Surveillance: Labor Market With Luzzetti

terrific job. It's maybe a fractious view with a different view short term versus their view long term. Let's go wicked short to Friday with Matthew Lozetti our first real discussion of this job's report. Matthew, I love what you say. It is a perplexing labor economy. How will this Friday's report be perplexing? Sure, thank you for having me. I think what we've seen over the past of the months is UH data data points which are pointing at two

different things. We have an economy which on a number of metrics look like looks like there's a lot of slack, seven point six million jobs below pre COVID, a labor force at three point five million below pre COVID as well. On the other hand, you have record quits, record job openings, wages have been firm. Uh. And so I think we've been looking for data points to try to resolve these two issues in our mind, and I know the feed is is certainly looking at data points there. I don't

think we get a resolution this week. We expect seven thousand jobs. We expect the employment rates to take down by by one t the labor force to pick up a little bit. But I think, you know, as FED officials have said, it's more likely that we have to wait until the fall to we get labor supply coming on fully and get a greater resolution of these this

real dichotomy that we're seeing in the labor market. That February before the pandemic, we all look back at that Nirvano of what was build as a fully employed America. Is that what we're going back to or are we

going forward to something new and different? Look. I think there's definitely some things that have changed, and probably from a structural sense, and and the FED and Chair Palace has talked about retirements really picking up, probably on the back of a big pickup and wealth and and savings that the households have had there. But in my mind, what we learned from the pre COVID labor market was

we just continually found labor supply. The primary labor force participation rate continue to trend hire people coming off disability insurance roles, you know. Vice Chair Clarad at that point was saying that NEHRU could be as low as three and a half percent. And I don't think that there's anything from the shock that prevents us from getting back there. If anything, you know, greater workforce flexibility, some of these policies that the buying administration is looking at should help

the lift labor supply. So there is no doubt constraints in the near term on labor supply. But if we look for by a year, two years, um, I think that we should anticipate that we can get back to that pre COVID labor market. Some people have made the argument that holding back labor supply. Want factor behind that has been the additional unemployment insurance. You ke THEOGUMAN you find limited evidence that enhanced unemployment insurance benefits were exerting

a material drag on aggregate employment. What did you look at, Matt sure, So I know there's been a lot of look at the work done on this, and what we've looked at is try to look across states, try to look across sectors, and are you seeing labor markets either in low wage states that look like they are are more constrained because they should be more impacted by enhanced unemployment benefits? Are you seeing low wage sectors that are

also being more constrained and you really don't find that. So, for example, leisure and hospitality, we looked at the vacancy yield and this is the rate at which they're you're turning job openings into hires. The vacancy yield and leisure on hospitality, which is a low wage sector, is actually

well above a lot of high wage sectors. Similarly, if you look at across states, it's actually the low wage states that are really outperforming here, it's it's the high wage states that still have a lot of slack or or a well blow pre code levels. So in our mind, you know, unemployment trans benefits you no doubt, I would not deny that it is probably a factor for some, But if you look at the big macro stories, in my mind, it's COVID and it's really not unemployment insurance benefits.

It's the return to school part of the COVID story. So two things happen in September. The additional u I expires and the schools reopened hopefully and everyone gets to go back to school. Match you think that could be the dominant factor. Hit Absolutely. I think you have the direct effect of that in reopening, which is just getting greater education employment. But on the other hand, it opens up labor supply to an extent that we haven't seen

as of yet. So I think in the debates that we have with clients on this, uh, there's a very forceful debate on on both sides. But but we all kind of end up in a place where once we get to the fall, as vaccinations have picked up, as schools reopened, as unemployment insurance benage bits roll off, all of those things should really lead to a lift and labor suppli as we get to towards the ball. Yet we haven't seen as much progress in the labor market

as many people had expected. And yes, we have to wait, but at what point, well you rethink your your goals in terms of getting the unemployment rate back down to where it was and frankly getting the participation rate higher. I mean, what is concerning you and keeping you up at night with respect to this, Yeah, I think the lack of response from labor force participation has has certainly been one of them. Um. You know, the trend that we've seen in employment gains has been weaker than than

we anticipated. There's an interesting um if you look at the non seasonally adjusted data, we've been printing about one million jobs per month on average over over the past four months, a very steady pace, and Charepal noted this. There may just be speed limits on how quickly we can rehire people into this economy, and maybe it's one

million jobs per month on a nonseasonally adjusted basis. UH indeed has some great data looking at a really big pickup in job postings for HR departments, and so maybe this is business is trying to get around this natural speed limit. UH. In any event, as if we continue to print those types of nonseasonally adjusted jobs, it will

get a boost over over the next few months. So I you know, with a labor demand that we have out there, as labor supply does normalize, I anticipate that, you know, our our bullish outlook for the labor market should be fulfilled as we get towards the end of this year, and then as we get into next year. A lot of people will talk about the frictions in the labor market as leading to a lot of wage increases. How persistent. How much has the balance shifted back to

labor from corporations in terms of demanding higher wages? Yeah, there, you know. I think you're seeing different views from different wage numbers. So the Atlanta Feds wage metrics have actually decelerated in a broadway, and they're tracking individuals over time, so they're able to control for a lot of different compositional shifts. The average on learnings data will get on Friday, it's just skewed by so many compositional issues that they

don't control for occupation or sectoral shifts. So so it's really difficult to read too much into those data. We have to wait for the employment cost index to come out each quarter. But but what I would say, there is no doubt you're seeing wage pressures. I think uh

in a number of metrics. Now, certainly a lot of anecdotes and labor supply is constrained at this point, but if I go back to what I said before, I'd be very surprised if we go back, you know, if we look forward by a year, two years, and we're still seeing these same constraints there. I think, on the contrary, we should be back towards a pre COVID labor market where we are really unleashing significant labor supply. And that I that I think keeps price pressures in check, keeps

wage pressures in check as well. So what is your unemployment rate? That is a mental tip point? You know, the Deutsche Bank research of folkirts Landau and Hooper worried about inflation out three and four years and yet a short term view that's very much different than that. Can we use a tip point of unemployment rate is a signal that we're back to where we're supposed to be. Yeah, And I should be clear, you know, we have a baseline view that the inflation jumped at this year's transitory

and I think there's good reasons for that. But you know, we completely agree that the risks are very clearly skewed to the upside, given substantial fiscal stimulus that we've seen, given this regime shift from the FED, it's really unprecedented. So I completely agree that the risks are to the upside. Specifically to your point, you know, identifying NEHRW pre COVID was almost impossible. As I mentioned, Vice Chair Clarida had said that neighbor could be as low as three and

a half percent. In fact, we never really found it. He you know, I I would agree with that assessment at that point in time, which was we never really found it. You know, we tried to do state level analysis where could you see a non linear Phillips Pholps curve kick in, and the evidence was you really need to see the unemployment rate dropped to very low levels, you know, low three percents, perhaps one percentage point or

more below what people thought neighbor was. So my takeaway from the pre COVID economy was we did not find neighrew. We we could not find, you know, where full employment was. And I think the FED that was a big takeaway from their policy review that they had, which was you really could get broad based gains. The film scrup really flattened h and neighbor was probably lower than they always anticipated.

So let's finish on this. You've just painted this picture of a world that we won't see more clearly until the end of the year, which is basically the all my awesome, your full September October time. Why would the Federal Reserve make an announcement on the reduction of asset purchases until they've seen that data. Yeah. So I think

there's there's two things. One, the significant demand that they see in the labor market, record, job openings, um, you know, all the different survey indicators give them a lot of confidence that if supply does become unleashed, the demand is there to see substantial further progress in the labor market. So I think that's an important data point. The second is this risk management. And you know, we agree that there is just substantial upside risk to inflation, even though

I believe in the baseline transitory story. And because there is you know, a process here of your tape beginning the tapering process, drawing down to the net zero asset purchases, raising interest rates. Given the growth outlook, given the labor market outlook, it probably does make sense to start that process. And again they'll say that it's not tightening, it's just pulling back on some of the accommodation that they have. So I think by the of the year, given our outlook,

they should start that process. I think they will start that process. Uh. And we have them announcing tapering in December. In December, okay, MONTI with the December called Deutsche Bank Chief US economists joining us now is Manama John Alliance Global Investors, senior US investment strategist. Moment, let's just start here. The cyclical trade seen some cracks through the month. The bank struggled at one point, the airlines have been struggling over the past dirty days too. Do you want to

stick with it? Yeah? You know generally obviously, we've had a phenomenal run in the value trade, and we talked about this since November. UM, we've been up. Energy has been up, nearly, financials up fifty, industrials up over so you know, it's been a it's been a good run. And I think certainly people were anticipating investors were anticipating some of the recovery that we are now seeing in the economy. UM. But as we're standing here today, the

tenure again under one fifty. When you think about the upside downside on the yield profile, UM, if you really think you know yields have much more downside to go, then perhaps you step back from the value trade. But if you think that yields now may start to either stabilize or grind higher, given both technical factors and fundamental factors, then I think that there is one more leg in

the value trade to come. Keep in mind as we move through this year, as you know, the FED starts to taper eventually as the reopening occurs in earnest UH, that will support the value trade. But as we head into two, we are looking at comps that might get a little bit harder for some of the value sectors and compact get once again easier for some of these growth tech names. Again, so we do think as your progresses, the more and more interests or there will be more

and more interest in some of the tech trade. But for now we stick with the value mon American investors like to buy America. They want to go on American. You say, go law in the un American European stocks. These are unfamiliar names a s mL l V m H. We know that's not unfamiliar. Unfortunately, s AP Lindian Totel, the French oil company. Should we be buying European big caps? You know, we think Europe obviously has leveraged or is

leveraged towards the value trade. You know, a lot of their sectors and industries are long financials, long industrials, and a lot of great European industrial companies and long energy, so classic value sectors in Europe right now, combined with a European economy that's also catching up in terms of

vaccine rollout in terms of economic recovery. That being said, when you look at some of the index performance already year to date, a lot of European industries are in line, if not outperforming the SMP five hundreds, So some of that catch up trade has been had. But that being said, we do think that as this global recovery is unfolding, investors need to think more global in their portfolios as well. You know, earlier this year there as a period of

what we call us exceptionalism. The US really came out strong, uh in the March time frame with their vaccine rollout. Economic recovery started in earnest during that time period. But now we are starting to see this unfold globally. Of course, we're watching the variances as you guys noted noted earlier

as well. Um, but through the summer months, we do expect some stability, and not only the European economies, but some of those e M economies that really were lagging, you know, think areas like India, like Brazil that are now starting to show signs of stability. Their markets are playing catch up as well. And if we resume a softening dollar, friend, we do think that over time that supports some of the real egards beyond just Europe, parts of those em as well. There was a lot in there.

Let's unpack one point. You said that that you are watching the delta variant and how that is spreading. How does that play into your thesis? How much and how closely are you watching that to determine when you perhaps should shift gears. Yeah, you know, it does really seem to be a race betweenvaccines and variants, and I think here in the US we've done a really good job.

I mean, the vaccine roll out perhaps won't hit the seventy percent target by July four that President Biden had outlined, but we're getting pretty close, and so in many states we are now at seventy or higher. We think that's a pretty good situation. To be in UM to fight or offset some of the growth and the variants. Aside from the variance, the other thing that we're watching closely is the seasonality of this uh you know this UM covid.

I guess, uh, you know the COVID itself. And so you know, when you think about it as a September October months roll around, UM, that really could be when we see a surgeon cases once more. And so we are you know, looking at the summer months in line with last year's summer months where we're seeing a plateau in cases. But keep in mind seasonality is a big factor here, as are the variants. These are tail risks in our case, in our view, not really a base

case scenario. Mona always gonna see it. Thank you, Globe invest the senior US investment strategist. Right now, this is really a joy. We don't do enough on the soft We talked to Dennis Gartman about red weed, but we really just don't do enough on the softs soft. She is expert on the soft commodities. ConA Hey, because E. D. N f Man, head of research with just a terrific distinguished career in these trends, I want you to discuss

ConA first, the linkage of your world to Brazil. Why is Brazil so important in getting on board a soft commodity trend? Yeah, it's super important. Brazil is the biggest exporter for coffee, for sugar, It's a huge exporter of cotton, um, you name it. It's massive. So everything that goes on in Brasil, whether it's the currency or whether it's the weather, will have a direct impact on sugar, coffee in Cordon, Yeah,

it's and corn and soybeans. These are massive, massive. My my take on your world is you've got to get on a trend and stay on the trend as well. What's the most identifiable trend right now in soft commodities? It gives comfort to be either long or short. It's very similar to what we're seeing in the general commodity space. So obviously the inflation trade, the fact that we've had a post commodity inflation, rising inflationary expectations has led to

a boom in commodities. Now. Whether we're a supercycle or not, that's still debatable, but for sure we are seeing money flowing into commodities, and the soft commodity sector has definitely

been a beneficiary to that. So we have seen speculative and investor buying across coffee sugar, and it helps that the forward curves are in backwardation, so you know, that's basically suggesting that the markets are slightly tight, and that's helped by the fact that Brazil has been very dry in the first half of the year and that's really

caused some concerns for yields. With just fuels concerned, well, there's a question about the elasticity of some of the soft commodities, a question of how quickly you com plant, how quickly you can compensate for the increase in demand or the reduction in supply based on the droughts that we're seeing not only in Brazil but also across the United States. What asset classes, what commodities have the least elasticity, are the least capable of being produced quickly to meet

the demand. So I suppose firsh things like soybean and corns. At least you have other countries like the USA and Argentina that can competit. So if Brazil has a disaster crop, you can look to the USA. But right now we have seen some issues, you know, it's very drying parts of the US UM. The weather is turning a little bit better, so corn and soybeans. The rally those in those commodities have come off a little bit um, so

we wait to see. The nice thing about the way these commodities work is that just when Brazil is exporting, that's when um you know, and then when they finished export season, that's when the U S starts expertting. So you have a nice little supply UM chain across the calendar year. With when it comes to coffee and sugar, you're looking at more sort of the beginning the middle

of the year when you start seeing harvests. So then and there really isn't a lot of substitute areas to provide that kind of huge replacements, So we are more concentrated in in the soft as such. But I mean, if I wanted to talk about the demands at elasticity, I mean we're talking different things now. So for coffee, for example, the pandemic meant that lockdown cafes were closed across um the world if you like, and people had

to drink coffee at home. And now there's a real hope that as lockdowns are risk lifted, people can go back to outdoor coffee consumption. That should provide a nice little boost there, all right, Well, maybe some people drink more coffee when they go out, other people like myself during plenty when I'm at home as well. There is a question just more broadly in the entire commodities complex.

We've been talking about peak reflation, whether we have reached peak every thing, and whether that's being reflected and some of the commodity prices easing off where they were earlier in the year. Do you see that consistently around the commodities that are most sensitive to global growth? Um, So, the agricultural site, I suppose it is less sensitive to

economic birth per se. If anything, you'd say that emerging markets more of the income is spent on staple food commodities, So it's more about the you know, as the countries they move out of the COVID, their demand for basic romatils is going to be very, very strong, and that

is definitely happening. Um you know, we have we are seeing food inflation, and if governments start taking wind of that and they start worrying about food rights the likes we saw in two thousand eight, they might want to start important to start building the strategics reserves to ensure that they don't have domestic food inflation. So I think,

you know, are we at the peak? I would say we're in the middle with I mean, certainly for some commodities, UM, harvests are coming up that should provide something life pressure. But generally speaking, I think because interest rates are still so low, and the rate hikes by the Fed promised now are now still two years away, people need to put their money in. And I think commodities right now

still feel like a good bet. Connor has switched to oil, and of course you followed out at Macquarie for years. I don't want you to single point oil out to a hundred dollars, But do you see an identifiable trend in Brent crude that launches out to eight And then I think, Um, the fact that oil has done so much better than even I thought, you know, just a few months ago, suggest that the demand we really maybe underestimate the demand. So as more and more countries come

out of lockdown, I think that demand can really spike higher. Um. Maybe in the US we've slowed the demand. Birth from here is going to be slightly slower. We probably need aviation to take off for the next leg higher um. But at the same time we do know that OPEC is now, you know, bringing supply on the plan, and I think, how if they if they go over bottom,

it is most risk of cheating. And then I think he could stop seeing a little bit of a slow down in the old price cuad Conor John from Milan emails in and he says he's probably gonna lose money on Germany England today. What's your single best idea here for people that lose a pot this afternoon on that big soccer game. I mean, if you look the way France's art porshugoes out, I mean, if that's the same trend, then maybe Jermy's gonna go. I don't know, but England

has a good chance kind of. I love that. That's the best dance we've had all day. That's great. I'll expect it kind of thanne I think, because what I heard that head of race, she'd be bound the bottom in France this morning, wouldn't you tell them? I guess so. And it's just terrible. This is what surveillance is about. We talked to one analyst and go right to another

analyst where we can link them together. Ira Jersey on yielding, now David George on the outcome for the equity market, and of course the banks as expertise at Robert war David George. If we get in Ira Jersey tenure yield two point two two points, what does that do to bank equities? Um, If we get that, Tom, good morning, I think that it's fair to expect a you know, if you're gonna pin me down to a number ten upside for banks Fox if that's the outcome out of it.

In addition to the rate the rate environment itself, that obviously reflects a much a much stronger macro backdrop as well, so I that undoubtedly would be positive. How do you calibrate the umph of this one off in share by back and particularly dividend increase with the sustained dividend growth? What kind of model do you have for these big banks is they try to figure out the sustained dividend

that they will give shareholders well over over time. We're we're of the view that most of the big banks, and I say this as a positive, are going to be very utility like with respect to how they distribute capital. I would expect over the longer term, the three five seven year time arizon, you're going to see close to capita return to shareholders, both in the form of of buy back in dividend. And obviously the buy back discussion can be variable depending upon uh movements in the economy,

stock price movements, etcetera. But but I think that the punchline is that there's going to be very significant kapita return out of the financial services industry over the next

several years. David Mike Mayo of Wells Fargo came on the program last week and said that right now, with all in payouts, the yield on these financial stocks are probably equate to something like eight or potentially even nine percent one how much can people buy these shares for simply the payouts versus the dynamism from a steeper yield curve, from greater consumer lending activity, things that perhaps we're not really seeing as much. Um. I think part of the

investment cases is clearly capital return. But but I think buying banks on that alone is probably a somewhat of a frail thesis. I think in order to be very bullish from these prices and again to to kind of give you some perspective banks or out of over over the last twelve months, they're up over t on a year to day basis, So clearly they're significant expectations priced into them today. So so I think that the challenges

from here. UM. Capital returned from my perspective is very positive, but it's not enough to make a very bullish call for financials from these levels. I think for for for the group to do well, you need higher rates, you need more loan growth, you need to continue to strengthen the capital markets. And and again, as you said, UM, that that kind of remains to be seen at this point. Okay, let's put the rates picture aside, since that's a less

determined frankly is anyone's guests. There is a question about loan growth. And Alison Williams of Bluebrig Intelligence and I were talking yesterday and she said, really, the untold story over the past month was from these big executives saying that actually consumer loan growth is sluggish, that JP Morgan City Group is actually seeing disappointments in that area, particularly with respect to credit cards. How much have you noticed that?

How concerning is that too? Um, it's not, it's not concerning, but it's absolutely a factor. Allison is right on um as usual and this last basically, in simplest terms, the government stimulus has crowded out loan growth. That's basically from my perspective, really what's happening here that the amount of stimulus has been so significant that it is really um eliminated the need for many entities and consumers frankly, to

to really binge on borrowing. Now. I think that will change over the next couple of years, but over the short term it shouldn't be a significant surprise because it's it's very much in bank deposits. If you look at deposit growth for the banks, it's it's been well, well in excess of loan growth for the last several months. So in order for us to see loan growth improve, we would probably need to see deposits start to come down, and that frankly, hasn't happened yet. Will it happen with

these announcement of capital deployment. If they're gonna buy back shares, they're gonna use cash to do that, they by definition become smaller entities. You leverage out what they've got left there onto their balance sheet, and with that, do they preclude growth? Do they limit their growth? Um? No, No, they don't. If if loan growth does not manifest itself in a meaningful way. Ironically, most of these companies will generate capital faster um because they're not growing their balance

sheets because of that lack of loan demand. So I don't think that any um pick up in sheer bodyback activity Tom has any implications for loan growth. David Love catching up. It's gonna hear from you, David joyge that Robert W. Bad sena research analyst. This is the Bloomberg

Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg