Surveillance: Skip vs. Pause with Dudley

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I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. I take a four week moving average, try to smooth it out a little bit, but the other fraud thing hangs over it. Just more data of what is somewhat

He has been.

Absolutely one hundred percent on of a central bank looking for higher interest rates. Bill Dudley, thank you for joining us off your essay with Bloomberg Opinion. You quote the Clashy channel back to London calling guess what the echoes building is. Do they have to wait for the data or can they get out front?

Oh, they're going to take a pause because they believe that their long and verbal legs and manitary policy and so they want to see the effects of prior actions, but they've characterized it as a skip because they think that they'll probably have to do a little bit more, and we'll probably see that in the summary of economic projections, we'll probably see a couple one or two additional rate hikes PET penciled in for twenty twenty three. The economy

Bullet of Saint Louis and Indiana University uses his economics to say, we can do this exercise and avoid some form of NBR recession.

Do you agree.

I think it's made very hard to avoid a recession if you believe that the FED has to push the unemployer rate up by a meaningful amount. If you look at the FED Zone forecast, they think the unemployer rate's going to have to rise by at least one percentage point. Every time it's risen by one percentage point. Since World War Two, we've had a recession twelve out of twelve, So I'm betting against a soft lining this time as well.

Build the implication here that the FED hasn't really accomplished much and that they should go further with respect to hiking rates, that perhaps a pause or skipping or whatever you want to call it is perhaps not the right approach.

What's the consequence to that?

Do you expect this to actually accelerate inflation or keep it higher for longer in a way that people aren't really expecting.

It doesn't really matter if they hike in June versus July, as long as they keep financial conditions from easing significantly. And I think that's why they're using the language of skip rather than pause. They don't want the markets to think that they're finished, because they don't want this stock

The data has been really confusing.

We've been talking about that all day, whether it's earnings or whether it's just the macroeconomic inputs that we normally have used. What are you looking at to really highlight that there's still a lot of strength that frankly, the lag effects are not going to take.

Care of well. I think the layer market is the key thing to focus on. What's happening to payroll and ployment growth, what's happening to the tightness of the labor market. As for example, the Joeltry port yesterday showed an increase in the number of unfilled jobs relative to unemployed workers. We're back to one point eight unfilled jobs for every unemployed worker. Chair Pol in the past is said we need that rach to be down in round one to one.

So people will say, well, we are seeing disinflation and it actually will happen much more rapidly heading into your end from your vantage point. The longer that it takes. Does that create a stickiness that people are underappreciating or do you think that this is just simply they need to get back down to their goal. They want to get there sooner than later, just simply to remove that tax from lower and individuals in particular.

They think it's going to be a pretty drawn out process. We really don't get back to two percent inflation for a couple of years on the FED Zone forecast. I think they're not concerned about how long it takes, as long as inslation expectations stay well anchored. The risk, of course, if inflation stays higher for longer, inflation expectations could become unanchored and that will make the FED job more difficult. So they want to keep a close eye on infulation expected bill.

We're not thinking too hard today. I don't need it to two or three decimal points. But I'm fascinated what your math is on a slower China and their machinations exporting disinflation or outright deflation. You and I have seen this over thirty forty years as a theme. Are they going to adjust our lives because they're exporting price decline?

I think what's going to happen in China is we're going to see more stimulus the end of the day that they're going to want to have growth because growth generates jobs, and jobs generate political stability in China. So I think what we'll see is more stimulus out of China. I do not expect the Chinese impulse back to the US to be significant. We already are having goods disinflation. The problem in the US is really in the services sector.

Do you have any kind of vector of disinflation with services at this time or do you just simply need more data points.

Well, the one thing that we know is coming is we're going to start to see declines in shelter prices, is measured by in the personal consumption expension deflator. We know that that was going to happen with a lag, and that lag is about to arrive. The problem is, sure Paul is indicated, is services inflation excluding shelter that's still very very high. And as we've seen in the core PC of interflators that we've gotten over the last six months, we're stuck in this channel between four point

I think that's called sticky, John.

I think doctor Dudley there identified the range bound necessariness of the word sticky.

I've got some good news for some people. I'm not sure what your positioning is like at home, but for those of you long European vacations, the euro another break of one oh seven.

You're looking at that to five diods, yes, aren't you.

Yeah, for many reasons, the dollars stronger, the euro weaker. Off the mack of this pretty robust data in America, you will tire by let's call it three basis points at the front end, four forty four equit easily. So just rolling over, just briefly now, unchanged on the session.

Which might come partly on the ADP report that nobody trades until they do, and this idea that if you have a stronger than a expected employment reaction, that that will actually create more pressure for the Fed bill.

I want to just finish up with you on that point.

Do you think that it is a foregone conclusion that regardless of what the data is, regardless of the jobs for what we get tomorrow, they are not going to high grates this month. They're going to try to signal It doesn't mean that they're done, but basically they are not data dependent for this particular meeting.

I think the data would have to be very, very strong to convince them to move at the June meeting. They basically are concerned about the long legs of madrate policy and should that belief should not be influenced by the strength of the data. So I'd be very surprised at this point, especially given Philip Jefferson's remarks yesterday, that they would actually go ahead and tighten at the Dream meetings. But July seems almost likely at this point.

That found like a ralliant cry yesterday, didn't it from the presumed Fed yest. Yeah, it really did, Bill, Thank you both, Dudley, their former New York Fed president. Bloomberg opinion columnist.

Heidi Crabo red occurs with a senior fellow, Consolin Foreign Relations, really writing as much as you can on what we're talking about yesterday and continue today with Rika Rinmanbi, and that is China.

Heidi, thank you so much. For joining, is it China slowdown for real?

So I think, you know, you have a lag in data and some revisions, and I don't know if we really understand if the data coming out of China is accurate, in part because they're coming out of a very you know, significant COVID lockdown. So just think back to when we were publishing our data and revising it after after COVID. It's just I think it's it's it's too hard to focus on just one number. I actually focus more on the youth unemployment number as being a serious concern for me.

Yeah, we'll go to that.

You have a great trans atlantic and frankly trans world I'd almost call it linkage between Europe and China.

And you say evs to the rescue for China and that a.

Lot of the doubt about China will be solved by electric vehicles in their growth, discuss that export might were not factoring in.

So I just got back from from Europe, and you know, China was a key part of all the conversations because of the US EU Trading Technology Council. We had, you know, UH, we had Secretaries Blincoln and uh and Ramundo. There US t R Taie. We we saw kind of a focus just on the main bonus contention, which is that the subsidies for EV's in the US are are are you know, not not offered to EU auto makers because of the

There's the analysis, and the further analysis is whoever's out on Twitter trying to figure out when mister Musk's airplane leave Shanghai?

Well, yeah, that's for us exactly.

I just want to I know that we want to move on from the debt ceiling, but I kind of can't yet, and I have to set a pay into the conversation that I'm sure Heidi you are having over in Europe, which is what are these subsidies going to look like? Particularly when it comes to the recent tech driven investments in the US were promising to make.

Did anything really change?

Was any of the heft of some of those programs removed from this agreement that we got from the debt ceiling or was it basically the adjustments that kind of came in after the fact and made sure it.

Was all okay.

So, you know, one of the great things about being overseas is that you really didn't have a lot of focus on the debt ceiling as opposed to like living at twenty four seven. Here, the focus on US politics was much more driven by Trump and looking at the numbers and the upcoming election and whatever deals are being struck right now between the US and the EU, are they up for grabs if Trump were to win the presidency in the next go around. So I think, you know,

When we uh with our you know, with our negotiators in Europe this week.

What does that mean with respect to US European alliance with respect to China, with respect to some of these bigger issues, if there is sort of a pretty tepid receival of the United States with sort of ambiguous leadership.

So I think the US seems to be very much in line in the Biden administrations, in line with the EU Commission. It's just that there are twenty seven different member countries and all of them are sort of playing out how they want to how they perceive weakness versus strength and need to hedge. And because you have to have unanimity, it was in full display and particularly around China this week that you just don't.

Have it in the EU.

Where you do, I think really in Asia to a larger extent visa of EA China, I'll.

Be less diplomatic. You have the Commission and then you have Macron. And that's why things are confuseding in Europe right now. And let's said, that's been the story in it for the last couple of months.

Well, yes, and Amanu Macron is like, hey, we're gonna so I could deal with you go China.

Yeah, Hey, let's go to Beijing and the rest of Europe. It's like, what are you doing.

At the same time, I wonder how much reticence there is to really partner with the US in light of some of.

The subsidies, in light of some of the potential holatility. You think this is just a Macron issue?

Are the reports I hear about how well liked Macron is at the G seven. It's just kind of you know, well, yeah, I was about to say less like he's liked. I imagine that's let's me trying to be diplomatic, Heidi, thank you, wonderful as always to hear from you, Haidi Kreeber Redeka of the Council on Foreign Relations.

It is our.

Immense pleasure to speak with Alan Ruskin, chief International strategist at Deutsche Bank. His notes are absolutely fabulous. You can get them, of course through Deutsche Bank. Alan Ruskin, you have an absolutely brilliant paragraph on M two dynamics and nominal GDP.

Is the surprise of the next twelve.

Months forward that we have sustained nominal GDP because of sticky inflation.

It's a little bit like that, Tom.

I think we're going to see, for example, data today which shows that productivity was extremely weak in Q one, but not just Q one on a trend basis, it seems, and that weakness in productivity translates to high unit labor costs, which is sort of stagflationary, and output we know is relatively weak relative to employment.

That's part of the weak productivity story.

So it all adds up to nominal GDP doing an awful lot better than real GDP at this point. Some of this, I think is just this natural overhang from the M two growth it had, you know, something like thirty percent M two growth above trend a year ago. That's down to about twenty percent overhang thanks to weaker M two growth that you see more recently. But still I think that's really propping up the nominal numbers. But money, monetary policy and money supply is avail. It doesn't ultimately

The real GDP growth is the recession game. Your colleagues have been brilliant on this. Matt Lozzertti has arguably the single best recession delay call of the last eighteen months.

Reframe that.

Now.

I'm not saying agree with young Lozertti, but at least frame out the Ruskin recession to come.

Yeah.

You know, I've always been of opinion that given the overshoot on inflation, even if we have a mild recession, I would still cast that as potentially a soft landing sort of scenario. I know that's semantics in a sense, but I think we're still pretty much on track. But we do need to see some weakening in the labor market, and of course, everything we saw from the openings data

Another story there as well.

But I would say that we're still on track for something which skirts recession slash shallow recession. But it's not looking like a deep recession unless we get some sort of nonlinear event like the banking sector crisis sort of really taking hold in a proper credit crunch, which you have not actually seen as yet.

You mentioned manufacturing GWN, and that distinction I think is so important. Manufacturing pmis worldwide, Europe, China Satha fifty contractionary throw in the United States pretty ugly there. It screams rate cuts in some places. Then you look at services and which make up the bulk of some of these economies, still pretty robust, and in the surprise of the last month or so has just been the breakdown in another

I think it's deferred dollar weakness. You know, the whole idea of a divergence trade that worked against the dollar, whereby you know, Europe, if not outperforming, at least the ECB was hiking whilst the FED was on hold, and China was obviously you know, sort of reopening and strength that we would expect there, or we did expect there. You know, a lot of that just hasn't materialized. In fact, if anything, the US has been more resilient than anticipated.

The time being. As far as you were a dollars concerned.

Alan, you had this really interesting point in your latest note where you basically were saying, there's a little risk of overtightening. It does not seem to be the theme that we're hearing in the fedspeak that's been coming.

Out every day, day after day. Can you explain that what that means as to.

Where policies should be, where it will likely be, and what that means for longer term inflation?

Yeah, I mean, I think just look at your financial you know, conditions indicators. We all have our own numbers, but if you look at the Bloomberg numbers, for example, you look at say six month financial conditions, twelve month financial conditions, if anything, they've eased rather than Titan, which is truly extraordinary. So the tightening needs to come from

It looked like they were tightening sharply, you know, a couple of months ago, and now much less so.

Alan wonderful to get your view, as always an I'm rusking there of Deutsche Bank. Thank you, sir.

Chuck Graham, senior retail analyst at Gordon Hauskuld love having him on. And it is about this posing here of a hold to a buy Chuck, real simple, this deserve to a set of headlines and Macy's you nailed it with a tep at hold does Macy's become a cell.

I think Macy's is still doing a really good job on a lot of fronts, and I think that's exemplified on the balance sheet, where inventory levels are still really lean. You know, Macy's is a victim of the circumstance right now, and you alluded to it. People are preferring travel, and with inflationary pressures out there, budgets are constrained. So I don't personally think Macy's is a cell. We downgraded the stock back in late March at eighteen dollars to a hold.

Okay, they're doing a lot of good things, but the fact is it's been a train wreck for ten years, and then in the pandemic it sort of came around, and I get that's come off the bottom a little bit. Do you have enough faith in management and their strategy to say I got a three or five year vector higher in Macy's, even if it's not back to sixty or seventy.

I think that's all going to depend on the consumer and what happens over the next couple of years. In the near term, we definitely think the stock is going to stay under pressure. They did lower guidance by twenty five percent this morning, which.

Is a really big, big cut.

Clearly, the stock had been under some pressure and this was discounted to a degree. However, when you really unpack the guide, the fourth quarter, which is the holiday quarter for them, still does look aggressive. So another said differentely, this might not be the last cut on guidance right now. We're just going to have to continue to monitor the data points across retail.

Chuck, you were brilliant last time we spoke. You said this was the discretionary recession. And Chuck, I think what we're all trying to work out around the table is what is this about Macy's and what is it about the economy? Which one is which is this a Macy's story or a story about the economy.

Yeah, well, what's interesting is this morning you have two companies guiding down, both both Macy's and Dollar General. And if you think about the general customer, it's at the low end. Macy's is clearly at the high end. So you're seeing weakness across the board, whether it be low end, high end, discretionary. And we talked about that a couple of weeks ago when I was on post home Depot. It's really just people preferring needs versus wants at this point in time.

Chuck, you said that macy Use caters to high end, and yet the luxury players are all seeing gains. Is that really the case or is it really a question of identity, whether they actually are high end, whether they're low end, whether basically they're the middle income kinds of shoppers that are probably going to be the most squeezed right now.

Well, I look at Macy's more high end, but clearly if you were to look at Nordstrom, where even the Bloomingdale's banner within Macy's, that would be high tiered. But you look at a company like Restoration Hardware, which is really the most premier upper end company we cover, and you're seeing weakness there.

So consumers just getting strapped right now?

Do you think that this is a temporary phenomenon as people sort of get the Yolow experience out of their belts and basically just keep flying around. Do they run out of money and they'll go back to buying stuff again.

I do actually, I do think that there'll be a time.

And I'm not an expert in travel and leisure spend, but clearly people are over splurging right now, given that you weren't able to do that for a couple of year period.

So I do think at some point you'll see some balancing here across the board.

Could you talk about the difficulty of ordering the correct mix of clothing at a time that still is the pandemic economy, as we've been talking about pretty much over the past couple of months, how difficult it is to know whether people are going to want stuff to go back to the office, stuff to go work out in, stuff to go out on the town, or the casual back. I mean, how do you sort of parse out this quickly moving trend cycle.

It's not easy, and I'm glad that's not my job.

But I do think that that Macy's has done a pretty good job over the past couple of years knowing where the trend's going to be. But that's one of the reasons why people like off price, because the the lead times on off price are just so much shorter in duration. You know, you're talking about buying stuff today for the next couple of months as opposed to buying

Our department stores dead.

I don't think they're dead.

I think certain models are better than others, and I think, you know, again, I'm not here to be super negative on Mace's this morning, because I do think that the team and particularly their CFO Adrian, has done a really good job managing inventory levels. Others I think, you know, companies like Kohl's have struggles and getting getting foot traffic into that into those stores has been elusive for a really long time, and frankly, I don't know, I don't know how they fix it.

I just find this absolutely important and on a revenue and unit basis, this is just a lack of traffic into the stores. So what is the what's your single best buy within retailing now? Is it a combined department store? Feel or is it a specialty stock.

I think the best two names to own right now in retail are Walmart and Costco. And you'll tell me that's super defensive and potentially super boring, but sometimes boring can be good.

Costco is the best retailer I've ever covered. It checks all the boxes.

And to me, Walmart, there's no better time to own Walmart than right now, both from a from a sector perspective and given how difficult everything is out there, and also from a company specific perspective. They're doing a really a lot of really good things they and I think the key theme for both both companies is the lead with price. They're the lowest price guys out there, and what consumer out there doesn't want lower prices right now?

If you believe we're in a discretion recession, quite clearly, that's the place to be. Chuck, Thank you, sir, Chuck crom There of Gordon Haskett on the latest with some of the retail as.

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