Surveillance: Labor Balance with Luzzetti

right to it. We have to do that with the important economic data coming up as well, and we're thrilled to bring you from our studios in New York on radio and television worldwide. Matthew Lozette, Chief US economist at Deutsche Bank. Matt, thank you so much for joining us in studio with his data coming out is well. You nailed the win of it. Absolutely nailed not only the vector of the call and this on GDP and recession and not nbeer recession, but the idea of a slowdown.

But you nailed where everybody got wrong, the immediacy of recession. And you said, no, do you stick with that? Now? When is the win of any kind of slowdown that we see? Yeah? I think the recent data we've seen over the past several months. If anything, I think gives you greater confidence in that kind of timeline. Certainly the economy has momentum. Now. What we've seen from the jobs reports, or retail sales or some of the survey data bottoming and picking back up all tells you. I think that

Q one growth should be solid. It's certainly above trend, we think. I think that the ongoing narrative that we hear from the FED about this kind of gradual slowdown and growth over the coming quarters doesn't really seem to fit with the data that we have. I think that that narrative likely has to change. But at the same time, we've seen from an inflation perspective, is a lot less disinflation than we thought late last year. We see core inflation picking back up over the coming months. We think

that leads the FED to be more aggressive. We have a five point six percent terminal rate, which I think then builds into the hard landing wrestles later. Well, let's talk about the hand landing risks. Where do you have to downturn on the Canada? Difficult to do, but just to set up the conversation, no doubt, it's difficult to do. We currently have it in Q four. We've gone Q three Q four. It's but always been a second half

story for us. I think it's a few things. One, you know, we do expect the FED to be more aggressive. The market has repriced the terminal rate a lot, but I think not enough yet. I think we would probably see the market repriced at higher on upcoming inflation data. And then you have a number of things in the second half of the year. Households lose their excess savings. I think that leads to household fragility. You obviously have a debt ceiling, which could lead to financial condition tightening

and weaker government spending. So there's a lot of risks as we look out into Q three. You're at five to sixty now, right we are. So I'm gonna write, do you find this upside risk to that view? Look with the data as it is today, I do think that there's upside risks that view. If you look at the labor market, and I think it's really important. It's not just the latest data points, because we should take the January data with some grain of salt. Given weather,

seasonal adjustment factors. We had meaningful upward revisions to household income in the Q four of last year. You've had inflation data which was revised up meaningfully in Q four. So I think as you look at the FED, I don't think that they will really have any evidence of disinflation by the May meeting. They may only have a month or two by the July meeting, and really it's a question of, you know, ken they tighten financial conditions enough.

I think we heard concerns about that in the minutes yesterday. I want to take into that a little bit more upside surprise to five point six percent. Is that because long and variable lags isn't a thing, and it like we're already seeing basically the effect of the tightness, and that just isn't tight enough at a five percent or a five point five percent, Or is this that this is a less interest rate sensitive economy that needs to have a much bigger shock. Yeah. I think there's two

lags that we probably want to talk about. There's what the FED does and what happens with monetary policy to financial conditions. I think that lag has been very quick and tight. We saw it reflected in mortgage rates. Financial conditions actually tightened very quickly, and then there's the lag of that financial condition tightening onto the economy. I think that's where you know, we are probably seeing economy that's more resilient. You have the excess savings, we still think

it's one trillion dollars. You've had state in local governments that we're sending out checks, so there's been this latent stimulus in the system. At the same time, you have a labor market that's undersupplied, which I think is making it very resilient to the tightening so far. So I think those two lags have different lag structures, but the one where it hits the economy that's taking longer than

I think we've seen in the past. Is there a sense that there is a level at which the economy would break or that could really put a major halt on an economic trajectory that still seems to have momentum. Look, I'll be quite honest, I think we don't know what level that is. And I think that's in part the

idea that there's upside risks to the terminal rate. You know, going back a year ago, if you would have said that we'd have a five percent handle on the Fed funds rate, and we'd be contemplating whether or not the economy being in a recession. I think that'd be almost preposterous conversation to be having. As we continue to price higher financial conditions. You know they're tight, they've tightened, but I don't think they're tight enough to achieve the fed

dual mandate objectives. And so I think we have to be open minded and humble about where that terminal rate is actually going to be. I want to take the heritage Deutsche Bank. And this goes back to thirteen years now, to raging debate at the time off of Duley, Garber and folkirts Land out David leading all of your research effort, and there was a titanic debate about China's savings and China flow. Paul McCauley was involved in this, Brad sets are in others. I want to bring that to the

domestic right now. Not the unknown with China, but what's the unknown for Matt Lozzetti in the American economic experiment right now? What's the mystery out there for you three four or five years out? So I think three four or five years out there's this really interesting conversation about what the neutral that funds rate is likely to be.

It does plan too a little bit about the global saving story, and I think it's really about what are we seeing today that is simply reflecting unique circumstances around the pandemic, or what is it something that is more structural. I think some things that we know that might be more structural. I think inflation is going to be structurally higher going forward. You know, we have all these shifts going on, demographic forces, deglobalization, you have climate change policy.

All these things I think are at the margin least are going to be inflationary. I think you also have a world where maybe fiscal policy in the US has not structurally changed in an easier direction, but I think globally we might see that shifting in a more easier direction, and I think that does lift the neutral rate for the feed as we look at you see that coming from Europe, China? Where do you see that coming from? So I think we have in Europe, we have defense spending,

you have climate change policy. In China, you likely have a shift away from domestic savings in their economy over time. In the US, it's a more up in question. You know, we have a debt sailing debate that that's going to be happening in the second half of this year. Could this lead to fiscal or trenchmen It seems pretty likely to put death sentence in there in China savings just to keep his job focus. Landau was watching are you getting questions on that debt saving debate yet? Or a

people avoiding it? Is it you trying to talk to clients about it or clients trying to talk to you. It's clients trying to talk to us at the moment. I would say that the past few it was more we have to come up against it, you have to see it reflected in the bill market, and then everybody starts to focus on it. I think this time around there's been a lot more focused early on Maybe it's you know, what was going on with this speaker leadership votes.

It's very clear that I think from both sides that they're they're kind of entrenched in their views at this point and that it will be an issue, and so I think that there has been greater focus on it this time around. You think for it not to be an issue, it needs to become an issue. And what I mean by that they need to push it far enough that something happens in markets for them to back

a white Is that way you see this guy. I don't see any way that either side should back down from their view unless it becomes an issue where financial conditions begins to tighten. The problem we've all got is it's an issue for like somewhere else further out, and they cant delay selects in the summer sea into the summer. It's such a frustrating discussion to have if there is one.

A group of economists over at Jeffreys put out this note basically saying some of the sell off you've seen in bills with gilds rising above five percent in the short end could be tied to some of this death sailing debate. Muhammadalaran came out and he basically was like, no, it's not, it's all the fact, but you know this is the issue. It's sort of like, how do you game that out? Because even the reaction function in markets, what is it is it to go into short term

decks it's safe. I mean the irony around how the market would even respond when issue that seems to pay the play every single time, We'll say it is different this time anyway, core PC a little bit hotter for the fourth quarter. Tom, that's another reader that four point three percent jobless claims expected to climb higher. They did not. They declined to one ninety two from a revised one ninety five. What do you make of that GDP price

index up as well? And just to the amateur take, I'd take us to add up GDP annualized plus the GDP price index and I got nominal GDP of six point six percent, if I Matt Laszoti math is correct. And I'm sorry, John, that's a that's that's what keeps you going when you've got nominal GDP at that level. Matt, we've got to come to you on that. Matt Lasotti from Deutsche Bank alongside us, Can we just start with that number, one hundred and ninety two thousand, Your thoughts

on it. I mean, it's remarkable. I mean it's remarkable that the FETT tightened as much as they have and you don't see a labor market that is really certainly not shedding labor. It's not coming into better balance as the ft had hoped for. UM. I think the revisions to the recent data you've had, plus the latest data show really no weakening at all. I would highlight the

core PC number there as well, uppard revisions. I think it likely reflects the seasonal adjustment that we saw in the CPI now getting reflected in the core PC data as well. You get that if plus a point five reading tomorrow, I think we're you know, the ten minutes. The sentence that I focused on the most was you know, there's concern if they don't tighten sufficiently that progress on

inflation could halt. I think that with the revisions to the data, with the incoming data that we're seeing, there has to be a question about whether or not they are tightened sufficiently, and whether or not, with the market is pricing right now, is tightening sufficiently. After pay Rose, I spoke to a lot of people that said that was more noise than signal in the January data. Based on the data we've had in the last couple of weeks,

do you think it was most signal the noise. Look, I don't think we're going to print five hundred thousand jobs per month on average, so there's there's no doubt the headline, there's no doubt a lot of noise there. But when you look at the broad labor market data. If you looked at the Jolts data, you know a few days before that job opening is picking up initial jobless claims. Everything is telling you the labor market that

has momentum and that is tight. I look at just the equation, why we'll see plus I plus G plus nx. Can we guestimate any of those factors? Given we're coming out of a pandemic with a Biden stimulus. I am so fortunate I'm not doing what Peter Hooper's told you to do, which is actually try to guestimate this. What's your confidence in guestimating forward? Look, it's it's always difficult. I think it's it's even more difficult in the current environment. As I look at those Q four GDP numbers, the

downgraded consumption is meaningful. We were actually close to zero growth in private domestic demand already, meaning if you were to look at housing consumption and capex and so, it does look like from those numbers you had even probably a sharper slowdown in domestic demand growth in Q four. But I think the data we've had since then is

suggestive that was a temporary blip. It was around the period where we think financial conditions were hitting the economy probably most significantly, and if the Fed does not continue to engineer conditions that are tight enough, you have an economy that I think is likely to pick back up and a labor market that is unlikely to listen. Does that mean that there's another fifty basis point on the table. I think you know it's not the optimal choice from

their perspective. If they ratch it up to fifty basis points, we get back into this process of how do you get back down from fifty to twenty five? And if you only want to go one or two, it's going to be very difficult to do that by the mayor June meetings. I could think for the March meeting, if they need to deliver a hawker's surprise, you always kind of have that free card of the dot plot. The

dot plot is able to signal their intentions. They could show a FED funds terminal rate that's higher than what the market has priced in holding it for longer. And the messaging I think is really important here. If they were simply to talk down financial conditions, as as the minutes did a little bit, I think that that would happen. It is critical, this is original. Since when does a

central bank quote unquote talk down financial conditions? I actually looked at that than us and them literally bore the pass back just talken about talking about it. And the Schwartz didn't talk about it, The Georgia School didn't talk about it. You Cela didn't talk about it. How do they quote unquote talk down financial conditions? Look, I think we're in a in a Obviously, the past decade decond and a half is a new period of communications from

central banks. It is guiding towards their expectations of what they want to do in order to bring about financial conditions that will achieve their objectives. And so they always should be asking the question, is the market interpreting our signals as we want them to be interpreting them? And are we achieving financial conditions that will achieve our Doctor Phil,

except it's doctor Matt. But the interesting thing is is that actually this fed has less power than it has for a long time, simply because the data is what the data is, and they have to respond accordingly, and the market is trading off the data, it's not necessarily

trading off the rhetoric that we're hearing from the Federal Reserve. So, Matt, when you take a look at what we're seeing, especially at the upside revision to the core PC, is there a sense that we could end the year with even a four handle on inflation or a five handle on the overall headline, something significantly above where people are projecting. Look, you don't have too much confidence in an inflation has

been very difficult to forecasts. I think it's just unlikely given what we know what's going to happen with rent and oere. We know that in the back half of this year, those two really important components are going to be trending down. That said, you know we have a three three COREPC forecast for the end of the year.

The Fed's forecasts of three and a half, which was laughed out, I think a few months ago, looks a lot more plausible given the data that we're seeing, and you're an environment where you don't want to discount upside risks to inflation, particularly if the labor market is not going to be listening. Matt. Communication from the Fed over the last ten years changed, and we've talked about that. They started to manage financial conditions in a much more direct,

transparent way. But that's uncle because the nature of the economy changed over the last several decades. It became much more financialized. Because of the financialization of the economy, we also thought that when they started to raise interest rates to your point earlier on, that it would hit the economy much faster. The communications changed, the nature of transmission has changed through to financial market. It's everything tightens up.

I just think I have to sit here and sit here now and say, there's so much we don't know. Because to your point, if you told me twelve months ago, told anyone five hand or FED funds guess where unemployment is, they would not have said three point four percent. They wouldn't have said claims at two hundred thousand. So do you think we need to be a little bit more and not you because we get along. This is not

directed at you. Do you think we need to be a little bit more humble about what we don't know about what's happening with the FED here? And do you think they need to be as well? Absolutely? I mean we're in an environment of significant uncertainty about the outlook of a lot of data, volatility of mixed signals from the typically very reliable leaning indicators that we would look at.

You have an unprecedented environment, and where you have households which are still sitting on a substantial amount of excess savings, where a labor market seems to be structurally undersupplied. You know, how all those things work out, and how the lick structure of monetary policy to the economy works out is all key sources of uncertainty. I think for the FED view is that it means they need to see evidence that things are moving in the right direction to be

able to back off. We just don't have that evidence at the moment. Is there anything stimulative about being able to earn money from your cash? Look that if you looked at it just within that margin, I think you would say yes. The bigger picture is, as the FED titans monetary policy. We've seen what happens to mortgage rates, We've seen what's happened to the housing market. We see rising delinquencies on autos. So I don't think raising rates is stimulative. I think that component of it could be.

But the bigger pictures is certainly that a titan's financial condition that's straight at the School of Dramatis did he message you. That's exactly the kind of thing in dream mattis tost about. But you have to think, if suddenly you can make five percent on your cash, then it's you know, free money. You can play with it, you can do things, etc. And then is there something stimulative, especially if you're not seeing the weakness, if you've got locked in mortgage rates, if you've got a lot of

these other costs that have already been immunized. I'm just wondering reverse argum as an argument people might when we have negative interest rates exactly. Yeah, but that's what I'm saying. But it wasn't Spring geekin all my kitivity. But he was sparing some people to double down to try and save more, exactly. So why couldn't you make the argument potentially that it could have the opposite effect. I don't know.

It's just something to throw out there, something to talk about, something to think about, because I just don't think we've got a cliff. I think that that's correct any of this. I wonder if the federal zev's even got the toes to bring inflation dat towards target without just absolutely smashing this economy to paces, which is what Mohammed's talking about. I think that a lot of people are wondering what

it looks like when you cross them. I mentioned three percent inflation of Matte Lozetti tomorrow PCE deflator top line point four point one point one. I do a quick three month annualized, you get a two point four zero percent. That's how you get what's the value right now of a three month annualized review by guys like you, when you're wedded in the chairman's wedded to month month year over year. Is there a value to looking at ninety

days annualized? Absolutely? I think you know, we know a lot of the year over year is being inflated by very strong prince that we had last year. You want to be looking at the shorter term trends to see gospel, to see what to see what they're showing. And that's where I really think the revisions were important. So at the February meeting, the Fed core CPI was three point one percent annualized, they found out it was actually four

point two four point three percent annualized. And you're getting a pickup in inflation on top of that, and so I think you've completely changed the trajectory of what it looked like at the end of last year. That's such a strong point, Matt, thanks for that, Mattless Eddie Attebank, a wise man said to us a number of weeks ago, if you're not paying attention, if you're not confused, you're not paying attention. That was dune In Emmanuel of Ever,

Corny joins us around the table. We're going to catch up with him in just a moment. Features up by about a half of one percent on the SMP Tom coming off a four day losing streak and trying to bounce exactly, trying to bounce Nastac one hundred up nine tenths of a percent, trying to bounce Vis comes in twenty three to twenty one, breaches twenty two, twenty one

point eighty six. But I think it's right. Trying is the right equity energy this morning, and keep him one eye on the bond market, maybe two, maybe two one morning. The yex pushing Harrik and Lisa approaching high a year, and it's not just absolute nominal yields, but you're also looking at real year as a ten year real yield hitting the highest level of the year. Basically going back to early January. At what point have we gotten the

full reset in stocks that we're feeling in bonds? Have we priced in the full pace of rate hiking even with some of the recent weakness. Let's we're through these markets. I don't want to leave you waiting, Julian, just you know,

itch into speates here we left at home. You just look like this on sm F five hundred and a half of one percent, yields coming up a couple of basis points three ninety three ninety one on a US ten year and euro dollar earlier this morning, if you're just tuning in euros on CPI Lisa coming in at a record high on core and revised upward after the German mystery figures that they got in. Here's what we're

looking at today. At thirty am, we get US initial jobs claims plus the second read of the fourth quarter GDP in the United States, initial jobs claims expected to come in still near historic lows. Again, where is that's loosening in the labor market that a lot of people are asking for? It has not shown up yet. At twelve pm from US Commerce Secretary Gina Raimondo, She's talking about chips. She's talking about developing more technology in the

United States. I want to hear what she says about China. Will that be in the speech or will that be the subtext that we hear basically under a lot of the innuendo that she discusses. And today we hear some more FED speak because we you know, it's another day that's not a quiet period. Atlanta FED President Raphael Bosk is speaking at ten fifty am. San Francisco FED Mary

Daily at two pm. Is FED speak taking on less importance John at a time when the data is so confusing, and it all is about the data, not about the nuances of which member and what voting pattern. Without a doubt, it's the data that closed the gap between the FED projections and where the market was at a stand of the year. They can talk about knock cutting go what

they like. Ultimately, investors kind of understand, I say, kind of understand the reaction functioned if the FED and of responded to that economic data, pay rolls, retail, sus CPIPPI take your pick and push the terminal right high. Well, and the reaction function, let's be clear, has kind of shifted a little bit over time. So there's this issue, okay, inflations number one. But people are basically believing that the FED will be more hawkish if the data is more aggressive,

and they won't be if it weren't in period. What happened to the disinflationary process starting? I didn't see it anywhere in the minutes. Maybe it's already ended. It's kind of bizarre, isn't it. Usually the chairman's meant to reflect the consensus whatever that might be on the committee in the news conference, and then if he doesn't interview somewhere or testifies, he can talk about his own thoughts on matters. That performance in the news conference sounds even stranger now

going over those minutes from yesterday. I would agree. At the same time, I wonder how much the disinflation was his I hear you, Emmanuel laughing, But you're raising a great point. Was that the massaging to take out all the disinflationary talk or was that a Joe Powell issue and not necessarily a committee issue? Okay, Julian's with us said that four time. So hello, Julian, Well you should just start with you straight away. Do that more often.

You've got a line here in your research that says the path to our year round forty one fifty price target is lower than higher. Why is it lower than higher? So, if you think about coming into the beginning of the year, there were three reasons the market had done as well as it had done until a week and a half ago.

Number one, the positioning was incredibly barished. We all knew that there was epic tax laws selling, which is why the stocks that were the biggest sellers, the ones that really had the weakest performance, are all the ones that rebounded that's been neutralized. The second thing is, as you alluded to a moment ago, is inflation. The benefits of the decline in inflation where now at the bumpy path,

and the question is are we plateauing? We don't think we are, but the market has discounted the benefits of the initial fallen inflation. And then, of course, the third element here is this whole idea that the combination of the inflation reaction and the price action in the equity markets themselves have caused people to believe that the soft lending is now the base case. So at the end of the year December, remember the market was falling apart.

Everyone was kind of pessimistic eighty percent chance of a recession in the next year. We think that numbers around thirty. You look at New York Fed measures, that number is closer to fifty seven. So that to us is overdiscounted. Whether it happens or not, it's overdiscounted. And this is a probabilistic world. So we do think that the path is shifted to potentially lower before we start moving. Benjamin the Borrowed City Group talks about United Kingdom disinflation like

ede Heiman of evercore Issi talks about US disinflation. What do stocks do if we get ede Heiman's sub three percent disinflation? So in the long run that's going to be extremely beneficial. But I think again, and part of this environment is parsing between the short run, the medium term,

and the long term. With the short term having been this incredible rip in the stocks that we're most sold over the last several weeks, we would say in the medium term that a consequence of inflation starting towards that path is going to be the growth slowdown that frankly, you know, the FED wants because that's how the labor market cools off, and then ultimately when we get to that point, that's when the benefits of inflation kick in a lower inflation, but that is often into the future.

At this point, let's translate this into a stock market call. Given the fact that at the end of last year a lot of the pessimism came from this expectation of margin compression, We've gotten earnings, massive margin compression. Why has that not been priced in more significantly? Again, and this is something that we all talked about very frequently last year. The price action sets the narrative. So you had two consecutive quarters of EPs reductions and the stock market rallied

in the face of that. And so given the positionitioning and the price action, there is a tolerance for it. But from our point of view, this whole idea of multiple expansion happening before the economic downturn, however shallow and we do expect to shallow downturn, doesn't really add up. We'd rather see that multiple expansion coming out of the short and shallow recession that Anheimer's forecasting. A number of years ago, Judie and I went for lunch. I believe

it was Greek Greek food. It was very good, and he said to me said, Johnny needs to be watching what's hand him in volatility. And then we had vold mcgeddon in early twenty eighteen, and again now and now this conversation of vol mcgeddon two point zero. Thank for America, say that this warning of vol mcgeddon two point zero, which was presented by Marko Kolanovitch of JP Morgan recently

be of a sets overblown. Can you talk to us about what that so called vold mcgeddon two points I might look like and whether that warning is overblown, overblown to the third power in our opinion. Okay, here's the setup, right, What zero days expiration options do is actually increase volatility intra day, but if you look at the last several weeks,

it's decreased it in inter day. Right, So so basically you have zigs and zags from nine thirty till four o'clock that at the end of the day, because the options expire, it's all neutralized. And that is a recipe for books staying balance, no force selling, no force, volatility squeezes. It's not gonna have. You could lecture on that at San Diego. I mean, they're the land of this statistic

that was brilliant inter day. You know, it drives me nuts how people conflate intra day vaal with inter day vall. Let's take it out longer. When will you know that Ed Hyman's write about disinflation? You reads report just like we do. He said he planted you at his office like back, you're so far back in the cheap seats you're looking at, you know, Brooklyn and Queens. But but when you find only get to read Ed's report, how do you distill the win of it? When do we

get that disinflation? Well, we actually think it is still part of the subtext right now. So I agree our proprietary surveys are showing that actually some of the shelter costs are continuing to subside, contrary to what we saw last week from the FEDS, you know, the shelter component. We're seeing wages really start to moderate. They're still elevated. But all of this really in our view, and the goods part we all know that that's an open that's that's well known. So frankly, I think it's some of

the more. You know, the monthly data has got another month or two of choppiness, and then I think you're going to continue to subside, perhaps more gently than you. John the pros on this and this I learned it from Ed Hyman. He was a firm called you weren't there. You weren't CJ. Lawrence where you Hyman was at C. J.

Lawrence And he's screaming about three months annualized. We look at month over month and granted it's important hour year over year, and there's different ways Britain calculates it different than we do. Adults look at the three months of data and then annualize it out and those numbers on inflation out are not in the perception of the market. They're low numbers for a couple of months ago than they do now. Yeah, I just changed. I just looked at the thirty year mortgage rate and you know, I

just I was gonna buy and I can't. Jadi and Hapasis the office at the moment of people coming in, we want to know, Yeah, there's getting busier. Is it three day week? Four day week? It has been consistently a four day week, and I think there's a little bit more cross over there. But the really good thing is is that the client engagement is better. I've got a full travel schedule in March, and I think that's a you're traveling below fifty ninth Street, below and above

and on planes. Are you finding that you're more productive if post pandemic? Are you seeing more clients than you did pre pandemic just by not being in the office so much? Has it working out well? Well? Zoom is a remarkable thing, you know, it's it's it. You can go back to back to back to back. But again maybe it's old school whatever. There's no stuff suit for in person. Hold on a second, John, you're just steadily arguing for a four day work week. You find that

you're more productive. You're basically saying, you know that people you know should be allowed to have either forty weekly. You say that's what was going on? Think a productive in general? How dare you? I am Jenny, and thank you, Thank you. Get to see you buddy as always, Jennet Manuel, I've ever cool and the shortlist for vice chairman. Laura Rahim joins us right now, chief US economist FS Investments

as well. Laura, I want to go to a great phrase you've got on savings momentum in the income you have said it's going to be difficult to get the recession. Matt Lozetti joins us later, who was called for a longer, farther outpoint of recession, and all of that, to me, hinges on what John Farrell just mentioned, which is housing. Does housing put us into recession? This is actually a very unique business cycle, and I am happy that we're talking about housing because it's just one example of how

no business cycle ever truly repeats itself. I think something when we look at the impact of higher rates, housing is clearly ground zero in terms of activity. But when you look at GDP, when you look at the things that the FETE is really monitoring when they think about recession, employments one of them. And we often think that when housing falls like this, you would see a lot of layoffs in the construction sector, and we haven't seen that really.

So it's just one small example of how the dynamics this time around are really different. The labor scarcity that you're experiencing in construction remains a lot of these projects have long legs, and maybe they were put off a couple of years ago because they couldn't even find the products to actually build these homes. That's a little bit of a cool desact on. But it's just a way

to say that. You know, in every recession, we go into it thinking, you know, looking at our past prior business cycles, pulling out the playbook, and you just really have to rethink it every time. And that's why, you know, we have to think about what the FET is trying to accomplish. That is to slow the economy down, and our economy naturally wants to grow. It needs to kind of break something to get it off those growth rails, and we still haven't done that yet, even with such

a big hit housing. I think we all feel, well, the famous rom GDP now index, everybody looks at that. Where's the momentum right now? Laura, I mean, are we going to do a Q four equivalency forward in Q one, Q two, Q three? I still it's still it's still based in consumption, an unemployment rate at three point four percent.

We're going to get the personal income and spending data you know, later in the week, but the income data are just not going to really or they're not going to fall until we get some meaningful change in employment. And with the three point four percent unemployment, right you just don't get a recession. They need to move the needle on employment as part of their inflation wage goals

and then getting those back to two percent. But for now, I think you're just continuing to see that momentum coming from the household, from household spending, which is much more income based than wealth driven. Lauren, how much do you have faith with the long and variable legs to think that perhaps we just haven't seen the effect of the rate hikes and that if the FED doesn't hike rates further, leaves them where they are, it'll be enough to bring

down inflation. Well, this is one of the paradoxes. You fix the mortgage market, which was the problem of the last business cycle, and now you've kind of taken that piece away from monetary policy. With homes and mortgage prices mortgage payments lawed in, You're just not going to see monetary policy have the immediate impact on spending like you did during the two thousand five rate high cycles. So you know, I'm not saying that a recess is a

foregone conclusion. I think the GDP outlook for twenty twenty three remains stagnant, probably zero point seven for the entire year. The first half of that probably one point five percent growth. But at the end of the day, you know, you're really seeing an economy that is grinding along, and the FED is going to continue to have to push against

a lot of momentum that plays out of recorders. Well, this raise suspector of potentially much higher terminal rates than people expected, especially the lack of sensitivity in areas like housing. How much have you ratcheted up your expectation from perhaps not the Phillips curve kind of models that people are talking about with eight percent types of terminal yields, but something above that five and a half percent of the

market's gaming out. I mean, Lisa, it happens so rarely that I'm right that I have to crow when I am. But I've been saying for a long time that I think they're going to have to go above five percent, and as high as even five fifty. I think. You know that has been something that has been clearer because you know, while they absolutely need to slow the pace of rate heights, they were basically raising rates with their eyes shut last year. You know, they need to now

be a little more thoughtful, be more methodical. But we just the economy had so much momentum going into it, and I think, you know, also fighting against these market expectations of rate cuts, which I think they've very effectively done, and the markets have I think, had to come to terms with the FED. I think really at this time around strong sentiment that they are going to need to stay higher for longer. I think the data change that conversation, not the FEDS fake the data. From the start of

the year, we've been talking about residential real estate. Lara, can we talk about commercial real estate just briefly. We had this headline, this story in the last twenty four hours that an office landlord controlled by PIMCO has defaulted on about one point seven billion dollars of mortgage notes across seven buildings. Laura, what's going on there? I Commercial real estate is also interest rate sensitive, so we're going

to see some of these valuations be impacted. Remember, there are just so many fewer data points, and the data is lagging in that sector more than it is for the residential sector. So I think we're going to start seeing headlines like this, But it is a sector where you're seeing such diffuse performance. We know that office space is going to be challenged, especially in the major metropolitan areas. But that's why, you know, I think for investors we

need to look in other areas. We need to look at industrial, we need to continue to look at you know, the to some degree even some belt states regionally, we need to look at multi family. I think there are a lot of areas where we've continued to underbuild in this sector since the Great Recession, so there's still some there's still a lot of room for returns there. But at the end of the day, you just need to

access that differently. It's not a sector that I think we're going to see as uniform move invaluations as we have seen in residential real estate. Lara, this was great Laura of FS Investments joining us now as someone expert on the granularity of China away from the headlines, Leland Miller to say his chief executive officer of China Beije

Book International, doesn't describe the ability. Leland, what does a symbolism you see if a year ago mister Putin's talking a football field away on a table to mister Lavrov versus what we observed. I believe it was yesterday between Putin basically playing bridge with mister Wang of China. What is the symbolism of how close they were yesterday talking to each other. Well, the imagery is perfect for this.

I mean, you have China making no bones about being closer and closer to Russia, particularly as Russia's encountered way more problems than anyone expect at the beginning. So I think there's there's no question right now that from a you know, China is all in on Russia's side form the perspective of their support. The question is are they crossing red lines in the background, And that has become It wasn't an issue, you know, the first first six

months of the war. Now there are reports that they might be willing to cross lines in terms of providing goods to Russia, providing lethal arms. That that takes us in an entirely different direction. Is the backdrop here a recovery after pandemic for China? Ever, core ISSI suggest, as others do, we could see buoyant five even Dare I say six percent GDP? Do you agree? I do agree. Look, there will be a cyclical bounce back in China starting in the second quarter. I think people have made too

much of a baby indicators in January and February. Oh, or you know the story should be more bullish. Are less bullish? The recovery will start no earlier than March, you know, possibly April, and then you're going to see a real recovery because businesses will get back at it. You know, they told us last year they didn't want to invest, they didn't want to borrow, they didn't want to hire. Well now they're going to do some of that, and there will be some measure of revenge spending, revenge

consumer spending as well. The questions when you get to the second half of the year, how much policies support the government wants to lay on top of what will already be an organic recovery. So you absolutely have the ability. You're bouncing off terrible numbers for twenty twenty two. The numbers will be good. There will be a recovery in China in twenty twenty three. The question is is this more than two to four quarters? We don't think so.

Laden is there's a lot of attention at the moment now on the auto market, given what's been happening with Tesla and other brands. Are you saying that Chinese consume it tend more and more to domestic brands within China. Oh, it's sort of hard to read through the noise of COVID. I mean, in general, yes, I think that that's that's

the inclination. But you know, you have a big problem where you know the world wasn't exporting much during a time where China's exporters were running full throttle for the last three years. So as we get into the post COVID era, we'll be able to tell that more. But but certainly when you look at cars and you look at some developments in ev technology and battery technology, the Chinese are dominating, so there will be an inclination to buy home on some of these things, and maybe maybe

a lot of things. We've been trying to sort of decipher the change in Jijimping's tone over the past year. You talked about how the red lines they didn't want to cross they now seem more willing to cross. And what is the implication from the underlying economy. Is it youth unemployment going up? Is it this sense a frustration with the administration. Is there something going on that can give us a sense of why there's been this shift. There has been a shift, but I think it's a

mistake to call the game changer. A lot of people in Wall Street are saying there was never a desire by Jijimping to run the property sector from its heights in the pre COVID down to zero. There was always going to be a little bit of a roller coaster ride. And the way that we describe this was they need to cull the herd and then ventilate. Cull the herd to take out weak firms. Would ventilate before they take out the strong firms, before cash flow drives up, before

contagion spreads. So you're in a ventilation part of the sector. If they think the risky companies are still doing risky things they need to be handled, then we're going to go back into that part of the cycle. So this is a this is a relatively gradual process to minimize properties a growth driver. The fact that we're seeing, you know, a relaxation of the three lines that's happening right now. But that doesn't mean that Chijinping has suddenly decided his

policy of the past three years is wrong. I don't think he has. Although going forward, do you think that this is a sign that perhaps the Chinese economent has insulated itself enough from the US, from other nations that they can withstand sanctions or any consequences put on the nation as a response to crossing other readlines, say with Russia. Depends on the sanctions. So I would say that you know the sanctions that we were used to, you know, three, five,

ten years ago. Sure they're baby sanctions, sanctions on individuals, sanctions, baby sanctions on banks. The kinds of sanctions we're looking at right now are big economic warfare tools. Foreign direct product rule can take out the Chinese tech sector, could take out major Chinese companies. This is the This is the question about whether China will actually move forward with violating the big bank sanctions, giving Russia tools in Ukraine,

giving Russia arms in Ukraine. If they do that, the President Biden's going to have a very big mess on his hands because in order not to hollow out the credibility of these really powerful sanctions, which were intended for China in the first place, if you really look at it, then he has to fall through and crack down on companies that are violating. But that could cause a bigger bruhaha with China this year, which is something he's been

trying to avoid. So if the Chinese are behaving badly right now, and we don't know yet but there are leaks that they are, then then this could go in a very negative direction this year and quickly. This is a very tense moment. Lela thank you, sir, day in the middle of that of the China basebook International. Right to the Bloomberg Surveillance Podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting

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