This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business app on set. Right now is our interview of the day for those
of you who concerned about the persistency of inflation. Andrew Hollenhorst is chief US Economist at Citygroup and has been shockingly prescient about elevated inflation not only in America but for Citygroup worldwide as well. Andrew, I want to go back to yesterday's Free for all on one year, six months, three months, one month annualized John's beautiful job there on PPI. Seriously, the granularity of the data. Are we getting way too
grand n here? Andrew? Are we so desperate that we're just looking at every single tea leaf?
Well, I really think you have to do both here, Tom, and I would say for John, PPI is one of the hardest releases to read. You have a lot of different subcomponents, a lot of different core measures, and we look at all of those things. We look at those things in course CPI also the supercore. We're looking at various measures of underlying inflation one month trends, three month trends, So you have to look at the details, but then you have to look back, step back and look at
where is the factory broadly in the economy. So looking at the details, there's some upside risks we're seeing. If we look at inflation in August, we obviously have gasoline prices that are up. Airs are down twenty percent since March. That's certainly not the experience I've had with airfares, so we think we're going to see those coming up in the official data. That's on the kind of details, the
you know, short term movements month to month. But then you step back and you say, where are we going as an economy. It's an economy that's generating two percent plus growth, it's an economy with a very tight labor market wave growth running around five percent by various different measures. That's not an economy that's going to bring inflation back down to two percent. So yeah, we're getting a couple months of softer inflation readings here, that's certainly going to
look like a soft landing. I don't think that's where we're headed.
We were speaking with Vish Turbotur of Morgan Stanley earlier and he said that the bond market action this week was a head scratcher since you got softer than expected economic data. You did get confirmation at least in the data that we're getting right now of disinflation. Do you agree or do you think that this makes perfect sense that the more the Fed gets complacent, the more concerned people are about longer term inflation.
Yeah.
I think there is a way to make sense of the price action this weekly, so, which is partly that this soft landing idea narrative and the softer inflation data that's come in really well priced into the market. Speaking to investors ahead of the CPI release yesterday, it was hard to find anyone who really thought that this wasn't going to be a very soft print. So I think
that was already in the price. So then what investors are looking at is some of those details, some of those trends in the labor market, the longer term trends in the economy, and exactly like you're saying, Lisa, if the FED is going to be finishing up rate hikes and pretty much everyone thinks either they're done or maybe they're going to do another twenty five basis points in November and be done, then we're looking at where does inflation go from here? And do FED officials just need
to keep policy rates higher for longer? I think that that's a discussion that we're going to increasingly be hearing amongst FED officials, is increasingly going to play out in the market, this idea that maybe just the neutral policy rate where policy makers need to leave FED funds in the longer term, is going to be higher.
How much do oil prices do commodity prices feature into this? I was looking at a Muhammad al Arian column yesterday saying there's an asterisk next to the disinflation that everybody was celebrating yesterday, and it has to do with oil prices heading toward their seventh weekly gain. Looking at food prices which are starting to inflect higher. How much do these sort of affect the larger input prices like the factory gauge ones that we just got.
Yeah, so I think the FED really got helped out with lower inflation, with gasoline prices coming down, energy prices coming down, food prices that stopped rising as quickly, And we were saying at that time FED officials should be a little bit careful in terms of take credit for that down shift in inflation, because FED policy doesn't really control oil prices or food prices, and now they may start experiencing the opposite scenario where you actually get some
of these commodity prices moving higher, most notably energy prices. So that is something that FED officials economists tend to look through to the core measures. But ye know I mentioned airfares before. We're going to higher jet fuel prices.
That's going to boost airfares, and that that August inflation reading, we could get a month on month increase on the headline, something like zero point four, zero point five, zero point six percent month on month, So that could really kind of change the narrative in terms of how the numbers are coming in.
Andrew, just a simple question, are we beyond the pandemic? Are we back to conventional macroeconomic analysis?
So I think we can still use conventional macroeconomic analysis, and I think that's one way that we've been forecasting inflation and thinking about inflation staying higher for longer, the idea that tight labor markets do drive inflation over the medium term. So I think that framework of analysis has actually been a useful one throughout the pandemic and then
this post pandemic period. But the idea that the economy is going to kind of normalize back to where we were, you know, let's say twenty twelve or twenty thirteen, I just really don't understand that analysis. A lot of people would have thought in twenty thirteen things look pretty different than where we were in two thousand and five, so I'm not sure why there's this belief that we would go back there.
So this is the heart of the question. I'm gonna get a little wonky er folks. This is wrapped around John Williams our start and and all the theory mumble jumble that doctor Hollenhurst is really quite good at the school of thought out there, Andrew is that we return to a quiescent our start, and then there's debate. I'm going to wrap it around what Olivia Blanchard has done, where there's a new higher our start set or dare I say, people debt worried looking at an even ever
higher our start Where are you on this? How do you position our start out three and five years right now?
Yeah, I think we have to think about the possibility
at least that our star is migrating higher. And if you take the famous Laubach Williams model, which to your point, Tom is full of complexities and the ideas, you're doing this so called baysy An update, where you look at the account of figure out where our stars, I mean you can very simply, you can say, essentially what that model is doing is saying, if growth comes in higher than we expect, if inflation comes in higher than we expect, then it must be the case that the neutral real
interest rate is higher than we thought it was. Well, where's growth come in stronger than we expect it, where's inflation come in higher than we expected? So that model, over time should start catching up to what we've seen in the data that looks like our star is rising. I think we're going to hear about this at Jackson Hole. I think that that really could be the interesting conversation
that Powell brings up. Now to your point, new York Fed President Williams, the father of the Lavak Williams model. I don't think that he thinks that our star has moved up yet he's made comments to that effect. So Powell, I think, can't kind of completely break away from what Williams is talking about. But let's watch Jackson Hole at the end of this month. I think we're going to hear some discussion about the possibility at least that our star is higher.
How long can the Fed hold rates around these levels five and a quarter to five and a half percent before it causes recession at a time where perhaps growth is still strong but it's coming down.
Yeah, I think there are lags of monetary policy that will vary slowly but surely slow down the economy. We see that in the Senior Loan Officer Opinion Survey, where you see banks that are still tightening lending standards. You think about many people right now have a mortgage at three percent three and a half percent. Mortgage rates for thirty or fixed rate mortgage are seven percent now, So over time people will start slowly but surely resetting into
those higher mortgages. But those effects that slow the economy work with a very long lag. You're not going to be very incentivized to sell your house now and go pick up a new house at a higher mortgage rate. So that will only happen if you have a life event, you change your job, or your family size increases. So that does slow the economy, but it takes a long time, So Lisa, it could be quite a long period of higher for longer.
Andrew Hollanders, thank you so much. You're lighting up the airways. You're written in all sorts of emails here, and Andrew Hollanders.
Emily Rowland joins now cou Chief Investment strategistic John Hancock Investment Management. Emily, don't worry, we'll keep him in line. Let's talk about China. Emily, do we want stimulus out of China right now? If you have a seat at the federers.
F well, I don't know if it's working necessarily. You look at some of this lone growth data this morning and it's simply not showing up. I think the China stimulus narrative is one that the markets have really loved and embraced, and we're getting a bit of a reality check on that as it relates to commodity prices. All of this news of stimulus has certainly pushed them up, pushed inflation expectations higher, and that's become a big problem for the Fed here, who certainly has not yet claimed
victory on inflation. So we're watching that really cool here, but a lot of mixed messages. And by the way, speaking of mixed messages, I understand trying to get to the weekend here. As you've said all morning long, if you watch the macro and you watch the fundamentals, this week, the market action didn't really make a ton of sense.
You know.
Of course, we had the treasury auction that you talked about, pushing yields higher, but at the same time, the economic data were pretty disappointing. You know, you had softer inflation, you had initial claims picking up, you had dubvish comments from the Fed. Meanwhile, the tenure treasureyeld sort of right where we started, and European equities trading on another planet right now.
And Emily, it was in your note you talk about whipsaw and I think it's perfect if there's one big group whipsaw here over the last number weeks, whatever anybody's belief with that said, in the group whipsaw that we're in right now. How do you position out one year or two year in my depleted two to oh one K.
Yeah, it's tough. So the macro signals right now are like a stoplight. They're going from red to green and back to red. And we look at the macro messages right now is more of a yellow. You know, you want to maybe take your foot off the gas a little bit. You want to look both ways, You want to proceed with caution. So we're starting to see this
big shift in sentiment. It's been pulled back a little bit over the last couple of weeks from fear to greed, and you're starting to see more cyclical, higher beta parts of the market outperforming. We would be mindful of taking too much risk in this environment. Again, we still want to be invested. We still like higher quality stocks. We think bonds can do more heavy lifting in a portfolio. But look, the leading economic indicators have been negative for
twelve straight months. The yield curve has been inverted for thirteen straight months. I mean, it's just become exhausting. But we need to stick to our premise here. We need to stick to our work that tells us that our recession is likely to unfold due to the lagged impact of FED tightening. It's becoming difficult to stay patient for sure.
I just want to pick up on what you said about European equity is trading on another planet, what do you mean, And just the fact that they haven't sold off more aggressively in the face of China weakness.
Yeah, I think it's notable to look at the strength particularly versus domestic equities. As of late, Europe has certainly been more tied to China stimulus. You've seen that, You've seen a big momentum trade there. I think is some short covering has resulted in a lot of gains in that market, and you're seeing some major companies in Europe disappointing on the earnings front, some solvency issues there. You know, markets really seem to be very much enamored with Europe.
They're very much enamored with this China story, and it just doesn't match up with the macroeconomic dan look at the City Group Economic Surprise Index. It's surging in the United States right now, and it's about negative one hundred in Europe, and yet those markets are outperforming to US as macro investors. We want to continue to emphasize domestic equities because of the relative economic strength here.
That said, US tech underperformed this year. This week, I should say not this year. This year, they've outperformed tremendously. But how much is that going to be a real challenge to your thesis if it continues.
Yeah, we've definitely seen a pull back there, and of course valuations were stretched and we were expecting to potentially see you know, a bit of a profit taking there. And you know, I still wonder if tech is the biggest issue that market should be focused on. It's hard not to like quality in this type of a market, and of course tech is your poster child there. I think over three five years we've seen the US technology sector has produced of the best earnings globally. Of course,
we want to diversify from some of that. Look at some of the ways the sectors that are starting to perk up a little bit here. Healthcare one of our favorites. It's trading at a meaningful discount to the S and
P five hundred. It's got the quality metrics that we love, great balance sheets, good return on equity, and it's more defensive so I do think that the baton can be passed here in the back hap of the year into next year to some of these more defensive sectors in order to create that balance away from the tech sector.
Emily, final question, and you on the strong doll to train as well, then yeah, we have been.
The way that we look at the dollar is where's the best relative economic growth and which central bankers globally are going to be continuing to tighten the most. And because of the relative strength we talked about here in the US, we think that's the US Federal Reserve. We think the US economy is doing the best. We also think if a recession on folds, which is our base case, there should be a bit.
For US dollars.
I don't know that the dollar goes gangbusters like it did in the first few quarters of twenty twenty two, but I would say I would fade any weaker dollar trade here.
You're got to pay Malkes on another planet. That's the headline from every island of John Hancock. Whether we intended that's the headline or not, it will be heavily. Thank you.
