Surveillance: Tight Labor with Richardson

the Bloomberg Terminal and the Bloomberg Business App. She has the advantages of working for automatic data processing Nila Richardson as chief KADOS for the people that punch out the payroll checks like nobody from C to shining C. Nila at the ADP franchise, what do you see in your

ADP granularity? We see wages are strong. Look. ADP provides payroll services for over twenty five million workers, that's about twenty percent of the working population, and we're tracking wage is very carefully, especially as the economy is looking in the phase of inflation, and what we're seeing is a little bit of a deceleration and pay growth but still too high to be consistent with a two percent target, and that speaks to the tightness of the labor market.

It's not maximum tightness. Right now, we've seen things come down, We've seen jobless claims go up. It's not at the maximum like it was in the summer and early fall of twenty twenty two, but it's still very, very tight compared to where we were before the pandemic, even though the unemployment rate is about the same. How difficult, Nila, is it to talk about the labor market as a

whole rather than the specific parts. And I say this because yesterday in the Beige Book, there was an anecdote about a construction company having a commissioning a plane to fly workers out to it because that was cheaper than trying and actually more effective to get workers, not even cheaper than trying to hire in the region. And I mean, how much are you seeing strength that you've never seen before ongoing in specific industries. It's a very fragmented market.

To your point, Lisa, Some parts of the of this economy are so interest rates sensitive housing construction, and yet some of those sectors are chronically undersupply housing construction, and so you're seeing a real mix in the market right now. There are companies that overhired or maybe extended. They're hiring aggressively during the pandemic, you're seeing those same companies fullback.

There are smaller companies that we track in our data that never got really a legend to this market because the labor market was so competitive and they had to compete for talent with larger firms. So it's really a mixed bag. But the common thread is that wage growth has been stronger than before the pandemic throughout the economy. How bifurcated is it that wage growth among the lower income sector has outpaced the higher income sectors pretty substantially.

I mean, as that gap continued to widen, as you see some of the layoffs in the tech sector and the white collar the middle office workers that have gotten stripped out of certain areas, while you still see some of these service sectors continue to robustly higher. Yeah, so we've still see double digit wage growth in leisure and hospitality sector and the ADP data, and that growth has calmed down. It's down a lot since again the summer of last year. But overall, the wage moderation has been

really really modest. In fact, there's only a couple of sectors where wage growth now is lower than it was before the pandemic, Information tech, is actually one of those sectors. So even though we're as we're seeing layoffs, we're actually seeing information in the tech economy decelerate, the sharpest decline in wage growth of any other sector. That's notable. The markets here recovering here they were in negative a lot

of red in the screen. Order back to a mixed red and green picture here SMP futures at negative one point five zero. I should point out that widely watched twos tens spread with the pros watch is now at one hundred and five basis points. Interesting to see if that breaks to a less inversion. Neil Richardson, I just did a very informal long term moving average study of claims out eight minutes ago and critically the long term

moving average in March of twenty and twenty. The end of the pre pandemic is the same as it was right now. Two hundred nineteen thousand is a close approximation of any arbitrary long term moving average there are we back to pre pandemic now. The economy has changed structurally. There's so many things that are different than they were

in twenty twenty. Just the advancement and adoption of hybrid work for example, the fact that we're seeing double digit wage games in the lowest part of the pay scale. That's a complete, one complete change from the pandemic. At During the pandemic, these low wage workers were barely keeping up with then very low inflation, so we even saw declines year over year and pay growth for the lowest

end of the spectrum. These workers have become much more competitive post pandemic, as noted by the double digit wage game. So the wage structure has been turned around in the last three years, and the question is will that endure through the next three years. Now, before we let you go, we're hearing from a little birdie named Michael McKee that the Whisper number for tomorrow is currently two hundred and

forty seven thousand. Do you think after two two undred forty seven million, to excuse me, being created, I'm curious from your perspective two hundred forty seven thousand, what you believe will be the number based on the anecdotal information that you're seeing come out. I think you're going to get a solid number, let's start there. I think you're going to get strong job growth based on the private sector payroll data that we're seeing an ADP. We're not

predicting the BLS. We're just looking at the market as we see it. And if you compare that with other data like jobless claims, like job over thanks, you're still seeing a robust game. But I don't think you're going to get a half a million jobs. We should have me on every day, Neila Richardson, Thank you so much. I can't say enough, folks about the granularity of payroll analysis at Automatic Data Processing. Let's dive into this right now.

Andrew Sheets is really quite good at this chief cross asset across asset strategists, I should say, at Morgan Stanley, Andrew coalescing the wonderful and fractious narratives plural at Morgan Stanley, what is your conviction right now? Well? Thanks, it's great

to be here with you. So we still think that the US economy is going to slow as we go throughout this year, and I do think the market might be a little bit too fixated on this kind of will they won't they question of a recession when the dominant force we think is still going to be a slowing and economy, both in real and nominal terms. Now, the recent data that we had out of payrolls and retail sales was very strong. I think that definitely worked

against that narrative. But we'll see what the data comes this month. We'll see how that data looks without those large seasonal revisions in the same way. And we still see a lot of leading indicators pointing to a slowdown. So we still think that we should be positioned for decelerating growth, weaker than expected earnings, and we still think that that will be the dominant narrative when investors reach the midpoint of the year. You'll underweight global equities Andrew,

so let's start there. Is that spread evenly equally between regions or other regions that you favor over others. So I think the story in Asia is actually pretty notably different from the story we see elsewhere. So I think if you talk to investors and you ask them, why are you concerned about markets? The concern is decelerating growth, high inflation, hawkish monetary policy, high competing rates on cash, decelerating earnings, growth, expensive valuations. That's not the story in Asia.

That's not the story with Asian equities. These are markets that are generally pretty reasonably valued versus history. Growth is going to be improving, Inflation is not high, the central banks in Asia are not hawkish, and cash as a competing asset is actually quite quite low and yield. So I think that this is a story where overall we still see a lot of signs that suggest that this is a time to hold less equities than normal, to

be underweight equities. But within that, we're much more optimistic about stocks in Asia, and we think there's a legitimately different macro story there that could help support that. How can you justify andrew being underweight equities yet more positive, more constructive on credit. So I do think that this is an environment where I think it's a little bit better suited to credit. And you know, some of that is that I think in a decelerating growth environment that

is still tough for earnings. You know, my colleague Mike Wilson and our equity strategy team, we are very worried about operating leverage, meaning that earnings really underperform what you see at a GDP. But that type of decline in earnings, we don't think really creates major credit problems, major refinancing problems for the bulk of the credit market. I also think that when we think about incentives as yields move higher,

think about this from a corporate treasure perspective. All of a sudden, paying down your debt looks a lot more attractive than buying back your stock if the debt is yielding five and a half six percent, and so the idea that it higher yields we might get more credit friendly activity rather than shareholder friendly activity is another part

of our thinking. Andrew to combine these ideas of both the international approach and picking different regions with and equities, and also your appreciation of credit and how it functions. How different is the picture for credit in different regions based on what Christina Kampmany was talking about, which is that there are different regions with different sensitivities to rising rates,

potentially more given variable rate interests. So I do think that's a really great and important point, and I think i'll across a lot of these different credit markets you do see different outcomes. So a market like Europe is a market, especially European investment grade is a market we like a lot. You know, that's an investment grade market

yields four and a half percent in euros. That's the same yield you've got back in two thousand and three or two thousand and four, and these companies have refinanced their debt to a pretty significant extent at some of the longest duration in that market that we've seen in its history. On the other hand, I think the leverage loan market, where you have more issuers, where those debt costs are resetting quickly. There you have the feed through

of costs that are much more significant. And my colleagues are also pretty cautious on the commercial real estate side, you know, we still think that that is a market where you could really get hit from kind of both directions. That cap rates need to come up, as risk free rates have come up, but then also financing costs are up significantly, and so that's an area where we're more cautious.

Where we're more cautious on the equity side, and I think that's still an area where we probably want to avoid relative to parts of the corporate credit market we like more. Andrew, just to take this an extra question, I'm quite interested by this thing that you have that ultimately the C suite will make decisions that benefit credit investors more than equity investors. Is this another way of saying I want to bet on fallen angels becoming rise

and stars. Is that a story that you like within high yield credit, Well, I do think that this is an environment where I think the incentives to be more conservative and be more cautious would seem to be there. I think if you combine CEO surveys, which are pretty notable that much of the C suite seems relatively downbeat about growth, that's I've gotten a little bit better in

the most recent month, but stillatively downbeat. And then just the math of where bond yields are relative to equity and dividend yields that I do think that this is an environment where we want to play for credit improvement more broadly, so in terms of the fallen angels specifically, I think that could be a little bit more complicated because I think there you are often dealing with companies with a little bit more cick locality, and there it

might be harder to support that given our below consensus growth forecasts. But I think the idea, I do think it supports the idea of credit versus equities overall within a portfolio context. Andrew, thank you for that smart stuff. Andrew Shaits of Morgan Standing, Christian Maliglishman, Managing Director, Portfolio Strategy, Sex. We're not going to start sinking, Christian Dan Warri. Let's talk about how low that bar is for fifty from

this federal Reserve. What would we need Friday morning, tomorrow and on CPID next week. Yeah, I mean, listen. I think it's all about the trend, and the FAT wants to see a down trend that's convincing. I think we had this blockbuster print last time, so it's going to be a down trend. How much I think consensus is looking for two hundred thousand or so. I think we're two hundred and fifty on payrolls, so we're a bit above. I think it's dead enough to push the FAT to fifty.

I think you would need to put it in contact with the inflation data, with the average hourly earnings. We're actually expect the average hourly earnings to be a bit more moderate, in line with consensus. We're a bit above on the inflation side as well. But our economists actually kept the twenty five bibs and I think they feel like it's it's making sense for Powell to open the door to fifty. But to step up after you step down.

I think that is still a significant step. So the question is really if there's you know, some type of blockbuster surprise to the upside, it can get them there. I think with the current data set, our economy is kept the twenty five. Christian's going to Tony and you did this at the Work Business School years ago. We're Jane attended. Christian. I'm going to look at your phrase macro momentum. I think this is incredibly important physics and the of the mass of the system, the velocity of

the system, which leads to an immovable macro momentum. What is the macro momentum right now? Yeah, I mean like the challenge is exactly as you said. The momentum is actually really good. I mean you've had the pms and new orders over inventories, a lot of the leading components are confirming what markets have been pricing now for two months or so, which is that the global economy is kind of accelerating actually and the US is not decelerating

as much as anticipated. So the momentum is positive and we've taken the credit for that already. That's the big problem you mentioned it The vixus kind of eighteen nineteen twenty. If you compare it to the move index, the type of rates vonds generating, it tells you, like the market already discounts that better growth, because otherwise equities would have suffered, just like last year from the rates volatility. So so

my senses, growth momentum is very good. The challenge is that where we are on the cycle to your statement with regards the state variables, we are still late. We still have unemployment, very low, inflation very high, risk premia very low. That just creates a bit of a tension

between momentum and where you are. I was looking at your allocation as you look at this mess that we all are looking at and trying to understand where we're going, and it says that your neutral equities and credit underweight bonds, overweight cash, and commodities underweight bonds. How counter consensus is that? And why? Yeah? I mean, listen, I think as you all like, our view has been that rates volatility over the course of the year is fading and all because

you have peak inflation. Center banks are also to the end of their tightening cycles, and now we have this new burst of rates volatility because inflation is stickier, there's re acceleration risk, and we need to get through that in this process. We have to be clear, we're quite advanced. The market has repriced the peak grade for the FAT for the ECB and it looks much more symmetric. We've

kept the underweight at this juncture. We've had the underweight for a few weeks now because we feel like it's a h for the portfolio in case there is really this type of blockbuster data that scares the market, And a lot of conversations we currently have with clients evolve around maybe monetary policy is not as effective anymore in tightening financial conditions and possibly getting demand under control. If that narrative gains traction, you could easily overshoot peak grades

that are currently priced. And that means that, yeah, you want to probably have a bit of a short duration by and be careful to go back to bonds too quickly. But we have to be clear. The yields that we're starting to see in the front end, they look much more symmetric. How would I play offense in that world? What would I do with my portfolio to set up

for that story? In terms of rates, in terms of equities. Yeah, in terms of equities, I think we need to go to the sources where there is the biggest growth momentum, of course, and I think we've been quite focused on Asia, both Asia X Japan, China, and also we like Japan, which is linked to growth in the region but always has a certain global growth linkage. It does have incremented

catalysts via the BOJ policies. So we've been very focused on non US markets to kind of add cyclical risk tactically. There is a bit of a setback on some of those traits because you know, you have a bit of a kind of moderation of the narrative and obviously risk appetite that could actually create a good opportunity to revisit doors into that better no momentum at this juncture. Christine, thank you, really fascinating stuff. You said a lot there.

Ten minutes. Christie mcclisman of Goldman Sacond on our radar now in the white marble of Capitol Hills, Henrietta Trey's managing director partner, I should say of economic research data partners always informative as well. I'm going to cut to

the chase, Henrietta. The budget outlook At cbo IS nineteen xcel spreadsheet lines the interest payment is modeled out at six point eight percent of the budget, and it is jaw dropping their model of what we're going to pay in interest over the next ten years on a per year basis. I thought it was a cumulative summation and it's not. Ten years from now, we're gonna pay one point four trillion in interest. Is it out of control?

I think everybody's going to make the case that it is out of control, but nobody's going to do anything to stop it. To put it in perspective, there's a thirty one point three eight one trillion dollars debt ceiling and we're talking about cutting three hundred billion dollars into the deficit. So it is definitely a humongous number. It will continue to rise, but there are no plans on the horizon to materially dentist. So get used to it.

Many others say, calm down because the mathematics, the complex mathematics of this is wrapped around the gross rate of a nation versus the our start and the implied economics of the moment. Do we have the growthiness of America to get out five years, let alone ten years. I mean, I think you obviously have the growth right now. And another question is how does it compare to the other nations that are coming out of the COVID stale, that are in recession dealing with bigger inflation than we are.

A big question about it in sort of the morality circles of economic policies. How much does it matter? And what are we looking like compared to our peers the rest of the globalized economy. So I think in general, the feeling is and the voters are telling you, we love to rail about the deficit when it's convenient, but we don't have any bandwidth or the backbone to actually do anything about it. So you'll see that play out

in the Social Security or the Medicare debate. You'll see that play out with Republicans calling to extend the twenty seventeen tax cut, which alone was a five trillion dollar bill, one and a half trillion dollars of which was pure

deficit increases. So nobody's really willing to do anything about it, but they love to jump on about it, which is a reason that maybe we're going to be talking more about TikTok than the debt sailing debate or coming into the election season just because it's easier for people to wrap their heads around I mean, is that basically how you can interpret some of the discussion and the unity that you see within parties otherwise is lacking. Absolutely, this

is entirely about comparing and contrasting. And what's interesting about American politics right now is that almost everyone unanimously believes that China is a problem. So you'll see this president's budget come out later today with eight hundred and eighty five I think billion dollars just for defense. That's humongous for a Democrat or a Republican. And then on the

other side, we have the issue of China. Obviously, of all these defense folks coming out saying we need more capabilities on the defense side, but we need to continue to bolster Ukraine because it's a proxy war for what China would do to Taiwan. So there's just this tremendous focus on China from every direction, whether it's IP defense spending, TikTok ai, it's across the board. I think the view the budget on the deficit conversation through the lens of China,

and it helps everything makes sense. And given the needs or the asks with respect to spending, and given the reluctance on all sides really to raise taxes ahead of an election season, and it's always ahead of an electric season, what is the likelihood that we really have a problem here with respect to the debt ceiling debate. It's different that has a different character than the previous debt ceialing debates. I was just talking to a dear former colleague peak

going about this. I love that everybody says this time is different. This time it's a calamity. This time it's a train wreck. The House is a disaster, exactly. None of that is different from how it was in twenty eleven, twenty thirteen, twenty sixteen. I mean, we have seen two consecutive Republican speakers heads role as a result of conflating the death ceiling with the government funding bill and relying

on Democrats to provide the bulk of the votes. And that's precisely what's going to happen here this year as well. So I find a lot more consistencies than differences, and the dysfunction is a normal part of especially the House of Representatives. I'm gonna tries one of the best always great to get your thoughts, Hendrid to try cynicism is off. Let's be clear, though, and connect that Washington cynicism with

how markets will at least take that point. The biggest risk is that people believe that it isn't different this time. The book is freezing order. Bill Browder, I can't say enough about it with the clarity of three, four and five years ago. Mister Browder joins us this morning from London. Bill, I can go eight ways here, particularly off of Angela Stents work on Putin, my book of the Year last year, but I can't. We've got a Battle of Stalingrad going

on right now in Ukraine. The Russians had to stop the Nazis, and they did with a wall of bodies. Translate that analog that mister Putin knows over to what we're witnessing an eastern Ukraine this evening. But Putin basically doesn't care about the number of casualties. He has this huge military advantage that death of his soldiers doesn't even make him sleep worse at night. And so they're losing

soldiers at a rate of five to one. Of the Ukrainians right now they're throwing convicts, conscripts, and anyone else who they've been able to corral into this meat grinder. They're throwing them into battle and they're being mowed down. These people don't oftentimes don't have even the proper armor, guns or whatever, and they're being shot down on a major basis. And the purpose of this is to try

to just soften up the Ukrainian lines. And no matter how good the Ukrainians are at fighting back, if they if wave after wave of soldiers are being thrown into this meat grinder at the Ukrainians, it has a negative impact. And that is going on right now as we speak. And it's if you watch All Quiet on the Western Front, which is about World War One, this is the type of tactics that are going on right now as we speak in Europe today. And ask a contender, they're Bill Browder.

When you were at Chicago, you and I were weaned on Thomas Shelling, the giant theorist on war and game theory. You've been courageous about saying, look, this is all about Putin. But what has changed in the last year when Bro talks about Putin? Now, what's new? Well, the main thing that's knew is that Putin is showing himself to be, you know, totally not credible in all of his chest thumping alpha male threats. He has a weak military. He didn't win in three days. He's running out of ammunition,

his gas blackmail against Europe didn't work. They found alternatives. He thought that Europe wouldn't in America and the Allies wouldn't reacts harshly we have. He thought we wouldn't supply weapons we have, and so he's completely i would say, misjudged this war from start to finish, and as a result,

Russia is not in a strong position. Russia is not going to win this war with the capacity and the capability as they have right now, particularly if the West continues to provide weapons, which we're doing, which raises a question can we expedite the end, especially if it's basically a meat grinder at the front lines, which is tragic to watch on all accounts. You used to be one of the largest foreign portfolio managers of Russian assets. I mean,

how far we have come from that time financially? Have we done everything possible to perhaps expedite an end to this tragedy? Well, there's really two areas that we need to be continuing to help the Ukrainians on. The first, on the military side, is that they have asked for jets which we have not provided. They've asked for long range artillery which we have not provided, and they've asked for a certain number of tanks and we've only given

them a fraction of what they've asked for. On the financial side, it's the one thing we can really do for them is to starve Putin of the financial resources to continue to fund this war. And we have done a lot on the financial side in terms of sanctions, but the one huge, huge loophole in this whole system, and that you could drive a truck through this loophole is the sale of oil and gas from Russia to

the West and to the east. Putin receives between five hundred million and a billion dollars a day, even after all these sanctions, after all the disconnection of Russia from the Western system, and that money is enough money to

continue to fight this war into perpetuity. And so we have to figure out a way to stop him from getting that money, because as long as he gets that money, there's no stopping this war from his perspective, it's deeply painful to read the articles, the very human articles about what's going on, the fighting, the victims of this fighting. Bill. I wonder how long it will take and whether this war can end with Vladimir Putin still the leader of Russia. Well,

there's two ways that this war could end. We could give the Ukrainians enough military weaponry so that they finally overcome Russia, which I think they have the capacity to do. Or the other thing that could happen, And this scares me a lot is as the war drags on, and again, as I should point out that Putin doesn't care about casualties, and so he can throw more and more, manage the grinder more and more casualties, and as it grinds on,

the West can lose interest. And you're starting to hear noises in Washington, particularly out of the sort of far right of the Republican Party, the Marjorie Taylor Green, Lauren Bobert, Tucker Carlson. Let's not finance Ukraine anymore, that's what they're saying. And if those fringe people start to become mainstream, America is the single most important backer of Ukraine right now,

and if America were to step out. If there was a change in leadership in two years time, Putin could win the war that way instead of winning on the battlefield. And so that, in my mind is probably the scariest prospect that we're facing right now as far as Ukraine is concerned. Bill Broder can them the dramatic exercise work now. The Ukrainian shocked with damage to a key bridge to Crimea a number of weeks ago, so many in the West seemed to be looking for a dramatic moment to

put mister Putin in his place. I'm guessing that's the thinking of children. Well, not necessarily. Remember, in the summer last year, completely unexpected for me and for anyone else who's been following this, the Ukrainians broke through the Russian lines and retook fifty four percent of the territory that

Russia had previously taken. It was dramatic all the different places they pushed Russia back, and the Russians were running, you know, running back, retreating, and it's not entirely impossible. And interestingly, where I get this little inkling that there's some chance of that happening is from the Russians themselves. This guy. You have Getny Progosion, Putin's chef, the head

of the Wagner group, this person group. Yeah, he's out there screaming, bloody murderer saying if I don't get enough weaponry from the Russian government, We're going to collapse, and then everything will collapse. He's the one saying it. No one else is saying it. He's the one saying it. Now. It may be for internal political reasons, but if I hear him saying that, it makes me feel like, you know, maybe there's a second chance for the Ukrainians to do

the same thing that they did last summer. On the other hand, Booms has unlimited numbers of people who can throw at this and he doesn't care whether they die. Bill Browder, thank you so much for joining us with this update. With the Hermitage, Capital Management barely describes that the book is freezing order. I will not mince words. It is chilling, to say the least. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you

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