This is the Bloomberg Surveillance Podcast. I'm Lisa A.
Bromoids, along with Tom Keen and Jonathan Ferrell, join us each day for insight from the best in 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.
Joining us around a table here in the studio, Stuart Kayes at ahead of US Secrety trading strategy over a city. Good morning, Stewart, Good morning. How long can Goldilocks last? Hsb's question, not mine, HSBC just asking that question seconds ago. They say, continued disinflation and stronger than expected growth in many DMS argues for a continued risk on stance, does it?
I think in general with those I think, you know, a big picture. If the labor market in the US remains strong and course CPI continues to ease, I think that's a good backdrop, you know, for risk assets. I think the issue we're having now is frankly, expectations. You know, if you look at what's happened over the last month, you had a reasonably solid earning season, but the average stock that b EPs was unchanged on the day. You had, you know, a solid payrolls report, the market traded off.
You had an easy inflation print, and the market was flat. So yeah, I mean, there's a lot of good news out there, but the market I think has become a little callous to it, which is kind of not good for risk reward.
In review, Michael harn had talked about this Lisa over at BFVA and the fund manager survey. Their line was basically bear positioning was strong tail went for risk assets in the first half, not the case in the second half. Their fund manager survey. You mentioned it yesterday at least bearish since February of last year.
Yeah, cash allocations coming down, and we heard that to start the show.
Basically, take the cash.
You might as well put it into risk, because why not, you might as well get the upside surprise if the economy is strong.
You put it into tech. At the start of the year, you did do it, and the other people didn't. There was that pool of negativity to feed on to drive tech higher. After a brutal year in twenty twenty two, are you sticking with that trade.
You know, it's a tough call right here. I think yes, as a base case, we still like tech and growth. We still think that can work because we do ultimately expect you know, the labor market data to begin to weekend, and I think in that environment, that's kind of where you want to sit. Obviously, the last month has been pretty tough for that trade, particularly because yields have risen, you know, pretty sharply, and that's impacted tech I think
more than other sectors. And also this expectation story. If you're worried about high expectations, you know, that's clearly very acute in the tech space. So I think you are fighting expectations, you're fighting performance, and right now you're fighting higher yields. But if you do think economy can weaken and that should hopefully put a cap on yields, that I think tech is a place that you want to be in that case. But certainly the past month has been been a tough ride for us.
Can we just talk about quickly just pause cash on the sidelines. This is sort of the misnomer that everyone keeps talking about, Oh, there's so much cash in the sidelines. All these people who aren't invested. Cash is great for some people if they're earning five percent. So at what point can we say the cash in the sidelines has been used up?
I think it's a great question. If you look at retail money market balances, those are up six hundred billion dollars since April of last year. Six hundred billion is a big number, right, you know, But to your point, you're you're equipping a five percent coupon on that, and clearly not all of that six hundred will go into cash. A lot of that's probably come out of traditional bank accounts and got into money market funds to get that yield. So I think the question is to release that money.
What has to happen, right, Either you need to get yields lower so that five percent isn't as attractive, or you need to have equities continue to perform the way they are and you get sort of a fomo you know situation on the equity side. It does feel like equities are topping out a little bit, so I think I think it's going to be hard to dislodge that money.
To the sentiment point, at what point do losses become self fulfilling? At what point do losses spur a question to this whole goldilocks to John's point and FOMO feel that we were hearing about for the past couple of months.
Look, I mean, if equities start to move a little bit lower, yeah, that's going to a dense sentiment. I don't think there's any way around that. You know, tech has performed Polard, but frankly, the SMP isn't that far off off its high. So, you know, it's interesting last year, in a high volatility environment, the moves we've seen recently would have not you know, not really registered, right. But July was the lowest realized volatility months that we've seen
since December of twenty nineteen. So you get into August, you get at a little bit of a blip and it feels I think a little more painful. But yeah, I think you know, one of the things we were a little bit worried about is, you know, a lot of folks were very defensive and hedging earlier in the year. That hedging did not work out. It cost a lot of money in terms of premium paid. The market is probably less well hedged today, you know, than it was
probably three months ago. So to your point, there if we do get some losses, the market is going to be a little more surprised by it, or probably a little more disrupted by it than it might have been earlier this year.
Let's finish on where the negativity is now. It's in China. Everybody that comes on this show is so downbeat on what's happening in the country at the moment. The dates is bad. The date that you can see, you're not going to see much more of it on the youth unemployment side. I've got no idea when that changes. The data this week basically led to a policy response by the Chinese central banks cut rates by the most I think since twenty twenty. This is typically the time to
lean in, to lean into Chinese equities. When people are so down beat on what's happening, there is this that time you.
Know, we're not there yet, you know, I think I think, at least me personally, you know, we're pretty co on China. But like I think, there's three aspects of the China story. There's two weeks ago, everybody was celebrating China's exporting deflation. This is going to help the FED, right, But that sort of ignored the flip side of it, which is you're losing a global growth impulse. This week, the discussion is much more about the growth side and to what
you were discussing earlier, which is a sentiment issue. And I think the sentiment issue, frankly, is what's going to keep people out a little bit. You know, foreign investors. I think we're we're not happy with how they were treated by China over the last couple of years, and I think it's going to make money, you know, kind of slow to re engage in that space. So I think,
to me, the sentiment is very hard to predict. The growth versus inflation trade off, I think really just has to do with what the market narrative is at any given point in time.
Right, you know, if.
Two weeks ago was an inflation narrative, it's good. Now it's a growth narrative, it's a little bit bad. But I think we're we're generally, you know, being fairly cautious about about putting money into China. The flows that we've seen are much more options based, high payout type stuff, you know, limited risk, you know, you know type flow is going into China. We've discussed this in the past.
If the evolution to that Chinese trade this year is and you know, or over the last twelve months have been very, very fascinating, and right now I think people are a a little bit cautious to put under to work.
There's a question about whether or not put money to work in Chinese equities. There's another about the read through effect in the United States for companies that are leveraged to China. And then just more broadly, I think about the fact that this wealth manager mispayments on several of its products, that you're dealing with a housing market that doesn't see a light at the end of the tunnel. At what point does that have contagion that percolates outside of China.
It's a good question because you know, I think initially or stage two or three of the China trade was I'm going to own Europe and I'm going to own luxury goods that sell into the China consumer. Right So you know, certainly those type of stocks would be under a little bit of pressure given the lack of spending growth that we're seeing in China. So yeah, it gets
an impact. If you look at the foreign direct investment in China, it's come off a little bit us companies are clearly not putting money, you know, directly in there for luxury goods, and you'd probably throw Apple on into that category.
In Tesla as well.
You know, the domestic demand has been ahead wind, so yeah, it's it is a risk, and I think that just gets into this global growth narrative of when does the benefit on the inflation side get out weighed by the sort of detriment on the growth side.
Well said, I'm just looking at Target on my screen right now, slightly distracted. It's by by eight point five percent at the back of this. Do you those one of those stories if you told me the earnings before they came out and then said, guess what the stock price is going to do, I'd be like, we they've cut the outlook on profits, so that's not great, that's right, but it'll be like this second quarter reband for profit.
I personally think this is just where where the expectations have been set, because if you look at those shares, they're down considerably on the year. So at a certain point, if they're not hemorrhaging money and throwing all in, you know, some negative news, I guess it's positive. I can't really read it any other way?
What can I learn from a MAF like that.
Well, the thing is you say Target. If you said Tarja, it would be much more be much more understandable of the type of move. But look, this is the important part earnings, right, It's what happens with the consumer.
Santaturists over in China. Couldn't they taj out of out of the mh some kind of collap What you said? Did you say this how syncs?
No, you're the one that they sell. I know, the soap that goes on saying so I can affirm that nice.
Okay news you need to know.
To see city. Thank you? Thank you kinda right. The guess that comes on this show, they're like thank you.
Yeah, I think I think I'm going to run away.
Now, thank you, and I'm kind of sorry. Let's turn to Greg Peters, co c I of PGIM Fixed Income Greg Joints. Just now, Greg, not to talk about what's happening with Target, t j X, and Walmart, to talk about this bond market. Greg. A question that we've asked all week, and we've got a different perspective from different people. What is behind this bond market move? Greg, of the last month.
Yeah, So I was listening to your rep artee, you know, before you came over to me, and I think I have a very different narrative than the one that you were just talking about.
I think it's about growth.
You know, the FED has raised interest rates, inflation is coming under control.
Are they done? I don't know.
There's probably some more room left to move higher. But it's the underlying growth element that has driven the bond market in my estimation, as it's about the shape of the curve, right, So if you believe that inflation is going to remain relatively high, the economy is strong and stable, then the curve has to start to normalize, and what that means is that back end rates have to move
higher as a consequence. So to me, it's all about this strength and economic activity and sure, inflation you know, remains you know, above above trend, but it's really the growth story.
But if you take a look at that implication, there's some broader market consequences to this. First of all, it means that the yield curve is normalizing up, not down to three percent, and that means that we could have higher rates for longer at a time, or this economy can keep chugging along despite rates where they are. Can the credit markets sustain a five percent or four and a half percent long term.
Based treasure yield?
Does that wreck some of the math behind the credit bed Well.
Yes and no.
So I mean I think the economy can handle higher interest rates. I think that has been the mistake that many investor has made, myself included the underlying strengthen the economy and the ability to handle higher rates and the benefit of higher rates that you're seeing visa via the consumer. But you're quite right, Lisa, there's been so many capital structures, whether it's in commercial real estate, whether it's in credit, that have been built on the backs of extremely low interest rates.
So as interest rates.
Remain at the high higher level here, then a lot of those capital structures really can't withstand that environment. So as a consequence, I think we're in this stronger growth environment, but at the same time we will see above trend default and distress activity as a lot of these companies really just are unable to.
Be a going concern with the higher rate environment.
One thing we keep hearing Craig is a number of investors say they're leading into duration because you might as well. Lock in yields where they are getting four point two percent for ten years looks pretty good relative to what you used to be able to get. Are you saying that there is more normalization to be had if we are going to create a more flat or more normalized yield curve.
Yes, and that's what we've been saying, and I've been arguing that for the past six months, as I think it's too early to lock in duration. If you believe that the economy you know, is entering a soft landing, no landing, whatever landing you want to assign to it, that means rates have to move higher, not lower. And so yeah, the FED might modulate a little on the margin take rates down, but not as much as in the price right, and so for me rates are higher.
I don't see any rush to lock in duration at this point. We're leaning against that and have been leaning against that for quite some time. So we're still short duration. As once again it's growth, Lisa.
I see me taking that position, Greg, Not because you think we're going ten twenty basis points high than where we are. It must be bigger than that. What kind of numbers do you think we can get to?
I don't know, there's been a big move already, right, So I don't want to get greedy either, But I think on balance, the tendency will be for higher rates, not lower rates. And so you know, we've been kind of talking about this range of you know, four to four and a half, but the truth of the matter is it's leaning against the forwards and what's in the price, and what's in the price in the forward.
Space it continued rate cuts in a lower yield environment.
So that's kind of what we're leaning against more than kind of making in the call and where rates ultimately settle out. But it's the tendency for rates to be
higher that I think most investors are missing. As the regime that we were in pre pandemic is gone, it's different, and I think the rate regime is different as a consequence, and I don't think investors have accepted that reality or accepted the reality that the FED also can't easily and readily cut interest rates like they did in the past.
So, Greg, what I hear then is just another way of saying, don't worry about the reinvestment risk of sitting at the front end. Is that right?
Yeah?
To a degree, I mean, I think cash rates are really quite attractive here. I think that's inducing investors to take risk off the table, not lean into it. On the credit side of the aisle, there's tremendous opportunity across the global credit markets. A lot of that opportunity, though, is in safe type of allocation. So whether it's end type of credit, whether it's structure products, these are safe bets where you earn a.
Tremendous amount of carry.
You don't have to dip down into triple c's take a lot of duration or credit risk, and so take what the markets are giving you, and what the market is giving you is really quite quite attractive here.
So we're extremely.
Bullish on the US economy kind of on a long term basis. We're very bullish on fixed income as well. But you don't have to take a lot of risk in order to be successful. And I think that's the important message that I want to leave.
Message receaved a clinic, Greg, Thank you, sir, Greg paid us they have paygim fixed income.
Carcadonna has been brilliant on this point. Chief you as economist at BNP Pariba who has been talking about how he will expect inflation to keep coming down, which it has this year, and that there can be some relief from the FED to move away. Carl joins us. Now I'm so pleased to say a good front of the show, Carl. What's your take on the resilience? Just starting with the housing market that we continue to see.
There well as we look at this morning's numbers, I think when housing starts tell you one story and housing permits tell you a slightly different story, permits are the ones you're supposed to trust, because housing starts can be very volatile due to weather and other types of factors that custom choppiness. On a month to month basis, housing data have been in a pretty sour environment for the
last several quarters. The pace of decline is slowing, but with affordability as low as it is and mortgage rates hitting new highs on a daily basis almost I think these are some real constraints going forward. Of course, the inventory shortages that you highlighted are a big factor supporting activity,
especially encouraging new construction. But even yesterday in the home builder sentiment survey that buyer traffic prospective buyer traffic is extremely low and home builder sentiment declining for the first time this year.
So straplight that into retail sales, are you saying that you're seeing similar signs that it cannot continue to have the same kind of robust gains and consumer spending that we've seen.
Well, Lisa, I see some significant headwinds emerging for retail sales and consumption more broadly in the back half of this year. Now, as we dissected yesterday's retail sales data for July, and maybe Amazon Prime Day helped to support the numbers and whatnot, but as we went into the details, it looked like discretionary spending was particularly strong. So the sporting goods, hobby, leisure, restaurants and bars, all the things you would spend on if you have extra cash in
your pocket. Those categories were actually the strongest categories in the report. So things are on a solid footing in the month of July at least, But as we go into the back half of the year, we know that labor activity is slow, We know that income generation from
labor activity is decelerating as well. We have student loan payments resuming in October, so there's questions whether people will immediately jump back into paying those loans or not, but with an annualized price tag of about one hundred billion dollars, it could have a very significant consequence, even if it isn't fully felt in the initial months. You have a potential government shutdown coming in the back half of the year.
And also all those excess savings generated during the pandemic have been getting spent at a pretty healthy clip, whereas we think the kind of excess savings will be fully exhausted by the end of the year, And as we look by income quintile, we can see really the lowest
three quintiles that's a significant share of the population. The lowest three quintiles have basically exhausted those savings already, which should mean more price sensitivity among consumers, which helps on the inflation side, but also a slower pace of conser ssumption as well. Not there as of July, but that's something we're watching for in the back half.
People have been saying this for a while, and then you see house after house push out their forecast for recession and say, well, maybe it's not happening as soon as we thought. Can you give us a sense of what gives someone conviction that it will eventually happen, even though month after month everyone had expected some of these
consumers to run out of cash by midyear. Now at the end of the year, maybe it's early next year, when does it sort of start to shift to okay, maybe this is sustainable.
Well, I think that, you know, as we see new data coming in, there has been more resilience in the labor market than a lot of folks anticipated earlier this year, you know, jobless claims. We've had a few false starts where they've started to back up and it looked like maybe there was some deterioration in the labor market and then kind of the numbers came right back down and whatnot. So, you know, those kind of like canary in the coal mine moments proved to be a false false flag in
the past. But if we look at the broader trend, we do see that it is slowing. So as nominal GDP growth decelerates, as payroll gains decelerate, this does change a lot of dynamics in the economy, including corporate profit trends, which as corporate profits decelerate, that has an implication for
both capital spending plans and also hiring plans. You still have a tightening of financial conditions or of lending conditions from the banking sector that we can see showing up in the FED surveys, banking surveys, bank earnings, etc.
