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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. Let's talk about this market.
US companies looking to protect the top and bottom line as the fedkicks off its easing cycle, or Lisa Command of JP Morgan Asset Management writing companies have been working hard to maintain margins by maximizing efficiencies wherever possible, Except for tech layoffs have not been and are not anticipated near term. Lisa joins us for more. Lisa, goamrnig. It's going to see you as always. Nice to see you too. Before we talk about margins, let's talk about top line
new growth. Why do you think that's going to be so challenged in the it's accounty.
Yeah, you know, it's been declining steadily when we look back over the trough in Ibadah. So you know, going back, let's say about a year that started to recover and it's really moving very nicely up, but revenue at the top line has just been slowing and slowing. I think that's consistent with a slower economy. But I think what's really fascinating about this is companies. I give this analogy.
Companies are like a duck on the lake, right. They see this top line that's kind of waning a bit, and they're really trying to maintain margins and they're paddling faster and faster and faster, and they're doing a really good job of maintaining margins. When you look at the median company within our investment grade universe, they've been able to maintain margins at around fourteen percent on an operating
margin basis. That's pretty good. So you know, really what we're waiting for now is can we start to see a kickstart to the top line. And I think this probably goes back to what the Fed's going to do with the economy.
So what I'd be worried about, and this is me, I'm a worry. I've got Lisa for company. What I'd be worried about is that the next step is that they run out of their ability to maximize efficiencies and protect margins, and the next step is layoffs. Do you think we're easing early enough to say, really, the next STEP's top line revenue growth, the margins is going to be okay, right.
Well, that's it's interesting you make this point because when we went through we looked sector bi sector, and as you mentioned in your lead in, you know, it's really just tech that has been the one area that's been laying off. Now, Tech has been using layoffs as a way to maintain margins for probably the better part of two years, so this is not a new phenomenon with tech, but you're right, other sectors really have not. And you know, we can look at you know, how they've maintained margins.
So you look at energy companies, there's technological change. You know, companies have been very good about making acquisitions where they had more contiguous acreage, so there's no need to make layoffs there. Even the spot of consumer goods, for example, you know, companies built in a lot of resiltiancy in light of the supply chain problems that we had earlier, but maybe they don't need that anymore. So, you know, we've had the efficiencies come through. But I think you're right.
If we don't start to see an improvement in the top line, can employment start to be the lever that they pull. So far, I think there's been a reluctance and maybe it's a little PTSD after what happened during COVID with finding people, training people and the like, but I think it's something that we're a little bit on a precipice here.
I love the granularity that you have when you look under the hood, and I want to go a little further talk about the nature of how these companies look at employment because it speaks to the uncertainty that we see in the data. How much are companies not mace making broad based layoffs but not hiring either and kind of relying on attrition and expecting to end up with a smaller footprint relative to the size of their businesses. And I'm thinking of US banks where CEOs have even
come out that's going to be the future? I mean, is that kind of what you're seeing in terms of this paddling duck type of corporate sphere that we're looking at.
So far, not yet. I think if I were to get down to that level of granulary, I think we'd see that there is not necessarily new hiring. And so you know, how the drill goes, you take away the job openings that might be posted. Maybe you pull the back there so you're not actually removing workers from your company.
But I don't know. I think as we maybe go further down the road, if we don't see the economy start to pick up, as John was saying earlier, I think we are going to see maybe some deeper layoffs. But again, nothing to indicate that at this point everything it's like the calm waters on the top the duck just paddling along.
So moving from one thousand feet to five thousand feet, there's a question about the US. We're talking about companies here and their ability to withstand and maintain that fourteen percent margin. How different are things right now in Europe, in particular in Germany in the sphere that you're.
Looking, Yeah, very very different. So we did a little comparison across Europe. We looked across sectors and said who's doing well in Europe? And who's not doing well. And what we found is companies with exposure to China, we're doing much worse than those companies that didn't have that exposure. So, just to throw a few numbers on it, if you look at EBADUG growth through the end of the year that we're projecting for Europe in general, we're thinking around
three percent. If you're looking at companies with exposure to China, we're seeing those companies down five percent. So it is a vast difference. Now, granted, some of that is influenced by auto manufacturers, and auto is not just about China. There are other issues. But yet you see it in companies with retail exposure with consumer products. They're all starting to see or feeling that downturn and that lack of
growth that's coming through in China. And I think that is the big difference between US companies and many companies in Europe, is that China representation.
