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Marvin Love joins US now sceney global macro strategist to State Street. Marvin, wonderful to have you with us on a program. Tom, want us to talk about the note from Selfgen's Kit Jookes this morning. He said, this US data will dominate sentiment and will probably deliver solid retail sales, decent industrial production. The debt limit remains a major issue, but for now, evidence of recession is missing. Marvin, Is recession evidence missing right now? For you?
Yeah, I mean it's certainly not clear. I still think that a recession is unfortunately someone unavoidable after the banking a situation, and you know, we're waiting for that to make its way through the economy. But the consumers still strong, jobs are still of you know, robust based on the latest numbers, and inflation is proving sticky.
I look, Marvin, at the inflation proving sticky, and yet there's a single headline from home depot. Granted it's a commodity, Granted it's volatile, but lumber deflation. Are we going to see more headlines like that?
You know what?
Probably, you know, the good, the good side of things has been a bit more volatile in this discussion. You know, it does come down to services wages in this economy, and that's really where the FED is focused on. And it is the stickiest of the sticky, if you will, parts of the incation discussion.
But on a global basis, I mean I looked at copper very carefully this morning. I looked at Newcastle coal and Australia folks, this is north of Peth, and you know, I look at these commodities and effect is they're rolling over, indicative of a slowing China, maybe a misguess on the Pacific rim. How do you fold that into your investment allocation?
It stays strung, Yeah, I mean, I mean, for sure it is signs that you've got growth problems that are starting to emerge as we go through you know, the one year anniversy of this aggressive Titan cycle. Within the developed markets, those recessionary signals are are all over the place. It is this kind of one slice of the American
consumer that's making it harder to play. But I think if you can look past the timing of this consumer, which again with some of these retail earnings, with some of this data that's coming out softer, you do get to a much slower growth type of discussion. And you know, if you're willing to put those investments in place, they're out there.
Do you think that this is disinflationary to the degree that would give a bit of a reprieve to the Fed, especially if the stress that we're seeing in the banking sector is there is real, but a slow burn that isn't going to necessitate some sort of real response.
Yeah, for sure.
So I definitely am in the camp that this had a tightening that I expect in the second half of the year is going to have a bigger impact on the economy than you know, maybe some of these risk assess are saying, particularly on the default side of things, particularly on just overall loan growth slowing, and you do get a more disinflationary type of world. Once we get there, it's you know, the timing is really hard. It's not really the expertise of global macro to pick one month
over another. But you know, going into twenty twenty four, I think that those headwinds seem much stiffer.
Where's the death healing debate on your radar? Are you excited to wake up every morning to get a sense of the machinations between the different discussion points that the two parties have.
You know what, if you talk to my coworkers, they would say, I get overly excited about it. So yeah, I certainly do think that the market is a bit sanguine about it this time, particularly given the volatility on the deficit side of things.
It's just a lot harder.
To pick the date when we're going to run out of money, and that really creates a problem for Washington, which seems to need that impetus to get things moving. I'm also very cognizant of the amount of reserves that moves around once we get the deal, and that in and of itself creates more challenges for bank deposits, at least in the in the short term, potentially in the intermediate term kind of just given how the shape of all these short term curves are somewhat inverted at this.
Point, Marvin, Let's say we knew the X state was June one, June first, would there be a different practical X state, a deadline that we had to really come to an agreement on to pass the legislation needed to ultimately skip the dreadful outcomes that most people are predicting if we do go through that X state.
Yeah, I think there would be a greater sense of urgency. For sure. We are running out of time very very quickly. You know, the President is still apparently going to the G seven. So you know, again the litany of of of conversations that are coming out of Washington show and degrees of concern, and that in and of itself is a concern when you're talking about a date to two weeks away.
How you get how you get.
There is really some sort of hopefully acknowledgment that June first is a date that we should focus on in a temporary agreement to get us past or else, you know, we go into territory that we've never been before.
I thought you had done them. Movin just got trigger happy on the sun of the I just hit the gap. Yeah, it's nice straight, I'm worse than you, mama.
Thank you. Really important here, I think to look at the retail data, rip it apart and someone that can do that, of course as a general lady from Pimco.
And this really is the question, especially after we were talking about a discretionary recession, are we seeing that in the data? Joining us someone who is someone who focuses on this all day, every day, Tiffany Wilding, economist at Pimco, five point thirty am their local time. Thank you for waking up and keeping Eastern times the Jacob partake. But I'm curious, Tiffany, from your vantage point, are you seeing signs of some sort of discretionary recession or is that premature?
Yeah? Well, I mean I do think that the consumer some of the momentum in consumption has decelerated since the beginning of the year. So, you know, the first quarter was extremely strong in terms of consumption growth over three percent, you know, but a lot of that, as we know, if we look at the sequential monthly data, it was really boosted by warm weather in January, and then we saw deceleration in March, and it looks like we're getting
a little bit of a pop back. But as as Michael suggested, there's probably some noise around Mother's Day here, so you kind of have to smooth that over, you know. So we would suggest you are seeing some decline or you know, growth deceleration in consumption. But overall, you know, as as was said, the consumers are hanging in there, you know, and of course that's also going to be a function of the labor market, you know, and it is still it is still reasonably strong.
Hanging in there and willing to pay the prices that are being demanded are two different things. Is there a sense that there really is starting to be some pushback to the inflation that's being borne out in consumers pocketbooks and in the fattening margins of profits at companies.
Yeah, well so, I mean we're definitely starting to hear more of that coming from you know, the various earnings releases from some of the consumer companies. You know, they're saying obviously that consumers are a little bit more price sensitive in various categories. I would say, when when I look at the macro data, you know, I don't see it as much and of course we need more macro data. You know, we're starting to see these trends at the
company level, they're noticing it, you know. Then note it will come out with the macro data with a lag, you know. But but overall, I would say inflation is actually still you know, still reasonably robust. I mean, obviously at five percent or more, it's over the FEDS target. You know, we do expect it to come down, but it's been I think it's been continues to be stickier than expected.
Tiffany, I'm I need to ask you this because in the equity market, I've been looking at the slow motion convergence of moving averages down to what Lisa and I call a snooze fest. I got the same thing in the bond market. If I look at the two year yield, there's a tenC weed see two bases point differential in the three moving averages I use. Does your own Powell call that a success? To see the lethargy the boredom within the bond market described by the two year yield?
Well, you know, I you know, I do think that the bond market does listen to the Fed. You know, I think sometimes commentators like to look at, you know, just the forward curve, which is which does suggest you know, a significant probability that rates will be lower by the end of the year, to suggest that, you know, the markets aren't listening to the Fed. I do think the
markets are listening to the Fed. But I just think the markets probably have you know there in terms of their distribution of risks, they assign more downside risk the
economic outlook than the Federal Reserve does. If you take a historical look at banking sector crises and stresses defined by you know, thirty percent drops on average and banking shares, you do see tendencye the economy decelerating after that, you know that'll that'll of course come to tighter credit conditions for consumers and households.
What do you hear from then, your PIMCO portfolio managers, without giving away the crown jewels, what does Pimco say about the dynamics in this banking crisis in agency paper?
Yeah, well, of course there's some you know, banks that failed obviously held you know, they held a lot of treasuries as well as agencies. You know obviously that won't need to be sold. We think that's probably priced into the market, though there's a pretty good understanding of exactly what that is, you know, in terms of the how much it is, you know, And obviously the Federal Reserve is also shrinking its portfolio, you know. But on the other side of that, you don't have a refinancing wave
because interest rates are so high. So overall we think it's it's priced in. We actually like agency nbs, and we think that they actually provide pretty good value right now, just because volatility has been high and the level of interest rates are high, and those things can mean revert back down.
As we prepare for a slew of retail earnings, particularly tomorrow with respect to Target and then Walmart, do we get a sense that perhaps people are too barish, that home Depot was an outlier, and that otherwise, to your point, the consumers are still spending and they can keep borrowing to do so.
Well.
I mean, so the data that we got some credit data from the Federal Reserve, which did look like there was some reduction in credit card there was a deterioration in credit card loans and things like that in the first quarter, you know, So I do think there are consumers out there that are feeling pain, and I do think banks are tightening credit conditions.
You know.
The other piece of this obviously is just demand for credit, and demand for credit is also falling just because rates are so high. You obviously it's more expensive to take out loans, et cetera. So you know, all of this to me is suggestive that you know, monetary policy is working.
You know, the consumer, you know, ultimately it is they are getting squeeze, some of the lower income consumers more so than others, you know, and you are seeing some deceleration in credit growth as a result of of the current environment.
So as you put this all together, is inflation decelerating enough to really get the FED where they want? Or are we looking at a sort of higher inflation but also higher growth kind of area for a longer period of time.
Yeah, I mean, I think that's yet to be seen. You know, as I as I mentioned, we do think this banking sector stress is going to impact the economy. It's going to slow things down. Higher interest rates take time to work their way through the economy with a lag. And you know, I would even say inflation even lags you know, activity momentum, so growth, So you know, we I think we're seeing these lags start to play out.
You are, you have seen inflation decelerate. It's probably going to continue to decelerate given the monetary policy restriction that's in place and the Federal Reserve, you know, just needs to be patient, as does markets just needs to be patient to see that.
You know.
So we think inflation does decelerate to three percent core CPI for example, by your end three to three and a half, you know, but obviously that's still above target. There's still some sticky trends and inflation, you know, but ultimately the Fed probably will be successful in getting it back. The question is, you know how you know, how big of a recession do they need to do that?
I think, thank you, Tiffany will greatly appreciate it.
With pim Core, Lindsey Rosena of Paging Fixed Income wang in on the market reaction right in the following there's a kink and the tea bill curve around the next day with one hundred basis points of extra yield. If we don't get a resolution, we're just kicking the can down the road and not eliminating the problem. This makes the T bill market tom a challenging plan.
To be really good note from someone who really qualified to talk about this, and of course, with all the hierarchy of PGM and the excellence they've done over the years, Miss Rosner joins us. At right now, Lindsay, the note really goes to the opportunity that's out there. What is the opportunity given a discontinuous function in the three month T bill? How do you play it? Right?
I think the answer is you you don't play it. There's so much talk right now about getting this extra one hundred basis points, but if you think about it the downside, if we actually do have a default, which we think happens with a five percent probability, one hundred basis points is just not good enough upside downside analysis.
So for us, it's skip the games in the front end of the curve and get more into the intermediate duration space where you can take advantage of doing the right kind of things.
I mean, what's so important here, lindsay, And this is to the elasticity or responsiveness of the belly of the curve five to seven years I'll call it as well. Well, then, what's the opportunity there? How do you play that?
I think there are a lot of opportunities and you can go kind of any which way you want. So if you want to be more conservative, you want to stay more investment grade, great opportunities and agency mortgage back securities, even commercial mortgage backed securities, if you stay high quality on top of the cap structure trip as with a lot of credit enhancement, there's good stuff to do in an investment grade space, a lot of opportunity there. But if you want to seek more risk, go for more yield.
There are idiosyncratic opportunities in high yield. So you've got kind of a diner menu of options in the middle of the curve, and you don't have to get stuck in this noise or the anxiety that you all were speaking of in the very front end of the curve that is really hard to play. And the big problem is is that if the debt ceiling, if the quick solution is prioritization, that's just kicking the problem a couple a month, two months down the road, you're going to
be right back in it. And so if you thought you did something cute and you bought T bills two months out, well you may now be back at the X state before you know it, and it's just not a game worth playing.
Okay. That said, if this, let's say, gets resolved, do you then get more risk on do you start to get more aggressive in other areas that go beyond just simply the idiosyncratic trades?
So we go back to with your prior catch you're asking, Okay, it just gets resolved, what's next? And what's next is we go back to what we were concerned about, which is we still have the central banks across the globe that are trying to fight inflation, and they're parts of the globe where we still have double digit inflation. So this battle isn't over, and we need to think about
how does the curve respond. Right now, we all know that there's a significant amount of cuts priced in in the US, for example, at the end.
Of the year.
How does that work out moving forward? And so we go back to inflation watch. We get out of debt ceiling watch, and we move back to inflation watch and figuring out is a recession happening, will it be a soft landing? And in that scenario, it still isn't yet green light going.
We've been talking about that Bank of America fund manager survey, and one aspect of it was the allocations to bonds are the biggest going back to two thousand and nine. This is the latest one from May. How much does that give you a sense that things are crowded in the duration trade? Basically this idea that longer term, there is a confidence that we're going to be low inflation, low rate kind of you know, trading the same way that we were over the past few decades.
I think what we've got here are some big shifts in asset allocation or portfolio allocation. Forever there was a discussion of the sixty forty sixty forty is not really working. If you have a move to this fifty to fifty or even more fixed income, that then tells you that these flows make sense and they are stickier than one may think. Also, as we've been saying all year, you've got income and fixed income, this isn't a place that
you just park it because you're scared. There's a lot to earn here, and so I think that movement into fixed income is well founded. I'm obviously biased as a fixed income manager, but I think it makes a lot of sense now and it didn't make much sense for a very long time.
Do you think the allocations are just generally increasing in a structural manner to fixed income and decreasing to equity so that it might be more of a fifty to fifty kind of new portfolio.
I think time will tell. I do think it's moving in that direction, and I think that direction makes a lot of sense.
Lindsay, go to wrap it up there, Alice Enjoy. You're inside, particularly on the debt sating, you know, for once Urction having some intelligent conversations Tom on the debt stalend this morning, Lindsay rose to the on the bond mal ket.
Right now in Washington, and we're going to try to take a different spin here. Isaac Multanski joins this, director of policy research at bt IG. Exquisitely good on the distill it of when we're done with this, Isaac, first question, the morning after this is fixed, what happens.
We go on to fight about other things, you know, then the morning after then we're going to refocus on whatever the next big legislative deadline, and that baby, the spending bill at the end of September, maybe the farm dell. But when we get this off the table, I think the market can go back to worrying about everything else because the debt ceiling is so important.
All right, Look, Isaac, and this goes back, folks, to Pete Peterson, the gentleman from Nebraska who called me up, is quite elderly at the time, and he and I talked about his ageless concern, Isaac, where the former Secretary of Commerce made clear he was forever worried about this debt. Peterson Foundation publishes that CBO interest expense over the next ten years will go from six hundred and forty billion to one point four trillion dollars. That's the interest expense.
Every American knows. That's nuts. Why shouldn't we be concerned about this?
We absolutely should. We absolutely should. But DC hasn't. Is an inability to focus on the long term, right. We are focused definitionally on short termism. And even when we have these discussions regarding the debt ceiling and maybe spending, we've already taken off the table talks about addressing long term entitlement reform, which as we know, is one of the larger drivers of our debt. And so we've also
taken off the table defense spending and other items. And so when you start with so many sacred cows, it's impossible to actually get anywhere over the long term. So the most we can hope for Tom from these negotiations is just not shooting ourselves in the foot with a technical default and having to go through the mess of prioritization and whatever else may come from not doing the basic job of lifting the debt.
Sealing, Isaac, I'd love you to build on what Wendy Schiller was talking about at Brown University earlier this morning when she said that in our ultrapolarized world, she expects things to sort of be a repeat of twenty eleven in a bit, but with a less satisfying legislative solution, basically saying that Republicans tend to want the government to go into some sort of default or at least some sort of non payment because it plays well in terms
of them taking a hard line on spending. Is that true or is that not really born out in your experience.
I don't think that we're there, you get, and I'm still operating under the old maxim that things in DC are impossible right up until the point that they're inevitable, And I do hope that we're able to get some progress today where we're able to move forward on that list of menu items that we've all seen reported about over the past few days, to the point where perhaps President Biden leaves his G seven meeting early, or skips Australia and some of the other stops, comes back as
a one on one with Kevin McCarthy as early as next week, and then at least in my base case here is we just have a deal that pushes the debt ceiling deadline to the end of September, which then aligns it with the federal spending deadline and gives negotiares a little bit more time, because look, they're trying to solve some pretty thorny issues when in reality, you got to have something lady to move its way through the legislative process. By the beginning of next.
Week, as we wait for paying to dry and get a sense of when things get to be a little bit more urgent, we're going to have the hearings with respect to what happened with Silicon Valley Bank and all of the regulatory oversight. We already got a look at some of the pre released questions from the former CEO of SVB, blaming the FED, blaming regulators, blaming social media. What do you expect the response to be?
Look, the reality is hearings very rarely change the policy trajectory, and we need investors to know that the regulatory framework is going to be tightened for banks. They're going to start with super regionals for their total long term debt requirements and resolution requirements, and then they're going to go down to the one hundred billion plus bucket and start to deal with things like AOCI. But my issue here is I don't think this banking crisis is over. I
think it's going to flare up again. And what we're going to have to deal with when we look at the post mortem for this crisis is what was the logic behind us tying the hands of the regulators on the front line to address these crises. The fdiic has nothing else it can do administratively to address this deposit insurance issue. So once again we're waiting on a Congress it's either unwilling or unable to act on the matter.
And frankly, that scares me because we're not through the woods yet on the banking issue.
Well, Isaac, let's tast out a little bit more of that. What about the tension in the last couple of months do you think has the potential to flare up again?
Look, I think that we have not addressed the mismatch of assets and liabilities across the banking system. I think that we have not dealt with some of what I
think we can all agree we're supervisory failures. And we spoke earlier about the federal reserves mandate, and the Federal Reserve is also going to take some flak here there's a hearing about Federal reserve reform later this week, worrying that perhaps their guiding star is just monetary policy and that leads them to fall down on their job as a bank supervisor sometimes. So I think that's still out there. And look, I listened to Jamie Diamond when he also
says that he's concerned that it's not over. So I put all that together. I put into that mix the fact that you still have some policymakers talking about the need for a short selling band on banks, and I look and say that our option set for addressing another flare up, especially if it's in a bigger, more systemically important bank, is pretty limited to just Congress passing legislation quickly, and they're not good at that.
Isaac, thanks for the perspective. I a botanskin. They're brutal. Honesty there at the end from btig.
Elise is an expert on this because she's in Home Depot three times a week. John and I are clueless on this. Somebody really confident is Charles Gram. Chuck. Graham is senior retail analyst at Gordon Haskett and joins us right now. And what's so very cool about this out of the College of the Holy Cross is this is one of the coolest things in the securities research side. This gentleman is a CPA and a CFA, and that
is bulletproof across Wall Street. Combine the two, combined the accounting, Chuck, and also the financial analysis of the CFA designation. Is Home Depot a different company than the company we've known for twenty years?
No, not at all. I mean, I think there's a lot going on with the consumer right now, and you touched on it in terms of the weather impact. But I think the key line out of the Home Depot release today was demand starting to normalize, and I think that's something we haven't heard from home depot in quite some time, and I think that's the big issue, and understanding how long that's going to last is really going
to weigh on shares here in the near term. But when you, let's face it, I mean, March was very unfavorable from a weather perspective, but April wasn't. And we don't know the exit rate for the month of April, but we suspect it was weak, and so you can't high behind weather right now.
One of the distinctions they have is they own the pro market, or at least that's the verbiage. Do they still own the pro market? Is that the home depot distinction forward.
Oh a hundred percent? I mean, let's face it, nothing really structurally has changed here with home depot stocks down a little bit. Pre market, they didn't have a great first quarter, they're cutting the guide for the year, but pro business north to fifty percent of their sales, they still dominate that part of the market, particularly relative to Piers Lows is way behind it, close to twenty five percent. So again that has not changed.
At all today.
How much is this really a housing specific sector issue, a construction related issue, just simply because there has been so much investment in people's homes. There has been purchases and prices have gone up so much.
Yeah, I think it's all I think it's all of that. I think demand normalization again is the key here. But you know, when rates are this high, people are not moving. But let's say that people have jobs, so they're still investing in their homes. We're just seeing category demand normalization across the board, and I think that their seasonal business will learn more on the nine o'clock call was also soft because of some of the issues with weather.
Here.
We are seeing those shares down in sympathy, as you can see those shares down almost four percent as well, so people seeming to believe this is a sector specific issue. Moving ahead to Target tomorrow and then Walmart on Thursday, how much we're going to see a similar trend in those retailers at a time when a lot of different stores are saying that they can pass along price increases and then some I think.
Retailers are going to have a much harder time, you know, taking price from here. I think we're starting to see the consumer pushback. We're seeing consumer starts to trade down into companies like Walmart and into categories and private brands in particular. So we're we're cautious on Target, we're more optimistic on Walmart. I think that the key thing here is we're starting to go through a discretionary or recession across retail, and I think we're actually already in it.
And I think we're going to start to hear that from a lot of companies over the next couple of weeks. If you rewind the clock, you know, the past couple of weeks we've heard from Costco their business has been softer. It's very typical for Costco to have that volatilt in their business. So if Costco's volatility is there, Home Depot's businesses softening, that's happening everywhere.
One of my big things, Chuck, is managements adapt. How does retail adapt to the slowdown you describe? Is it layoffs? Is it protect the margin at ebit that it all costs? What's the prescription here looking at.
History, Well, I mean the number one thing they need to do is protect the balance sheet and control inventory levels. And if there's anything that could happen in twenty twenty two, was demand started to soften and inventories started to get in better shape.
Are they there yet?
Not really across the board, but they'll start to get there. And you know, for Home Depot their their s g Anda expense control was very, very good in the first quarter.
That's why even with.
Softer business they were able to come in with earnings of three eighty two. So the first thing will be inventory, second thing will be cost control, and I think the third light would be would be job cuts down the road if business continues to deteriorate.
Chuck that phrase discretion red recession. Can we dig into that just a little bit more. Is that up and down income brackets? Does that go from goods to services? Can you give me a little bit more detail on what you're looking for there.
Well, I think it's a little bit more goods than services right now. I mean, you look at the travel industry and anybody that's been at the airport or been on an airplane in the past few months, they're always full. So people are definitely shifting spend towards services. But I think it's the categories that that my companies sell into. We're just seeing softness across the board. You know, whether it's whether it's consumer electronics, whether it's home furnishings, whether
it's home improvement in this case. You know, again, all three of those are starting to see weakness.
Chuck.
How much is this going to really challenge the fact that companies have been raising prices beyond their input prices. In other words, that profit margin has to come in much more than people are expecting.
Yeah, I mean, that's a really good point. I mean, and that's what we're going to have to watch elasticity across the board. You know, we're starting to see it in discretionary areas start to normalize on the price front. We'll start to see it and see areas food areas in the coming months as inflation starts to starts to pull back. I'll just point out that just traffic across retail has been very, very soft over the past two months, and that's always a harbinger of things to come. And
it doesn't look good. Consumer's pulling back, and frankly like none of this should surprise after the past couple of years of splurging across the consumer space.
Chuck.
I'm looking at this weekend buying the American pushmower for eighty two dollars from home depot. I mean, we got a most central park. I got to do my part for Mayor Adams. Where's their perfume section? What part of home Depot is where they really make the margin as they get to sixteen percent EBITDA, it's really.
Pretty even across the board. Really in the seasonal areas, home furnishing area that that's where the margins tend to be the best. But if you go back to hear that this print from Depot again, like it's not pretty, but the gross margins are actually pretty well protected and their inventory levels are in good shape. So it's not a great print from Home Deepot this morning, but it's also not the end of the world in my opinion.
Chuck, this was smart. Let's say this again soon. Chuck Grumnet, I've Golden HASKI. Thank you, buddy. I appreciate it.
Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always I'm the Bloomberg terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg