About this episode
Neil Dutta, Renaissance Macro Head of Economics, says the Fed is following a "rules-based framework" around inflation and expects the economy to continue top grow . Elyse Ausenbaugh, J.P. Morgan Private Bank Global Investment Strategist, reacts to the ECB decision. Sree Kochugovindan, Abrdn Senior Research Economist, says she sees the possibility of a start of a technical recession in the UK and expects recession-like conditions to persist. Stephanie Roth, Wolfe Research Chief Economist, says the runway is wider for a soft landing in the US. Get the Bloomberg Surveillance newsletter, delivered every weekday. Sign up now: https://www.bloomberg.com/account/newsletters/surveillance Full Transcript: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app. This is a joy. Yesterday was humbling ability for everyone, no question about that, and today well accept But today a recalibration year of where we go in our optimism on the American experiment. A few have been right, nobody like Neil duddat how to Economics at Renaissance Macro over the last eighteen months an absolute tewort of force that America economic might will prevail. This morning, David Rosenberg writes of a tepidominal GDP. At the same time, the tech analyst Dan ives Hit Webbush and Joel Fish buying it truest go out two in three years. I'm technical excellence of the Magnificent seven. Can our technology lead continue the dota optimism on American economy? That's a tough question, Tom, I mean, I hope so. I mean, productivity is notoriously difficult to forecast. But if productivity is picking up, which it has been over the last couple of quarters, then it raises the you know, the capacity for the economy grow without stoking inflation, and that takes a lot of pressure off the Fed. The last few months, you've been absolutely locked in. You seem to have some kind of visibility on what's happening here that some of the people are lacking. What's helping you. What's the framework that you're using to see things a little bit more clearly over the last few months. Well, I mean you had mentioned earlier that you know, Powell uh sounded some sounded different a couple of weeks ago. I mean, but you know, to me, the die has been cast for this for for a little bit of time now, I mean, and that's because inflation is slowing more rapidly than they expect. I mean, I think the Fed is following essentially a rules based framework where they're taking changes in inflation and the unemployment rate and translating that into expectations around the federal funds rate. And that's basically what's happening. That's what they did yesterday. And so you know, core inflation in November is likely to come in barely one tenth of one percent month over month, and that means that the momentum going into twenty twenty four is quite weak. And so if they're revising down inflation in December, which they did, and then a few months later they're going to be revising down inflation again in March, what do you expect expect them to do? What I would push back on, John, is this notion that this is because I mean, you know, you see all this already. Oh the ten years broken below four percent, that means a recession is happening. No, that's not what this is about. This is about inflation coming in better and the adjusting as a result, and that's ultimately a good thing. And you know, I think it's going to, you know, give the economy it a chance to continue growing. And I think that's that's what's likely. Well gets you around look on growth in just a moment. Policymakers like to use the word if just to hedge themselves if this continues, we might do this. You don't think that if is that large? You think this is already kind of baked in these right cuts are coming. Well, I don't know that it'll be six because to me, six feels like, you know, if there's a recession, six wouldn't be enough, but if the economy is growing, six feels like too many. Frankly, but I do. I don't think it's much of an if about round inflation. I mean, Powell talked earlier this year about a disinflationary process, and I think that was a little bit premature to talk about it. But now it really does feel like a meaningful disinflationary process is underway, and we have continued moderation in housing rental inflation coming. You know, the Terminal has an article today about Manhattan rants going down year over year. We also know that used car prices will continue to deflate over the next several months, and that was actually it popped in November. So and between that and you know, core goods excluding cars, I mean there's continued downside there as well, so I do. And the labor markets are basically normalized. I mean, they're they're back into balance. So I think you kind of go down the line, and you know, to me, it suggests that we're going to see continued disinflation over the next several quarters. Jpewell did not want to really dig into the question around financial conditions and the easing of which we've seen over the past couple of weeks, but I'd love you to weigh in on it. Do you have any concerns that the easing and financial conditions will actually push inflation in the other direction? Well, I think that's a reason to expect there to be a ceiling on how many cuts they'll end up doing. But I don't think that they're going to be upset about the easing of financial conditions in and of themselves. I mean, if you think about the Fed's reaction function, right, it's labor market, it's inflation, and then financial conditions. If labor markets are in balance and inflation is slowing, why would they be The markets are then reassessing the Fed's interest rate paths, So why would they be upset about that? Well, you've been really good about tracking homebuilders. For example, if suddenly you start to see a reacceleration in the home space, right, if you start to see people re engaging with selling homes and being able to price up some of these homes because mortgage rates are lower, could that pose a problem? Right? These are some of the questions that people have. So I think I'm of still robust growth. So Powell yesterday talked about the seesaw thing right where we go from like one story like no landing, soft landing, hard landing back to soft landing. And I just feel like we need to get through this about of disinflation first before we talk about what happens next. And I mean, could I make a case for things may reaccelerate and that could reignite inflation, and then the FED will have to come back and undo the cuts that they put in place in twenty twenty four. I mean, that's a plausible scenario. You know, we're not going to have any multi family construction really next year, and that could you know, reignite inflation because there won't be enough housing supply. But I do think the FED has to deal with the issues that are in front of them, and right now, the overwhelming issue is that inflation is slowing more rapidly than expected. And for a central bank that believes that neutral rates are two and a half percent, they're going to be more cognizant and sensitive to the risk that they overtightened, and so I think that's why they want to get the cuts away first. It's not about you know, I mean what my reaction function is. It's about what their reaction function is. And that's what we're trying to get. I want to go quickly here. The Neil Deta optimism is much like the edge Yardeni optimism. He on Inequity Call has a huge stock market out to Dow forty seven thousand, SPX six thousand, you know, two three years out, and he talks about the Roaring twenty twenties. There was a Roaring twenties one hundred some years ago and it didn't end. Well. Your optimism, how it different from the effervescence the exuberance of an unstable roaring twenties, Well, I would just say, I mean, if we do have a roaring period of economic activity, I mean, it does help that we we had a financial crisis in two thousand and eight. We already had the big one, and you know we have guardrails and we have well we have the benefit of hindsight, right, I mean, you know, one of the ways you avoided depression is by going through on the first time and you know, so I think that that's that's helpful. What do they say, congratulations on a great quarter? Congratulations now, oh, thank you, thank you, Sir nod'nswer of NISO's Macro at least saw some of US global investment strategist JP Morgan Private Bank, and she has a wonderful image in her note summing up the FED, the ECB, the Bank of England and fourteen other central banks about investment strategy into twenty twenty four. Somebody's got to land the plane. After what we saw on the turbulence yesterday at two o'clock and in that press conference, recalibrate this morning, how are we going to land the plane given the instabilities of the last fifteen hours. Look, I think there is a distinction between what's going on domestically in the United States and the position that that puts the FED in too potentially cut in the first half of next year, versus what we're seeing abroad in England and in the broader euro region. You know, it's no surprise to us that both the BOE and the ECB stayed on hold, and we do think that the ECB is probably still the most obvious candidate to deliver the first cut simply in light of the economic weakness that you're seeing. This is a really interesting point, and it's frankly what I'm sniffing out from markets that are not reacting to this as I thought that they would. I would expect the euro to actually strengthen dramatically on the heels of this in response to a more hawkish ECB that many people say, are you just saying that you don't believe them? No, not necessarily, you know, I think the ECB has to continue to kind of hold this hawkish posture, especially given that wage growth hasn't necessarily rolled over in a commencing way in Europe, but given the economic slow down and maybe nascent signs of some sort of economic life coming back, I think the ECB has to talk tough, but we'll probably be the first to cut, maybe as soon as the spring. This was the conversation we had yesterday before we went into chair and powe. If we got push back, how credible would it be? Just feels like from the ECB doesn't feel as credible might be given what we already know about what's happening in the economy. Here's the market question at least you're more bullish now than you were yesterday morning after what you heard from Powe. Sure, we were having a lot of conversations about this on our floor yesterday. I think what we learned from the FED is that we have to start entertaining our bowl case a little bit more. But we came into yesterday's decision on the front foot, and we've been encouraging investors to add back to risk exposure. We have a relatively bullish view on the S and P five hundred for the year ahead, and I think this just kind of underwrites our conviction in that call. What's the bullcase bolcase is S and P five hundred ends next year five thousand, But we'll see. I think that would probably dictate the FED cutting before the second half of the year. But right now our base case pencils and cuts in the second half of the year and not yet. So the Banner's Awesome Bosses Fortress Diamond calls five fodcast. Yeah, not quite, I would say, isn't there a risk we could be there in January based on what we're seeing? How I think January feels a little aggressive. We still have to see, you know, the earnings come through. We are making this call that the earnings recession is likely over and that we're going to see rolling earnings recoveries. But let's get through the fourth quarter reporting season and then look beyond to twenty twenty four US. That sounds like equal white and not market cat whited SMP. Is that right? We do have conviction in making sure that you have exposure to the other four hundred and ninety three names in the index beyond the magnificent seven. But we're constructive on the magnificent seven. I mean, these companies are projected to grow earnings north of twenty percent in twenty twenty four, and that is definitely an exposure that we're encouraging investors. That's your conviction. When everybody gets out of cash, what's going to happen? I want to We've never been here, six trillion in cash, we get under five percent money market fund, what happens? Well? I think you have to take into consideration that bonds are back on the table, right. That to me means that there is still a trade to step into some duration and not necessarily just plow into the equity market. I think some folks will remain a little reticent given where valuations are today, but given the you know, improved free cash flow generation of S and P five hundred companies relative to ten years ago, we are comfortable with today's valuations. We just don't think that that's going to be what drives the upside into the next twelve months. At least it's going to see in person. Thanks for coming in that Jpmulgan private bank following the ACP decision. These are absolutely extraordinary time. Let's get a European brief on this with Aberdeen three Katrikavidian joining us this morning. Siri, the divide here between the central banks, I believe I've never seen. Do you perceive that, how alone is Jay Powell versus Governor Bailey or what we're going to see from Christine Lagard in a bit. I think this really highlights is the differences across the economies and the different challenges that each of these central bankers are facing. So obviously we had a bit of a pivot yesterday from the FED and that's really spilled over into rates markets across these different regions. However, as we've seen the Bank of England does face a very different challenge. Inflation is less of an outlier that it used to be. It is coming down at a steady pace, but they still have some challenges if you look at the core inflation and services inflation in particular services is still running at six point six percent year on year, So that's still a problem there for a Bank of England which is trying to manage we GDP growth as well as a stickier inflation picture then compared to other regions. So hence there's no change in guidance, no changing statement, and we still have a six to three vote split. And I think that's a key communication point right there, the fact that you know we have that split, given that there is no statement of economic projections, let's create our own. If they did put out whether they thought that the economic growth was going to be better or worse they previously expected, what direction do you think it would go? Well, I think what we've seen just in the recent data, we had the October GDP which was a disappointment there and I think that will be something that they would definitely consider. If we look at the moving averages across if we look through that contraction that we saw a month or month for October that was across the board for services, construction and manufacturing. But if we smooth that out, it is we are looking at a flat three month on three months, but there's a possibility tive a start of a technical recession and recession like what we're expecting is recession like conditions to persist throughout the first half of next year. So really it's a difficult balancing act for the Bank of England, but we do think that they're more likely to hold on with this five point two five percent and stay there for a few more months. Yet, timing is obviously quite fluid and will depend on inflation how fast inflation decelerates, But they might be one of the later central banks to cut if we compare with potentially ECB and the change in tone from the Fed se how much does that benefit them in a sense, given the fact that we are seeing the pound strengthen that this actually could be a disinflationary if they do diverge from the other central banks. Yes, I think the move in the sterling will help somewhat in terms of imported price impact, but really it comes down to this wage inflation that's that's really going to be key. Now. One good piece of news is that real wages are a bit stronger because inflation has come down a bit, so that should help boost or at least support consumers to some extent. But nonetheless, the imbalances in the UK labor market are still there. They've improved, but they're still there and that's going to create that bumpy last mile for the UK. Three if we've got to run rate in the United States of nominal GDP of four percent, anybody's guests, what is your custamate a nominal GDP for the Bank of England and for the ECB, what numbers are What of those two different numbers this morning, what we have seen. I think we're going to see a slow down there in terms of GDP growth, particularly for the Euro Area. I think the challenge there is that we've seen a much weaker inflation outlook than they've they've actually projected, and I think that what we're projecting versus what's happening versus what c beer projecting. I think that challenge is what we're going to really see later on today from from the ECB, whether they're you know, how they address the fact that actual data has been weaker, both inflation as well as the growth outlook is weakening, so I think that could be quite important in terms of what they say about the shift in timing. Obviously, the markets have pulled forward the timing for the first cut from the ECB, and we have as well. We've moved. We were looking more mid year and now we're looking for in March April, more likely April. So you know, I think this is the kind of signaling that we need to be focusing on in terms of what what messages are coming out of the ECB later today and again going forward for the for the UK as well, it's going to be you know, that relative shift in data that the UK will be will be focusing on in the coming meetings. Sorry, thank you, Sory goatcha guvnd of Appetite Stephanie Rod's had a very busy weekend scheduled cancel that the chief economist at Wolf Research has to rewrite the view, as she did last night in a sharp post FED note. Let's go to your post FED note. What was the biggest change in that note after the drama of two o'clock yesterday. I think the biggest change is that the FED is less scared of stronger growth and they're now appreciating that inflation's come down. Like they took up their growth numbers, but inflation came down so much that they feel pretty good about the backdrop. It said, so far, so good. Is this FED still data dependent? They're data dependent, but they're more inflation dependent than growth dependent. I think they're recognizing that inflation can come down even if growth remains fairly strong. This, to me was the biggest change that basically this is not going to be contingent on some sort of deceleration in the economy that they are really leading into the soft landing narrative. Do you have a more optimistic view that they can achieve a soft landing after yesterday than you had before? Yeah, and I've been calling for a soft dish landing. Now I think I just have more conviction in that they can. The fact that they can cut rates even sooner than our base case. Our base case was Q three of next year heading into yesterday. We've pushed that up to Q two, and that just makes the runway even that much wider for the soft landing to happen. Do you think that financial conditions don't matter? Were you were you okay with how Chair Powell responded to that question yesterday. Yeah, he didn't. He didn't really talk about financial conditions that much, and November he mentioned it thirteen times. This was a big turnaround. I think he's just not that scared with the way financial conditions have eased, because inflation has come down, notably with the markets that where there are futures up twelve. I have been really I've really failed at the core theme that I think that was somewhat alluded to by the chairman yesterday. We're going to go to Mike mckeere and a bit folks before we get to Christine Legard and Frankfort. But Stephanie Roth, you're quite good at this, which is interpretating what I call the three ratio productivity dynamic of capital labor in the pixie dust of American efficiency as well. What have you learned to reaffirm better productivity in the last fifteen hours. Do they have a confidence that we're more efficient, a better run economy. We have seen productivity pick up in the last couple quarters. I don't know if we can bank on that continuing, but I think there's real scope for that. The economy has learned to operate with fewer workers than what the pre COVID trend would suggest. The standard idea is of you have ten years, you know, we'll know in five years or whatever about productivity now, But are you guestimating that we grossly underestimate not the capital dynamic, the labor dynamic. And you know Alisa Torsten Slock with that comment out today have more employed people in the middle of the age bracket in America. But is it really about the technology overlay that we're completely underestimating even as we live it. I think there's an element of that, but I think the bigger story here is a labor supply. We've had such strong labor supply this year that's helped the rebounds the labor market. It was a combination of immigration and female elberforce participating in Claudia Sah mentioned this yesterday with a Nobel Lauri at Claudia Golden at Harvard and that the women coming back into the labor force is jaw dropping. If you are just joining us, just to repeat some of these numbers because they are notable, I want to just take a look. Initial jobless claims came in yet again below the expectation. That is a good downward surprise, two hundred and two thousand versus the expectation of two hundred and twenty thousand retail sales month over month. The control group came in zero point four percent versus the expectation for zero point two percent. Zero point six percent versus zero point two percent expected when you strip out autos and gas, Stephanie, do you get a sense that basically the consumer is not cracking at all, That basically they still have money and the actual real wages going up will continue to fuel the spending spree that has underpinned a lot of the recovery. Yeah, I think the consumer is doing just fine. I mean, the one thing to highlight within the print is we did get some downwards vision to the prior month, so like if you smooth through it, it's a little bit less strong than it seems. But yeah, the consumer seems fine. You're starting to see some delinquencies at the most vulnerable spots, but with rates coming down and conditions easing, maybe that's the Maybe that's kind of the end of that. What would you have to see to start to really question the soft landing thesis? Where would the weakness come from? Do you see it anywhere on the horizon that you're watching and some of the incoming data. I think there's two things to watch out for. One, the labor market is that going to crack As long as the consumers are employed, they're going to keep spending. And then on the on some of these cracks that are forming within within the consumer, that's just you know, keeping keeping me looking quite closely. So some of the delinquencies at the lower end or with the younger borrowers by now pay later, that kind of thing that feels very late cycle to me. But overall the consumer seems fine. What's your run rate for GDP? All of us got wrong third quarter? There was a third quarter quiet and we got this shock optimistic number. We're going to reduce that in the fourth quarter as well and get say three percent GDP two point eight percent. Those are pretty good numbers. Yeah, I think it looks like it could be tracking above two percent, above two coming, give me above three? Can we get above three percent? I don't think so. You're gonna have an inventory drag, so I don't think so. Okay, what about export imports? We got the you know, the pricing on export and imports today, but on trade to me. The wild card next year's China, And to me, the great question is do we underestimate China once again and the export import dynamic of America adds to GDP. Is that possible? I think trade could be a bit of a boost next year. I don't think it'll be dramatically, So I think the thing to think there's two things to think about. One is are we going to end up with cross the board import tariffs in twenty twenty five? Is that? Is that a real issue depending on how the political cycle plays out. And then the second thing is everybody's talking about reshoring, but there's not really that much signs of it yet, so they're not really you know, we're still importing disinflation. It's not as if we're all of a sudden manufacturing all of these goods here and that's going to create lots of goods inflation in the US. Who do you think is more right the Fed projecting out three rate cuts next year or the market pricing out six rate cuts next year the Fed unless we get a recession, which is not my bease case. So in other words, that that seems the most likely, which is actually less than the market is currently expecting and less sort of disinflationary than people are pricing in. Yeah, but I think the one thing is the market's not pricing the FED getting all the way down to somewhere on two and a half to three percent, which is where I think the FED will ultimately cut to. So that's where the rest of the market could sort of price too. We have to turn to Franford. Thank you so much, Stephanie Roth with it's just terrific summer here with the Wolf Research publishing and that we can get that research from Wolf. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business App. You can watch us live on Bloomberg Television and always on the Bloomberg Turn No, No, thanks for listening. I'm Tom Keen, and this is Bloomber See omnystudio.com/listener for privacy information.