This is the Bloomberg Surveillance Podcast.
I'm Lisa Abramoids 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.
I was distracted. The average heighte of a cruise passenger is forty seven years old. Hi, fool, didn't know that?
Well, there you go.
Didn't know that?
Would you like to Nope?
At least as some badges now investment strategists that Jpre Morgan glob wal have that listened to me about cruises. The stocks are doing great. At least, it's good to see.
You, great to see you.
Vibe shift, Let's talk about the vibe shift. We're not talking about recessions. What are we talking about.
Look, we can sede at this point that we came into this year probably too pessimistic on the macro front. What we're seeing is this resurgence, or rather perseverance of the resilience in the US economic backdrop, and I think that's been driven by a handful of different dynamics, But it seems like a lot of people are kind of coming around, facing the music and trying to figure out where we go from here.
Equity market rallies usually do that. People start to jump on board and now they're thinking about where else they need to be, what's missed out, what's lagged, and they're shifting towards the stike of the course. Banks had a great month in July. Do you see reason for that to continue?
We do, actually, so I think it's really important to think about the anatomy of the year today equity market rally. Everyone at this point knows that it has been predominantly driven by the megacap complex that you know, kind of has been flying on the wings of artificial intelligence hopes. But we do think that this rally can start to
broaden out. And that's a big reason why we've been encouraging investors to focus on the other four hundred and ninety three names in the S and P five hundred, which taken together are actually still trading at evaluation below their ten year average.
What money are they going to use to buy these stocks?
In other words, do you start to recommend that people take money out of money markets and put them into, so you know, the other sectors of the equity markets, or are you saying to people that you have to have a balance.
I mean, how does this.
Sort of come to for if you don't want people to necessarily cash out of big tech?
Look, cash is a great place to start. We think we know that a lot of our clients are still heavily overweight excess cash based on the anonymioused client data that we look through for our mid year outlook exercise. So even in light of this shift in our macro view that the FED could possibly pull off a soft landing,
we do still think that reinvestment risk is here. Come first quarter of next year, we think the FED could be in a place to start gradually cutting interest rates, and we would much prefer that investors take that excess cash exten duration or start rebuilding that equity portfolio that they want to carry through the next cycle.
Does it bother you that you're looking at earnings yield on the S and P five hundred that are the lowest relative to what you're getting on a ten year treasury Going back to two thousand and one. Does that raise some alarm bells that maybe valuations are at a whack and that bonds look better than some people are making them out.
Look, we continue to love core bonds. It's one of our highest conviction ideas, and it does bother me a little bit, but we certainly take it into account when we think through portfolio construction. I think investors more than ever need to be mindful of goals based or outcome
oriented approach. And if that means then the choosing core fixed income with yields at these current elevated levels is enough to get you to your long term goals, then by all means, but long term ten year plus time horizon, we still see the potential for stocks to act as that engine of capital appreciation in portfolios, so we don't want to sleep on the opportunity.
We started this conversation by talking about resilience, and about four minutes into it you were talking about right cuts. What are the factors behind resilience of the year so far that you think are going to fade sufficiently enough that the Fed's cutting rates in early twenty twenty four. Can you identify the factors first and then just walk us through where you're seeing signs of weakness that you think will continue coming through that eventually are going to lead this fed to cut rates.
Sure.
So in terms of what's been driving the resilience, start first with the consumer. I think excess savings perhaps weren't drawn down as quickly as everyone thought they might have been, but we do see that kind of tapering to an end over the course of this year. You also have to consider the businesses and consumers. Both have been relatively insulated from interest rate pressures given that they locked in
lower levels of financing. And you've got these tailwinds coming from the fiscal spending front related to the you know, more than two trillion dollars worth of infrastructure investment that's kind of you know, earmarked to be doled out over the course of the next ten years. So those are
the reasons for resilience. And you add to that what we've been seeing in the labor market, which is pretty favorable trends when it comes to labor force participation, but to the extent that growth continues to slow and we are still calling for you know, flat to slightly negative growth in the first and second quarters of next year, maybe you do see a modest rise in the unemployment rate, and that I think continues to urge investors to heed some caution and not get two over the skis when
it comes to adding risk.
How much does that really hinge? An oil price is staying where they are, an inflation continuing to steadily come down.
Look, I think oil prices are definitely kind of one of the you know, variables or X factors here. We'll be curious to see if prices do continue to consolidate higher. We're doing the work right now on our oil price outlook, but that could potentially change the outlook for the FED. And we know, just looking at the past year of data, right a year ago, when oil prices had exploded higher, that's when you had consumer confidence hitting all time lows.
And so to the extent that we see that kind of rear its ugly head again, it could potentially weigh on the outlook and you know, bring a resurgence of bearish sentiment.
Bring crude eighty five. At least this was great. Thanks for joining us and thanks for coming in of course, thank you. At least Austin, by that of JP Morgan Global Wealth Management, I could join us now seeing research ouna list at TD count Helene, let's talk about these airlines and the distinction that Lisa draws between the performance of the domestic focused airlines and international what's happening in the two markets at the moment, Helene.
Well, Lisa hit it on ahead. We are seeing very good demand on the North Atlantic especially, and we're seeing less good demand in the US domestic market. And what we have been thinking is that twenty twenty one and twenty twenty two we're all about US domestic because there
really wasn't a lot of places to go internationally. And now that the international markets are open again, people are traveling again, and we think this summer is all about Europe and next summer will be all about Asia, especially because the US passport is not going to get you as far as it gets you now, beginning in twenty twenty four, you're going to need a visa to go to Europe. You're going to need a visa to go to the UK. You can do it online, but it's
going to cost you. And so I think you'll see that shift away from European countries to Asian countries.
We've got a playbook with regards to that heline when we introduce the Esta visa for Europeans and others to come to the United States, do is it really hit travel in that way, given how easy it is to actually complete the thing. I remember many years ago I used to have to do that when I came to New York, when it actually moved the dial on visitors to Europe.
Yeah, I think I think it'll be a combination of that. And I think fares have been really, really high this summer. It's turned a lot of people off if you didn't book really early. And then and I think as Asia reopens, it's kind of you know, we did Europe, Now let's go someplace new. And I think that's the trend you're going to see probably beginning after a Labor Day this year and then going into twenty twenty four and five, and it'll probably be twenty five before we get whatever
normal is going to be. You know, that single digit growth that's probably sustainable. The ten to twenty percent growth we're seeing in the industry and we've seen in the last couple of years is just not sustainable for a whole variety of reasons.
I have to say we've done Europe, now let's do Asia. It makes it seem like we're all just living in this hard mentality of post pandemic reality.
Helene.
I'm looking right now also at visas to go to Europe, and they range from it looks like seven euros to forty euros depending.
On where you're going.
Although I could be getting this somewhat wrong, Helene. How much is this driven by business versus personal travel? How long can individuals and families continue to pay prices that seem pretty sticky and.
Unresponsive to demand pressure it Anyway.
I've been trying to figure that question out too, because the answer to that too, because it seems to me when I go on a plane and I make a right turn, all these families are making the left turn, and I'm trying to figure out, Gee, I've paid a lot of money for my ticket. I booked it two months ago or ten weeks ago, and how come you're going there and I'm not. And I think that there's
going to be pushback. I mean, I do think that people will just say, Okay, we you know, we bought all our stuff during the pandemic, and then we did all our traveling after the pandemic, and now We're just going to get back to kind of a normal lifestyle of working because I think over time, as we get further and further away from the pandemic, companies are going to require people, even in a hybrid environment, to come to the office more off and then they've been.
Going and that won't lend itself to traveling Thursday to Tuesday or Thursday to Monday, and then business travel will shift, right, You'll see that shift and mix.
You're laughing at me, Well, no, I'm not laughing at you.
Just the image that you paint of everybody who's not working going with their families, paying through the nose to do.
Your going to give us a commentary on newborn babies and business class and whether they should be allowed in there or.
To I'm just sitting here wondering, you know, how long can people keep networking and spending all their money. Have you seen any signs of pushback on the pricing, Helene, as of yet or is all of your anticipation of that simply an extrapolation of pure logic.
Yeah, I think it's a combination of both. We have seen pushback on pricing. You've seen domestic prices come down pretty much on a year over year basis from really levels that again we're not sustainable, so you're still above twenty nineteen levels, but we're below twenty twenty two levels, so I think that's a positive. And then you know, when you think about shifting demand, airlines can shift demand by lowering ticket prices and people will respond to that.
And then the last thing I would point out is in terms of visiting friends and relatives. You know, China was closed for years, right, three four years and it opened earlier this year, and you don't see a lot of business travel there, some business travel. You don't see a lot of leisure for sure, but what you do see is a lot of people who couldn't get home for a couple of years going home. So that's the trend. And then six eight months a year later, you start
to see tourists pick up. But for sure, we're seeing pushback on pricing. And every Tuesday I get fair sale offerings from a lot of the airlines. You know, just sign up for the email alerts to monitor discounts, and the discounts are deeper than they were six months ago. So yes, we're seeing some pressure on price.
Helene, I've got ten seconds. So just pick a name favorite airline right now? Which stock is it?
Yeah, we're still on United. Okay, well we're domestic and higher international.
Scott Kirby getting it done over night, Helene, Thank you, Helene Becker of TD Jordan Rochester joins US now G ten FX strategiest for at Namura Jordan. What for to catch up with you, sir, Let's start with the Bank of England later this week. Is it twenty five? Is it fifty?
Is it?
What the ECB and the Federal Reserve delivered over the last week, which is a lot of communication about a ton of nothing?
What is it?
A ton of nothing? Well, in terms of the Bank of Ingland, we think they'll do twenty five. And the problem John for Sterling is that there's about thirty two and a half basis points price for that meeting, and that's going to move Sterling.
Now, it's not too much.
It's not like a fifty to fifty chance of them going for a fifty basis point hike at this meeting priced in. But you saw with the RBA overnight when there's around eight basis points are so priced in for potential hiking they don't deliver, it can see a big move lower in the currency. So it could be the case that on Thursday we have banking and doing twenty five. It's too early for them to declare a victory lap,
that's the thing. So we think there's gonna be another few more hikes to come, maybe seventy five basis points overall from where we are now today this year, and that's the reason why sterling has relatively traded quite well. It's become a carry trade, John, it's one of the highest carry currencies the G ten. But all the charts we follow that tell us where inflation's going say it's going to slow down quite noticeably. So the good sector, John,
really go to slow down this inflation is here. The problem with the UK with services inflation are indicators suggested it should have gone down starting around a few months.
Ago, and it didn't.
But the good news is the last CPI print was possibly the peak of service inflation in the UK. That's why the banking might take note of that and say, actually there's some early signs that policy is working to slow down that sector.
But it's just one data point.
We need a few more CPR reports until that victuy lap can be declared.
On this side of the Atlantic, we've had a similar conversation about whether the Federal Reserve is sufficiently restrictive. When you put everything together that you've just said, Jordan, can you draw that conclusion that the Bank of England is sufficiently restrictive?
I think they are. John.
We're seeing evidence in terms of PMI, input prices, supply side all saying it's restrictive. Demand is slowing down, retail sales. All these sort of indicators are nowhere near astrong as what they were last year. But a lot of the analysis that goes into it sometimes just proves wrong in terms of the hard data. So the pms have been very weak on the manufacturing sector, but the industrial production figures haven't been as weak.
The soft versus hard debate.
So if you're looking at hard data, you're looking at realized inflation, you'd you're.
The Bank of England saying we need to do more.
But if you're in my space, if you're looking at the forward looking indicators, they suggest, yeah, we are pretty close to being sufficiently restrictive.
That's over in England where John was mentioning UK housing prices which dropped the most since two thousand and nine, as you do see these rate increases, and we will
talk about that later. Over in Europe and the European Union, there is a question around whether they are sufficiently restrictive at a time when core inflation has exceeded headline CPI the most going back to twenty twenty one, and at a time when you're starting to hear a little bit more of a dubbish conversation from some of the members.
There can you still get bullish and long.
Euro versus dollar if you do have that kind of shift even among the hucks.
Indeed, we've had a shift already, and that's kind of why euro dollar has really fallen from the one twelve handle to where we are today just below one ten. We've had various moments this year where it felt like euro dollar might break to the upside and to the downside, but the pain has been this range that we've had for most of twenty twenty three. We need a trend, and these false breakouts are just mutton dressed as lamb.
We need to have some sign that either the US disinflation story is strong enough and we'll see that dollar weakness, or that the ECB perhaps doesn't need to cut rates at all next year, or if they do towards the n Q four. If we get that sort of story, then euro dollar can be supported from the rates angle. But the problem at the moment, Lisa, equities are rallying, which is a reason to buy euro and it's the reason why we are long euro. We're looking for one
fourteen by the end of September. But oil prices are picking back up and the rates market in the EGb space have softened. In terms of what's price for the ECB by your end, we think they're done. We think that's possibly the last rate hype by the ECB. Little bit of market price and that's left for year end.
Will be disappointed. It's not too much.
We are pricing less than one rate height now, but that is a drag on the euro. But if equities go to five thousand in the SMP like your previous guests were talking about, then the only way is for dollar weakness in that environment.
In my view, how disruptive could higher oil process be and natural gas for that matter, given some of the recent disruptions and cost sun carriers.
The biggest headache I have right now is oil prices. I would say it upsets the apple cart for sure, because the story is about US disinflation.
Energy.
Before this oil price rally was down forty percent year and new in the US, and if it had stayed at those levels before we had this rally, it would have really dragged down USCPI. But now we've seen retail gasoline prices in the US pick up by five percent towards the end of July, and it could go further. If we break ninety dollars a barrel in oil, I think central bankers will be too cautious and they'll say, actually, we don't need to even discuss about cutting grapes at all.
We need to stay higher for longer or even surprise with another hike this year. And we think both the FED and the ECB are done. But if we have oil go to ninety dollars, let's say it goes to one hundred, that's clearly a mixture of supply concerns, but it probably is due to demand picking backups in a surprising fashion that we'll see a few central banks have to turn hawkish in the second half of this year, which we don't really expect. We think that most center
banks are close to the end of their cycle. But if we get to ninety to one hundred lisa, a lot of things will have to change in the narratives that are out there.
Jordan, I've got thirty seconds. Is it too early for aston Villa predictions for next season?
Well, look, I think we're now a top ten club that's whole ten day after last year. Okay, that's a massive improvement of where we were when we had Gerard.
Jordan, Rochester Namura with a subtle dig as Steven Gerrard Regina Mayor joints as clobal head of Clients and Markets over at pmg Regina, Let's start there and talk about this run and greater catch up with you and working program as always. What's on depending that rally through July and can it continue through August?
Well, demand continues to outpace supply and opiq plus with its strategic cuts and even the Saudi's voluntary one million barrel per day that they've indicated they will extend through September has created buoyancy in the crew markets like Brent above eighty five, WTI once again above above eighty and
that demand is outpacing supply. There are some analysts that are saying, when we're able to go back and analyze the actual demand figures that July, given it was one of the hottest months on record, or the hottest month on record, and we still rely on a lot of fossil fuels to drive cooling, that July of twenty twenty three will be the highest demand for hydrocarbons ever, outpacing August of twenty nineteen.
Wow, Regina, where's that incremental demound coming from? Has it been Europe where we've had this massive heat the United States? Has it come from China? Where's it coming from?
Well, China has just not given us the demand uptick that we keep expecting. I think I've been on your program multiple times and you know it's always Chinese demand will pick up in the next few months. Chinese demand will pick up in the next few months.
The thing that's really.
Created the added demand is industrial activity is picking up in the Western market. So the supply chain challenges, you know, the deep bottlenecking that's occurred, and the travel you all were talking about crews, passengers, there's still tremendous travel consumption, tremendous bullishness in the consuming population. We continue to consume, we continue to travel. Companies continue to produce, and that's
driving record demand. On top of it's a really, really, really hot summer, and it takes a lot to drive the cooling.
That we need, and it also is interrupting some of the processing. There was a piece out this.
Morning talking about how the very hot weather has reduced some of the refining capabilities of certain companies. You also are seeing some of the shipping costs for even natural gas rising substantially over in Europe.
How much is this fueling a call.
From you that oil prices are going to go substantially higher, even natural gas over in Europe.
I'm not as bit bullish that the prices will continue to go higher, Lisa. I do think that supply continues to meet the record demand that we're facing, and we're going to get a peak right summer. Travel is in the US is starting to tail off. I know in Europe it's kicking off for August, but there's an end to that, and so I don't think we'll see the big spikes that we've seen in the past. I think that demand continues to or supply continues to roughly meet demand.
The story in the gasoline price spikes that we've seen in the US, it's just inventory. It's inventory inventory, inventory, and motor gasoline and refined products don't move around the world as well as as crew does, so they are very geographically specific. And in the US, motor gasoline stocks inventory stocks are down to its lowest level since twenty fifteen. I think that is a remarkable statistic.
How do they rebuild that, especially at a time when there is concern about the strategic petroleum reserve of the US and there's a question about rebuilding that, and there is a lack of refineries in the United States.
Yeah, so the refining industry has contracted significantly, but it's also incredibly more efficient than it ever was. Refineries are still running pretty flat out. The statistics I was looking at showed roughly ninety four percent utilization throughout the month of July, which is really about as high as it can get it. Maybe ninety five ninety six, but just a little bit a few basis points above what they're
currently at. But we will see summer driving season come back down, the demand for motor gasoline will rationalize, and the refineries will be able to catch up. We will see a short term spike and gasoline prices, But I do see consumers seem to be less reactive to the price at the pump. Our survey KPMG recently did forty nine percent of consumers say they're moderately or concerned about the higher price of gasoline. That's down from seventy percent
last year at this time. So I think there's less price sensitivity in terms of gasoline consumption as well.
Regina, how do you do friendship between less price sensitivity and price is just not being as high as they were last year?
Fairpoint?
Fair point, John, But I do think because of this consumption boom and that there's inflationary pressure across a lot of activities. We've seen price spikes and different commodities like eggs over time, and you know, the prices for experiences and restaurant activity, travel costs, and we still see consumption moving. So I do think there is perhaps less price sensitivity overall with the consumer. Maybe we're becoming more immune to some of the inflationary impacts that'll only last for a
certain period of time. But I do think we're benefiting from that lack of price sensitivity.
Downtown, the airlines, Jana Thank you. Jina Mah of KPMG.
We have been talking all day about the UK housing market and how much prices have declined. We're talking two thousand and nine levels at a time when the US has been bolliant, amazingly resilient, defin all expectations. Bizarre, however, you want to categorize at joining US now to do a much better job than I could. Jonathan Miller, President and CEO of Miller Samuel, who has an overview of US housing markets and global housing markets at a time
where it has be fuddled pretty much everyone. What's your take on the resilience in a US market that should have been brought down by these higher rates akin to what we've.
Seen in the UK.
Right, It's the difference between variable and fixed rates. Most of the world relies on variable mortgage rates, and in the US people are locked in. Actually, the reason why we don't have a lot of inventory and inventory is the metric to focus on, or lack of listening inventory, and that's because people are wedded to their low rates because rates were probably kept too low for too long.
There is a study that I was looking at.
US homeowners are nearly twice as willing to sell if their mortgage rate is five percent or higher. But just one in five mortgaged homes.
Meet that criteria. In other words, they have such low rates, they're not going to move right.
It's like eighty percent, Yeah, eighty percent are sort of just sitting and waiting. There's uncertainty. Everybody's expecting a recession. We've been forecasting a recession for in six months for two years. You know, people are just sitting. When consumers are uncertain, they sit, they wait, and as a result, and also too people that may want to buy, they have to sell their house to do it, but they
can't find a house, so they're stuck. Inventory is extremely low across most of the markets that we cover.
Could you give us a sense of historical precedent of last time the inventory was so low. Basically, the number of homes on the market that you could potentially.
Buy there hasn't been you know. The inventory now, for example, in Florida is sixty percent below pre pandemic levels. Many housing markets, you're looking at inventory thirty forty fifty percent lower than it was in twenty nineteen before the pandemic, when rates really dropped and demand surged and there was a frenzy. I'm not sure people realize how extensive the obliteration of listing inventory was during the pandemic. With rates being so low.
Well, so here's a question.
Right now, we see home builders going nuts, building as much as they possibly can because there is no inventory and.
People need a place to live.
If rates do come back down, if there is what of new housing supply? Could you see prices go down dramatically when the door is actually open to true price discovery?
I think so. I mean the way to think of inventory coming back into the market. If rates drop substantially, you know, they're sort of in the sixes, you know, high sixes and low sevens. You know, if they're in the fives, maybe we start talking about more supply coming on. But we have unemployment at three and a half percent.
You know, it.
Seems like there's more rate cuts in store just on that item alone, which sort of goes in the opposite direction of rates falling.
We were talking earlier about the UK, and I do want to just wonder if there is any corollary, what would happen in the US if there were variable rates. We saw prices fall at the fastest pace going back to two thousand and nine in the United Kingdom, they do have variable rates.
We talked to at that earlier.
Would that be what we would see in the US if we weren't shielded by a thirty year mortgage rate?
Absolutely, that's you know, the idea here is that the psychologist people are locked in and they're able to enjoy a lower rate, while people new to the market can't. And there's a premium for that. And one of the premiums is to sit and wait. It's a luxury rather that to sit and wait. You don't have to. You know, we have home equity at you know, some of the highest levels in history. There's no stress for people having to sell economies pretty good. People just sit and wait.
And so I think this whole process is going to take time, which as opposed to, you know, a few years rather than a few quarters.
One thing that some people will say is that the housing market is bottomed and you're seeing a recovery. Is that an accurate way of careterizing a market that's essentially stagnating.
So I think when you refer to that, the reference is really to pricing, because pricing has leveled off and is rising in some markets from pandemic highs if you will. But sales activity, you know, is still way off and the rate of descent is slowed. It's somewhat stable. But sales activity is held back because of inventory, and inventory is held back because of high rates, and high rates are held back because of low unemployment. I mean, it's just this whole domino thing.
Talking about the domino effect.
You speak to a lot of mortgage brokers, I'm sure, and people who work in real estate.
Yes, what's the mood like, Well, it's interesting. Over the last year, there's been this sentiment that, hey, you know, rates are going to come down, and I keep asking the question. You know, with unemployment, you know, add or near record lows consistently, how can rates be cut? You know, maybe they'll drift lower. If the FED stabilizes for a while, we can. I think it's reasonable to expect that, but
not a sharp decline. The economy is too strong on the unemployment side, so it really, you know, the FED is going to have to keep using their baseball bat to damage the economy.
Well, if the rate structure, if we stayed around five and a half percent, or even if we go down to five percent, say for a full year. What does that do to inventory? What does that do to the mortgage market?
So, first of all, that would be great to get things going. You know, rates in the mid fives even, I think would pull a lot more people into the market, which would not in a panic sort of flood of inventory, but it would be it would normalize to a certain degree. And we see transactions pick up right now because of the lack of inventory. We're seeing bidding wars start to approach forty to fifty percent of local housing markets, meaning
sales that close above the last asking price. We're seeing some big numbers in certain markets, and that's because of chronic lack of supply. So the demand is still there even with higher rates. Yeah, so New York Metro is a prime example. In Southern California another example where we're seeing bidding wars at nearly half of the close transactions in the quarter last quarter.
Are you seeing any soft patches?
Not really, I mean, you know, soft patch to me would be defining it by price. Pricing is stable in terms of activity, sales that is certainly almost every market is very slow, and it's because everybody's stuck. No supply, no sales.
Is a Sun Belt still as hot as it used to be?
I mean, I shouldn't have said that bad metaphor, but i'm you know, is it still as popular?
I should say as a star, I'd say it's hotter than outside the Sunbelt, but to use that same phrase, but yeah, I mean, but not as robust as it was. But I think in a lot of the Sun Belt markets inventory is even tighter than in say markets like the Northeast, where inventory while it's in many markets twenty percent off a pre pandemic, it's not sixty percent off.
Jonathan Miller, thank you so much.
This is really one of the most fascinating times I could possibly imagine for the housing market of Miller, Samuel. I look forward to reading your next report, which will highlight all of the latest trends. Subscribes the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberok 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 bloomberghm