Surveillance: Grim Outlook for Sterling with Rochester

What are you talan clients at the moment? Well, right now, the rate cut is pretty much baked into the market. But the big question is what are we going to see in the aftermath of the July rate cut. Will the FED position for a near term second round cut or will they take more of a neutral stand saying we'll continue to watch the data as it evolves without

any sort of specific tea up for a September rate reduction. So, lindsay, are you in the camp that says you know this is this FED is prepared to cut maybe four times by mid next year. Get us a full und basis points Well, right now, our forecast is for a basis point cut later this week, an additional in September, and then we could actually see the FED take a pause depending on whether or not that initial policy reduction of

fifty basis points cumulative does stabilize the economy. Of course, there's other variables going into that, international variables as such as slower global growth if we see their stabilization there, if we see progress in terms of trade talks. So there are a number of uncertainties still weighing on the outlook. But if in fact we do see domestic growth stabilized by fifty basis points and international certainties, excuse me, uncertainties abate, and then the FED could sit on the sideline for

some time. Lindsay, what is the dividing line between an insurance right cup and a right counting cycle. It's a very thin line. I think it really comes down to a pause and a surance style rate cut would be somewhere in the ballpark of one to two rate cuts, and then sitting on the sideline for a number of meetings.

So essentially pleased with the initial policy adjustment to stabilize the economy, entering into an outright easing cyclele at least from historical standpoint, would be a number of rate cuts in a rapid time frame. Do you think the Chapman poun will be happy that he won't have to have a summary of economic projections with him tomorrow and he won't have the Dolt plot to be thrown at him

in the news conference. Well, there won't be an official forecast, but I do suspect that he will be asked about any sort of change in the forecast, Which is interesting because if you look at the June Summary of Economic Projections or the step the FETE is still very optimistic

in terms of growth and inflation. And so again this supports the notion that the FETE is not concerned about the economy falling off a cliff, but they're simply offering that preventative policy measure to help stabilize the economy against potential headwinds. So lends some folks that come in here talking about the likelihood of a recession in the U. S economy, UH sometime mid to late in that camp, I do think the risk of recession is around fifty,

so rapidly rising in my opinion. Now you can certainly point a second quarter GDP that was above expectations, but noticeably reduced from the pace we saw at the start of the year, and if you look at the composition of growth, it was very isolated. Predominantly the consumer helped stabilize the economy in the second quarter going into the second half. However, if we don't see a pickup in housing, business investment, manufacturing, it's going to be very difficult to

even maintain this reduced two percent growth level. And if we continue to see this slow slide or the slow deterioration of growth, we could easily easily be in recessionary territory. By lindsay, do you think the birth for the slowdown next year comes from abroad or within the United States? What do you think this is coming from. I think both. I think it's very difficult to pinpoint point the slowdown as a result of international headwinds which are acting as

contagion to the domestic economy and domestic weakness. I think we are seeing both variables come into play here. Many people think the easing cycle that has commenced worldwide will offset some of these difficulties. I think a question that Chairman Pan will face again tomorrow, perhaps from our colleague Michael McKee, who has asked this question before, why will

an interest rate cut help? Do we have an answer, a really good answer to that as to why a rate cut from the Federal Reserve actually helps given the conditions we have at the moment. Well, that's one of the biggest questions, because right now you're talking about traditionally providing easier money policy or additional accommodation to the credit markets. Rates are already historically very low. So on the one hand,

the FETE is saying the economy is in a good place. Well, if the economy is in such a good place, why do we need even more accommodative policy than we already have? And to your point, will the Fed be able to stabilize the economy. They have very little wiggle room to vide additional stimulus if you think back to oh seven, If you think back to oh one, the Fed cut

rates around four hundred, five hundred basis points. This time around, we only have to fifty And in fact, looking at the partial inversion of the yield curve, if we give back fifty basis points just to write the curve, that leaves the Fed with only two hundred basis points to

provide organic stimulus. So if in fact, the economy does begin to significantly lose momentum towards those recessionary conditions or non accelerating period of expansion, the Fed is going to have a very difficult time relying on rate reductions alone to bully the economy back into positive territory. So, Lindsay, you mentioned that the obviously the consumer has been very strong supporting this, uh the late stages of this economic cycle.

What do you expect to see in the jobs report on Friday, Well, first off, I think the consumer is stronger than they were in the first quarter, but I wouldn't say they're outright strong. There's still a lot of uneven activity that we've been seeing in the consumer sector. But as it translates into the the upcoming employment report, we saw very strong June, we saw a very week May. I think July it comes right down and splits the

difference around a hundred and fifty thousand. So certainly we're still seeing Americans put back to work on a month and month basis, but at a noticeably reduced level, certainly compared to the more robust levels we saw in years pass. Lindsay, no real signs of stress. Looking at initial jobless claims. Though some people have come on this program and pointed out what is happening with the ADP report, the smallest sized companies actually shedding jobs. How are you framing that

for clients at the moment? What are you telling them? Well, when we talk to businesses big and small, many are complaining about the already heightened level of labor costs and the expectation that labor costs are going to continue to rise. So in fact, when we look at the breakdown of business investment, businesses remain very hesitant to invest in further

new employees as we've seen very tepid hiring. As we just discussed, the one area that where businesses are willing to invest is technology, So in fact, they're willing to eat that upfront cost, but also potent to replace that rapidly rising labor cost. So on the one hand, yes, we could be driving higher productivity and keeping costs of production lower, but that will in fact replace many of

these payroll numbers that we're expecting to see. So lindsay, are you surprised that given that we are at or near full employment? And I'm not sure how we want to define that, but we haven't seen more wage inflation. I'm not surprised because when we're looking at the civilian calculation of three point seven percent, that sounds pretty impressive. Certainly, that's a vast improvement from ten percent in the aftermath of the Great Recession. But three point seven percent doesn't

tell the whole story. It doesn't include the millions of Americans that are sitting on the sideline and have been sitting on the sideline for years, not actively participating in the labor force. When we add them back in, that unemployment rate doubles, which more closely coincides with the lack of wage pressure that we have seen on the aggregate.

To catch up with you ahead of a really important fedmates and coming up tomorrow, Lindsay p X of that STATEFLE chief economist Jordan Rochester, otherwise known as Mr Brooke, said he joins us now the moreg ten f A strategist. Jordan, Good morning to here, Good morning, John Hayden. I'm very well, Just tell me what you're telling clients at the moment about this relentless move lower in sterling. It really has been relentless, and I guess for someone who follows the

ins and outs of the Boris Johnson leadership campaign. I mean, none of the actual politics so far has been surprising. We've seen a Brexit here champion who led the Brexit campaign, who has pushed for a more tougher stance on the EU when it comes to the withdrawal agreement. He has consistently said, get rid of the Irish max stop and we won't negotiate until the EU admits to that. And now he's Prime Minister and guess what he's saying the exact thing. But I guess the market was just a

bit asleep at the wheel. Um. I guess folks were looking for him to be less of a campaigner and more of a Prime minister when he came in, and to maybe soften his tone whatever it is that draw things. It was perhaps the headline from US now Michael Gove, who is essentially the guy who was in charge of the no deal preparations, and he has said he said on the weekend the working assumption of the government is

a no deal Brexit. Now he would say that he his his role is to plan for a no deal in the event of that, and that's what kind of change things for the market. Where we suddenly stopped treating it like a tail risk and more of a base case. And the pound it's fallen the lot we're talking two

to three over the past month. But if you told me with a hundred certainty, Jordan's there's gonna be a hard brexit at the end of October, whereas the pound trade you're talking one fifteen to one eighteen against the dollar, talking cents to against the euro. So Jordan, what could turn around this doomsday scenario that we're seeing just here in the Sterling. It's the question I asked myself with on those calls of clients today and yesterday. There's a

few things that could turn things around. The problem is it's very unpredictable because politics is a slippery animal to deal with um and also I struggle to find a date in the diary until we get to September before those positives could happen. So what are they? So the main thing that keeps everybody, allows everyone to sleep at night, I guess is Parliament does have a majority against a

no deal brexit. The problem I have is Parliament can't do much right now because they're on their summer holidays in recess and they do not come back until the third of September, and when they do come back, it's more likely we're going to be dealing with negatives rather than positives. So Parliament that could perhaps stop no all, but it's hard in the short term to provide a positive positive go on just quickly the EU offer us something.

