This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business app. As confused as we are, but never confused. It's Jay Bryce and
chief economist at Wills Fargo. Ja, wonderful to have you with us. I think that states the confusion right now. Does Wells Fargo have clarity on what the American consumer is doing?
Clarity that's a strong word, Tom, But I guess in general, when I stand back and I look at everything here, there has been some deceleration in consumer spending. Consumer spending in the first quarter in real terms, grew over four annualize. We're just not going to get that in the second quarter.
We came into the second quarter with some deceleration. These numbers that you know Mike just talked about, I mean, you know, on on on balance, I think you know they're okay, But in general, it doesn't change the big story that there has been some deceleration in terms of consumer spending out there.
Jay, how much has the overall discussion been completely distorted by the auto sector. How much the price is just shot upwards in the aftermath of the pandemic and now are coming down and resetting, especially as auto loan rates are getting so high. How much is that behind all of the confusion.
Well, at list, I wouldn't say it's it's a huge part of it. I mean, so if you break down consumer spending, you know, roughly two thirds of consumer spending is going to be on services, and the other third is split roughly equally between non durable goods, so that would be like clothing and shoes, et cetera, and then durable goods. We component of that is autos, so it
moves things around on the margin. But again, you know, the big driver of consumer spending growth in the economy is services, and I think that has been in some sense more distorting over the last three years. You know, in the sense of when the economy was shut down, the service sector was shut down, and then that came
roaring back last year as the economy opened up. All this pent up demand for spending, and a lot of that now is pretty much behind us right now, so we hopefully are getting to the point where things, you know, the aftershocks of the pandemic in terms of the economy are now settling out.
Okay, so the after shocks are settling out. What is the new economic trajectory when it comes to inflation. Is it back to what we saw previously or is it something different, especially if people are getting paid more and they're not pushing back as significantly as some would like. With respect to how much prices can keep going up.
Well, you know, I may differ a little bit on that. I mean, I think you are seeing some signs of that right now. I mean, we are seeing it in terms of deceleration in terms of inflation out there. It's still slowly coming through in the service sector, but if you look at the rate of change over the last three months, you're seeing less service sector inflation as well. I mean, our view here is that we are heading back towards two percent. Now. It's not going to be
right away. It's going to take a little bit of time, and part of that is predicated on some economic softness i e. A mild recession early next year. But you know, I think these nine ten percent sort of numbers that we saw are even five percent. I think that's the thing of the past, and I think we're heading back towards a two percent sort of error.
Jay on the international basis here and after the clumsiness that we see here of American retail analysis, do you have a clue what the Chinese consumer's doing? I mean, we sit there, guys like you have to pontificate and say, yeah, this, this, this, but do we really know what the Chinese consumer's doing?
So, you know, we started this with Lisa saying, you know, what's your view with all this noise in the United States now square that when you talk with China and just in terms of the data laps and gaps, and you've got to take it with their grand assault sort of stuff. But it does seem like, you know, things in China are also kind of slowing down as well. You got this really lousy GDP number the other day,
and I think that's going to continue going forward. What we do know is the Chinese consumers or you know, they still have a very very high savings rate. You know, they're still very concerned about healthcare. You just don't have the healthcare system in China as you do in many Western sort of company countries, and so that keeps the savings rate in China elevated.
Over there, Jada, go to micro here. This is your team under you working on this, including Sarah Hunt, the retail sales control group X, what X X, red SOX, tickets, Mike X, building materials X, autos X this X that. Do you get value out of a buoyant control group for sixty days?
Jake? You know, there's obviously there's there's some information in there, Tom, but you know, again these are nominal sort of numbers, and at the end of the day, what we economists are more concerned about is real and so you have to deflate that by you know, some things that are in the CPI. And again, as I said earlier, when you look at overall retail spending, it's roughly a third of the US of spending. You know, the big component
is the service one. So what we pay much more attention to is the numbers that we're going to get at the end of the month and the personal income and spending. That's when you get the service sector components and you get real numbers as well.
So just putting this all together, are you increasingly in the soft landing camp with this being a soft landing type of retail sales number.
So we've been in the you know, it depends on what your definition of a hard landing is. But we've been in a recession camp now for about a year, and you know, we've had to push that call increasingly back out. I would say, right now, if you hold a gun to my head you say what's the probability of a recession in the next twelve months, I would still say it's roughly it's still roughly sixty percent. I mean, what's going to happen as we go forward is the
inflation is coming down, okay the Fed. No one thinks the Fed's going to be cutting anytime soon. So what's going to happen in the month's coming is you're going to get a passive tightening of monetary policy as the real rate drifts higher and higher. So in order to have a quote soft landing here, I think the FED needs to be still very adept in terms of monetary policy later this year as inflation comes down.
Is that to Bryson thank you so much for joining us today. Jay Brison leading all the economics at Will's far.
Going joining guess now, Amy wou Silverman, the head of Derivative Strategy of RBC Capital Markets, to have you with us on the program. We've had the bank earnings over the last week, the banks have lanked. What's happened with tech? Pretty much everything cast tech is absolutely dominated. You today, Amy, I'm sure you filled the same question that we ask repeatedly over the last several months. Can this rally broaden out? Do you think it can?
I do, John, and I actually think you are seeing that already in the options market. You know, we kind of take that metric of call exuberance, you know, where are folks buying single stock call options? And of course that was in your in the videos and your apples and your Googles, not too surprisingly a couple of weeks ago. But we've really seen that expanded not only to SMP but also to IWM names and also two smaller in
MidCap names. And that's kind of happening on a much broader basis than it was before.
I mean, let's cut to the Wheehouse. That's what everybody on Global Wall Street wants to know from Abe and with Silverman, what are the cross moments saying right now the four dynamics of the option space. And critically, to get a little bit jargoning here, what does SKEW do right now?
You know, Tom, it's it's doing a whole lot of nothing. And I always say memory is really short in the options market, and it's gotten even shorter. So the folks who have had on you know, long put trades, hedging trades, they've been burned. The best strategy year today when you back test every option strategy has been to be long the S and P five hundred.
So no option.
Strategy year today has actually just beaten being long the SMP. And you know you've seen that kind of taken to heart in the VIX levels and the volatility suppression that we've seen right now.
You said that you do expect the rally to broaden out. What are you looking at specifically for the areas to benefit the most in this broadening at a time when some people still are expecting consumers to stop spending as much.
Yeah, interesting question, Lisa, And I think you know it goes back to all these rotation trades that I think investors had wanted to put on even you know, six months ago, even after the October bottom, which is value versus growth, or you know, finally small MidCap versus large cats, cyclicals, those type of areas. You know, one thing I will say as a copyat is I've asked investors why it couldn't be the case that we could just simply have
a parallel rally. You know, so megacap tech doesn't necessarily get hurt, but we just simply broaden the rally because one is sort of a secular drive of AI and the other is more of an economic recovery story. And to be clear to my earlier point, you know, we're not seeing less bullish positioning in tech. It's simply that that bullish positioning has widened out a bit.
This is the reason why some people are saying, okay, let's just hold on a second before everyone gets over their skis and the soft landing type of narrative, because if you look at the data, more people are invested than have been in equities going back for quite a while. We see a much more overweight suddenly in market technicals. At what point does that become a concerning sign to you?
Yep. I watched this too, because I do think you know, part of the story from the beginning of the year, Lisa, was that there had to be this catch up trade.
Right.
One of the reasons I think we thought that positioning would get even broader was there're just folks who at the index level had to catch up to the momentum you were seeing from seven names contributing so much to return. Now from a positioning perspective, we are in a much better shape. But the question is is there even more to go? I think there is if the rally becomes broader.
And the second thing is, you know, you get these kind of technical rebalances, the technical rebalance for the NASTAC for instance, which I'll give folks who really couldn't participate in that narrow breadth to have some excuse to continue to do that widening breath.
Does diversification pay here, Amy, or is it better to place larger focused bets.
So, Tom, it's interesting because we always think about that from a correlation perspective, and correlation has been really really low on a real level and an applight level, because it's been you know, tech going this way and then everything else going the other.
Way.
The one thing I point to folks is, look, if we get more things widening out and that breadth going, you know, even larger, then maybe that picks up the correlation component of index volatility. So to your question, maybe the reason volatility goes up and we see a few points stick higher is actually because of that widening of breath, which actually makes your correlation component what kicks the ball into higher gear.
Interesting, Ami, thank you, Amy Wosilverman that NBC Capital Markets, Ed Marse is.
Different than the others, and we talk to them all and have an immense respect. For example, the oil microeconomics of Goldman Sachs, an allegiate global sense of Bank of America, maybe what we see from Emerita sen Over in London. And then there's Edward Morse. Yeah, he's global head of Commodities Research at Citigroup, but he does geopolitics in the larger view better than anyone. Doctor Morrise joins this this morning, Ed Morris, I'm going to rip up the script here
and you allude to it in your research. Note, we are having a climate change twenty twenty three globally.
To beat the.
Band, someone as giant as Michael Mann is really, really intense about this is a new climate change. How do you, with all of your expertise, interpret the global warming we're observing.
Well, it certainly has upended a lot of expectations. The world has decided to rely significantly more on solar and wind and on water. And part of the climate change process that we're seeing is disrupting that the sun is being impacted by wild buyers, the rain is not happening in the places that we needed, is happening in where places that we don't want it, and the wind stops blowing at the wrong time. So we are really in a power gen crisis that is global and is not going to stop anytime soon.
What will that do to price of oil and off the price to supply and demand dynamics.
Well, the price of oil is still essentially that based on a transportation fuel market, not on a power fuel market. Part of the climate change surprise in twenty twenty one, reinforced by both climate change and the rescue frame war in twenty twenty two, is that we had a surge in natural gas prices and it made diesel more expensive because there was fuel switching to beat the ban between
natural gas and diesel. So that's the first time that we've seen a spillover effect from the powergen market into the transportation fuel market, and it's not going to be the last time that that's happened. But that separation that we used to think of is automatic is no longer is no longer automatic. And when we get into the next crunch on that gas, which might well be in
twenty twenty four, we might see that happening again. Meanwhile, between the obstacles to invest in fossil fuels and the reduction and demand that we're seeing, that spells volatility ahead. It spells a market which will be moving between supply shortage and supply oversupply on the oil side from year
to year. And the oversupply won't be big enough to bread us down to twenty dollars or let alone negative prices, and the undersupply won't be big enough to get us over one hundred, but it will mean volatility in the market is going to be there as we go through decades of an energy transition.
So what's the range then? The band is from sixty to one hundred dollars A.
Barrel I said, there's a soft put it around seventy at the moment that soft put exists, not only because we have OPEC, which really doesn't want oil below seventy and are proven to be to take action, but we have the US which is basically announced that it will be more aggressive about filling the strategic stockpile when we get to seventy. We have China that has, since the two thousand and eight to nine Great Financial Crisis, decided to build inventories when prices are low and to use
those inventories when prices are high. So I think we have a soft put at the moment higher than sixty and maybe at the seventy level. On the upper side. You never really know what happens. There are wild cards. Hurricanes are certainly wild cards. What we need is two, three, four or five category hurricanes in the Gulf of Mexico and we get damage like Hurricane Harvey or Rita and Katrina a year where refineries are out for four or five or six months. The US is the heart of
the global fossil fuel market. The US Gulf Coast is the largest contributor to combine to oil and gas in the world. We are in bet oil, cruit and petrolion products now seeing nine or ten million barrels a day of exports, most of that coming out of the Gulf Coast, and that's larger than the total production of either Russia or Saudi Arabia. And we're seeing fifteen bcf a day of natural gas coming out of the US Golf Coast. Flooding can knock all of that out for a while,
So we have that wild card sitting there. But without the wild card, I'm comfortable thinking ninety is a real ceiling for whatever we see on the Titaness side of oil for the time being.
Ed, where does a soft landing versus a hard landing fit in from the US? You said, we haven't really priced in something of a more honest recession in the US, which a lot of people are discounting altogether. What makes you think we shouldn't.
Well, partly because of my colleagues Veronica and Andrew, who you were talking about earlier, And you know, I believe what they say about about where economic growth is going, and I tend to believe people like Larry Summers who are among those pushing for the hard landing scenario. But
there's something secular going on as well. We had lower oil demand last year in the United States than we had a year before, and that's by every measure on almost any product other than this category we call other. But we had less gasoline demand, we had less diesel demand. We're seeing a pickup in gasoline demand this year because people are taking vacations more than they did last year, but we're not at twenty nine nineteen levels yet, if
we ever will be there again. We're really seeing a phenomenal structural shift both in gasoline and diesel in the US. The diesel side of it is partly related to the efficiency of trucks. More importantly, there are two things structurally going on. If you look at those of us living in New York and looking at on the street and seeing delivery vans, they're mostly fueled by cleaner energy than diesel. They're mostly fueled by either hybrid vehicles or electric vehicles
or natural gas vehicles. So that plus the actual drop in trade where we have a lower level of containership movements. Since last September, we have on shoring going on in the United States and in Europe to take away from China what has been a significant part of their exports. We're seeing a slow down in trade which means to slow down in trucks going back and forth to ports. Between the change and the fuel stock and the change in the trade environment, that's a really permanent factor in
the market. On the gaso leane side, one of the biggest issues is of course the increase in fuel efficiency. And we didn't expect the increase in fuel efficiency that we've seen, but certainly during three years in which we have supply chain problems in the auto industry, auto manufacturers were selling either the most fuel efficient and therefore the most expensive ice ice vehicles they had, or selling more electric vehicles. And the fuel efficiency of the US has
gone up a lot in the last three years. And on top of that, we're having a record amount of retirements and with that, fewer people with two or three going to more people with one or two cars, and they're driving even with the labor market statistics, so balancing that are other factors, and I think we're very close to the US joining China and Europe in yiji oil demand coming sooner than most people expect ed.
We've got to leave it that fantastic assessment analysis on the commodity intensiveness of economic growth, that's most of SITSI.
Gretoriy Peters's cool common collected coat CIO at pGEM fixed income Right now, Greg, if I defind a given aggregate index is in between here maybe on a technical basis, it's a Pennant formation. Which way is price going to break? Are we going to get higher price, lower yield or the other way around?
I think it's the other way around. If you look at what's going on in the market, the market is very excited around policy rates peeking, But if you see what's embedded in the future price, there's talk about soft landing, inflation coming down, and then on top of it you have pretty substantial rate cut. So those two factors are somewhat confusing to me. Right, if the economy continues to
actually chug along here we avoid a recession. I'm not necessarily sure why forward rate should be two hundred basic points lower than they are today.
I look at where rates are and what is going to give way from where you sit, How will issuance change given price down, yield up, what will be the spirit of the market.
Well, what we've found over the past, you know, a couple of years, is that there's not a lot of price sensitivity here, corporates will issue when they have to. There's a constant desire to issue, so I don't really worry about that factor too much, you know, honestly. So you know, to me, I think it's steady as you go. So I think it's a very good environment for fixed income for sure. But at the same time, some of the pricing confuses me.
Okay, let's talk about that, Greg, particularly an investment grade. Why do you think that prices are just too high?
Well, that's so much.
Well it's just it's pricing in a soft lending, which I think should be the little outcome. But the risks are still, you know, pretty elevated. And so I look at you know, IG credit spreads, you know index level just called one hundred and twenty five basis points. That's well below the long term average long term me you know, high yield is sub four hundred basis points, So you're not getting paid a lot from a spread premium standpoint.
Basic the risk out there, But you know, the overall yield environment is a fantastic one, and I think that will continue to drive flows into fix income. It makes fixing come a very attractive place. As we're back to the role and carry days, which I think is the hallmark of fix income investing.
Typically after banks report earnings, they issue a slew of bonds. We saw Wells Fargo float and offering yesterday with an eight handle offering more than eight percent yield. It was on a subordinate bond with equity like features. Is this a type of asset that you want to own? Are you looking to the big banks and saying I'm a buyer?
Yeah?
So the key point there is equity like features, right, So I've always been on the mind, We've always been on the mind that that's a poor risk.
You have fix.
Income type of yield equity optionality, so that the option is always against you. So never really like that part of the market, you know, known as the coco part of the market. But the senior place looks very attractive to us and continues to be. So, you know, the money center banks as we call them, are very attractive investments in fixed income and continue to be one of our favorite places to play. In investment grade corporate.
The theme with price down Greg Peters is I'm going to get a coupon along the way. I get that rationalization, but as a general statement out one year or dare I say, out of PGM short term three years, are you going to clip a coupon or are you going to invest out three years for total return?
I still believe that given the shape of the curve, given the attractive nature of the front end, to me, it doesn't make a whole lot of sense to go out in duration. So I think front end. Carrie just called three years in tom a very attractive place to play. So I don't really see the need to kind of reach, right. I think investors are stole very much in the reach for yield environment, you know, going back pre pandemic, and the truth of the matter is you don't need to
reach now right, it's right in front of you. So there's no reason to take unnecessary amount of credit risk or or duration risk at this.
Point in time.
Does this mean that you don't necessarily buy into the soft landing narrative or just that it doesn't matter whether there's a soft landing or a hard landing. You're going for the short thing.
Well, so I mean you go to the soft landing narrative. So I don't understand, you know, this is the price confusion in my mind. I don't understand if you believe in a soft landing, why the FED would be cutting two hundred basis points at the same time over the next year or so. So to me, that's the income brument seeing the market. So if you actually do get us soft landing right, I think front end yield will
remain pretty sticky. So maybe there's a little cuts, you know, into the market, but that should help normalize the curve, which means, you know, the inversion starts to normalize, and that means kind of higher yields across the curve. So that's how I see it, actually.
Greg one of the best, always apprivileged to listen to you. Gregats the page and Fixed incompany.
Christopher Merinek, Jenny Montgomery Scott, thank you Christopher taking time out from your clients this morning. Is Margan Stanley a.
Bank, Absolutely sure, they take they make loans and take deposits.
Their deposit costs rose a lot in this quarter.
Tom, I mean they had one hundred percent beta if you look at the change and average deposit costs from a first quarter to second quarter, so that's forty seven basis points, which is exactly what the average change and the FED funds rate was for the court.
I am fascinated by the compare and contrast with the mystery of what we'll see tomorrow with gold and Sacks. To begin that study, what's the key distinction here of a Marcus like free Morgan Stanley.
Well, I think Morgan Stanley can get access to funds cheaper than what Marcus is paying. Marcus is the rate leader in the marketplace, and so that has a different spread component at the bank level, and I think that's awfully important. I think there's less of an advantage at Goldman on the cost of funds, and so that's one thing that most banks have, and certainly Morgan Stanley does have an advantage in terms of borrowing and raising money cheaper than the cost of FED funds.
As we parted through the results in Shanali was great about pointing this out. At Bank of America, the average FICO score was seven sixty seven, an incredibly high, very well off kind of customer base. We're seeing a similar type of suggestion in the numbers of Morgan Stanley. What does this mean for those who are not in the
echelons of the upper tiers of and come earners. Does this mean that they are not getting credit or does that mean that they're going to the P and c's of the world, maybe the Western alliances.
I think all those banks tend to have a higher FICO score in general, so I think unfortunately they're probably looking outside of the banking industry and other sources, which really means that it's more expensive.
I think that's the hard part.
The banks are bragging about having high FIGHTO scores and that kind of cuts both ways.
It's good from a credit quality perspective.
But it does make it difficult for certain barrowers to access funds from a consumer standpoint.
Right now, as you take a look at Morgan Stanley, Bank of America JP, Morgan City Group, Wells Fargo, who looks the best to you in navigating a pretty uncertain time.
Well, Bank America has the best deposit base in the country, and so that gives them a leg up. I mean, they have access to consumer funds that are cheap, and they have a big advantage over fed funds. As I mentioned earlier, I feel that they've got a lot going
for them. They also have been a leader on the digital buildout JP Morgan has too, and you know those are two big engines and the whole transformation of the industry towards digital that's going to continue to create a wider gulf between other banks and the quarters ahead.
Chris and the zeitgeist of this July is a massive roll up worldwide in asset management. Clearly active management, dare I say also Index passive management as well. Is Market Stanley one of the giant players that can take advantage of their roll up or do they have to grow and defend against the roll up?
Oh?
I think they're on growth mode.
I think if you go back to March and April when we had the explosion of First Republic, they received several clients and teams of people, and I think that's going to bode them well. Even though they did not bid on the bank, they still had a lot of transactions and new customers that have come in, and I think that's going to become more apparent on the asset side in the months ahead.
Shanali Bassek is studying the succession plans as well. You're student of it. End If person should be taking over a wealth manager, a banker, somebody from outside.
I think you need one who can be a leader.
At the end of the day, you need a person where he or she can really focus on how to lead an organization, bring in new clients, being able to be flexible when you have market volatility like we've already seen this year.
That's really is what it's about.
I would be less about labels, about whether they came from the investment side or the bank side.
I think being able to.
Lead a team of folks and grow the business and the next decade is what I think is most important.
Hey, Chris, I appreciate you being with us this morning. Chris marinache At, Jenny Montgomery, scot.
Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always. I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and this is blumber