Hello, and welcome to What Goes Up, a weekly markets podcast. My name is Mike Regan, I'm a senior editor.
At Bloomberg, and I'm Aldana Hayrick, Across Acid reporter with Bloomberg.
This week on the show, Well, the Federal Reserve did not raise interest rates at their meeting this week, but nonetheless the markets freaked out a little bit, probably because policymakers released projections showing that they don't expect to cut
rates as aggressively as previously expected next year. Stock sold off, and so did the bond market, especially on the long end of the curve, with the ten year treasury yield reaching the highest level since two thousand and seven and the thirty year yield reaching the highest since two thousand and eleven. While the latest update from the Fed makes it look more and more like they're expecting a soft land for the economy, well, the markets are taking it
pretty hard. We'll get into it with the chief US economist at a major Wall Street bank, but they'll dona first. I have to say it's been a while since we bugged our listeners to go and rate and review the show on Apple Podcasts. I think we need a new gimmick to entice them.
Do you have one in mind?
Funny you should ask I do?
What is it? Bo?
I'm thinking since you're a Buffalo Bills fan, you could do like the Bills fans do at the tailgates and like smash a card table.
Yeah, you have to jump. You have to jump through the table.
Jump through the table.
Yeah.
How about would you think you could say we get one hundred more reviews? You could how.
About things one hundred more reviews and they make it to the super Bowl?
Both of those?
Yeah, to those I don't know to be too much.
Then you'll you'll jump on a card tabe.
Yeah all right, but the one hundred.
Reviews being the first first order of business, it'll be a weird expense account item. Smashed the card tape? Okay, I think I.
Can expense it to Bloomberg. I was just I would do it just for fun. I don't know if our guest is a football fan at all, but we have Ellen Zenner, chief US economist at Morgan Stanley, on this weekend. Ellen, I'm so happy to have you on the podcast. Thank you so much for joining us.
Hi, guys, I love it. Thanks for asking me.
Are you a Buffalo Bills fan. A secret Buffalo Bills fan by any chance.
No, not even secret. I was quite into college ball growing up in Texas. That was really the Texas thing, high school and college ball, and never been a big fan of the NFL, although my dad was a big Saints fan, New Orleans fan.
What if I remember correctly, you went to Colorado? You have coach Prime.
Now, I did go to Colorado, but you know, I'm a walking paradigm. I started at University of Texas and never stopped being a Longhorns fan.
Like I am loyal to the Bills. But Ellen, we had this big week, which is why I'm so thankful you were able to join us this week because, as Mike mentioned, markets sort of had a little freak out post the FED meeting. So just to start, can you give us your big takeaways from the FED meeting.
Yeah. Look, I think it's undeniable that the statement was more hawkish than we expected. I think for me, you know, in the current conditions paragraph, which is how the FED describes sort of what's going on or what's happened since their last meeting, they you know, it is a fact that jobs have slowed, but remained strong, and they noted that it is also a fact that inflation has come down quite a bit but remains robust, and they did not note that. And sometimes what they leave out can
be just as important as what they put in. I mean, Chairpal did note it in the press conference several times that core inflation has come down significantly. Well, why didn't they just note that fact in the statement. It's because
you're far from declaring victory. God forbid that the market thinks that you're declaring victory over inflation and you get some easing and financial conditions you hadn't planned on when type financial conditions is really what they need to sustain to be sure that the economy is going to continue to slow. It's been growing much too quickly this year.
For I'd like to sort of just step back and talk about say the last three or four years, you know, I feel like for the art or science of economics, however you view it, it's been a really weird few years.
You know.
We've had this massive shutdown of the economy like nothing we've ever seen, then this massive stimulus to bring it back to life, followed on by you know, a major war in Europe, what's it been like to be a really high level, very closely watched economists during all this? You know, are there lessons to be learned? Because I feel like it was so hard to predict and forecast anything throughout all of this. What's it been like during this whole last few years.
Gosh, well, it's it's been exciting, to say the least. I think, you know, the word humble comes to mind. You know, it's been a humbling experience, and it's taught me and my team to be very creative in our approach to thinking about the outlook. And frankly, I've been looking forward to, you know, sort of the period that we're going through now and next year, where you know, it's a period of normalization as we get COVID further
into the rear view mirror. I think, you know, what I'm starting to realize was some of the incoming data is that it seems like we go through these big crises and there's a lot of never will we ever and this after two thousand and eight as well, never will we ever take on debt again, never will we ever buy homes again? And guess what we do? We do all those things again? But you just have to
get the crisis further into the rearview mirror. Folks were saying, we'll never go see a movie again, We're never going to the theater ever again. And you know, I'm pretty sure that Barben Hibern brought in a billion dollars through the box office. So I'm looking forward to more of the datas that folds to just see a normalization of the economy. I don't think a whole lot has changed in the
way we go about our business. I think we just have to get a lot of these big distortions that are now unwinding out of the way.
So you say you've been very creative in your approach, what does that entail? Because I remember during the pandemic a lot of people were looking at these sort of alternative data, looking at off occupancy rates, as you mentioned, movie theater going, you know, foot different foot traffic. All kinds of different measures had come about during the pandemic. They've sort of fallen off to the wayside more recently. But so what types of things does your team look at now?
Yeah, Well, I think to me, what was really lucky is that even before the pandemic hit, you know, technology was advancing in a way that we were getting more and more private data sources and high frequency data forge sources, daily data that was becoming more prevalent, so that we were starting to find new ways to track the economy.
The need for that during COVID really escalated and so you know, this is where we were using Google Earth to look at ships that were parked offshore that were not able to be unloaded, and more robust use of things like Google Maps and Open table to figure out a people were starting to move and shake again and going out to dine and that sort of thing, and that kind of data. Those data sets proliferated, and hey, for a time they were free. Now those data sets
have become more and more expensive. But using those data sets instead of just you know, the traditional or in addition to the traditional government and other private sources that were already prevailing before COVID really helped us stay more abreast of exactly what was going on on the ground.
And I tell you what, the fact that all of that's been introduced and used more robustly now means that also we have an even more and even larger portfolio of data to rely on during government shutdowns when the government data is not available. We used to fly blind during government shutdowns. And I say this because we're facing a possible government shutdown on September thirtieth, and depending on the breadth and the length of that, we might start
to miss data points. And luckily we've got private sources and other high frequency data where we can have some sort of idea of what the economy is doing even if we're not getting the official government data. And so I think even in the field of economics, we've seen a good deal of transformation of technology and how we use it.
You read my mind, Allan, because I wanted to ask you about that looming government shutdown potential government shutdown, and reading one of your recent notes, you seem to think that it could be a sort of catalyst for the FED to pause again in November. But walk us through exactly how you're thinking about it. Is it the lack of available data for the FED that would cause that, or is it the potential damage to the economy that
could be done from a shutdown? Little of both. What's sort of the implications for us for this one more curveball to be thrown at the economy at this point in the cycle.
A good economist always says it's a little bit of both, and economists right to added economists, but it really is. So in monetary policy making, uncertainty tends to lead to policy paralysis. And so certainly when you have a government shut down, and the breadth of it matters, right, if it's a partial shutdown, there are some agencies that will continue to operate, and we can continue to get things like hey, roll data, even if we don't get Census
Bureau data and the like. If it's a full government shut down, then you really don't get any of the government data. And so if we're lacking data that the FED can officially think its teeth into, right, then that's going to lead to an inability to make a decision about the path for rates, And so that's sort of through the lens of the FED becomes foggy. The damage to the economy comes from, say a full government shutdown
where all non essential workers are furloughed. And our estimate is that for every week of shutdown, it shaves off abouto point two percentage points from GDP growth, And so that's where you're actually getting to the meat of it that you have an impact on the outlook. Now, we can go back and look at past government shutdowns and see that, Okay, in hindsight, they were sort of a blip in the economic outlook. Because the government opens back up,
you do have some permanent loss of activity. Workers that weren't buying lunch around the agencies, you know, those restaurants, coffee vendors, others are not going to make up for that. But you know, workers go back to work. Congress has always approved back pay for those furled workers, and so especially for income, it ends up being a blip for the time being. It's something that stays the Fed's hand. Now in this case, right, they've got a lot of
time on their hands. They've got until the end of the year to decide if they're going to hike further, and they've left the door open tike further if needed. I have a strong view that they're done here, but they have left the door open. And so this is just something that you know, the incoming data that we've got over the next several weeks, say a month, tells me that it is highly unlikely they hike in November, but they still have the December meeting to consider after that.
What potentially might make them hike in November or December. And if they are done here, can you lay out your views for what you expect in twenty twenty four, because I think you are projecting cuts starting in March.
Yeah, yeah, that's right. So I think for them to hike in November and December, you know, two things have to happen. One, they're pleased. Let these seem with increased slack in the labor market and the slowdown in job gains. They noted that in the statement three month moving averages around one hundred and fifty thousand for payrolls. Now, let's say that that starts to re accelerate again, and so it doesn't look like that slow down in job gains
is durable. And then you pair that with, say, core services, I'm going to strip out durable goods prices because they've been in deflation, and that's only twenty five percent of the core inflation bucket. And so it's services that really matter here. And let's say that core services also reaccelerate, and for that to happen, you really need core services to pop upward to a round point six percent month over month, which would be quite a deviation from the
current trend. But those things together you could see putting a November hike back on the table, putting a hike in December solidly on the table. And so you know, I've got a strong conviction from the forecast that we have for the incoming data that it's not going to meet that criteria. But there's there's always a bar, and we just think that the bar is higher for them to do something further this year in twenty twenty four. The cuts that we have there, you know, you mentioned
that we're expecting them to start in March. We have a quarterly paced twenty five basis points a quarter. You know, the FED is now expecting two cuts next year, and it may be a little tongue in cheek to say, but the difference between the Fed's expectation and our own is a difference of opinion around the outlook. So we
have a forecast that this deceller and inflation continues. That means that even as the FED holds rates steady at between five and a quarter and five and a half percent, if inflation is falling, then real rates continue to remain very restrictive around that two percent level. In our forecast, which is historically quite high. The fed's forecast has real rates rising further from around one point nine percent at the end of this year to two and a half
percent next year. You plug that into any macro model, and that doesn't look like a FED that's really wanting to achieve a soft landing. And I think therein lies that the issues that can come about with internal consistency when you're forecasting by committee. It's not quite consistent that the median forecasts of the FED suggests that real rates are going to need to rise six tenths further next year, yet they're wanting to achieve a soft lane. There's something off there.
Can you talk about real rates a bit more? Why do real rates matter? And can you talk about the sort of through line to the real economy.
Yeah, so real rates matter both from a company perspective in terms of profitability, from how restrictive credit is in the economy, banking's ability and willingness to lend. And you know, if you think about the where the FED thinks the neutral rate of interest should be, they think the neutral rate of interest is half a percent for the real rate.
So two percent real rate is really restrictive, really far into restrictive territory, and you know, feeding that through into macro models would tell you that that's going to have a pretty big downward impact on the economy, and I think much larger than what the FED thinks is necessary
in order to flow inflation. I don't think individual policy makers are really thinking that we need to have two and a half percent real interest rates next year, that they need to be two percentage points higher than neutral. But that's what it looks like if you were to just take their forecasts at face value. The impact to the real economy is essentially what we've been seeing, right. It's not that the Fed's interest rates have not had an impact. You know, we've already gone through a recession
in housing. We saw the impact on housing first and foremost. It's the very interst rate sensitive area of the economy. We've seen higher interest rates have the effect of flowing demand for credit and credit availability, making credit more expensive. We are of the camp that monetary policy works with long lags, and that is the biggest disagreement, the outstanding disagreement on the FMC. Those that believe monetary policy works pretty quickly through the economy and those that believe it
works with a lag. So while it may look like we've escaped unscathed after such a rapid pace of tightening and monetary policy, we think that all of the impacts have not yet been felt, and that uncertainty alone means that there's a good deal of downside risk to the economy that we think is out there.
Obviously, the other big elephant in the room these days is the price of oil. West Texas Intermediate is back in the ninety dollars a barrel range, mostly a supply issue with Russia and some of the OPAC nation in
Saudi Arabia really limiting production. You do seem out an interesting note out on this about a week ago, and you know, to summarize and correct me if I'm getting this wrong, But basically it seems like you think a lot of people are worried about the inflation are aspects of oil rising like this, But you point out it should take a while for it to feed into the core measures of inflation that exclude energy and food, but that perhaps that sort of tax on the consumer element
of oil is a bigger story here. So how big of a risk is this oil price shock to both sides of the equation, growth and inflation, because I think one thing I would point out I think is different about this than a lot of oil price shocks. A lot of times you get this spike in oil prices because of say a hurricane in the Gulf for some geopolitical tension that really ratches up the speculation in the market, that boosts the price, and all that turns out to
be ephemeral and short lived. Personally, I'm not sure if that's the case this time, with the OPEC producers really seeming very happy to keep the price higher for the near future. But I'm wondering, how you thinking about it. How long do we need to see prices elevated for the risk to really become acute, both from an inflationary and economic perspective.
Yeah, so it's great points we like to point to weather forecasters and commodity strategist to make us feel better as economists when we're trying to get things right in the economy. It's a really tough job because there are a lot of people that will tell you only geopolitics matters for oil prices, and so I have no idea where oil prices will go, But I will tell you that our commodity stratus do believe, as you noted, that this may be more durable, but it is a mixed
bag for the US economy. When it is a supply shock and not a demand shock. Demand shock would be that just the strength of the US economy and global economy is so great that demand is outstripping supply. That tends to have a more muted impact on the economy than if it's a supply stock where the amount of barrels that were producing globally just drops, And so in that case you do get an impact on demand on
top of the impact on inflation. So we've modeled these changes, and a ten percent increase in oil prices does raise headline inflation in the US by about thirty five basis points on headline over a three month period if you just modeled as a one offstock. But the transfer to core prices in the US, because really you're only immediately impacting transportation prices in core inflation, it's only about two to three BIPs, right, two to three basis points on
core inflation, So a really really small effect. What outweighs that? And I think you were getting at this and what we addressed in the note is that it acts as a tax on households. If you are paying more to gas up at the pump, then you are having to pull spending from elsewhere, and so it tends to reduce consumer buying power and weighs on not just real income growth, but real consumer spending, and that is the predominant concern of the FED today. So it's really a blessing in disguise.
If you're the FED and you have been trying to slow the economy and the consumer has just been frustratingly resilient. If you can get some additional help from higher gas prices, then you might welcome that. It becomes problematic only if it is sustained over longer periods of time, and then, as chair Pal noted at the FED meeting, it then becomes something that could pose a risk to inflation expectations, raising inflation expectations, but it does have to be sustained for some time.
So, Mike, rising oil prices were another elephant in the room. But I can actually name like a bunch more, including that consumer loan repayments are restarting. We also had a survey that we had done at Bloomberg, where the majority of respondents we had asked about consumer spending said that personal consumption. They see personal consumption going down in the first quarter of twenty twenty four. So how do you see all of these factors impacting the consumer?
Yeah, so I think the student loan, the resumption of the student loan debt payments is a great point to note. We have tried to use surveys to get at the percentage of student loan borrowers that say they are going to start paying that back right away because there is an option to be able to delay that into the second court, sorry, the first quarter of twenty twenty four, and I like to think that, you know, as good debt holding Americans, we will delay the payment as long
as we can. Probably does create a drag in the fourth quarter and the first quarter. I will note that it has been surprising the amount of payments that have been resumed already in anticipation of that. But you can imagine that that folks that have decided to start repayments already are those that want the balance to be lower when the interest rate is again applied, and of course those that have paid it down already or already restarted
that are obviously not the lower income student borrowers. Really those are going to be the ones that are delaying the payments the most. But we have taken into account not just sort of the payback from as I mentioned, you know, Barbenheimer hitting in the third quarter, Taylor Swift and Beyonce Tours peaking in the third quarter. You're going to have some payback in the fourth quarter from that
plus the start of the student loan repayments. And so we already have forecast that consumer spending is in decline in the fourth quarter. Now, some of that are just those one off impacts fading, but I think further weight on consumer spending in the first quarter is likely as well. Now, is the consumer falling off a cliff? No, we think that in the grand scheme of things, when you smooth through these impacts, it really shows that consumer spending is
just continuing to slow. And there is sort of a little spoken about silver lining here, and that is in the second quarter, wage growth among lower income households started to turn positive on an inflation adjusted basis because inflation
has come down. Now higher gas prices can throw a monkey wrench in that temporarily, but that means that we have started to get some modicum of buying power back for lower income household So I think there's plenty here that tells me that the consumer should not fall off a cliff, but the consumer spending will be slowing, and I think that will You know, seventy percent of the economy is consumer spending, and so that's critical to the
said who's looking to further depressed inflation going forward.
Now, Ellen, one more final elephant in the room for this economy. Maybe it's not an elephant, I don't know, Maybe it's a baby elephant or something smaller. I don't know, a donkey or something. But the United Auto Workers strike. And I'm not sure if your team have done any work on this, but it's again one of those things where I think there's a little bit of a risk to inflation and a little bit of a risk to growth.
You know. Obviously, however this has resolved, it's going to be a significant wage increase for a very influential union that may inspire other unions, other workers, or other labor groups to see khier wages. Also could cause the price of cars to go up again. That was a pretty big part of the CPI numbers for certain months used cars, and obviously if there's a lot of lost production, there's going to be a drag on growth. But how big of a deal is it if it lingers on if
the strike expands to other plants. You know, is it a risk to the headline numbers in either CPI and GDP or is it Does it not rise to that level?
Yeah, I think that. You know, autos are a major sector in the US, and right now the strike has started off small. It's not impacting a good deal of workers, right so it's not been as big of a drag as we initially on say the employment report. But let's say it extends for some time more and broadens out
to capture more workers. So, first and foremost, if it extends through mid October and starts to capture the survey week in which we survey employers for their level of payrolls, when you could get something like a negative payroll print in the month of October, which would be reported in
early November. So again go back to the additional fog this creates on the data front for the said in terms of GDP, you know, it's interesting there there seemed to be some evidence that automakers were ramping up production ahead of the planned strike, But it does interrupt production for the time being during the strike, and then that resume, so you would have further weight on fourth quarter industrial production and GDP if the strike goes on for a while.
Average our earnings is interesting because it's not just the fact that you know, if you count the UAW strike alone, it's not that big of an aggregate wage bill to really move the needle nationwide. But as you say, what if there are spillovers, what if other unions take the example of UPS and UAW and start to follow suit, you start to get a notable impact. If say, you're pulling in the majority of all union workers in the US.
So it does take a significant wave capturing almost all union workers to really show up on average hourly earnings in a meaningful way. But I think that I would just take it at the at its least, it adds to all of that data fog we've been talking about that it will make it very difficult for the FED to hike rates further this year.
Ellen, I have them millien more questions for you, So I'll just I'm going to combine two of them very quickly, because I think this is important to bring up. One is about your track record, which you've been spot on about the soft landing narrative. I think you've been calling for a soft landing for quite a while, so I
wanted to ask you about that. But I also want to ask you about I don't know if ironic is the right word or word we can use, but is it around ironic that recession odds have gone up just as people have priced out a recession.
Yes.
I think those are great questions, and it gives me a chance to pat myself on the back, which economists to have a rare opportunity to do. And we have been calling for a soft landing since February of last year, and we could do a whole other podcast on just why that is. But you know, I think what I would like to impart is that even as I've had that long soft landing narrative and others have finally grabbed
onto that, I have not reduced my recession probability. First of all, let me just say any economist that says they're accurate more than two quarters out is just lying. You can get the narrative right. You almost always get the numbers wrong. And so with that being said, I'm very confident that we have enough momentum in the economy to get us through the next six months, and so I think for the next six months the odds of
recession should be lower. I think when you go out of full twelve months, which when we talk about recession probabilities, it's always over a twelve month horizon. The six months beyond that I am not so certain about. I think there's been so much monetary policy tightening that I do believe has not all come through. I think a lot can go wrong with the economy the further you go out on the horizon, and so I have not reduced my recession probability that within the next twelve months there's
a forty percent chance we have a downturn. I'm confident it will be mild, but I do think that we have to be realistic and not reduce the probability of recession too much, just because today growth remains very resilient.
Well Ellen Zendner, chief US economist at Morgan Stanley, thank you so much for joining us today and sharing your thoughts. A lot to think about. Can't let you go quite yet though, however, we do have attrition on the show, where we must share the craziest things we saw in markets this week. I'm going to go first. Mine's a little stale. It's almost two weeks old, so forgive me wil Donna. All Right, Wall Street Journal story about California
real estate, particularly the Brady Bunch House. Did you watch The Brady Bunch as a kid, fil Dona, I did not.
You know, she might be a little bit younger than us.
I'm dating myself here, Ellen to some degree. But the famous house you see the picture of it at the beginning of every show and every commercial break. It recently went on sale, and so it's time to play the prices precise and you guys have to guess what the sale price was for the Brady Bunch House. I'll give
you a little more details. It was previously bought by HGTV and they did a whole show about remodeling the inside of it to make it look like the house on the show, which I'm not sure boosted its value because it's all dated seventies appliances and furniture, and I'm not sure that's what your average La house hunter is looking for. But it did sell. So the question is what do you think the Brady Bunch House just sold for?
So it's in LA, it's in Los Angeles. How many rooms?
It's huge? Actually five bedrooms. Total square footage approximately five thousand wow. With they added bedrooms and a second floor when they did this whole remodel to I guess recreate the kids rooms and everything. So five bedroom, five thousand square foot house in LA not cheap. They don't tell you this straight doesn't tell you what neighborhood in LA, which.
Might Oh, that was gonna be my next question. Okay, I'm gonna go with three point five million dollars.
Three point five million dollars, Ellen, what's your bid for the Brady Bunch House, completely remodeled to match interior and experts?
Can I prices right?
Say?
Three three and a half and one dollar? No, I'll say I don't know. If I think about the square footage, the cost for square footage in LA, even though we don't know the neighborhood, I think I would say closer to nine million.
Wow.
I would have guessed somewhere in that vicinity. I'll be honest. A five thousand square foot house in LA five bedrooms, but as the buyer points out, it actually sold for less than what HDTV bought it for because the buyer thinks no one wants to live in a house with these seventies of liots is a shy carpet, and so three point two million.
Dollars, Oh my gosh, wow, we all overget.
Even if you told me a five thousand square foot house in LA with five bedrooms, I would have gone over three point two.
I mean buy it and got it, although that might not be allowed now if there's a historical landmark designation on it, as you know, that's going to reduce the value.
That's right, that's right.
Yeah.
I don't know if a recreation of the historical interior accounts, but maybe I don't know.
That's all I got. I have a good one. It's also a Wall Street Journal story. The headline is A Mother's Love a bargain at four hundred and fifty dollars a year plus applicable fees. It's about parents hiring concierge services for their college students. So you send your you send your kid off to college, then you hire somebody to be their mom. The mom can hug bring you soup when you're sick, pick up your medicines. Furniture assembly is one of the things for some reason they give you.
They give students rides to and from the airport.
Just a furniture assembly.
I know. They go to doctor's appointments with people. It's just, yeah, you.
Can I hire one of these for myself.
Surely is a stressor?
Yes it is. It really is a real stressor.
That alone is worth the four hundred and fifty bucks. That's pretty good. Don't let my daughter at the University of Maryland find out about this. I've got enough expenses for lated education. That's pretty good. How about you, Ellen, Have you seen anything crazy lately?
I'm going to still go back to, you know, sort of all the wrap up reports after the said meeting, where it just seemed, you know, why, why does the market take the FED at face value and suddenly all of a sudden decide that the Fed are perfect forecasters and know exactly what's going to happen even out to twenty twenty six. Why and so that always astounds me.
Yeah, yeah, that dot plot was a blessing and a curse. I guess I wonder I sometimes wonder if they regret introducing that, that maybe it causes more confusion than it than clarity that they hope it would cause.
Yeah, there are definitely those on the SAED that regret it. But you know, once the Fed introduces something, it's near impossible to take it away. So so chair pal, even with chair Pal saying basically ignore the dot plot, it's just sort of a fun exercise for nineteen participants to air their dirty laundry about what they think about the outlook. Nevertheless, markets take it at face value as though that is exactly the path that the Fed will follows.
That's etched in stone, not in you know, light colored pensil. That could be a raise at the next meeting, right, Alan Zendner, Chief US Economists at Morgan Stanley, thank you so much for joining us.
Good bet, Thank you Ellen.
What goes up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal website and app or wherever you get your podcast. We'd love it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us. And you can find us on Twitter. Follow me at freak Anonymous Wildna Hirich is at Goildona hira. You can also follow Bloomberg Podcasts at Podcasts. What Goes Up is produced by Stacy Wong. Thanks for listening, See you next time.