To brief you forward in the next week. Joseph Feldman Joins just senior research analysts. You working with Dana Telsea at the Telsia Advisory Group. They've been in a fire the last forty eight hours. Joe, I want to get the big box, but I really want to frame out the different here at Tarja. I've got a women's boxy zip up denim jacket wild Fable Blue denim for thirty five dollars. That's what you're looking at, your colleague in crime,
Dana Telsey's looking at the MEDUSA ninety five. Do a leap of denim jacket over at for Sachi for one three d and fifty dollars. When all this is done three years out, is there going to be anything left in the middle between Coach Corps, Versace or LVMH and Target. What's the middle end up doing in the coming years.
Yeah, the middle is kind of squeezed right now, and that's where we're seeing that middle has been trading down and then the upper end is kind of staying where they are. It's that aspirational customer has traded down a little, the middle has traded down. So I think that still positions Target and Walmart pretty well. Data. I think likes the deal with Tapestry and Capri in the sense you
can bring these two companies together. There are a house of brands, and I know there are more of those middle aspirational type brands, but you can operate them more efficiently, and maybe the way you allocate resources to the different brands and do the back end can make it more profitable and make them more of a stronger venture to go forward. So I think that we kind of like
that lineup and the strategy there. And you know, honestly, the Capricecide has been kind of languishing for a little bit, and so I think that now if you put it together, you could maybe make a go of it, make it stronger. That all said, the near term, the consumer's still under a lot of pressure. Discretionary sales have been slow, and especially big ticket discretionary sales have been slow. And so that's where we're at heading into this earning season. And why we like Walmart.
Engineer well Walmart yet today outperformance target by massive margin underperformance from Target outperformance from Walmart.
Joe.
There's a word I really don't like around the retail names. It's shrink. Why don't they just call it what it is? Theft and how much are we going to be talking about that next week?
Yeah, I think we're going to hear a lot about Shrink next week. You know. Target has laid it out and told us, you know, they're expecting around five hundred million of incremental strength this year. Walmart's got a big number as well. Now they haven't quantified it, but it is big and Home Depot and Low's and Best Buying, you go down the list, and it's been a big problem for everybody. I mean, theft has really kicked in
higher you know, the shrink side. Yeah, there's always been damages for turns that you can't really sell, things that maybe walk out the store with an employee every once in a while, things like that. But this organized crime that's happening in retail is really a big problem for
this especially for these big box retailers. You know, Dana actually recently was in Beverly Hills and witness at firsthand one of those grabbing gos somebody just running out of the high end store and literally right in front of her, And it's just it's frustrating to see and it's scary for the average consumer to see that.
Happen, and it's something that we've seen, particularly with respect to a lot of drug stores, particularly in city centers. I'm wondering how much this pushes the emphasis then on the online presences of some of these companies, and I think of Walmart in particular, which is actually putting up competition to the likes of Amazon with what they can offer in e commerce.
Yeah. Absolutely, I mean the e commerce side of the business at Walmart, at Target, really many of the big boxes improved significantly. They're very robust, and we see Walmart is going toe to toe with Amazon, especially on the retail side of it. It's clearly Walmart doesn't have AWS, but on the retail side and the physical presence, to leverage the physical with the digital is a real advantage, especially relevant to Amazon at the moment. Now Amazon wants
to get more physical. They're trying to open grocery stores. I think we'll see that accelerate once they've kind of figured out the box that they want. But there's definitely this conflict is going to be around for a while, and you can get great value of both of these tailers, adding Target, adding Costco, adding all the other big box guys, And you're absolutely right, you know, that is a way
around this. We have seen East commerce sales decelerate a little bit, you know, broadly speaking in retail as people have returned to the stores a bit more. But that's definitely a strong area of opportunity for the retailers forward.
Walmart's kind of a confusing read on the US consumer because on one hand, if it does well, that's a good thing. People are spending money. On the other hand, it's been people who are trading down, who are trying to spend less, who are going from Whole Foods or whole paycheck is Ton likes to call it to Walmart and looking for a bargain. So is Walmart's gain everybody else's pain? Is it sort of a counter indicator of consumer strength.
Well, that's a great point, you know that it is an indicator of where the health of the consumer is now. The good sign is the consumer is still spending, they are trying to save money. They may be trading down, they may be trading in. But Walmart has done a really good job over the past few years and making that their business model stickier, and so they're retaining a lot of those customers. So they've seen trade down and trade into the business, but they're seeing those people stay.
So yes, that's not great for the rest of retail. It just shows that Walmart's gaining market share. But some of their latest formats, especially the ones over in New Jersey if you just cross the river, they're really phenomenal stores, and they're very much target light, to be quite honest,
it has that little slightly more upscale feel. Really goes after that the core American consumer, And you're actually right, we are concerned about how things will shape up, especially for that middle income consumer for this holiday season.
So, Joe, we talked a little bit about the prospect of trade down to Walmart. We've heard that over the last few quarters from the company itself on the earnings call. Joe, what about holding onto talent. We've seen a bit of softening in the labor market. You're talking about maybe the economy deteriorating. Do they have that issue on the talent side? Do they have a ups pro Do they have a problem like GM Ford.
I don't think so. I think Walmart and Target and all these guys have done a really good job over the past few years of trying to pay their people better, to raise wages, opening opening starting wages, I should say, and raise the average wage for everybody. They've added more benefits to their consumer and to their to their employees, and you know, they've done a much better job with that.
And we haven't heard as much of the griping that we used to hear a few years ago, especially around Walmart or Target or some of the others that the employees felt underpaid.
Ass Joe, and I'm jumping in because we've only got about sixty seconds left. I can only imagine how difficult it would be to work at some of those stores in certain locations, a Target, at CVS, when you're seeing people come in clear off the shells and you're told that you can't intervene, you can't do anything. You've just got to step by step back and watch it. What's happening to those locations? Have they just been shut down?
Unfortunately? Some have in I mean, you saw Walmart shut down a couple of stores in Chicago. Others have shut down stores in San Francisco and other parts of the country. You know, the retailers tell us there's definitely isolated pockets and they're limited to certain stores. It's not everywhere, but it's a concern, and it's scary for employees, it's scary for the shopper while you're there. And it's very frustrating too.
I mean, we keep hearing stories of employees that occasionally, you know, step in and when they're told not to, and yet it's just so frustrating to them that they step in and try to stop it, and some have actually lost their jobs for doing so, because you know, it does put them at risk. It puts a company of risk, and puts everybody these the shopper at risk as well. So it's best to let the people go. But very frustrating for sure.
Some shocking images Joe, thank you, sir, Joe found when they of the TAUSI Advisory Group going into warnings next week.
It's about yes, US, China, China, US, but also the complexities of other nations as well. We have an expert on this, the banker from Arkansas, the Republican French Hill, joins us this morning. French, you and Arkansas live this. You are absolutely front and center on agriculture. I'll use Tyson's as the iconic chicken maker and also pork and the simplicity that's in the political dialogue. Versus the complexities of chicken from America to China, chicken from Brazil to China,
and the stew of it all. Not to use a pun here, what is your best policy with China given the complex realities of a multinational export import reality.
Well, Tom Jonathan, great to be with you. Yeah, this is a super complex issue. You know, we're not going to fronted with a Cold War situation like we had in the nineteen fifties to the nineteen nineties with the Soviet unions Soviet Union, where we were not an integrated economy there. The case is exactly the opposite with China, for Japan, for South Korea, for Taiwan, for the United States,
and for the EU. So, first of all, I think your comment has to be thought of in a multilateral way because all these developed economies have supply chain and
market revenue opportunity. In China, this de risking that we're seeing led by the private sector, I think is one of the most important components of why you see concern in China, and I hope that's the case, because in my view, economic deterrence to Beijing is one of the most important things that we can do on a multilateral basis to keep them from being provocative visa the Taiwan or the South China Sea. And I think that's a key point.
French. We're thrilled dead you on as you are the only Republican that will not be debating here at the end of the month. It's good to see at least one Republican won't be up on stage. But French, can all of Washington, Democrat and Republican the bipartisan China view. Can we have an adult, multilateral and complex discussion or we just gonna end up with silly simplicities that we hear and listen to.
Now, Yeah, such a good point. And that's why I think Mike Gallagher, who chairs the China Select Committee on behalf of Speaker McCarthy, has got a good worldview. He comes from obviously a military background, but he understands these global capital market and trade market complexities that are multilateral and not solely with the United States. And that's why I was glad to see the G seven countries think about a reverse Scithius type approach at the G seven meeting.
This is the essence of where Joe Biden's going with his executive order yesterday. I do agree that I think it's more complicated. I think don't think it goes far enough because everything in China is a dual use technology and that's how they operate. So it makes very hard for us to monitor and think about how to limit capital flows or technology flows into China.
That's the China story. There's a very big domestic story that was highlighted last week by Fitch that a lot of people are discussing, especially in light of the auctions which were okay to pour as the week went on. One thing that Michael Zesus of Morgan Stanley said in a recent note was we're taking seriously the risk of a government shutdown this fall. Do you think that a government shutdown should be on the table in order to reduce the deficit.
Well, Lisa, here's my view. The House is behind the curve here. We need to pass the other eleven bill appropriations bills that we did not get to in July. We passed one. We need to pass all twelve that gives us the maximum negotiation capability on behalf of the House of Representatives, with the Senate and with the Biden administration to get the kind of spending deal that we
anticipated from the debt sealing negotiations. We want to hold the line on that and the best way we can do it is to get our work done on the appropriations bill in the short time of remaining. Those conversations are going on every day. Secondly, look if we can't get all that done before September thirtieth, I think a short term continuing resolution in order to get that work
done is important. We don't need to go into a government shut down when we've done the hard work through the debt sealing negotiation, and we've done the hard work in our committees both in the House and Senate on the appropriations process.
Is there enough unity right now within the Republican congress members and senators to really get an agreement that everyone can get on board with because it was splintered in order to get anything through. Is that one of the big obstacles for you?
Yeah, I think it is, Lisa. I think we are talking with our members every day, as we've done all year, as we've accomplished. I think a broad set of solid policy accomplishments this year that some of which have even gone to President Biden's desk. We have to do that on each of these appropriations bills, you've got concerned about each one from different members of the Republican Conference. And I think that's good. I think it's constructive. We can
handle some of that with amendments on the floor. But we do need to get these bills move forward because look, that maximizes our negotiating clout. And I would say to my Republican colleagues, if you go to a continuing resolution and don't do your work, what you're doing is essentially institutionalizing Nancy Pelosi and Joe Biden's spending levels of last year and their policy positions, which is not something that House Republicans are in support of.
You know, French, we got to cut to the chase on what matters here. You and I have talked about this before. But if you look at razorback football and you look at the schedule, A Western Carolina Kent State BYU LSU finally a real game LSU and Texas A and M later on, what in God's name is happening to college football? And what are you going to do in Congress to tell these people to get their act together.
Well, let me tell you, Tom, this is all about the money, and those schools love coming to they love coming to Arkansas. They're going to make a lot of money. And I guess the Razorback is going to hopefully have three victories in a row. But college sports is now absolutely all about the money. And that's why Jonathan needs to come out here and watch some good SEC football and stop talking about quote European football close quote.
French tells you, Frenchman gonna make it happen. It's a treat of mine. I want to make it happen. I want to go and watch college football in the South. I think want to come watch shit.
To someone like Congress school Hill tell us it's all about the money. I mean, that's the most shocking thing I've heard I've heard this year.
This year, French is going to happen. Congressman, Thank you, Congressman. French Show at Bakers.
Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Easter. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg