Surveillance: US Growth with Hatzius (Podcast)

you want to get stand places? Sagi Natsia is the chief economist and head of Global Economics and Markets Research at Comments Sexy And coming off the back of a weekend where you actually cut the outlook for us crow, so let's start there with y. We cut the outlook because there was there's been a very material tightening in

financial conditions over the last couple of months. All Financial Conditions Index is up by more than two hundred basis points from the end of two thousand and twenty twenty one, and we think that that's going to keep growth below trend over the next several quarters. Over the next year or so, so we're now looking for only one and a quarter percent growth this year on a fourth quarter to the fourth quarter basis and then one and a

half percent next year. And I think that's needed to create a little bit more capacity in the labor market, in particular alongside an improvement in labor force participation, because we have this huge gap between labor demand and labor supply. We've got eleven and a half million open possessions and six million unemployed workers, and that gap needs to shrink. As share Powell has said, yeah, I want to talk.

There's any ways to go here, but I do want to talk about sub two percent g d P. And one of the partitions here is domestic final sales, a review of the American economy versus export import dynamics on the other side, and your call exact Pandel then can throw in dollar dynamics as well. Is your call a foreign call or is it a domestical It's really a domestic call. Mostly that's the main driver here. I mean first quarter, I had a lot of noise in the

in the trade statistics. I think some of that is going to unravel, but I think it's really about higher interest rates, lower stock prices, somewhat wider credit spreads, and to some degree the appreciation of the dollar. But all of those different drivers which are primarily going to impinge on domestic demand, slowing growth to a much lower pace. Do you see any indications at this time at the labor economy is easy? Is it in the micro data that you look at every week? Not yet in the data, No.

I think there are some signs in the more anecdotal reports, company by company reports some of the tech firms scaling back hiring, lowering open positions. In the hard data that get published by the Labor Department not yet. Yeah, And how high does unemployment have to get to reach that sort of spare capacity they're looking for the labor market? I actually don't think that the unemployment rate has to rise a lot. What needs to happen, I think is

that companies bring down open positions. So the path that the FEDS tight targeting is to slow growth to a pace that is slow enough too for companies to shelve some of their expansion plans and bring down some of the open positions, but not so slow that you start getting large numbers of layoffs. So we're expecting a little bit of an increase in the unemployment rate from the you know, three and a half percent range to the three and three quarter percent range, but not a large increase.

Do you think that basically Michelle Meyer was correct when she was talking about the ability for consumers to lever up even if their incomes aren't keeping pace with the with the inflation rate right now, and that basically the FED has to go a lot faster even still, then if then people seem to think in order to slow that, otherwise we're going to get even more overheating. Well, I think, you know, borrowing is going to be a short term uh driver of spending, and I think has been to

some degree. If you look at the consumer credit numbers over the last couple of months, there clearly has been some you know, re leveraging to some degree. But I don't think that that's going to be a lasting kind of uh, you know, support for for spending. So I think the sumer spending is going to be relatively slow. Income is going to be quite weak in two thousand

and twenty two. We're looking for only zero point five percent real income growth on the fourth quarter to fourth quarter basis on an annual average basis actually significantly weaker than that. But even on a Q four, the Q four basis only zero point five and I think that's going to keep spending pretty soft. Long on fair away there was Dudley and mclvy and this young whipper snapper from Germany. What was his name? I think it was heart serious is what it was. You codified emmy W

mortgage would you withdraw? Let me cut to the chase yourn. When does the housing market break? Well, emmy W is actually a very important issue. Again, not as important, I think as going into the oh eight crisis, but there has been a pick up in mortgagee would you withdrawal over the last year, and you've got had this increase in consumer credit as well. You know, similar kind of dynamic. This supports spending in the in the short term, but ultimately is not going to be a sustainable source of

big increases in spending. So builds in a slowdown sort of down the road. And I think you know when the housing market slows, of course, is going to determine the timing of that. We haven't really seen significant slowing in the in the part data yet. I do expect that mortgage rates up even more than ten. Treasure Pharaoh wants to know should he buy in June or July. I'm not going to give advice on that that I think is probably not not don't worried that's too long

term for you and it's finished here just quickly. What's the biggest risk right now to your view? Well, I think the the FED is still trying to bring down you know, slow slow the economy, slow employment, and bring down open positions because they're still worried about inflation being too high and it will be well above target for the foreseeable future. I do think it's going to come down, but if it doesn't come down quickly enough, we can see,

you know, still significantly higher rates. Our call at the moment is three to three in a quarter percent for the funds rate. We've stuck with that and it's you know, fairly close to market pricing. But I think the risk cases that you know, they have to do more, and that then also raises the risk of a hard landing. Not our baseline, but that would be the rest of the upside. Wrist the rights clear in present. Yeah, thank you,

as always, Saxon. We're thrilled to bring you now someone hardwired to the retail of America and particularly the aspiration that all of us are guilty of. Dana Telsey, his chief executive officer chief research officer at Telsey advisory group and lives in New York retail truly like no one I know. Dana. I was absolutely crushed at the price rise on the Selena hoodie sweatshirt the men's it's got the Selene thing on it. I thought it should be

in my closet. I mean there was. It was eight hundred bucks and all of a sudden, it's nine dollars. Everything's going up in price, right it has. We're seeing price increases and Tom, thank you for having me. Price increases across the board on many different categories, especially on luxury goods. The consumer is buying, and we're seeing a wide range of rumors buying in terms of demographics and age group. The brand matters and they find ways to

pay for it. But what is so important here from the days of you, I I bear Stearns, where you're doing, you know, channel shops and going through Abercromie and Fitch, is the way we buy this stuff is fundamentally changed. How important for you and Joe Feldman is a firm is PayPal credit? Is the access of get that Selene sweatshirt now and pay for it later. That sea change,

It is a sea change. It's very important and frankly it lifts the sales and also the companies are learning what to produce because of the options that they have, both buying in store and buying online. The world today is more integrated than it ever has and we're watching sell through, watching influences, We're watching Instagram in order to pick up what are the trends that are going to mean something on main street? So what are you expecting

right now in about ten minutes time? And these retail sales numbers, I mean I think April hopefully should be a little bit better. We saw gas prices come in a little bit. We still have an environment, like was mentioned earlier, a shift to services from goods. We're expecting a big summer season and vacation. The other thing is you have two point six million weddings occurring this year.

On average, people spend around four hundred thirty dollars every time they go to a wedding, so you'll still have some of that good spending. April should have been a little bit better. But inflation is a headwind and that is in every aspect that companies are dealing with. Its people change the way they pay for luxury goods. Do we have to change the way we think about who's shopping there. Typically we think of the high income earner and the luxury goods, and those two are so closely tether.

I just wanted to Donna if that's changed now over the last couple of years. I think it has. I think you've gotten the millennials and the gen z s, and I think the brand awareness the collaborations that have been done is bring making these luxury brands younger and younger while still keeping the ethos and the interests of the higher income down graphics. As interest rates go up, can they maintain the buying? I see the lines outside

of the luxury stores in Soho, we all do. We could spot the average age in that line as well. What's gonna happen here does not look good as you look further forward. I mean, we need the Chinese to come back and spend Right now, you're seeing some tourism happen with Europeans coming to the US. Will need that Asian traveler. But the product innovation is key. We've seen what demand can be when newness is out there. You've

seen it from LVMH with their brands. You look at what's happening with Tiffany's you've seen what it's what's happening with bolln Siaga. There there are luxury brands that matter to these consumers. There's a bigger issue underpitting John's question. It's an important one, which is at what point will higher borrowing costs really matter, especially as more consumers do start to level up in order to keep their purchasing at the same levels as before inflation took off to

the way that it is now. I think overall, the lower income consumer at the lower end, obviously they're struggling. The middle income can summer continues to get some higher wages, and those wages are allocated. It may not be allocated to goods, but allocated to services above that mid tiers. The question mark if there's a pullback given what debt

levels could look like. Dana, your thoughts, thoughts and Joe Filman's work on Amazon has been great, but I'm gonna editorialize and say Amazon has been a train wreck your thoughts and now they turn it around. I mean, there's work to be done there and Amazon. The narrative that was two and three years ago that Amazon is going to take over a retail and the consumer spend isn't there. It definitely cost more to be able to shift than

ever before. Everyone basically expected what was happening online sales to continue the growth, and we're seeing that shift now. We're seeing the shift of a return to stores from digital sales. That's helping the physical store retailer. And frankly, digital sales are moderating, and that Sianca is a brand. I just don't get t k. What is a Cianca about? You know, to be honest, I just but you know,

on data will be dazzled by this. I actually watched a little short video on the Guide Balanceaga that he went. He went bankrupt like three times, and every time he came out he revolutionized what he did out of Spain and it was with always with drama, John and I guess that's what it is. I don't get it, Dana. I'm convinced that in a few years time they come out of the head office and say, got you. This was all a joke, but you bought it anyway. I

just don't get it. I think one of the things they do, you can go buy their windows like I did last night. They're putting things in their windows that whether it's big inflated balloons in the in the look of a person, they're basically creating that something you need

to see. And frankly, there's a difference between heritage and authentic luxury, like what you have with the quality of the goods at our mez, and there's a difference with what's happening now that is in demand because of limited supply. That's what some of the brands. Dana, what does your universe do when we come off China lockdown? Uh, the luxury goods universe will do very well. But also don't

forget what China supplies. Every manufacturer is looking to diversify their supply and being able to get the goods is key, brilliant, thank you, awesome advantag Do you know that the sweatshirts I thought, if you bought a luxury sweatshirt that didn't shrink in the wash, I guess you got to watch out for tom as if the other half takes set sweatshirt and shrinks it deliberately so that they can wear it. To bet the idea that women spend so much more

than men, I mean, that's typically the stereotype. It's going to paint out that's exactly right. I just want to make that very clear now joining us, and this is a really important conversation for you on radio and television because Sky Clemens, with thirty plus years of Brown Brothers hareman synthesizes in all the eco babble into the market strategy and your foundation, Scott Clemens, is everybody calm down

about inflation? If you're brief and Chairman Powell today in the forty seven other FED speakers, how do you tell them to calm down about inflation? Um, I think it pays to be a simple minded economist given all of the moving parts that you've laid out here. At the

top of the hour, I would remind the FED. Far be it for me to lecture the FED, but I would remind the FED that the price of everything, in the price of anything, is simply the interaction of supply and demand, and that the FED has an ability to influence demand through monetary policy, but the FED does not have the ability to influence supply. So to the degree that lingering inflation is a result of lingering supply chain disruptions, the FED should not get over eager and raise interest

rates too much. Much to try to choke off inflation that ends up not being demand driven to begin with. I think that's the story for inflation and the FED for the balance of this year. Let's talk about the story for this market. MARKA. Kolanovich of JP Mulgan and the investment banks saying we're pricing in too much recession risk just two pound question one to agree and to

how do you measure that? I think that's right. I think the market is too pessimistic about the risk of inflation in an environment where we're adding jobs and roughly let's call it half a million jobs a month, net wages arising. Combined those things together, keeping in mind of personal consumption is sixty percent of GDP going to twenty three twenty four. Yeah, there's a recession out there somewhere, but I don't see that in the near term. The

background was just too strong. Where I think the confusion or the anxiety arises is we're still in the midst of this transition of economic leadership away from the policy support of easy monetary policy and a lot of fiscal spending twelve eighteen, twenty four months ago, back to a more normal driver of economic active that's naturally anxiety inducing. I get it, but I think people are looking at the glasses being half empty. There are a lot of

half full notions out there as well. Well. Are have full notion something that would encourage the Fed to hike further leading to half empty? And I know this sounds like a paradise, a parody of what it is to be gloomy, but honestly, this is what a lot of people are thinking. That the momentum that we're seeing in a lot of the economic data is a bad thing because it means the FED has to do more. What do you say to counter that? Well, at least I

think the answer to that is what's really important. And this is a subtle nuance, but I think this is the source of a lot of the volatility and financial markets. The important thing is not that the Fed is raising interest rates, but why they're raising interest rates. And admittedly that's very subjective, but if the Fed, on one hand, is raising interest rates out of growing confidence that this transition and leadership is taking place, that's a pretty benign

and even supportive outcome. If, on the other hand, the market concludes that inflation is running away and the FED is playing catch up. That's a very just up to outcome, and I think the push and pull between those two notions is what drives market volatility, not just day to day, but sometimes even hour to hour. We've we've all seen these days in which the market opens strongly and closes

in the red or vice versa. Hopefully today's opening polls, but I think that's likely to continue for some time to come. We're telling our clients to get used to the kind of intra day volatility that has characterized the beginning of this year. It's not gonna go away anytime soon. So given that, where's your highest conviction right now, Scott Well, With the rise in interest rates, we've begun allocating capital into traditional fixed income for the first time close to

a decade. For our clients at Brown withs Harim and taxable clients, remmisciple bonds are are offering a better trade off of risk and return than we've seen in quite some time. Beyond that, the carnage in equity markets has left a lot to find. I take a very simple measure and look at the percentage of stocks in an index trading below their fifty day moving average as of last night's close. Seventy eight percent of the SMP was

below it's fifty day moving average. Of the Russell two thousand and nine point nine five percent of the NASTAC is trading below it's fifty day moving average. That doesn't mean that everything is cheap, but it certainly means that among that carnage there are plenty of good trade offs of risk and return. Scott, let's think positive. Let's say

you go down in flames with your inflation call. Instead of getting two to three percent inflation, you fail, you're wrong, and we get four point two percent inflation by the end of the year. That is a c change from where we are right now. What does the stock market do if Clemens is wrong? That's probably more disruptive for the stock market if Clemens turns out to be wrong. I think, though, at the same time, the trajectory of

