandemic. In twenty two and twenty three, business travelers were still a bit sluggish, largely because they weren't back in their offices and they were still working from.
Various remote locations.
Once companies have finally laid the edict down, you needed to get back and particularly if some of those businesses started to getting a little challenge themselves. People wanted to be back in the office that opened up. They need to travel for consultancies, to go visit clients, for people to get back out on the road to see their own people.
So we've seen business we see We saw about a ten point increase in business travel at the start of the year and that's continuing to climb.
Middle of the topline. Okay, so we talked about that as we can get middle. What's happening in the middle of the P and L. You still seeing What kind of inflation are you seeing in the business.
We're seeing inflation, but it's starting to moderate a bit. For us, the biggest part of our inflation story is wages. Is our people, which is the best type of inflation we can have, and our people continue to grow wages in the four to five percent per animal rate. We're continuing to work on productivity and efficiency so we can take some of those rates and make certain that they're productive. Increases other parts of the supply chain where the supply
chain is still not where it needs to be. We talked about the engine issues.
We still don't how it's just not holding you.
Back, Well, it's significantly against not just Delta, it's the industry and the.
Turntimes are longer.
You now have turntimes on planes that could extend up to months rather than weeks.
Which they should be.
Parts are higher than ever, material cost are growing. You know, the manufacturers across the industry are having challenges.
It doesn't sound like an economy that you're describing that the needs needs rate cuts right now.
Well, it's it's an economy right now from I standpoint, that's doing well.
But there's not just one consumer out there. Okay. Our consumer again tends to be in the upper end.
Our consumer generate a tremendous amount of wealth and continues to have that wealth through the pandemic. The markets up, real estate's up, Unemployment is extraordinarily.
I don't need more help, is basically what you're saying.
The lower end. Yeah, I think there's I think there's some challenges. So that's something that the FED will will look at all the data. I don't think an airline is necessarily the.
Pretty You've got a pretty good view of what's happening in the economy.
Yeah, our business is doing quite well.
Okay, you bring up Boeing. You talk about what's happening with the with the OEMs, Bowing and app us, but it's also the engines, as you mentioned the and Whitney engine issues that we've been seeing. How long does this last? How long? How much of a struggle is it to get hold of the kit that you need right now? How much? How long do you think the problems that we're seeing at Boeing and Airbus and Pratt and Whitney are going to be lasting for well?
Right now we have no Boeing orders that we're anticipating up delivery on in the next several years. So from our standpoint, it's really an Airbus story. Air Bus has been a great partner, and Airbus continues to provide us the planes and the technology that we've been expecting for them, and they were right through the pandemic.
The engines are going to be a bigger issue, particularly for us.
The gear turble fan that's slowing down a little bit about the amount of new deliveries that we can take, but it's more engines than it is planes. What is causing us to do is maintain the existing fleet we have a little bit longer. So that's another cost to the business.
You are well known for keeping your fleet for longer it had. The age of the average aircraft has come down a little bit over the last few years. But does that strategy work in an environment where the sustainability question comes in? If you fly all the planes, they inherently tend to be less efficient. Is that something? Is that a problem that you're going to come across at some point?
I don't think so. Again, I think this is transitory. I think the OEMs will get their parts.
I think they will get the transition. A lot of this is about.
Labor and the fact that many of the engine not just the Tier one, but down into the tier three and tier four of the supply gen let a lot of people go. So it's experienced, it's staffing its rates. I mean, it's a very complex story. But long term, I feel good about our sustainability story. We're taking our overall footprint down in the range of one to two percent per year every year, and that's going to continue to go on, and as we get new planes, those numbers are.
Going to go down faster.
Politics is going to become a bigger and bigger issue over the next few weeks and months. As we approach November, when you think about who goes next to the White House, What if the next administration need to do to keep the aviation market that you've just described, this buoyant market, this market with momentum, keep it going. What do you need to see from the next administration to keep it on track?
Most important thing is infrastructure investment. Maintaining the current structure is challenging, and they need to continue to modernize the technologies. They continue to need to get air traffic controllers staffed and hired and in position.
To enable us to grow.
And from a from an investment standpoint, that's where we were very happy to see the FAA reauthorization bill finally come about. It took unfortunately months, if not a year or year overdue in its delivery, but it's here now.
And we're going to work closely with the FAA to make that happen.
Just to wrap the conversation up, you feel like you are on the front foots at the moment. This is an airline that is growing. What is the capacity constraint that you are seeing right now that is going to slow your race of growth down? If I'm gonna invest in looking at delta. Is this as good as it gets? What does it get.
Better from here? We're doing well on capacity growth. This year.
We expect to grow our top line in the mid single digits, you know that four to six seven percent range, which I think is healthy growth consider particularly the growth we've had over these last handful of years. This year will be the highest revenues in our company's history.
A support are sixty billion dollars plus remind us.
And the outlook I think is strong because I think think the supply chain and the extraints are only going to get a little bit better as we moved forward.
At Congratulations on the award, the ATW award that you'll be getting here a Dubai this evening. Great to see you here at Dubai. Thanks for stopping bye to see us here. Thanks guys Bloomberg. Great to be with you. Thank you very much. John from Dubai back to you.
Thank you, buddy. Great to catch up and hear that conversation Guy Johnson there with the down to Airlines CEO at Bastian. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiet politics. 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.