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Jeffrey You, senior Email market a strategist at bn Y, and really Jeffrey, just honored to have the kernel line and then to have you on synthesizing this. What are the correlations, jeff you in the market now? Is it equities, bunds, currencies and commodities for themselves or are they linked overall?
I think it's each asset class for itself. I'm looking at equity markets right now. Some reaction in somes of the futures, but I don't think there's going to be
too much in the grand scheme of things. Foreign exchange much more interested in where dollar en is going, and maybe there's going to be more of a knock on effect on the treasury market, so when a waste and see mode there, and of course some US treasury markets focusing on the inflation aspects as well, so individual drivers, you know, not one unique force at the space but you know, overall, I think markets will take this in.
It's right over the weekend, jeff and this is your wheelhouse. There was a lot of discussion about linear and nonlinear movement and yields, which comes back to the belief in fixed income. In this case of worry, price down and yield up. Are we at a point where yields trip and we get a real accelerative tendency to higher yields.
I think that's the broader fear. But if I look at the last few trading days, there's much more concern about Japan intervening and the stronger dollar causing Asian reserve managers in general and those in the GCC mind you, due to the need for dollar preference, will they need to sell US treasuries? That seems to be much more of a driver compared to the inflation shock. So we are looking at the treasury market, We are looking at these drivers are but probably these triggers are not where
we expect them to be. But that confidence of factors is something the markets served me attuned to and worried about higher yields.
So Jeffrey and we have seen some movement over the past you know, a week or so pronounced movement in the Japanese yen here pushing up with the one sixty. Now we see it back down to one fifty seven here. What do you think's going on in that market?
So two things are really one inflation inflation expectations. Inflation number is actually softening in Japan. But I guess it's a unique environment right now, high base effects, inflation expectations due to the oil shock. Of course, that is driving things higher. But finally the market is saying you've warned about intervention. The ad Ministry Finance said, this is a final warning and learn the whole They actually came in. So now that they've put the money, you know where
their mouths are. Let's see, you know, whether this can drive broader, stronger APAC currencies. In general, this is one of the most favorite positions in currency markets. At the beginning of the year, you're going to these anchoring things. Of course, balance of payments shifting a bit. But now with the end move this could be one of the bigger themes for the rest of the year. And this is good for the US by the way, greater purchasing power for Asia to buy US assets.
Jeffery you were US with the B and Y. What you've heard there, folks, was a really sophisticated as you'd always get from JEFFU idea of yield guessing inflation versus flows. Right now, JEFFU is Chairman Walsh in the Funneral Reserve, central banker to the world. And then if the Japanese have troubles or any other nation, it is swaps to the rescue.
Well, the US will help itself.
The most amazing thing we've seen in US treasury markets this year, our clients are US clients. In our data, they are buying US treasuries phenomenal amounts. Actually, domestic clients in Europe, domestic clients in the UK they are buying their own debt and phenomenal amounts. Why I look at the brake even, I look inflation break even barely moved right, So your real yields are tremendous right now, foreign aging population.
This is happening all over the Western world. I wouldn't be worried about the trophy market with real yields at least that.
Is brilliant, folks. Can we get him back?
He's pretty good?
I mean, if the Red Sox win three in a row, Jeffrey, you will come back, maybe if Tottenham stays out of relegation and they'll come back, jeff you this is just so so so and important here. If you look at the ten year real yield, however you measure it, how a whack is it because of insatiable war demand for our full faith and credit debt?
Well, right now it's the break evens. I'm just looking at ten year right now. They're barely above levels where we were a year ago, right so, you know, holding well about two and a half percent, yet nominal yields are higher. So I think there is this absolute belief that the AI trade will bring up, will push up US productivity and productivity differentials, and sometimes it's about differentials.
The rest of the world will be so strong versus the rest of the world such that inflation is not now and will not really be a problem for the foreseeable future. So yes, you can have a supply shop AI and productivity growth in the US will be able to deal with it. And this is helping domestic investors who don't have to worry about FX anchor the U S creasury market as well. So I think Stan I really don't worry about the US creasury market either.
Jeffrey, you thank you so much. Too short a visit, stay with us. More from Bloomberg Surveillance coming up after this.
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It's a joy at Mattlizetti in the studio with a Deutsche Bank and all of his US economics because they see him like on the feddicides and he's got to run to his clients, so he's down for like four minutes twenty two seconds. John's asking a five minute question. So I'm toast great to have you here. The heritage of Deutsche Bank folks. Deutsche Bank owned hydrocarbon coverage twenty years ago. Adam Saminski, Paul Sanki. It was legendary. They had this huge Asian a projection. I should say, where's
your mentally in your head? Where's your gallon of gas? Tip point for the American consumer.
Yeah, So for us, our forecast is kind of based on the idea that oilfesers are going to come down over the course of this year. Our house view is that we're going to be down closer to eighty or eighty five dollars a barrel on brent by the end of the year.
Not not too far offrom where market pricing is, but.
We've identified if Brent were to be moving up towards one hundred and fifty dollars a barrel, that's roughly forty dollars more than where we are today being there on a sustained basis. That's where we've become a little bit more worried about the growth side of this picture rather than the inflation side. I think there you kind of clearly wipe out the benefits from the tax cuts in the one big beautiful bill and be a little bit
more worried about consumer spending. Obviously, the consumer sentiment has already taken a big hit. So that's the oil price level that we're more worried about. What do you think the federal banks are worried about? We heard from the Fed last week. What did you take away from that?
Yeah, it was you know, an interesting one.
You know, all the debate was about whether or not they would keep their Ford guidance language or not they did that had a very slight cutting bias or dubbish bias. But we got three descents to the statement, which is an unusual outcome for the FED. And initially when I saw it on the headlines, it was an eight to four decision. It looked more like the Bank of England than it did the Federal Reserve. I think you have a FED that is kind of inching in a Hawkers direction.
Pal said that the center of mass is moving to more neutral. I think you have a committee that you know at the June meeting could have rates unchanged in their own dot plot, and it's possible. At that point you have people that show rate hikes. But key for them is how sustained this oil price shock is. The more sustained it is, the more the more worried that come about inflation pressures, the less likely they are to cut this year.
How about other central banks? The Bank of England, the ECB looks like they may be more on a hiking trajectory.
So the ECB we do have with great hikes, we expect that they cut twenty five basis points in June. It's I think the bar is somewhat high for them to not cut, but it's still a possibility that they don't cut at the GYM meeting. We then have them falling up with another twenty five basis point cut later this year. Okay, you know other central banks, they're dealing with a little bit different outcomes than what you're seeing from the FED.
At this point in time.
The US economy is more insulated from the oil price shock, which is a good outcome. At the same time, you do have a bit more of pass through from oil price shocks to core inflation in other economies.
I mean, this is all great, but here's the reality. When you were u c LA, you had a super woo where you could see through the floor d three hundred thousand miles on it. Now you're driving the Maserati after the bonaw you got from Deutsche Bank, and you're pulling up to the little home by Union seventy six. There's this GA station by USC. It's like it's like it's like a historic monument. They're popping for fancy gas
or seven dollars fifty five cents. I mean, that's the reality our listeners and viewers are facing.
Yeah, I'm thankful for being in New Jersey and not having to pay those gas prices and driving a Masa rather than a Maserati is helping me a little bit. But look, no doubt it's a big hit for household disposable incomes.
As we look ahead, we.
Do think that households are buffered from this to a reasonable extent. You have savings titchs which have been a little bit more elevated. The labor market is accelerating a little bit here. We think we'll get data on that this week. Household wealthy income ratios at record high levels. Financial positions are very easy. You have the tax cut benefits coming through refile.
Where's the real wage, the inflation adjusted wage for all the Deutsche Bank enthusiasm.
Yeah, it's been positive recently, but it's going to get turn negative on as headline inflation.
Finally think negative.
I want to view that.
Within the context of the broad aggregate consumer and the broad economy, which I think the data that we continue to get there is resilient.
The labor market data, the job.
Macause forty two people in AI are making a jillion dollars and going to the med gale. Half of America's flat on their back.
Look, I think, no doubt that's part of it.
I mean, we got the Durbal goods orders data last week where AI related investment is really driving. You look at the year of a year growth rate of computer and perperal equipment, it's at a twenty year high. You do have a as you always do, a US consumer that is very heterogeneous and very divided in terms of their ability to absorb these shots.
So no doubt.
But as we think about the Federal Reserve and as we think about monetary policy, it is that aggregate picture that I think matters more to the FED than the dispersion economic growth.
I need growth in my labor pool.
I need productivity.
I don't have any growth of my labor pool these days.
Is productivity we do intern activity?
And is that an AI productivity or is that just me and Tom working harder?
What?
Well?
You and Tom are working very hard, I think, and helping us all out.
But you know, I think so far it's mostly just looking at backward looking.
Historic tightening in the labor market. And what we've seen.
Back over history is when you have very tight labor markets, labor is expensive and hard to find.
That leads to productivity gains.
So I think we're still reaping the benefits of the very tight labor market in twenty twenty one, twenty twenty two. I think you're beginning to see some early evidence that it is AI related. When I have a chart in my chart book where you look at AI adoption across sectors versus productivity across the different sectors, there's an emerging
positive relationship between those two things. Ultimately, I think as you look ahead, we expect AI to be driving productivity growth fifty to seventy five basis points higher.
Wow, let me get this in. Are you nominal GDP agnostic? If it comes from real GDP or the growth comes from the inflation part for American corporations, it really doesn't matter. There's just a pop there, right. Yeah.
I think there's a very big difference between the stock market and bond market on this one, because the Fed cares a lot about that breakdown, whether or not it's inflation or real growth.
The more it is inflation, the higher for longer they are.
We think that the Fed does not cut rates this year as a result of this inflationary environment, and so that that that mix matters a lot. Our own forecast has moved a bit more towards the inflation side. We've marked up our core PC inflation forecast about fifty basis points from two point four to two point nine percent this year.
We've kept our real growth forecast at two point four percent two point three.
Gas station UCLA. It's just wild, how gorgeous.
That is everything.
It's like everything is gorgeous out there.
It's just great. And then what they're doing, and I could see your maserati there right now in the photo. Thank you so much. Stay with us. More from Bloomberg Surveillance coming up after this.
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Detrees, joins us out co founder at Veda Partners, Henriette. I've never done this, but I'm going to do it because a cacophony of headlines this weekend was stunning into this morning. Does anyone in Washington have a plan or is it every congress type and senator for themselves?
That's a really solid question.
There are so many disparate factions in Capitol Hill right now that I wouldn't say there is a plan. I would say that lots of different groups have their own agenda that they'd like to see. You know, there are some really hardline Republicans who want to see the president perpetuate this war with iron, who are encouraging the President to stay the course, actively encouraging him not to back down. And there are folks who are even calling for more
military as escalation from here. Senator Tillis as a plan to give the president a year long authority to wage this war however he sees fit. And then you have other members who are looking at gas prices and see, you know, it costs one hundred and sixty two dollars to fill up the tank of the most popular car in America, and they have a problem going into an election.
So it really is pretty disparate.
When you look at this. Do you have the optimism that this will get solved at the ballance box, that our ability to go into a secret place and vote will fix it.
No, definitely not.
For example, I get this question a lot, because you know, there's a strong sense that the House will flip to democratic control and maybe even growing possibility that the Democratic Democrats take the Senate. But think about what the margins would be, you know, most and you're talking if Dems were able to pick up red states like Texas at Ohio. You're looking at fifty one seats for democratic control in the United States Senate. So in that scenario, you're not
passing legislation to reign in the president. You don't have sixty to overcome a filibuster. You sure ise don't have sixty seven to overwrite a veto. So you're working on just investigations. And so for investors trying to see what are the fallouts if Democrats take the House. In the Senate, it's actually usually what investors like best, which is no action from DC. No legislation on tax policy, no legislation
on really anything. It's still just the executive branch. So that's where you get tariffs and foreign intervention like we're seeing right now.
Henrietta, I can't recall the last piece of meaningful legislation that was pass me.
That's just me.
But what is Congress working on? What should they be looking at? Should we be expecting anything from this Congress.
You forgot about the one big beautiful bill. I guess that's about a year ago. No, it's okay.
I mean we've been dealing with government shutdowns effectively since then. So we had a forty three day shutdown and then a sixty seven day shutdown or whatever. Right now, they have just passed a flurry of legislation on the House side, and what tells.
You everything that you need to know.
So they passed all their work and then they left town schedule to recess.
They get me out of here. They're gone for the next twelve.
Days, so they're operating in like fits and starts. When they get back, they'll be in for about two weeks. They'll hopefully have a reconciliation bill that they can pass, and that bill is really just an appropriations which I don't want to get too nerdy, but it's really just funding for immigration and it'll clear the decks on immigration for the next two and.
A half years.
And then they're going to go on recess again. So we're not working on massive, you know, new deal style legislation right now.
So what is the next thing coming out of DC here?
Is?
Are we just still at the waiting for the next social media posts from the White House.
Yeah, the White House definitely is a very firm control over DC. Democrats are in full campaign mode. Republicans are very much catering, i think, to the administration, and that's going to persist through the rest of this month. As I've discussed with y'all before, when it comes to the war, there are two real inflection points five dollars gas lane, which we're not yet at but rising quickly and could be at before Memorial Day. So that's something to be
extraordinarily anxious about. You know, when it takes that one hundred and sixty two dollars to phillip An f one fifty, you have a problem. And then the month of June and June is optically in DC considered the time when the president really needs to migrate to domestic politics and really concentrate on affordability, where he pulls the worst and is also the most important thing to the American voter. And that's why the president's disapproval numbers are in the sixty four percent.
Right, You've got to have that conversation.
Okay, brilliantly said quickly. Here, Then what happens in June. What do you expect to see in June at.
That point where at the ninety day marker of the war.
So there are a couple of senators Senator John Curtis or Republican of Utah and most recently Senator Collins of Maine who's in a very real fight for her Senate seat in Maine. They have crossed the aisle effectively or told us that they're going to when we get to that ninety day point, or in the case of Susan Collins, already rain and the President's authority on the war Powers solution, try to have some messaging boats that ninety day threshold
is really what's most optically important to members. If you simultaneously had five dollars gasoline, there's going to be a lot of political pressure on the administration. You've already seen spared our lines go out of business. I was just talking about that with your colleagues on TV. I mean, the compounding effects are cascading now. It's going to be in food prices, it's going to be in services.
This is not ending. As long as the straight is closed.
I don't care if there's a ceasefire or a blockade or whatever, it doesn't matter.
You need a straight reopen.
Henrietta, thank you so much. Really appreciate Hanny to Trey's there on a Monday to get us as started here on the cascating moment. We are all stay with us. More from Bloomberg Surveillance coming up after this.
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This is a joy in perfect time. Stephen Trent with us right now with STT Capital Advisors, absolutely definitive and grinding out twelve page detailed reports on the aviation business give us. Is jet Blue the next Sprint? I mean it's just as simple as that.
Well, thank you so much for having me on.
And I think jet Blue is propositively in a difficult spot if you look at it today versus the pandemic. Its leverage is very high. It hasn't generated cash in a while. It has six years, yes, correct, that's a while.
So what are these?
Is there a market for these lower cost regional airlines today? Is there even a business proposition, particularly with jet fuel with these levels.
You know, it's really hard for the discount airlines. I mean, I think we've seen structural adjustments POSTP. Part of that's coming from the consumer. You now have a lot of consumers that are no longer in the office five days a week. That has affected travel patterns. You also now have a lot of the traveling public is from the wealthier side of the fence. So if you're one of the big three, you're enjoying the flow, you're enjoying premium, you're enjoying your co branded card renumeration.
But for the discount folks, it's a tough one, you.
Know, and pre pandemic, they would really win the battle by diluting seat mile cost. And we've seen so much cost convergence. We don't have the air traffic control capability to jam a whole bunch of flights like we used to. So those guys are in a tough spot.
So what is the you mentioned the air traffic control.
What is the solution there?
Is it just.
Hiring more bodies? Is it improving the technologies at all?
The above?
Because I don't know where that problem came from, but yeah, you know, what that's.
Been brewing a while.
So the actually been attempts over the years to try and modernize the aviation, the air traffic control system. There was talk about using satellites. You know, it seems to be very slow for that stuff to get impacted and affected, and I think part of that's coming from you know, appropriations in Congress and what have you. But the job itself and training air traffic controllers, I mean that's not a particularly easy task.
I mean I was just again coming into work today up the Jersey Turnpike. Literally a plane flew right over my car, like it does every single morning. How does a plane hit a lamp hole in Newark by the way, I mean, I don't know what happened there.
Oh boy, yeah that I don't think I've seen that before myself.
Mine just shows you the boy, the air traffic control and the right thing just needs an upgrade.
Your world, Stephen Trent, Is there a more persistent stream of cash floats with all the buffeting and and you know the price of fuel and all that. Is it a more blue chip sector than in your ute?
You know, I would say today versus twenty years ago, the network airlines are definitely stronger cash flow producers, not only because twenty years ago you had a lot more network airlines, you know, and they've all emerged, for example, but you also have co branded card renumeration is huge.
So some of this flow is coming through the income statement, you know, the royalties they receive from the credit cards, but a lot of that flow is working capital tailwind so every time somebody uses the card, So when you look at the cash flow coming in from that and the amount they're doing at a premium.
Okay, so Delta, you know, whichever what portion of their story is the credit cards versus actually running an airline.
Yeah, look, you've heard the saying that you now have credit card companies that start airlines.
I would say it's the outpost.
When we think about the stability and the earning stream and the cash flow stream, I would absolutely say the co branded card enumeration is a very important part of it.
Maybe one third of that greatest.
Stability percent as a credit card company.
The greatest ability, yes, at least.
That how do you spend your miles on flights? They want me to spend it on everything else and the afterthought needed a ticket? I'm shot, I.
Know, you're shocked exactly, And I did it with Miles and it works.
I get value out of that.
So in the airline business today, for an investor, how do you play it with given more jet fuel is it's got to be.
A crusher on profit margins.
But when you talk to institutional investors, how are they playing in the airline business these days?
Yeah, Look, I think over the short term you'll have a little bit of noise and Jet Blue and Frontier because of Spirit's demise. But I think when we look at jet fuel, I think people are looking back to what happened in twenty twenty two where we did have this big spike in fuel where fuel prices didn't really start to subside until July.
And what you saw over that.
Period is the network airlines were really able to sustain a long period of higher yields and the pricing. If you look at sort of a sequential increase in yields versus sequential increase in jet fuel carrising, you saw one year of stronger pricing from the net.
So they do pass along to cut consumers, the price increases.
Absolutely, there is you know, an effort to raise fares and if they need to you know, very likely we'll see more capacity cuts that should also support pricing.
Chapaul's good question about I call it the aircraft carrier known as newer airport. How are we doing a night a not in my backyard building new airports? One?
Well, look, I think that in terms of the effort to build out some of these new facilities, I think that's actually a really good effort on their parts. So a carrier like United has done very well in terms of cash flow from operations growth, for example. And one thing you look that I think is changing now versus pre pandemic, I would say with the discount airlines pre pandemic, there was the saying what's good for the consumer is
bad for the shareholder, or vice versa. So you look at a Spirit people didn't want to fly in, but Spirit pre pandemic made a lot of money. I think United Airlines and others I think more focused on the customer experience now. They want sticky, relatively wealthy flow and the airports upgrades are part of that.
Do you have a single best buy.
Copa Airlines and Panamas.
Myspap you're still flogging that one.
That one is unbelievable.
Twenty one percent EBIT margin, six percent cash dividend yield. They have a mote surveying a preponderance of low density routes.
Out of their Talkumen hub. That one, I.
Feel isn't a class by itself, but we're fans of the Big three. Maybe the place where we're out a consensus is going to be American Airlines with a positive view.
Okay, Steven Trent, thank you so much. I really really appreciate it. This morning, all of us work at SDT Capital Advisors.
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