Etc.
So there are some problems that are becoming pretty intense headwinds in an economy that's slowing already, but getting the timing right has been problematic for forecasters. More broadly, I don't think we're at the point where you're supposed to throw the recession call away and it's kind of immaculate
disinflation and the soft landing for the economy. I'm still skeptical that we'll really be able to pull that off because monetary policy, as we know, is a very blunt instrument, and so kind of finessing the landing to have no contraction is something quite unprecedented, and so I would be surprised, given that the speed with which to Fed Titan policy, if we can nail the landing, given the uncertainty over lags and the net impact.
So do you think, Carl, just to sort of underscore what you're saying, do you think that right now bond markets have it wrong with a four point two percent yield on a ten yure. Do you think that people are getting over their skis in terms of how high rates can be and how long the economy can be strong.
Well, Ultimately, those longer dated yields are going to be a function of real growth in the economy and inflation trends. So if you think that there's a kind of a persistently higher inflation trend over the longer run, then you can make a case for four percent or higher on yields. We do think that we will see some pretty impressive
cooling of inflation pressures over the next several quarters. We think inflation will be back to target by the end of next year, and I think that maybe part of that higher inflation for longer CAMP may have to revise some of those estimates as we see the economy decelerate, the labor softening, and a lot of these inflation categories moving in a favorable direction. The rent story alone is a big factor for the inflation profile that's coming down. That's a very big component of the CPI or the
inflation basket that's decelerating. You have goods prices showing further signs of moderation. So the real question will be the labor market dynamics, and if we do get some softening of labor conditions and wage pressures coming down, then I think that might alleviate some of those inflation concerns, which then could factor into where longer term yields are headed
as well. So I don't know that they're getting the story totally wrong, but maybe assessing it as being a little bit too hot at the moment.
Just real quick, Carl, what's the one question that you want answered by J Powell next week at Jackson Hall.
I'm very curious, given the theme is structural changes in the global economic outlook, you know, to watch the degree to which this might be setting the stage for changing inflation targets or things of that nature. Now, this is the conference or the symposium is put on by the Kansas City FED, which is notoriously hawkish, So this may be a way of kind of chopping down the straw
men before they can even get any firm anchoring. So rather than saying there are structural changes and we should change the inflation target, they can say, well, there are structural changes, but these are the reasons why we don't think we should be changing longer term estimates for growth, inflation or inflation targeting.
Kura Kadano VMP Paiva, thank you so much for being with us.
Benasausie joined us now see and chief research officer at houseI Advice Recruit. Diana, great to have you with us on the program. Target I guess being a low bar because the stock is running really hard. Can you tell me what's going on there? How low was that bar and how much clarity have you got on what's going on over there.
We'll have more clarity after they do the earnings call at eight o'clock. But I think the real change is the fact that the inventory levels continue to remain very clean. When you take a look at the gross margin, it was better than expected. Shrink continues to be an issue out there, but it's all about essentials, which is frankly
much stronger than what you have with DISCRETIONATY. At Target, it's a world of difference because you had TJX support better than expected numbers talking about the strength and apparel and accessories. So if you have essentials, that's what's selling, but off prices where the action is for.
Apparel, Danna, before we get into TJX and exactly what the retail trends are. I'd love your thoughts and what we're hearing more of, which is the social pushback and the consequence on sales. If you look at Target's earnings, they said that last quarter's profits took a hit as a result of the controversy around Pride Month collections of items that they were selling. Dana. We also heard this from Anheuser Busch. How much is this becoming a theme?
How much is this a real potential threat for retailers that hadn't dealt.
With this kind of thing as much before.
It is a threat, and we've seen it happen to multiple different categories of companies selling consumer goods. Certainly, I think the care and the concern about how you navigate this landscape is something that is new for all the retailers and I think is only going to continue to become more of a topic going forward. And I think you can see these consumer companies even more mindful and planning about what stance they take on particular issues going forward.
When you talk about the off price retailers really benefiting at a time where people are being more discretionary, is that a negative sign for the luxury players or is it just there's plenty of money to go around.
I think overall the luxury players are in a world of their own. They have a high end consumer who has less succeptance to really being careful about their spend. But there's different magnitudes of certainly luxury and aspirational goods depending upon the price point. The comparisons year over year are very challenging in luxury and while many of them, even the European luxury goods companies, are lower year over year, when you compare it to twenty nineteen, they continue to
be up, could be fifty percent or more. But I think every level of consumer spend overall, we've seen a moderation and where we're seeing the allocation. It seems like one of the only places in discretionary if it's any of the events like Taylor, Swift or Barbie, that people are buying new costumes or new items to wear to those events.
Dana, just to touch on luxury a little bit more. Different regions are performing better than others in America, it's been disappointing. I'm thinking of Richemont and others too. Data recently China have allowed group tours to I think the UK and the United States. Some people believe that might make a difference. I want your opinion on that, based on experience over the last year. Does that move the dial?
I think it's going to help. I think it's going to help. I think it's going to help show an increase. I think it's going to help to drive demand. I think you need more than just the tourist groups to truly move the needle, but it should help stem the rate of decline that we've seen from some of those luxury players in the Americas.
The theme I've tried to work on over the last year, and I have to say I haven't had much clarity on it, Dana, but maybe you can help me. A year two years ago, we would see a lot of people embracing buy now, pay later for entry level luxury goods. What we've learned in the last month or so is that entry level luxury at certain firms has been hit. Are the two things in any way, shape or form tied. Do those dots join up to you, Dana? Have we seen that buy now, pay later bubble burst for luxury?
I think that it has burst, certainly a bit. Luxury. I think when you think about the headwinds of rising interest rates. You have student loans that are coming up in October. The average household has six two hundred dollars dollars of expenses and you're going to get an increase of three to eight percent on of spend coming from student loans. On top of that, there's less to go round, and so that's why there's the focus on essentials and a reduced focus on some of the aspirational items.
Dana, just to build on what John was asking about, are you surprised that we haven't seen more of a hit to luxury retailers on the one two punch of certain entry level buyers stepping away and some issues with China, whether it's restrictions or whether it's the idea of just the contraction that we're seeing in certain aspects of the economy, why that hasn't had more of an effect.
I think some of the aspirational players that are out there, they've added a lot of newness and product innovation. There's extreme demand for newness and innovation, and it's really led to be able to have continued strength. But it's not a world of equals. It's definitely a world where essentially what's the price you're charging, what there's some promotions on some of these items that people can get, And what are you seeing others wearing. What are you going to
give up in order to buy that aspirational item? And I think it's definitely haves and have nots in terms of being choiceful in what spend is on.
So what happens to all of the middle players, the middle tier that don't fall into bargain picking or luxury Well.
Look what we've seen it be very challenging out there. We've seen it for apparel retailers like the Gaps of the world. Who is encouraging to hear American Eagle the other week talk about the pickup in July. We've seen retailers overall lower their inventory levels. But I think you're going to see these inventory levels continue to come clean because the lower freight costs being helped to the margins.
The leaner inventory levels, there's more margin clarity. I think the cleanliness on inventory will be the key to managing through this is you have to keep your balance sheet.
Dana.
I have no idea how you listen to the call and conduct an interview at the same time, but you can it's amazing, Danna. Thank you, Dana Tausi Tasi Advisory Group. We appreciate it.
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 on Bloomberg dot com, the iHeartRadio app tune In, and.
The Bloomberg Business app.
You can watch us live on Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Lisa Abramowitz, and this is Bloomberg