Lisa, do you think that's an opportunity given the easy we've started to say from Chinese authorities in the past twenty four hours.
I think it's too early to know, I really do. We're just at the very early early stages. I mean autos are a different one, you know, different cattle of fish here because the China story is much more complex for autos. You know, what a lot of people may not realize is when you start to look through the surface at auto manufacturers, particularly European ones, where they're making their most money in China is not on evs but on ice vehicles. And ice vehicles are considered to be
premium vehicles in China. Now, if you start to get tariffs put on Chinese EV's by the European authorities, do you get retaliation on ice vehicles in China? So there you have, you know, a little bit of a nuanced situation. And of course, as you alluded to earlier, for some of the auto manufacturers, there are very aggressive targets for emissions coming through and that's really forced a lot of these companies into making very large capital investments particulate a time.
Now we're seeing with EV demand starting to wane.
How investible a real tide credits right now? In Europe? I think so.
Look, I think when we talk to the ratings agencies, what we're told is they will have some time. There is not an imminent downgrade expected for these companies and when you look back, think about during the COVID period, these companies made a lot of money, and so they have really a little bit of a like a little bit of money in the bank, let's put it that way. When we look at leverage, it's very low. Margins are still pretty good, but they're coming down. So again, the
health is not bad. The ratings agencies don't appear to be primed at least at this point for downgrades. But I think you're subject to headline risk and that is likely to continue for the next month too. But I think at that point you may have an opportunity, once we see spreads really compensate you for some of that headline volatility, to get back into the space.
When you think of volatility, you have to think of the US election. How much do you see these companies basically waiting on the sidelines so they have a little bit more clarity.
Yeah, I wouldn't blame them for rating on the headlines. I mean, yesterday there was a good headline on deer that we're all aware of. And I think what this speaks to is really I think companies want certainty, particularly if you're looking at making large capital investments. And so until the elections have been decided, and also the composition of Congress is decided, I would suspect that many companies would probably take a wait and see approach.
The autope sector is in such a tight spot right now. The remedies that are required in Europe to cut capacity, to cut jobs, there's going to be massive opposition to them from unions and from government officials, particularly in Germany. And so Lisa's point the outlook for terrists. You've got no idea what the next twelve eighteen months is going to look like for some of these companies.
Yeah. I love her point about the difference in the cars that get purchased in China. Are speaking to your car manufacturer from Germany and they said that they're designed differently in China because normally it's the driver's seat that's really nice and that has enough space, and that the cars that they sell to China, it's actually the passenger seat because there's always.
A driver live to be driven, yes, not to drive?
That is that your call?
Basically that's what rolls roysters are for.
Right.
It gets so I wouldn't to be driven into taxis Lisa? Thank you? It's good to see. Thank you very shot that Lisa Carmen there, JP Morgan start a page of this story. The OECD releasing its latest economic outlook, expecting global GDP to stabilize with continued disinflation. Central banks still have room to cut rates, but debt sustainability is still a top issue. Joining us now, Alvaro Peretta, Chief Economists
at the OECD. Avara, Welcome to the program, Sir. I want to begin with the United States and get to some of your forecast on the US GDP. Growth in the United States projected to slow but becustioned by monetary policy, with growth projected to be at two point six percent in twenty four this year and one point six percent in twenty five. Two part question why the slow down?
One and two? Why do you think we can actually stabilize around one and a half percent GDP in America and not go to someplace worse.
Well, good morning, great to be on the show. Well, first of all, I think it's important to realize that we're talking about a very robust US economy compared to the rest of the world. Because we see we came back to China. China is slowing down quite significantly. We also think that Europe is not doing as well as he could and other parts of the world are not doing so well. So under the circumstances, knowing that we had a huge pandemic and a big energy crisis, the
United States is doing fairly okay. So what explains the slowdown? Well, first of all, there's a statistical carry out issue. Is basically the last quarter of twenty twenty three was stronger than we expected. It has a statistical carryover, and so that explains part of the slowdown. And so if you take into account quarter on quarter, we would forecast, you know, for one point nine for a slowdown will be from one point nine to one point six. But the second issue,
why is this happening? Well, first of all has to do with consumption, and so a lot of people have savings during the pandemic and they are running out and so this is not so good for consumption. So there's slow down in consumption. There will be a slowdown in government consumption, which is welcome because we think that both the deficit and the debt in the United States, you know,
we should go back to fiscally prudent policy. So I think it's very important to go there, And obviously there's also an issue regarding experts and investment, But we think that main reasons why the United States will continue to do well is because it continues to be a very dynamic economy compared to other parts of the world. Even though certainly the slowdown is explained by the consumption, both of the government and the individuals.
Make a great case for why we could see something of a slowdown in the US, but still why the US is a better growth trajectory than say Europe. So then why don't you have the Europe region actually increasing to one point three percent. I know it's downgraded from your previous estimate in twenty twenty five, but where are the accelerators to get us away from what we're seeing now, especially given some of the trajectory in the industrial base in Germany.
Well, with Germany is almost stagnated this year, almost close to zero this year. We see France doing a little bit better, partly because of the Olympics, but partly because of the consumption as well, one point two one point two percent, and we have Italy doing so so Spain much stronger. Next year, we think that there'll be higher growth in Europe and not fantastic when we're talking still
one point thirty percent. But we see higher growth because we think that the recovery that we see in terms of purchasing power will continue, so because wages are recovering and so this will happen, will have an impact on consumption. But we also think that some investment will take place, partly linked to the Resilience Fund that were spent by the Europeans on infrastructure projects, so this will help a
little bit. So that's what explains a little bit better performance of Europe, but certainly not spectaclical growth rates.
All things being equal, Where is the growth really going to come from? Where is the growth engine the new growth engine in Europe at a time where some of the challenges for Germany are structural, especially the time where Chinese growth has been unreliable.
I think you just mentioned something that is absolutely essential. Part of the problems with Germany right now are cyclical, so it's coming out of the energy cry, and we know that there's been downward trajectory for part of their manufacturing but also services, and also because consumers in Germany have been very prudent, so they've been saving more than
other parts of Europe. But there's also structural issues. You mentioned something that is absolutely true, which is a competition with China and particularly in manufacturing, and there's less demand from China as well for German manufacturing, so that is having an impact. But also there's another issue that I think is important to highlight. We think that German should focus on first of all, improving their infrastructure, especially on
digital infrastructure. They are lagging compared to other parts of Europe. But in particular it's time to go back to reforms in Germany. There's many competition friendly reforms that I needed. There's too many barriers to services in many parts of the German economy. It's still too difficult, too much red tape around, and we think this is having an impact.
In fact, we calculated what's the impact of all this and we say that for the OECD economy is in order to be with the best practices, arnemies like Germany could profit. It could increase growth by three percent over ten years if they would do this type of reforms. So besides the structural and the issues linked to China and the structure of the economy, we think that is important also to go back to reforms for Germany.
Well, let's talk about China. The PBOC out with another move today. Do you think any of this is going to help spur the Chinese economy?
Well, we are forecasting four point nine percent for this year and four point five percent next year. This was before the stimulus. But I don't think that there'll be a huge change in the forecast right now for two reasons. We know that their exports Chinese exports are doing fairly well in terms of manufacturing particular, they're doing fairly well. But consumption continues to be a bit subdued in China.
So this could help.
Some of these messages could help a little bit, but we think really the main ailment of China continues to be high debt, private debts. So remember private debt is there about one hundred and seventy percent of GDP. It's mostly quasi because it's see that, but it's quite private debt. And on top of this, we know that there is a very large real estate market, much larger than most economies, and so there's some adjustment that will have to continue.
And so the question is whether these measures we'll be able to help demand or not. It's a question mark that we'll see in the next few months. But to be honest with you, if you look at our historical examples of other countries, when you have a big real estate adjustment, very often takes a bit longer than authorities would like.
Avar I appreciate the update as always, says thanks for tuning. Joining planned out to host the likes this this morning, applications to refinance home loan searching for a second week. According to the Mortgage Bankers Association, homeowners are looking to take advantage of the lower rates a thirty year fixed mortgage sitting at just over six point one percent. Daniel Helfrelter dot Com saying this surveys show that consumers expect additional mortgage rate declines in the next year now that
the Fed's a longer waited cut has arrived. However, the improvements may be more modest than we've seen to date. Danielle, John Deers Moore, Danielle, Welcome to the program. So we've seen refis explode search over the last few weeks. How low do you think that rate needs to go before we start to see home purchases actually start to accelerate in a more material way.
Yeah, thanks for having me.
So we've started to see a bit of a week to week uptick in the purchase applications, but it takes time for buyers to become aware. And remember the mortgage application is a later stage in the home buying process. You have to have an offer on a home that has been accepted before.
You go to apply for a mortgage. So what we will actually likely.
See is that pending home sales start to pick up, and then mortgage applications follow. The pending data is a monthly series, the mortgage applications are obviously weekly, so the timing wise, you might see the result in the mortgage applications first, but there's an order.
Of operations here, so offer is accepted.
And the buyer applies for a mortgage, and that's when we see it reflected in this MBA data.
Danielle, what do you make of the fact that actual listings have increased. It seems like there is some motion in the pool of existing homes that are actually finally.
Up for sale.
Yeah, we've seen the number of homes on the market for sale growing very slowly over the year, but we're now up about thirty six percent compared to last year, so it is a substantial improvement. Big picture context, we're still down pretty substantially from the twenty seventeen to twenty nineteen period, which suggests to me that there's more room for recovery in the market. And you know, as we see more sellers come into the market, we'll see that
room improved. And I think it's important to note that existing home sellers are often also buying another home, so when we see existing home listings increase, increasing both supply and demand in the housing market, which will help increase the turnover rate in home sales that has been rather sluggish in recent months.
I see a number of reports Staniel that show that it really homes haven't moved as quickly as some people had expected, So even though there are more listings, it's
not as they're flying off the shelves. And understanding that mortgage rates are still relatively high to orere they used to be, how much do you view this as a sign of what's to come that essentially, as you DeFreeze this market, you won't necessarily see the same kind of price increases as some people are calling for on the heels of lower mortgage rates.
Yeah, I think with affordability as stretched as it is in the housing market, there's less room for prices to run. That said, everyone I think has been surprised at how resilient prices have been in the face of higher mortgage rates. So buyers have been willing to stretch affordability as opposed to necessarily waiting for home prices to fall, and the big picture inventory shortage that we see is a big explanation for that.
So if we look over the last decade, we are.
Several million home short of the number of households that have been added. And when you have that kind of scarcity in the market, it's hard to see prices really relax or decline in any meaningful sort of way. So I do think as mortgage rates improve, we are going to see buyers come back to the market. If we look at the time it takes to sell a home, we are seeing homes take longer to sell than.
One year ago.
But again, if you compare to that pre pandemic benchmark, we're still seeing home sell about a week faster, and so I think we have some more room for the time on market to slow. At the same time, technology has improved and it's much easier for I think shoppers to find a match in a home now than it was four or five years ago before the pandemic, and so we may see some.
Of those that market speed.
Kind of stay as a factor in the housing market, and so buyers may have to make quicker decisions. But I think there are two things going on. There's a market momentum and then there's this seasonal momentum that we see, and fall tends to be a slower period for the housing market.
We see buyer demand wane. It's one of the.
Reasons that we identify next week actually as the best time to buy, because buyers have some seasonal advantages. With fewer of them and a good number of sellers still in the market, they have more negotiating power and often tend to see lower home prices than we do at the peak of the summer.
So for buyers who are flexible.
And are not trying to sell a home as well, it can be a really good opportunity to get into the housing market. And the fact that reads are coming down now is just an added bonus.
We've got a flexible buyers sitting around the table, so we appreciate that particular advice. Danielle Thank you, Daniel, how They're a rilter. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiot 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 Out