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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. There is quite of whether this is enough of a disinflationary effect to really give people confidence that inflation and the disinflation that we're seeing now is more than just transitory. J. Brice and Over at
Wells Fargo chief economists there joining us. Now, what's your thought just now to start with Jay on what we just saw in the CPI print that did come in just a bit hotter than expected.
Yeah, Lisa, I mean, I'll use a phrase here, and I think John is probably familiar with it. You know, this was kind of a damp squib. It's kind of right. I mean, I don't think it's going to change anybody's view of what's going on in the economy. I don't think it changes anyone's view, you know, at the Federal Reserve about this. I think it you know, maybe in general,
it kind of keeps them in play. It keeps the possibility of another rate hike, probably not at November, maybe December live, but in general, it's it's kind of what I think most of us kind of assumed was going to happen.
Damn squid. I actually had to look it up.
It means an event that is not as exciting or popular as people thought it would be. I'm curious, though, Jay, the fact that we got an upside surprise PPI yesterday and the smallest of upside surprises on CPI. Now, are you surprised we're not seeing more of a reaction in markets? That if I'm responding to winds blowing in another room over the past couple of days.
Well, you know, as you know, and we had just a tremendous backup in yields over the last few weeks here, and so you know, I think the market is just trying to find this sequilibrium right now. And you know, again, I don't think this was big enough to really change sentiment all that much. If we would have printed you know, another point six on the headline and a point four on the core, then I could see much more of
a market reaction here. But just given all the price action we've seen over the last two weeks, in some sense, it's not all that surprising to me. We haven't seen a bigger reaction this morning to this data.
What it does highlight, though, is something that you and Sarah House have been speaking about for quite a while, which is the final mile and how difficult it is to get inflation back down to two percent. How much does this edify just how difficult that battle is, given the fact that we're seeing signs that goods inflation is starting to reignite.
Yeah, So, I mean, you know, for us, it's you know, it boils down to services. Right, services represent more than sixty percent of the overall CPI. I mean, I don't know what, you know, the so called super core was
this is services x housing. But that's been running, you know, we've been getting point four sort of numbers on that, and so that last mile to get us back down to two percent on a sustained basis, you know, that's that's tough, and that's why the FED is probably going to remain restrictive, you know, for quite some time to
make sure that that does come down. And so what you have to do is you have to have and they said this in the minutes of the FMC minutes the other day, you have to have subtrend growth for a while to bring that down to two percent. And I'm afraid that's what we're going to be looking at over the next few quarters, is kind of subtrend economic growth.
The report also talks about the increase in the gasoline index as a major contributor to the rise. How difficult does the current geopolitical environment make the fact that this gasoline index potentially has potential to continue to rise to make this two percent even that much harder?
Yeah, I mean, it's interesting and if you look at you know, if you look what's happened since let's call it late September, so gasoline prices have actually come down pretty significantly, like in the you know, fifteen twenty cents a gallon or something like that. You know, what's going on right now in the Middle East will probably stop
that decline right there. And if things obviously heat up over in the Middle East and you start talking about you know, potentially a ran going offline in terms of you know, pumping three million or so barrels a day, then that's obviously going to put upward pressure on oil prices, and that would arrest that downward trend that we've seen at least in the last two weeks in terms of gasoline prices.
Do you start to consider that and put that into how you were thinking about the next year or so.
So, I guess what I would the way I would characterize that to our inflation forecast is it's an upside risk.
I mean, at this point, just given out how fluid that situation in the Middle East is, I don't know if we would necessarily try to factor that in right now, and so you know, we would come up with some sort of point estimate in terms of our view in terms of inflation over the coming year or so, and we would say, well, maybe the risk are a little bit skewed to the upside here, and so we'll just have to keep an eye on what's going on over there.
But keep in mind that gasoline itself represents a pretty small part of the CPI. I think it's only like six percent or something like that. It's pretty small, and so you'd have to have see, you know, pretty significantly increase in gasoline prices that were sustained to have you know, a lasting impact on the overall rate of inflation.
Jay Bryce And and Wells Fargo, thank you so much for being with us.
If we.
Do want to parse through what the response has been to the CPI report, joining us now, David Kelly, chief Global strategist at JPMorgan Asset Management.
I just would love to get your.
Thoughts, David, on whether the CPI, the PPI coming in hotter than expected, moves the needle anywhere on your radar, even just a touch.
Not really.
First of all, on the CPI, I think it was close to being exactly on expectations. The one thing that seemed to be stronger than people that expected was hotels. Hotel rates had fallen a very sharp three point six percent in the prior month, they jumped four point two percent this month, and that was one of the things to push up shelter costs, And if you take that out,
there's really not much else going on here. Meanwhile, we're looking very closely at the price of gasoline, because what's happening is, even though crude oil prices are holding in at fairly high levels, we've seen refiner margins come crashing down. And so the price of a gallon of gasoline is now nineteen cents lower than it was a month ago, and so I think that bodes well for a better reading for October CPI. So right now, I think we're
still on track. I think we're on track for CPFF year of a year headline CPI being at two percent or less in the fourth quart of next year, and the consumption to fasier also being a two percent or less by the four court of next year, and that's one year ahead of the FEDCE target, and that's you know, so overall, this report makes me really, you know, I'm still very optimistic that inflation is coming down and meanwhile, we do have these other issues. We do we have
this expanding UAW strike. I think the continued sort of chaos in Washington makes it quite possible that we'll have a government shutdown in November. So I think there are you know, there's still plenty of weights on the economy here, and certainly when I look at inflation, I still think it's coming down.
When you look at this report, though very much so feels like status quo. How much harder is it going to be to get to that two percent?
Well, I don't think it's going to be that hard. I mean, it's a lot of this has to do with year over year changes and basis. So if you look at the core CPI, it came down from four point four percent year over year to four point one percent, and actually Core is going to keep on coming down over the next next few months. And then you know, as I said, I think the energy story is gradually getting better. I think the economy will grow more slowly in the fourth quarter and next year. So and then
the last thing is shelter. We know that that owners equivalent to rent actual rents. As the government reports some lag reality on the ground when it comes to negotiated rents, and we're not seeing any increase going on in the actual rental market. We're not seeing any increase going on in actual new car prices since the start of this year. So we think that that will all tend to push away at transportation or cutaway at transportation services and at
shelter costs. And that's really where our forecast of two percent inflation by the end of next year is coming from.
Does that make you bullish or bearish?
Siting BULLETSH I think I think you have to pick and choose here. The overall US equity market's not cheap, but it's very bifurcated between those top ten stocks, a top seven stocks, and everything else. The rest of the market is looking like pretty good value here. I would
also say the bond market's pretty good value here. I mean, if I'm right, then inflation gets down to two percent, then a ten your treasury at about four and a half percent sounds about right, and we actually could get a little bit of a capital gain when inevitably we trip into recession at some stage in the next year or two.
We've been trying to wrapperhead around some of the whipsaw action that we've seen in ten year treasure yields and thirty year treasure yields. We've had softer than expected auctions yesterday the ten year, today we have one of the thirty year. There's been a question of how much is technical and how much is a larger lack of certainty about what the ultimate inflation paradigm is going to look like.
Not to mention fiscal from your vantage point, does this volatility make this market less investible or more investible?
Well, it's disconcerting, of course for investors, But if you're a long term investor, just look at the prices and don't worry about the day to day action because a lot of this is whipsaw, as you say, but over the course of a year, or two years or ten years,
it'll diminish. I do think that there is something important going on the fiscal side, and we just got the Congressional Budget Office numbers on their estimates on the budget deficit on Monday even and it looks like this fiscal year or last fiscal year came in at one point seven trillion dollars. This fiscal year probably about two trillion dollars.
You add in the fact that the FED is returning bonds to the market, and the federal government is having to borrow about two and a half to three trillion dollars every year from global public capital markets, and that is an enormous lift. And that does suggest that when long term deals come down, they're not going to come down to you know, one percent or two percent. So there is a floor to how low long term bonds
can come down. So what I'd say is, you know, buy bonds for income, buy them far to diversify your portfolio, but don't expect a big capital gain from bonds, because I think there is a limit to how far rates could fall given how much the government has to borrow.
When you look at the fiscal trajectory though of the United States, you see a lot of the dysfunction that goes on in Washington. The fighting is about a very small sliver of the US budget. Is can we ever really deal with the fiscal health of the United States until we start looking at the defense budget or things like entitlements, these mandatory spending measures.
Well, it's not just on the spending side, it's also on the tax side. I mean, the reason we have big budget deficits today is because we had two huge wars over a very long period. We had two major tax cuts, one of them which was extended, and we've had and we've had a pandemic and a global financial crisis in which the government has poured money at the problem and we didn't pay for any of it. The reason of the big budget deficits is because politicians treat
us like children, and we accept it. So I completely agree with you that what they're talking about today is just complete sideshow. You can't deal with the budget deficit without either raising taxes or cutting defense, Medicare and Medicaid and social security or both. You simply can't. And we need to have these tough discussions, but I don't expect that anytime soon. So I think we will be looking at rising deficits or rising debt and very high deficits for many years to come.
David Kelly of JP Morgan Asse Management, thank you so much. There is this question of whether this is enough of a disinflationary effect to really give people confidence that inflation and the disinflation that we're seeing now is more than just transitory. J. Brice and over at Wells Fargo chief economists there joining us. Now, what's your thought just now to start with Jay on what we just saw in the CPI print that did come in just a bit hotter than expected.
Yeah, Lisa, I mean, I'll use a phrase here, and I think John is probably familiar with it. You know, this was kind of a damp squib. It's kind of right. I mean, I don't think it's going to change anybody's view of what's going on in the economy. I don't think it changes anyone's view, you know, at the Federal Reserve about this. I think it you know, maybe in general, it kind of keeps them in play. It keeps the possibility of another rate hike, probably not at November, maybe
December alive. But in general, it's it's kind of what I think most of us kind of assumed was going to happen.
Damn squid. I actually had to look it up.
It means an event that is not as exciting or popular as people thought it would be. I'm curious, though, Jay, the fact that we got an upside surprise with PPI yesterday and the smallest of upside surprises on CPI, now, are you surprised we're not seeing more of a reaction in markets that if I'm responding to winds blowing in another room over the past couple.
Of days, well, you know, as you know, and we had just a tremendous backup in yields so over the last few weeks here, and so you know, I think the market is just trying to find a sequilibrium right now. And you know, again, I don't think this was big enough to really change sentiment all that much. You know, if we would have printed you know, another point six on the headline and a point four on the core, then I could see much more of a market reaction here.
But just given all the price action we've seen over the last two weeks, in some sense, it's not all that surprising to me. We haven't seen a bigger reaction this morning to this data.
What it does highlight, though, is something that you and Sarah House have been speaking about for quite a while, which is the final mile and how difficult it is to get inflation back down to two percent. How much does this edify just how difficult that battle is, given the fact that we're seeing signs that goods inflation is starting to reignite.
Yeah, So, I mean, you know, for us, it's you know, it boils down to services, right, services represent more than sixty percent of the overall CPI. I mean, I don't know what, you know, the so called super core was this is service's x housing. But that's been running, you know, we've been getting point four sort of numbers on that.
And so that last mile to get us back down to two percent on a sustained basis, you know, that's that's tough, and that's why the FED is probably going to remain restrictive, you know, for quite some time to make sure that that does come down. And so what you have to do is you have to have and they said this in the minutes of the FMC minutes the other day, you have to have subtrend growth for
a while to bring that down to two percent. And I'm afraid that's what we're going to be looking at over the next few quarters is kind of subtrend and economic growth.
The report also talks about the increase in the gasoline index as a major contributor to the rise. How difficult does the current geopolitical environment make the fact that this gasoline index potentially has potential to continue to rise to make this two percent even that much harder?
Yeah, I mean it's interesting and if you look at you know, if you look what's happened since let's call it late September, so gasoline prices have actually come down pretty significantly, like in you know, fifteen twenty cents a gallon or something like that. You know, what's going on right now in the Middle East will probably stop that
decline right there. And if things obviously heat up over in the Middle East and you start talking about you know, potentially a ran going offline in terms of you know, pumping three million or so barrels a day, then that's obviously going to put upward pressure on oil prices, and that would arrest that downward trend that we've seen at least in the last two weeks in terms of gasoline prices.
Do you start to consider that and put that into how you were thinking about out the next year or so.
So I guess what I would the way I would characterize that to our inflation forecast is it's an upside risk. I mean at this point, just given out how fluid that situation in the Middle East is, I don't know if we would necessarily try to factor that in right now.
And so you know, we would come up with some sort of point estimate in terms of our view in terms of inflation over the coming you know, year or so, and we would say, well, maybe the risk are a little bit skewed to the upside here, and so we'll just have to keep an eye on what's going on over there. But keep in mind that gasoline itself represents a pretty small part of the of the CPI. I think it's only like six percent or something like that.
It's pretty small, and so you'd have to have see, you know, pretty significant increase in gasoline prices that were sustained to have you know, a lasting impact on the overall rate of inflation.
Jay Bryce and Wells Fargo, thank you so much for being with us.
With this around the table. And please to say Michael Shaw, CEO of market Field Asset Management. Morning, Michael, morning. And to go back to this Gympianco question I asked in the last Now, I think it's worth asking a view because I know your answer to it, so we can have a broader conversation about it.
That's someone knows the answer.
The disinflation we've seen over the last few months is that transitory?
I think so? Yes, Why well, because I think you had this big, shocking COVID of excess demand and cons constricted supply, and that created a lot of took a long time, but it was transitory inflation. And now you have a sort of transitory deflation. And what you see is that end demand is still there for physical goods, and you've seen PPI start to spin around back into
positive territory, and I think CPI will follow course. Now, I would stress it's not going to be a wave anything like as powerful as what we saw in twenty one twenty two, but I think it is going to stop CPI getting back into the twos and staying there. CPI is going to be sticky.
Is it a mistake to sound like you might be done then at a further reserve?
Well, I mean my view, I said it last time I was on it's really about the long end of the curve, not the short end of the curve. Now, the Father's sort of box itself into a corner. I don't really care if it stops at five fifty or five seventy five, because if you look at the range of long term yields, I mean, the tenure was at three point fifty in May and was knocking on five percent a couple of weeks ago, And you know, I
think that that's really the question. I think the Feder's done what it's going to do in this monetary cycle. I think it's going to step away. I'm of a view that at some point in time we're not there yet, that you're going to see some form of yield curve control brought in to stabilize the bond market. But that's you know, that's not this week, that's not this.
Weak hold on a second yield curve control in the United States? Does that mean that essentially they're going to hold rates high, but that they're going to accelerate quantitative easing like they're going to quit accelerate purchases.
I think at the end of the day, financial stability is the unspoken mandate of the Federal Reserve. And they talk a lot about unemployment and inflation, but when when things really come to a head, financial stability is number one. And we saw a taste of it exactly this time last year in the UK when the guilt's market three briefly dislocated. You know, I'm of a view that the Fed doesn't really have things under control. It's certainly not
in control of the fiscal policy of this country. The fiscal policy of this country is reckless in the extreme. And you know, I think at some point in the foreseeable future you're going to have disorder at the long end of the curve, and I think that's going to be important enough that it becomes something the Federals of gets involved in.
So is that kind of what equity buyers are banking on that essentially when they say when they come out and they say stocks can handle bonds where they are, yields where they are, are they basically saying because if they get out of control, the Fed's going to step in, regardless of what's going on with inflation.
No, I think they're just not thinking about it. I think I think that that people spend an awful lot of time worrying about monetary policy over the short term, and the FED feeds into this. They're constantly out there talking and like sort of hinting, maybe we'll do this, maybe maybe we'll do that. And the sort of general sense for Federals of wants to get out of those that it is somehow in control the things that it's palpably not in control of I mean, I'd argue it's
had no effect on inflation. It's it's totally lucky that inflation went away. It didn't go away because of what the FED did. It went away in spite of what the FED did.
Supply side rebalancing, is that absolutely?
Yes?
Do you think that won't be sufficient then to get inflation down anymore? Have we seen the bulk of that?
I think we've seen. I think we've seen the bulk of it. Now the long end of the curve may have its own form of discipline. You know, I've said before that the you know, effectively nothing that happened from last October to last to this August really got transmitted to the long end of the curve. You know that's no longer true. We've now transmitted another seventy five to one hundred basis points of tightening to the long end of the curve. A question is is really what happens next?
Typically those sell offs can become self limiting because ultimately you start to worry about a slow down and people by treasures. Again, what I hear from you is that you think the bunch of deaf as a financial stability risk, that this thing is going to have to respond to. Now, if that's the case, let's run with that. Where does that leave the dollar?
The question is whether this is unique to the United States, or whether it's or whether it's something of a global something of a global malais. It's If it's unique to the United States, the dollar gets significantly weaker. If there's a host of G seven countries which are running similar deficits and have forced down similar paths, then it's a hard asset story.
If this is the case, then do you foresee a certain level, a certain trigger for the FED to step in and be able to justify additional purchases at a time where inflation is still expected to be hot.
I don't think it's as a magical yield number. I don't think five percent or five twenty five and the tenure suddenly gets a FED jumping up and down. It's more the orderly functioning of markets. You can have a very orderly market with a tenure at five percent. You could have a very disorderly market with the tenure at five percent. I mean, I think the quality of auctions, I think the amount of bids for viget, I think the off the market response post auctions matters a great deal.
You know, it wasn't that the yield in the UK was so high this time last year, but it was clearly a disorderly market. There was clearly massive force selling in the institutional community, and that's when a central bank wakes up extremely quickly, and.
Fiscal policy risk was at the epicenter of that as well. Let's finish here. I can hear people screaming at home, listen to this. Do I buy stocks? Are Salem?
What do I think in the short term? You know, for I think there's an investable market rebound here, and I still think there's portions of the equity market that are that are doing Okay.
It's Washington listening amh to this.
Well, a lot of people are, but doesn't mean they're going to react on it.
The privilege of acting recklessly just seems to have been lost.
This is the whole thing Moody's is talking about. It's the idea of governance that is not going the direction that it should that is concerning them.
Yeah, but if any of these officials are looking to the stock market for any validation of their concern, we hear all of these incredibly dooomy and gloomy prognostications and then investor after investors has but actually this makes Stucks a pretty good bye for now.
Just process that budget deficit is a financial stability risk that this FED has to respond to and commence yield curve control. And if it's unique to America, can you imagine the dollar weakness we're going to see off the back of that if we remember what happened to Sterling Right off the back of that story, what happens to the US dollar if that starts to materialize?
The key thing you said if right, But it's a global issue. And what did we hear from Tony Dwyer that basically battery higher rates are bad because this is an entire world leveraged that it to low rates and it is not just a US centric.
Issue joining us now? Is Shila Kayalu, the senior equity research analyst over a Jeffreys, Shila, let's start with this story, just how disruptive is this for the airlines?
Currently?
It's disruptive, but it's manageable.
What we've seen from Delta Airlines is the cut capacity to Israel through October. But I'm sure we'll see that change and schedules be trimmed into the rest of the Q four and potentially into January, depending on how long the conflict lasts. But it's manageable from a risk pro cloud perspective that it's one point five percent of capacity for Delta, so not a needle mover, and that traffic might get rerouted to other European cities. So obviously a
very sad situation what's going on there. And LLLL is the carrier that is flying because they do have some ISR equipment on their aircraft. So for Delta, it's a financially manageable situation.
There's a question though about larger risk aversion to travel. There have been other conferences that have been canceled or postponed in Qatar and other places in response to potential violence and just disruption in the region. Is there a sense that this could make any kind of dent in some of the revenues or just the appetite to travel at a time of incredible n ease.
I think it might pull back international traffic a little bit, but we you know, we seasonally expect that Q two and Q three are the biggest transatlantic mid East travel season, so we'll see it pulled back into that in Q four, So the airlines already have that built into their capacity plans, and again that travel might get rerouted to that holiday travel and leisure travel might get rerouted to other cities. In terms of corporate, more US focused, Delta did see
a ten point improvement this quarter. That was the first time they noted that corporate's kind of been stuck at eighty percent recovered. That's mostly in the US and talking, but you know, we did see some improvement to going.
Back to work.
So not sure how much corporate international travel to the Mid East and that region DELTA has specifically, but we do think it'll be a manageable risk for US network carriers in general.
The Delta results actually put to rest some of the biggest fears, at least for now, that higher oil prices would seriously impede profits.
It also raises questions.
About how much they are unable to pass along some of those price increases to the consumers. What did you learn in terms of the reality on the ground of how airlines are managing some of their fixed costs and their ability to actually keep airfares elevated.
So I think, you know, My thought into today was Delta's print was going to be online and it's inline, and that they were going to narrow to cut the guidance slightly, and they did.
But I think as we have other network carriers.
And especially the low cost carriers report through earning season, this Delta print is going to come out looking much better.
You know, Delta did go to the low end of its guidance, but one of.
The factors to highlight year is they generated two point seven billion of free cash flow year to date and they narrowed their guidance to two billion of cash from three billion prior. That's due to higher maintenance and fuel so you know, I think we're seeing the impact of that.
Delta does have a long term target of uh, you know, billions of dollars of cash generation out there, so we could see those from because of what's going on with higher fuel prices and maintenance expenses also coming in higher too.
How much more difficult is it going to be for these airlines to hedge for potential future spikes in jet fuel as they see this tragedy unfold in the Middle East.
None of the airlines outside of Southwest currently have a massive touching program, so they do it through other ways. For instance, to Delta, we highlight that fifty five percent of their revenues or from other services such as their Delta tech Ops network, which is quite a unique feature they have that's differentiated and helps lower their maintenance costs. They have their lower loyalty program with MX as well, so they have other revenue streams.
They really derive revenues from premium.
Customers, so they try to hedge it in that way rather than a direct edge.
Can we finish that just on those loyalty programs changes? Over at Delta Shielda, how are those changes working out?
I say, I wish I could use a sky Miles club because I never have time.
I'm constantly running around, you know.
And at Bastian is kind of taking a step back and saying they'll revisit the exact changes because of the feedback they've gotten. But it just making it more difficult to orn those points given that they have such a high loyal customer base, because they do have a very reliable on time network and part of that comes from their other revenue streams too.
I'm trying to work out if they're going to lose customers because of the changes they've made. Do you think they might?
I don't think so, just because they'll actually get me to where I need to go, so it's okay for me.
But you know, and they have such a loyal customer base.
I mean, that's what's resulting in these changes to begin with, is that they have too many loyal customers. So they're just making the tiers slightly more difficult. So I don't think they'll lose customers. Perhaps you might, you know, swap a Delta and United, but you're not going to move to a different tier.
My colleague Tom King would say, right now, beneath the brandum Lisa has views on this shade.
Well, I just hold on a second.
First of all, this isn't people necessarily being loyal. It's people get an American Express card. So if you get an American Express card and then you get into the lounge and then the people who actually are flying don't access it unless they spend about a million dollars in actual ticket costs, then you have to wonder why should someone stick with one airline rather than go to any airline that offers them the best fare that gets them to where they need to go.
I think also one thing to remember, which we haven't talked about because there's been so many fears of airline profitability with fuel going higher, is capacity is still tight in the market to certain city pairs, right, So it's not like you have tons of options.
You usually have one to two to pick from.
So that's why airlines have been so successful gaining pricing so far. Especially we're seeing that in the international areas. So yeah, I think that's where they're stepping back because they don't want to lose that customer base to that other carrier potentially, But I don't think you're going to see a massive shift.
Basically, then don't have to worry about it. It's in that customer Based on what I just heard, Sheila Sheila kailelu There, Jeffries, I'm the latest with doubts.
Subscribe to Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always on the Bloomberg terminal. Thanks for listening. I'm Lisa Abramowitz, and this is Bloomberg