Surveillance: Market Slowdown with Stanley (Podcast)

President United States in Madrid. Steve Stanley just doing fabulous work on the makeup of the American economy with Aaron Amer's Pierpont. What's your biggest mystery? Into Q three? Steve Stanley on the classic equation, consumption, investment, government or trade dynamics.

Which one is the great Stanley mystery? Well, I think you gotta watch the consumer and you gotta watch housing because the markets are starting to smell us economic slowdown, which I think is a little premature, but certainly that is the issue of the day, and if we're going to get a slowdown, that's where you're gonna see it. So we've been focused very keenly, I think, over the last couple of months on housing, and it does seem to be cooling off, but it's cooling from a very

hot temperature. Uh. And these numbers today on the consumer are a little disappointing. So um, I do think that the consumer is going to have a big summer, people getting out and uh, doing all the things they haven't been able to do for the last couple of years. But the data this morning or not, uh, not all

that encouraging. And Steven, that's exactly where I wanted to go, especially because real spending declined for the first time going back to December, and more than people have previously expected. This as inflation adjusted actual spending. How quickly is the consumer based on this data and other incremental points that we're looking at, how quickly is the consumer rolling over in terms of their ability to really accept some of

the price increases. So well, there's ability and willingness, right, and I think the ability is unusually strong because consumers are sitting on a huge pile of cash that accumulated during the pandemic. Um, you know, all the fiscal largesse in particular, so consumers have the wherewithal at least send the aggregate to spend. I mean, obviously inflation is going

to create stress for certain households. But uh, there is a question about willingness, and I think given the consumer confidence dada, you have to wonder a little bit about, um, how eager consumers are going to gonna be to continue to spend. My sense is that there's still very enthusiastic. Certainly, any any field trip to the airport would suggest that that people are are still looking to get out to the airport tomorrow and it's going to be a nightmare.

Already prepared for this. Flights are getting canceled. How much, though, is this part of the story that it is a blip. It is revenge travel. It is people who are reprising the past that they were not able to live during the pandemic. That ends, it ends with the miserable experiences that people have in the airport. It ends with the fact that people have gone out, they've traveled, they're now exhausted, already to start whatever it is that is the post

pandemic reality. How much is this the last hurrah when it comes to travel and some of these inputs that leads to the next phase that begins at Labor day, right, Well, there's definitely it seems like there's gonna be some catch up. So that's the short run burst, if you will, in the economy, and I think that does certainly protect any threat of the down of a downturn in the near term. But but as you say, I mean, once you get past that, then it becomes it gets back to the

usual fundamentals. I mean, certainly, one thing that is on the positive side is the labor market. And you know, the unemployment rate around three and a half percent, so people have jobs and um incomes are not necessarily keeping up with inflation the way we might like. But but income growth has been pretty strong and I think sufficient to support ongoing growth and consumption. So um, I do. I take your point, but I think that the the

underlying fundamentals are still pretty good. I think what we really have to see is how sensitive is the economy too higher interest rates. We haven't had higher interest rates for a very long time, certainly going back before the financial crisis, and it remains to be seen how sensitive the economy is uh as interest rich rise. And I think housing is going to be the test case there. So that again is why I'm keeping it. When this

conversation often comes up. Often here economists described the aggregate story, the headline stuff. Can you break it down a little bit more for us, what the low income groups, middle income groups, high income groups, what do you expect from them this year? Because from an ex re market perspective,

that's gonna have different consequences, different outcomes, ramifications for different companies. Sure. Yeah, Well, if you if you go through the pandemic period and think about that accumulation in household balance sheets, there were really two stories. Um. For the wealthier households, they weren't getting a lot of the fiscal largees, but they were benefiting from the markets, in particular the equity market but

also housing UM. And then the people with more modest incomes were the ones that for the most part who were receiving the rebate checks and the unemployment UH supplement on employment benefits and things like that. So even the folks at the lower end of the spectrum UM came out of the pandemic, perhaps a lot of them at least in better shape than they might have been otherwise. Of Course, you know over time that that cushion will get spent UH and and in particular in this environment,

inflation will erode of purchasing power to a degree. So uh, it's going to be important for the labor market to stay strong. Those folks at the lower end of the wage spectrum have been doing particularly well in terms of wage gains, and um, you know you'd like to see that continue, you would, Stephen. Thank you, Stephen standing there of Amherst popon the challenge to the consumer issues we've all got to think about when it comes to markets

and this economy. Closing out June and looking ahead to July to like thirte CPN Americans, you like fourteenth JP more can kicking off things for the banks in corporate America, looking ahead to warnings, looking ahead to what they spawn market is going to provide for this Federal Reserve and it's next mazing. My shoemak At joins the snap Global head of Macris Strategy at Wells Faco and Mike, Lisa, Tom and I trying to work out where the bike point is in this credit market for this FED to

have a rethink. It's not where we are now, where is it? Mike? Yeah, it's interesting trying. I feeok at high ELD typically it peaks at about ten percent in the cycle. Right now, it's heights, so I would say that's tennish, maybe somewhere around there, but nowhere near current levels. The FEDS looking right now at the tight end conditions and saying yeah it hurts, Yeah, it's painful. But this is a feature, it's not a book. We're going to

see more of it, Michael. The clear theme here and particularly off the important panel yesterday, is the FED and other central banks are resolute by reading a meltzer, Anna Schwartz, Friedman Richard Timberlake of the Georgia School is simple, that's bologny. They always succumb to the political zeitgeist, the political pressure. Is it going to be the same way this time? I respect the FED and the other central banks will feel a ton of pressure from the politicians time. It's

almost inevitable. But the question is how quickly they I wouldn't say cave, but had the impact or decision making. And for Chairman Powell in particular, it's really a challenge because he's got to look at that wall down of the FED and say, you know what, Arthur Burns worst chairman ever, William Miller probably a close number two. I don't want to be number three. I've got to fight inflation and I think that that personal legacy is going

outwigh to politics for him quite some time. Michael Schumacher harsh today. Well, Mike, given that harsh review and given some of the barishness that you have currently looking at this market, how do we get to four percent on a tenure treasury yelled, given that we are looking at such a pessimistic scenario that usually sends people back in

the bonds at least, it's really interesting. I think you've got to break it down into where does inflation and the cycle and what sort of real rate is going to be implied or expected at that point in time. So we think core probably a core inflation that is, and the cycle maybe two fifty, perhaps a bit higher and really olds at least an our Va Wells Fargo have to be one fifty plus, So that gets you to four percent. You might say, well, wow, one fifty

with a recession, how can that happen? Think about the last cycle, granted fairly mild, but still at the end of that cycle you have the real tenure rate about one, so one fifty with incredible inflation and really the FED one and to take out insurance against that inflation, Genie coming back out of the bottle. That seems pretty reasonable to us. That's how we get before. What is four percent on a treasure yield for a tenure treasure yield

to do US equities, that's a really rough ride. So I think if you do get four on tens, certainly speed manners. Let's say it happens sometime around the end of this year. It takes stocks down quite a bit. I'm not sure if they get down towards three thousand. I'll leave that to Chris Harvey, but it's going to be a pretty painful journey. We'll catch up with Chris Likes and ask him that. Mike, I just want to finish up with deal reflections on yesterday. What was the

big standard thing for you? Listening to President of God, listening to Chamman Pou, listening to Governor Bady too. When I listened to those three central bankers, John, it strikes me the e c B has got the toughest job. Certainly it's most closely impacted by the situation in Russia and Ukraine. And I listened to Christine Legard and say, well, okay, so the e c b s history of ray hikes is not particularly great, And on top of that you've

got the question of gas floats. I would circle, I mean circle in bold red July one on the calendar. It's the ECB meeting and also, perhaps more importantly, that's the day of the nord Stream pipeline comes off. Me its will the gas go back on? How much that's going to drive policy through the CP. So they're all uncomfortable that. I think that's a central bank. It's got the biggest challenge ahead. Fascinating stuff. Mike my Shoemak of that of Wolds FAKA for Global Wall Street, get out

the pad of paper and take notes. Jane Foley is a student of foreign exchange. Yes, dollar centric, but with Robbo Bank far more looking at the linkages between foreign exchange. What I noticed irrefutable, and I know the President Trump was way out front on this, Jane is strong strong dollar. Trade weighted dollar by any indusicries is back to two thousand three, even back to two thousand two. What is the significance of a strong dollar back twenty years? Oh well,

this is, as you say, a pretty strong DOLI. But I think what it's reflecting is is the riskiness of other assets. I mean there is a pretty strong correlation or inverted correlation between the dollar and one hand and risky assets. When risky assets are not performing well well,

the dollar goes up and vice versa. And I think if we look at the tone and markets right now, people talking about recession, the US recession potentially over over the winter in Europe because the gas prices a slett with growth worldwide, then then that's an environment which the dollar performs well and risky assets do not. And I think that's, you know, very much a story that we're

looking at right now. I don't go short term with too much respect for your work, Jane, but I am going to do it here in June thirty where is euro and Yenne set up against dollar September thirty, Well, you know, our forecast for for Dolly Yenne, sorry for for euro dollar for a while has been you know, one oh three ish, and the reason for that is that, you know, we have this massive, big support level and one oh three and a half and and you know we're staring really closely at that today. If we go

below that, you know, we could see parity. And I think from while we've been able to outline the risk of a parity, and this is this is to do with Europe. This is to do with gas prices high over the winter, This is to do with that creating these refreshing recession recondition stackflation, and that of course putting a lot of focus on fragmentation in the Eurozone, which is a bad story for the euro. So that is

what we're looking at, I think this week. But with respect to the yen, well, you know that is a I think a yield story. Now the dollars gone up today more than the yen, and it's brought us up to you about one thirty six. But actually, if US yields do start to come down, then I think that gives the Bank of Japan a little bit of room to carry on doing their your care of control until they want to stop it, which will be one way to spegin to go up in Japan. Jane, I want

to stick on the Euro for a minute. You're really saying it's quite bearish for the euro right now, which a lot of people see the same, especially given some of the gas constraints for Germany. So why haven't we seen more weakness already? You know what? I think people are only just beginning to come around to the recessionary story for for the euro Zone. We've had that as a forecast for a while and we've been an outlier.

But I think more recently, you know, that has become or that view that we could see recession over the over the winter months has become a little bit more commonplace in the market. Now we've got the guard still defending the view that she still thinks the easy we would still carry on seeing growth in the Eurozone. But the fact that she's defending it again this week, the fact that she's reiterating it almost sounds like a pushback against the fact that she's aware of these weight of

views coming through from the market about Eurozone growth. Now, if look back to last week, we had the German Finance Economy minister talking about the possibility, you know, that we could have maybe supply cut off to some industries in Germany that would relate to Italy too, very difficult not to see recession if that happens, Jane. The spiraling effect of a weakening currency in an inflationary environment is something that is also a bearer case because it will

only exacerbate inflationary pressures in the euroregion. Prompting the ECB potentially to act more aggressively, only furthering the downturn. How much are you looking at the incremental weakening in the currency as a bear case for the economic trajectory? You know, this is really quite interesting, and I think we've seen this quite a lot in the last few weeks, certainly this month, amongst at central banks. You look, for instance, sort of speech by Catherine Mann from the Bank of

England last week. She was talking about the spiller of over effects of the FED hiking by large amounts and that coming through into the UK and and perhaps setting the scene for a more aggress pace of interestrate hikes in the UK just to defend the currency. Now you can see that already in in Norway. Norway height interest rates recently by fifty basis points, bigger than expected. It only served to stop the currency going down. It didn't

push the currency higher. The ricks bank today fifty basis points not an awful a lot of game for the currency, etcetera. So we're seeing this this momentum where central banks have to go big because all of the big ones are going big, and as you say, that can just accentuate the downside risks and in terms of demand, and whilst that might be that might fit well perhaps for the US, maybe for the Europe, and certainly not for the UK, will that be necessarily suitable when you have less wage

inflation and and perhaps more vulnerable demand? There what a great point, James Folly there of rather Bank, the head of FX Strategy, chief global strategist at Principal Global Investors, Echard joins us right now, seeming you wrote a midiar report five days ago. What's changed in the last five days? What is the new staggering in the Q three? Hi, I joined try Tom, thanks for having me on um.

I don't know what's necessarily changed. I think all that we've seen is that central bankers are finally being a little bit up from about what that actually having to deal with, and they've they've finally emphasized, especially for the feather, they finally emphasize that prestability has to be their number one priority. And I think the markets has given a bit of a wake up call. This is not going to be an easy ride. But I don't think that

excess can rally the back of the year. That makes the assumption that the set is going to let go of its entire focus and pricetability, and to step back from that and we have a very different view. We think things are gonna get pretty tough, seem that's another way of saying they are not going to tolerate anything of financial conditions. They're not going to tolerate a running and gets with the market, They're not going to tolerate tightening credit spread. So I want to understand from you

just how much downside do you think there risk. Do you think of this as a moment where markets can't alley or do you think of this as a moment where markets have to sell off more so, it's interesting because when we look at technicals, if you look at

just investor sentiment is getting extremely nervous negative um. You know, there's been a fair amount of flows into cash as well, which means that I think we could see a bit of a technical rally over the next couple of months, assuming that there are no negative or actually say positive upside prints on the inflation side. But that doesn't mean that that is a sustained rally which is going to

continue into three by any means. We think that as soon as you start to see your second leg of the downturn, which is essentially when earnies growth starts to come down, that is when you get your a further drop in the extra market declines. How far we go from here is a difficult one to cool. I think you could get another tent to fifteen decent dropped from this point, but between now and then you can't get

a bit of a rally. If we were doing a full on jargon hour, we would be talking about a softer recession, which possibly is the biggest cliche of the moment as we talk about how much this contour of the contours of this particular recession will be different than those of two thousand and eight or two thousand and nine. Do you agree with this assessment that it's going to be shallow, that it's not going to be as painful

as previous down terms. I do, and I think the reason is is that when you think about the GFC, that was really that was so much imbalance um that had to be worked through the economy, and that dragged it out for quite a long time and also made

it pretty deep. I think from our perspective, we can see that this is gonna be a shallow recession, but almost A more difficult part is that once we start to see the FED cut rates in response to your recession and inflation fears coming down, how far do they really go? Did they go back to the zero present level that we've become so accustomed to, or do they start to settle it just below the neutral right, which

is around two percent? So well, I agree that this is this is a more inflationary period going forward for the next ten twenty years UM and Monterrey policy is going to have to follow with up. So Seema, how does that reshape your thesis in terms of how to arrange some of your assets. I'm thinking particularly of sixty forty that just had its worst quarter ever. Yeah, well, I think this really plays into the idea that it's real assets. Right, We're looking at not just a medium

or a short term inflationing period. This is the medium term inflation outlook where commodities, infrastructure you can really continue to outperform. From a bond side, Well, look, I think we can still think we think about higher quality and moving into slightly longer duration, but unfortunately the longer duration doesn't work for too long because we just don't the US Treasury yields falling too far if you start to think that even in a recession, the FED isn't going

to cut all the way to zero. And a couple of messages this morning from a terminal subscriber, and he talked about the consensus that we've gone over a million times and how quickly that consensus has changed. This is what he said. I think the market call was this. The FED won't hike much in twenty three. The Fed won't hike fifty. The Fed won't hug seventy five. Inflation peaked in March, Fed wal force in September. Inflation will come down in the fall. The Fed will pause in

early twenty three. No recession, no recession, recession risk, fifty recession risk. And now seemingly tim the new one. And this is not me throwing shade a seema ca semara. Give you the chance to respond to this, but the new consensus view, it's recept but a shallow one. And we've heard that several times this morning. In fact, we've heard it a lot of times this week. John, you're

killing me. Will give me something to magnitude, I would look with an all the discussion here of y will c plus I plus G plus n X, the international component, the trade component. It's about gaming the magnitude of a slowdown. John Williams, New York Fed says, there's not going to

be a recession. We're gonna get that growth. The agony of a of a more subdued positive ste to one point five is what I think he said, seem I wanted to give you the shows to respond to that because it started to become this consensus view recession maybe but a shallow one. You're comfortable with that that a lot of other people just see it the same way. But we've had that story a few times this year,

and it's changed pretty quickly. I think. I think that investors, justice, central banks have been caught up many times in terms of the inflation view and you know through all the bit but energy and food inflation are going to be the wild card, and that is going to be difficult to predict, I think from the recession perspective because we just fundamentally don't have made it imbalances in the system.

It's difficult to see it getting to the g FD perspective unless this is a caveat which is where you get come onto continue to drive hitting the hundred fifty delivered barrel, and then you're looking at saxationary shock, which in that case that's a deeper recession and it's a longer recession. But that's the wild card. Sama. Thank you for that explanation at the end there to thank you very much, Seem Chanda of Principle Global Investors. This is

the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern. I'm 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