inflation is important. If at the end of this year the inflation number still starts with the four but we're headed in the right direction, that's different. In that environment, I would want to own companies that have pricing power, companies that passed through those higher input costs to their end customers. That that tends to be associated with brand, loyalty, essential products and services, repeat customers, all the kinds of

quality markers of a company. Not that they're immune from an inflationary environment like that, but there are a lot more resistant to it. Right to catch up, scill as always a different perspective of things at the moment, skilled climates at Brand brother Sentiment. Right now, we are all aware it is yield up and price down. That is the mix, the toxic mix for something rare in the

last decades, a bond bear market. When you Seesar's living, this is global head of strategy at Credit Sites and she knows, well, you can talk about spreads and you can analyze loans in different categories and the answer is prices down. And she joins us this morning, I want to look at the Bloomberg Total Aggregate Index, Total Return Aggregate, Full Faith and Credit Index, and the answer is we're down twelve ice seven percent. Analyze. Can you state it's

a bond bear market? It feels like we're in a bond bear market. And from talking to the credit investors that I speak to on a regular basis, they are certainly seeing a lot of signs of kind of continuing negativity. Don't fight the FED is definitely the mantra in the bond market, and the FED seems to be on a very hawkish course to continue to high rates. That being said, there are some signs of kind of constructive positivity on

on the credit market side of things. Well, no, but in the equity market, I clawback on growth, I called clawback on use of cash. How do you claw back from a twelve percent loss? Frankly, and I g it could be an eight percent loss? What's the strategy to clawback in fixed income? So in fixed income, we've had two phases of the sell off. First, it was all duration. We saw higher rated, longer duration assets sell off as

we saw that big sensitivity to the moving yields. Now with everybody very concerned about growth or moving into the credit risk phase of the sell off, and this means you have to be very selective in terms of where you are positioning your risk, and that is actually a very good sign for these dedicated credit investors who have longer term views and longer term mandates rather than kind of a three to six month time horizon like we usually see in the equity market, when you with about

an hour ago before we get retail sales. When you take a look at the corporate fundamentals, which sectors are starting to feel the biggest hit from some of the weakness that at least we saw in Walmart, if not beyond. So we're definitely seeing a shift away from some of the COVID pandemic darlings, some of the consumer staples and retails side of things. But we are also seeing a

continued improvement in energy fundamentals. While we might not hold energy prices where they currently are, the levels are still going to be quite strong for cash flow and credit investors. And we're also seeing some idiosyncredit risk in some sectors, things like high yield healthcare and how yield telecom. We're seeing some single name stories that are really driving outside spread widening in those specific sectors. They're sort of an

existential question facing credit right now. Yes, borrowing costs are a lot higher, but companies don't really have to borrow. And if they don't have to borrow, does it matter, right, I mean, does it actually affect their bottom line? When do companies have to start borrowing again and actually locking in these yields that are incredibly high relative to where

they were a year ago. That's a great point, Lisa, and I would also say the yields are high relative to one year ago, but let's not forget that one year ago was the absolute rock bottom for borrowing costs, a level that we're probably not going to see again, at least for a long period of time. And so even if borrowing costs have moved up by call it a hundred a hundred and fifty basis points in investment grade from a long term perspective, that is still a

very low level of borrowing costs. And in fact, the amount of no issue that we've seen this year has been quite robust because a lot of companies are looking at those current borrowing costs and saying, well, you know, the is actually still not a terrible time to be um continuing to add to the balance sheet, continuing to

refinance transactions. And then in the high yield market, that's where we've seen the most liability management, really giving a lot of these issuers a reprieve from having to go to the capital markets. And we probably have another twelve to twenty four months before there's really a lot of urgency, especially for the higher rated parts of the high yield market. The double b issuers when this presents a real issue

for the FED. And we were talking about this on the consumer side with with Michelle Meyer of master Card. But if a lot of these companies are immune to more substantial FED rate hikes at least at a financing level, how high can the FED raise rates before presents a credit issue. So I think that the way the FED looks at the credit markets is functioning of capital markets.

Are deals pricing is their investor demand, And for the investment grade market in particular, deals are still pricing, albeit at pretty steep new issue concensions relative to last year, and order books have been relatively solid. So I think the FED is looking at the investment grade market and saying, there are clearly some technical challenges going on in this market, but from a borrowing perspective and pure liquidity flowing, we

can continue to hike rates. Now we're in kind of the approach to the danger zone a hundred and fifty basis points of spread. You usually don't hold that for very long in the i G market. Either you break one way or the other. And if you break to two hundred, that's when the FED has to take a little bit of a pause. And say our capital markets still functioning when he want when he says to that of credits sis. This is the Bloomberg Surveillance Podcast. Thanks

for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomer