Surveillance: Weak US GDP with Pingle (Podcast)

concise note on all of this. Jonathan, do you look at this as gospel or do you believe it will be amended in a second and third Look, well, I so gospel is a little strong. Um. You know, these

numbers do revise. Um. I think the key takeaway though, is, you know, I mean chere Powell tried to downplay this a little bit yesterday in his you know, post meeting press conference, but I mean, you know, going back to what Mike said, I mean, and we've been pointing out, I mean for Q two, you you know, the guts of the report, you know, just just look weak. I mean,

real personal consumption expenditures rising one per cent um is soft. Um. You know, coming into this year, we all thought the abundant household savings, pent up demand hail winds would be more of a support. Um and and and and to your point earlier Tom with with you know, prices eroding real incomes. Um, you know, the consumers just shaped up

much more sluggishly than expected. And I and that I think is sort of the main takeaway from from the Q two GDP report, Jonathan mrs DI Inflation all over, Basically the idea that we're seeing inflation remaining high and going higher, with that GDP price component coming in at the hottest going back to one, at the same time that you're getting what some would call a technical recession

of two straight quarters of negative growth. How much can the Fed really back away from their rate hiking as the market has been believing as what you're seeing in that to year yield coming in at a time when inflation is not stowing signs of coming down all that quick play. Yeah, No, I think it's I think it's very hard for the Fed to walk away. I mean,

I you know, yesterday was a really interesting meeting. You know, cheer Powell came out swinging with tough talk against inflation right off the top, and as prepared remarks left the door open for another seventy five basis point rate hike, But the broader message that seemed to get sent was that they were transitioning to a slower pace of rate hikes, you know, which which is fair? And this goes back

and I caught the clip with Dennis Lockhart. They are moving on to this second stage now that they've brought policy to a kind of more neutral level, but inflation just remains too hot for them to think you're gonna they're gonna stop. I mean, we're expecting a fifty basis point rate hike at the September meeting and have been for for some time. But you know, there's just there's just too much inflation in the pipeline for them really

to relent yet. And Jonathan, with the greatest of respect for economic historians, does it matter from your perspective whether the nb UH caused this a recession or not. Shouldn't market participants just be treading on the data in front of us, And if it's waker, it's waker. Into lasist point that with nine percent inflation, it's problematic, isn't it. Yeah, No, I think that's right. I mean, the n b R isn't isn't gospel either. But but the NBR does set

a threshold for sort of how broad the weaknesses. It hasn't shown up in payroll employment yet. Um and also a certain amount of the severity. I mean right now, you know, as much as consumer spending has been weak, I mean it is positive. I mean, we're just chugging along at at at pretty weak growth Q one, and the report was held down by a lot of the noisy components coming off the very strong Q four. So yeah, I would downplay a little bit these sort of the

technical recession signal. But you know, going back to what Mike said, I mean, the fact of the matter is, and we've been sort of writing about this is the problem with the Q two report. The Q two reports weak for domestic demand. I mean, it's it's the US stuff that looks weak in Q two, and that doesn't really bode well looking ahead, Jonathan, do you see the spreading to the labor market and how quickly? Because one thing I think we'll hear from the administration later is

that the consumer is holding up. They'll say things like the labor market is still strong. Do you see it remain that way through the next quarter? Uh, we have. We have a pretty meaningful slowdown in payroll employment. We actually would make a case that it has been sort

of artificially supported somewhat um in recent months. You've seen substantially more weakening and initial claims continuing claims the household survey data, and given the severity of the slowdown and aggregate demand, we would certainly expect the labor market to follow. You know, we're looking for payrolls to UH at some point in the third quarter, you know, run under two hundred k a month as part of that slowing on the way to further slowing in Q four. Do you

wish you hadn't adjusted your your forecast yesterday? Kevin that it's pretty much money for the optics of getting these inventory deflators correct and everything. We were pretty close and getting the decline so and the and and and and altogether the components were sort of structured the way we expected. So I'm pretty happy because the original estimate was basically on the money. Chung anyway, Jonathan is good to catch up,

Jonathan thing of that of ups. Francis Donald with US now Global Chief Economist strategist manual life very good at the workings of our g d P. What are we not analyzing in today's g d P? First look, francis, what's the big mystery? The big mystery is not today's g d P at all. Today's GDP will tell us what we already know, which is that this economy has materially slowed down. We are not in the roaring twenties.

We are not in the reflation trade. And if you told most people that last year, they would not have believed you. The big mystery is what is the next four to six quarters look like? And this is really what concerns me. Is not recession or no recession this year or even three, it's what do we do if we're stuck in one percent growth for four to six quarters. That's much harder to trade, much harder for central banks

to respond to. And francis, what's so important? I mean, I featured this earlier in Austin Fox of Bloomberg Opinion has done great work on it. Powell really scirted yesterday the housing plug in to j d P, which is, if we get yields up, mortgages are slammed, house ownership is slammed, and that means rent sustaining go higher. How does that work into the g d P of the nation. Well, comments like to say housing leads the market. Nail housing,

you're gonna get the economy outlook pretty good. In fact, one of my favorite charts is one that shows that housing leads retail sales. So you know, really focusing on the housing side of the story is going to be critical. It is going to bring down inflation to a certain respect, and it's also very very bad. Every data point we have on housing is trending downwards. Frankly, Tom, Every data point we have across the gamut of major primary data

points is pointing downwards. Right now, There's not a lot of places you can look for for optimism unless you do what Powell did yesterday, which is to call initial jobless claims rise not real, or to question the validity of the GDP number. Three weeks of it now and we might have a fourth week if it lights to Francis.

Tell me why the market's been rallying then over the last month, why credit spreads have been tightening, and what you make if that using of financial conditions we've seen, oh bear market rallies, they get bigger the deeper you get into that bear market. I do not believe what we saw yesterday from Chair Powell was a pivot, although it certainly was the path towards the pivot, and markets care about second derivatives. But what Chair Powell told us

is well, he's data dependent. Unfortunately. I don't think that inflation number is gonna come down fast enough in the next two to three months to take out too much of the pricing for two. But what this market is gonna do, in my opinion, is pricing more cuts for three. And gosh, that makes the fens job harder. Just like we saw yesterday. The weaker the outlook, the more we see those financial conditions fall, the more offsets what the

Feds really trying to do, which is tightened. Look at the break even yesterday, the rallying that shouldn't be happening. When the Fed's tightening sending five bases points, they're probably not happy. That's actually funny that you mentioned next. I was just looking at the five year five year forward break evens, and they've been steadily rising. The more people believe in this FED pivot. So what do you expect

in terms of pushing back against this? How does the FED react to a market that's not cooperating and getting ahead of itself, well, I wouldn't be surprised. And in the next few days, the next few weeks, we do see beneficials who come out and really try to walk back. Some of that speak to some of the hawkish risks that exists in this market. And that's why I think it's dangerous to make too big of a change in

your fedue afriter a single meeting. And as we've seen this year, and a little bit of laughter, you could have these big rallies on FED day that are then reverse course the very next day. So fed Er Powell told us they wanted to be nimble. I think now is the time for economists and strategies to be nimble as well. Some people who are watching the show Francs are probably saying, oh my goodness, here she goes again being bearish. Thomas saying, we're sick of talking about recession.

Company is adapt and we are hearing around the margin signs that the rally that we've been seeing is a signal that we've priced in so much bad news that people are beginning to find value. What's your argument against that, Well, I'm not sure if the she is you or me, but Parish has been effectively the right way to do this. And if you look at the economy, it is still trending downwards. Historically, what we would see is that when the economy is about two thirds of the way through

its downturn, you can start to look for opportunities. And I will be the first to say that macro does not rule all. There will be pockets of advantage here. I think we should watch. I think the curb will still flatten, but we will reach a point in the next few months where you want that steep in our back on and there are always bottom up trades to be had. So the cool relation on macro, it does change over time. It's not the be all end all, but the macro does not look good. What it does

I'll be bullish again, francis. What do our listeners in our viewers do is they jump from forward guidance and the comedy that it was to actually just looking at the data. How do you actually get through a week, get through a month, get through a core or where you are data dependent? The great question, Tom, because we don't know exactly what data the FET is looking at. And sure we asked him, and he said, well, we're

looking at inflation. We want to see compelling evidence. What's compelling evidence probably a few months of month over month improvements in inflation that is heading downwards. They're looking at labor supply and demand, but not all data, apparently, because there's plenty of data that says jobless claims and unemployment is moving in the wrong direction. So we don't know the Fed's reaction function as much today as we did

even forty hours ago. And that's going to make a lot more market volatility, a lot more two sided conversations. One of my fears is that we're gonna have a lot of beneficials speaking to both sides of the argument. So the clarity on what happens next has been reduced very significantly. And if you're at home and you're thinking, what do I look at, well, I'm in the same boat. Francis can sense the frustration, so let's address it. What

do they need to do better? I'm not it's frustration so much And how much harder are you making the job of knowing what you're gonna do next? And the fence job isn't to make my job easier. The fence job is to contain inflation and and really improve the employment outlook. But what would be helpful is if the FED had more clarity on what elements of inflation they're looking at now. Two meetings ago we heard from share Powell that he was very focused on the headline inflation.

But yesterday and he said core is the best leading indicator. So I'd love to hear more about what really are you targeting because we know that, for example, inflation expectations for consumers are driven much more by gasoline prices than they are by FED policy. So which elements of this are you really trying to control? And do you fundamentally believe that it's your job only only your job to contain inflation because inflation came from a lot of places.

It's going to take a lot of places to fix. I'd love it if he could make count job Easia. I'll say I've been incredibly frustrikes it by the last few news conferences. Francis don'tald the of manual Life Investment Management. This is important and what you need to know is you need to hear the conversations while we're on commercial break. John Farrell and Walter pisk of light. Jed on the absolute tensions of the front line of Liverpool. This is

Sala and Monte Walter, Liverpool their front end. They're not on the same page. I mean there's some real tension. There is Apple on the same page or is it a Salomon a metaphor? First of all, Tom for not being on the same page. Liverpool almost pulled off four

trophies last year. Was it was tight at the end, but that's and I guess Apple being on the same page with earnings this quarter probably, but as you know, with the kind of concern over inflation and the economy, a lot of the a lot of the focus is gonna be on the elect for next quarter. I want you to discuss the pricing power Apple has to manage down the income statement. I never hear a discussion of if they go margins are under threat at whatever line

on the income statement. Do they have pricing power? I mean they have pricing power for the quality of the products. But I mean Apple has been known to reduce the price of their product in certain markets, and I think there was some reports even last week in China Um there was some reduction in the price of iPhones. Have

done this in other markets throughout the world. Why you don't necessarily see it crush their margins as you've had this mix shift over the years in terms of services, which has been a higher margin business for them, so they've been able to to generate a very strong margin.

Currencies are a hard thing to fight, though, right this is a this is a global company, so I think you know, currencies are certainly something they're gonna They're gonna have an impact also in terms of the guidance, and they can't do much about that well to the top tier iPhone though going on sale, that seems pretty read to me. Are you saying that's not a big deal

as some people are making it. I think it's a big deal because it's China, and China has been such a big part of the growth gen you've seen in other emerging markets in the past, which I think it may be more understandable, but China has been able to

grow without seeing these types of price cuts. So I think when we're all looking for kind of tea leaves on what's the impact of economic weakness, you can't ignore that as as one of those things to watch, and maybe that's going to be indicative of how they look for growth or what their outlook is for growth for next quarter and the following quarter. So they're all these nodes, right.

We've heard from Qualcom, We've heard from other chip providers that there has been diminishing demand for smartphones for a number of other personal computing devices. How much is baked in in terms of disappointment versus the unknown unknown right of an even bigger slowdown than expected. I think a lot of that is baked in. But remember the iPhone is of the revenue and even a greater percent of

the profit of the company. And you have to look at what's going on in Telco Land right now, where they had a surge of growth during the pandemic in terms of number of customers signing up uh, and then there was a lull. And if they want to fight each other to grab customers, their willingness to subsidize I

think could increase or sustain. Like Verizon as an example, which is struggling to try to generate any type of subscriber growth, doesn't seem like they're going to give up in trying to give you eight hundred dollars or nine dollars to get a new iPhone, and I think that's

the data that we're seeing. So I think that's one of the offsets to a weaker customer and their ability to buy a very expensive iPhone is the willingness of wireless operators around the world, but particularly in these markets that are still huge for Apple and these you know, these high high paying markets to subsidize that customer to

upgrade their phone. Which raises the question of how much the behemoths have an advantage in this environment, how much are used to seeing a distinguishing a factor of the haves and the have nots within big tech as this earning season grinds on. I mean, that's a great point in terms of you know, the people in society, they're getting impacted. It's it's you know, those that are buying iPhones might have a different impact than you know, some of the off that you're seeing me getting announced by

some of these major companies. But again, like if you have economic weakness globally and you're trying to sell a twelve product, you can't just ignore that that's going to have some impact. There. There will be some mitigating factors like again an operator willing to pay you um to to stay on their network or to switch over to your network. But that's still a pretty big headwind depending on how long this lasts. And we've got delayed bills

in the mix. Well to T Mobile talked about the same thing as well, what do you make of that? What's the connection there? I mean, first of all, I think a T T was a couple of days, so to me, that was more frankly an excuse because they gave very bad free cash flow guidance earlier in the year. But you're right. G Mobile tried to spin this yesterday. But the bottom line is if you read through what this CEO Mike Seaver said, they're buildings. The payments there

were also getting delayed. So yeah, I mean you're you're seeing in Walmart, obviously you've seen evidence of, you know, a weakening consumer um. Again, it's just if you're week and someone's willing to pay for your phone, maybe you're more willing to do it. The challenge here is what the operators want to get out of this is if they give you that free phone, they're not they're not,

you know, they're not. They're They're expecting something back and they want you to upgrade to a higher end rape plan and at some point the consumers not that they recognize what's happening and say, look, I don't want to pay an extra ten twenty bucks a month on my rape plan. So even if you're gonna give me eight dollars for her phone, it doesn't resonate. And I think

we saw that with with Veries in this quarter. They were willing to pay customers, you know, for these phones, and they still didn't get people switching to their network. It's I don't understand why the company continues to do that, but at the moment, this is why. This is what these operators are saying, that they're willing to continue to try and subsidize and keep these customers. Well, it's just awesome.

As always what as there of light shed This is a lot of fun because she comes with bulletproof academics. Berkeley was known for decades for chemistry, and part of that, of course, is chemical engineering. She's a chemy out of Berkeley. Gennine Way joins us right now with Barclayser, senior US Oil and Gas Exploration and production analyst, Jenny, and I'm gonna cut to the chase. The airlines needed one to three crises before they got capital discipline, before they got

the religion of operations. How is oil doing in this boom at capital discipline? Are they going to go off to the New Siberia and wasted all the way? Oh? Good morning, Thanks for having Barclay's I love it. Let's just get right at it. Um. You know, I think you're hitting at the crux of the issue. It's capital discipline. Whether it's going to hold is the number one question from investors. There's a ton of skepticism on that in

the bucket, and that's kept people away. We just checked in with all of our companies ahead of the quarter, and every single conversation the companies were still on the right narrative, which was low growth, backstree cash flow. Okay, well let's go, let's go right to the chase Juning. Just because of time, Chevron has always been the wild card. They're the Arco of the modern world, explained Chevron's capital discipline.

Who is keeping them in line? Investors are keeping Chevron in line, just like how they're keeping every other company in line. Energy was the worst performing sector for a number of years. Then that's because they were destroying value. No returns. Nothing was getting returned to shareholders that was anything meaningful, and the shareholders are spoken. And what Chevron did was a reducer capolics budget by five billion dollars a year for the next five years, which is huge,

and they've embarked on a big buyback program. You know, the buyback right now is five to ten billion, and we think that they're going to raise the low end of that. We're already at ten billion for the year and we think our investors are also at ten billions. So the market has really instilled capital discipline on the whole sector. Janine earlier this morning, she'll posted a record profit for the second straight quarter and they also accelerated by backs. Tomorrow we get the likes of XA and

other oil majors that are reporting in the US. What's the political risk as they start to report these blockbuster bonanza earnings and the heels of oil prices that have become a campaign speaking point. Right we have mid term elections coming up in November. It's a huge focus. UM oil companies are definitely in the crosshairs because of all

the profits that they're making. But let's just face it, you know, the companies are making a lot of money because oil prices are up, but they didn't make a lot of money for a lot of the other years. So what they've been doing with the cash is they've been enhancing the balance sheet and they're giving the money back. So you know, we already saw that companies are delivering on this show me the money mentality that investors have right now. Um, we think that Exxon could potentially talk

about their thirty billion dollar buyback program. They just tripled it last quarter, so it's unlikely that they increase it this quarter, but we think that maybe there could be some shifting our front end loading of that. We just talked about Chevron how we think they're going to raise the bottom end of their buy back guidance and so that will vote very well. But you know, companies have a couple of options. They can either reinvest in growth with all that cash, and that's pretty much no not

right now. They can pay it out via dividend and by backs, which we think they're doing, or they can hold the cash. But that's exactly the point. It's a no note right now to invest in more production at a time when a lot of politicians are saying that's exactly what's required of these companies. What is the risk?

How do you price out the chance of perhaps some sort of excess tax put on these companies if they don't invest in production or some other policy kind of check to try to, if nothing else, be a talking point heading into the mid terms. That that's a good point. We think the political risk in the headlines is very high, again because we have mid term elections, UM, but in terms of anything actually getting through, we think the risk is low. So we've seen a windfall tax in the UK.

We think that's highly unlikely in the US right now. UM oil companies they need a more consistent, friendly fiscal regime and a constant regulatory environment in order for them to really commit to plans and to increase growth. And they don't have certainty in what taxes are going to be, permits are going to go through, if frackinge is going to be allowed. Now, that's when they're not able to plan, and then you won't see as much production growth and

policy continuity. It's a massive problem has been for a while now. Jename, Thank you, Jenna lay That of Bankley's 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 h