So if the EU gives US and Olive Branch to work with, maybe talking about reopening the mandate for Michelle Barnier and discussing the Irish border, that could be a

headline that moves Sterling higher. Jordan great to catch up with you, Jordan Rochester and Mora GTNIC strategists, otherwise known in the City of London as Mr Brexit trade talks they begin or resume, however you want to frame it over In Shankai today, between the United States and China, the President out on Twitter today saying that the Chinese have not restarted buying agricultural commodities in the quantities that

they were promising the United States. The Huawei chairman out today saying that the supply of critical components from the United States has not resumed either, despite the President's proclamation in June that the company would be able to buy some American technology once again. So what does it mean for trade talks and what are the chances of a breakthrough this week? Jennifer Hillman joining US now CFR Senior

Fellow for Trade and International Political Economy. So, Jennifer, help us understand just how hard it will be to have a breakthrough this week. I think it's going to be extremely hard to see how you get a deal this week. Partly that's because there have been a lot of things added into these discussions that weren't there before. As you mentioned, the Huawei kind of tech war um is making it

much harder to get a deal. And added to all of that is China blaming the United States for inflaming the tensions and riling up the protesters in Hong Kong. So the atmosphere for getting a deal right now is really tough. So, Jennifer, you're a former commissioner at the United States International Trade Commission. You've got some experience with

this type of thing. Is it your sense that the Trump administration's policy of pursuing a unilateral tariff based appro two negotiations is the way to go with the Chinese at this point? No, I don't think it is um and that's because what we really need, I mean, to make it a good deal with China, you need to

deal with a lot of structural issues. The major problem that we really have is China's use of subsidies and the huge number of state owned enterprises where the and the party and the state are controlling it are directing the resources. Those are very hard structural issues to get at. China won't change those just because of pressure from the United States. If we're going to get a serious structural deal, we're going to need our allies to be there with us.

And the trouble for us is that our allies share a lot of our concerns and a lot of our worries about China, but do not share the idea that we should go at all of this unilaterally or use illegal tariffs to do it. So given that backdrop, what is a realistic outcome for trade negotiations between the US and China? Is it this can be some type of headline deal or perhaps even nothing at all. Well, I

think there there is a realistic prospect. China has already agreed to quite a lot of things in the course of these negotiations, and there is already a lot of text agreements worked out. So I do think you could see something happening where China would agree to get rid of their current limits on how much foreign investment can go into certain sectors. Right now, many sectors you can only have forty nine percent foreign ownership, which means, again

China remains in control. Those limits can be clearly agreed to. China will agree, I think, to increase the level of its intellectual property protection. China, I think, will agree to restraints on the forced technology transfers. So there is a lot that is already on the table and is achievable. The problem is going to be the rest of it, the hard things, the structural things about how much Communist party control there is, the subsidies, et cetera. I do

not see how you're going to get an agreement on that. Uh. The other of thing where you may see is again commitments by China to buy more American stuff, whether that's agricultural products or whether that's other manufactured goods. I can see that agreement, and the question will always come down to is this an enforceable agreement? Jennifer's we get closer to does that change things? Just in the President is currently already saying, um, maybe China would be better off

waiting until after the election to get an agreement. Uh. He's he's obviously arguing that UM, if a Democrat were to be elected, that China could get an easy um and quick deal that would be less tough. I don't agree with that, but it's clear that the President is already seeing this playing into the presidential politics. But it

cuts both ways. Already we are seeing that the US tariffs are first of all, not bringing jobs back to the United States, and that was one of the clear promises that the President made that this whole trade war with China was going to be bringing jobs back to the U S. That's not where the jobs are going. They're going to Vietnam, they're going to Mexico, they're going to Cambodia, they're going to Thailand. But they're not coming

back to the United States. And the second thing that you're clearly seeing is that the trade uncertainty that all of this trade war with China is doing is dragging down the US economy, and you're seeing that very clearly in the lower growth um in the second quarter of nineteen and in the lack of private investment in the United States is very much key to the fact that everybody doesn't know where this whole trade war is headed.

The longer it goes, the more it continues, I think, the more of a drag this trade war is going to be on the US economy. So Jennifer, just give us a sense from your experience what you think China really wants here. What do you think would be an acceptable deal for China, knowing that some hard concessions are gonna have to be made on both sides. What China needs to see a deal that is a win win

for sides. In other words, I don't think you can see China making major concessions that are just perceived as a unilateral concession to the United States because of this.

Certainly there are many of the reformers in China that understand the China needs to reform, that the increase in the amount of state owned enterprises that are not doing well financially, that the increased demand in China has so China needs to see a deal that works in China's interest as well as well, and they need to see that this agreement is one that is pushing China to do some things that would be better for the Chinese economy.

It's not clear yet where that deal lies, where China can say that it's also done some things that either it was going to do anyway or that are clearly in China's interest, and that's I think where a lot of the focus of the talks is going to have to be going forward. And Jennifer, how much clarity at the moment do you have on how much pain the Chinese economy and the Chinese government is going through at the moment. It's difficult sometimes from the outside looking in,

some some of the data points look weaker. But what's your take on that? Well, again, part of it is, yes, China's growth rate has come down, but you have to remember it's come down from very high levels. I mean, the Chinese economy has been growing eight nine So the fact that it's come down to a growth rate in the order of six percent, yes, is a significant slowing of the growth rate in the Chinese economy, but it

is still growing at a very substantial rate. And again we have to remember that the Chinese economy, when you think of it from a g d P on a purchasing power parity basis, is larger than our economy twenty three trillion dollar economy UM on a purchasing power basis, again growing at even a six percent rate a year, is still you know, again an extraordinarily large and dynamic

economy in China. The reason our standard fruits because many people listening to this program mark participants investors are like economists trying to work out whether China is gradually going to move into full stimulus mode. We've seen them reluctant so far or over the last year has been very gradual and very incremental. How do you see that panic gout in the next year or so. It's harder to

read it now. When you add in, if you will, the tech war on top of the trade war UM when it was just focused on goods and services, I think there was a there was a clear strategy, I think for China. But when you add in the sanctions on Huawei and you know the previous ones on Zte and and the tech war issues, I think it makes it much harder to see exactly where this is going

to play out. Uh, If you listen to what is being said in China, I think China is prepared to lose if you will, or to give up a fair amount in the light manufacturing sector, in other words, in a number of the products where the tariffs are. Right now, you are starting to see companies move out of China and into Vietnam and other places in Asia and into Mexico, and I think China concedes that that may have to go.

Where China now wants to win is on the tech war UM, and they want to create an in hire, you know, information and communication system that is geared around their technology, their wahwei sort of strategy UM, and to pull as many countries into their network and their communications technology, their artificial intelligence, et cetera. So I think China is putting a lot of it's it's you know, ammunition if you will into winning the tech war uh, if you will, UM.

And that is a different set of players and a different set of investments that China would need to make. Jennifer great a cat show with you to get your insight and a little bit more clarity on trade talks as they begin once more over in Shanghai today between the Chinese and the United States. Jennifer Hillman that CF A Senior Fellow and Trade and International Political economy over at CFR, the former commissioner at the United States International

Trade Commission, I'm looking at beyond Meat. In the pre market, trading stocks down about fifteen, about eight dollars a share, but remember the I p O was at twenty dollars a share, so still well in the money. The company reported earnings last night. They also announced that they are going to be selling some stock, mostly secondary shares. So let's get the latest. We welcome our good friend, Jennifer Bartashes. She's a senior analyst for Bloomberg Intelligence covering all things

food retails. She joins us on the phone from Princeton, New Jersey. Jen, thanks so much for joining us. Let's start first with the earnings. Looks like they had some pretty good numbers and guidance. Yeah, good morning, Paul. Um. Yes, Actually, the earnings report itself there was all good news UM. The revenue was higher than consensus expected. They actually raised their guidance and forecast for the rest of the year

UM pretty substantially UM. And in addition, with regards to adjusted EVADA, they also raised their guidance UM and that they expected to turn positive this year as opposed to just breaking even. So all things considered, it was really

a very very solid quarter for the company. But it was really the announcement about the additional share issuance that has been pulling the stock down, right, So this is a surprise that share issuance for certainly not the least reason that they're still subject to the lock up here, So how is this all taking place? How are they

getting approval to do this? Yeah? So so originally there was a six month lock up period from when the stock I pod in May, but the underwriters UM have made an exception UM and that's really all there is to it, and that they're allowing some of these early investors, which include obvious ventures Kleiner Perkins and then even uh the CEO Ethan Brown and the CFO Mark Nelson to

UM to sell some of their shares UM. And I think the bigger part of this is that it's really the bulk of this additional issuance is these insiders and only a very small amount and fifty shares is coming from the company will generate revenue that can be plugged back into their company for growth purposes. Yeah. I've been following stocks for a long time and I really can't recall too many instances, if any were you had an early you know, the waiver of the early lock up.

I'm sure sure it happens, a waiver of the early lock up and then having you know, so much of that inside or selling. What was their pushback on the conference call with Analyston investors. Yeah, it's actually very interesting because it is very rare UM and and basically the company shot down any opportunity for investors to ask about it because they said they would not take any calls or field any questions regarding the the share issue ince

citing regulatory um concerns UM. So there's really not any commentary from the company themselves about why they decided to do this as uns at this time. Well, I guess the price action today will be uh will show how investors feel about that. Going back to the to the operations here, I mean, what is really are you getting mentioned that they had better than expected numbers, they raised their guidance. What's driving the growth for this company? What

do you expect to be the key growth drivers? Well, really, for beyond me, part of the reason they can continue to keep growing their raising their guidance is that they keep signing on new partnerships, especially in the restaurant space. So the guidance that they that they issued yesterday doesn't even include newest partnerships that they've announced, such as with

Dunkin Donuts UM. And so you know, it's it's sort of an ever moving target as they as they bring these partners on and these are these are companies that will help raise the exposure and the visibility of the beyond meat products with a greater consumer audience. UM. It leads to it leads to trial, it leads to additional sales UM, and it just kind of keeps that cycle

burning forward. If I'm an investor, do I care, um whether they grow their sales through you know, selling beyond meat in grocery stores or in restaurants as a matter to me, Well, in the short term, probably not, But in the long term, I think it does become a consideration. Generally speaking, sales to restaurants are lower margin sales than

those two retail outlets. So that is one thing to consider because right now the revenue is almost evenly split between the between restaurants and between retail for beyond meat UM. In addition, going further UM, right now we're in an economic cycle where people are eating out and they are

frequenting restaurants and they are spending um. But should that pull back, you really need to have a very solid retail base where people who are preparing food at home are ready to buy that product and bring it to their house and prepare it themselves. And so a long term um A focus that you know is excuse a little bit more heavily to retail to to to create the sustainability of consumer reliance on the product may be

a very good strategy. So one of the things that I hear a lot from Annalson investors when you think about this story is competition. It seems like, you know, beyond me to such a small company. Yes, yes, it is growing very quickly and they have a great product in the marketplace, but it just seems like, you know, some of the big food companies at any time could just kind of flood the market with product as well, and they of course with big marketing budgets and so on.

What is management saying about competition, Well, right now, management is saying that, you know, although they view competition and that they welcome competition, they don't seem overly concerned about competition UM, and in part in honesty, they kind of have to say that because they are, you know, enjoying a great growth period with their company. UM. But when you look at companies like Tyson is a great example.

Tyson has started rolling out their own product this summer UM and they've got products that are completely plant based, and they also have some of that are half and half, so half beef and half planned UM. But Tyson has a huge relationship, for example, with Walmart UM. They're both Arkansas based companies. UM. Walmart is a huge customer of Tyson UM. And so when it comes to distribution and

getting products on the shelves, you can't can't. You can't count out these really large packet food companies because of the scale that they have and the networks that they have with their supply chain to be able to get products to consumers very quickly. Interesting, just amazing. So with the story again, just the stock is just done extraordinary well. Jen Bartashes, thanks so much for joining us. Jen covers all things retail on the food side for Bloomberg Intelligence,

including beyond meat, is it food? Is it fake food? Who knows? But it's certainly a big new force in the our big A trend in the food business. Thanks for listening to the Bloomberg Surveillance Podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.