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Fed Watchers Will Look For Clues On Hikes, Wages, Trade War · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim
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  Speaker 1: Fox along with my co host Lisa Bramowitz. Each day
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• 0:31
  Speaker 1: Right now, let's bring in Dave Wilson, Bloomberg Fox Editor,
• 0:33
  Speaker 1: columnist and blogger at M Life. Go on the Bloomberg.
• 0:36
  Speaker 1: I really want to start with bank earnings. We've got
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  Speaker 1: Goldman Sachs as results. Uh. Interestingly, the reaction has been
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  Speaker 1: decidedly mixed, even though they beat by quite a bit
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  Speaker 1: on the top line revenues. Yeah, some concern with what's
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  Speaker 1: going on with their equity trading business. That was a
• 0:53
  Speaker 1: weak spot in terms of revenue. Of course, you got
• 0:55
  Speaker 1: a management transition. It's understatement of the year management transition. Yeah, Boss, Well,
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  Speaker 1: it's a process, okay, I mean it's not going to
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  Speaker 1: happen right away. We know that Lloyd blank Find will
• 1:10
  Speaker 1: remain CEO and chairman until October one. We'll give up
• 1:13
  Speaker 1: the CEO job to President David Solomon. Then by Rand
• 1:17
  Speaker 1: will step down as chairman. Solomon will take that job.
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  Speaker 1: So yeah, it's a transition that it's in something that's
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  Speaker 1: been talked about for a few months. So it's not
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  Speaker 1: surprised that, you know, it's like anything else. It's you know,
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  Speaker 1: it's change coming to Goldman and you know people tend
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  Speaker 1: not to like change very much, and that would explain
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  Speaker 1: at least in part the stocks slide in early trading.
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  Speaker 1: Also a big big mover today Netflix They were portty
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  Speaker 1: disappointing earnings after the bell yesterday and they are just
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  Speaker 1: getting hammered and bringing the nasdack down. UH shares? What it?
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  Speaker 1: What's the latest with the shares? They were down, well,
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  Speaker 1: they're down a bit more than ten percent. But what's interesting, though,
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  Speaker 1: is if you go back and look at the history
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  Speaker 1: of Netflix's move was after earnings reports, this is not
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  Speaker 1: a surprise at all because you know, on average the
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  Speaker 1: stock up or downcent going all the way back to
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  Speaker 1: two thousand seven h the day after earnings, and you know,
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  Speaker 1: today we were down at the low's fourteen percent and change,
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  Speaker 1: and Netflix is actually making some of that back and
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  Speaker 1: now the stock's only up eighty seven percent. For the year,
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  Speaker 1: which really tells you, you know, what's happening here as
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  Speaker 1: much as anything is a bit of a buy. The
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  Speaker 1: rumors sell the news, even when the news isn't something.
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  Speaker 1: I'm just gonna get you what's going on in the
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  Speaker 1: bond market, which is basically nothing. Uh the ten year
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  Speaker 1: at two point eight five percent, though the uh, well,
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  Speaker 1: the two year at the two point six percent. I
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  Speaker 1: want to bring in Carl Rickadonna, our chief US economist
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  Speaker 1: for Bloomberg Economics, and Matt Posler are Bloomberg News reporter
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  Speaker 1: who covers the Federal Reserve, And of course we are
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  Speaker 1: awaiting Jerome Powell, Chair of the Federal Reserve, and his
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  Speaker 1: testimony before a Congress. Um, Matt, what do you expect
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  Speaker 1: him to say when we've got the prepared marks? But
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  Speaker 1: I mean, is it really going to say anything that's
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  Speaker 1: gonna be market moving? Well, that's a good question, you know,
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  Speaker 1: I think, Um, maybe if they start getting into some
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  Speaker 1: more detailed questions about the Fed's plans for interest rates
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  Speaker 1: this year and next year, you know, there's a big
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  Speaker 1: question about Um, the Fed kind of sees there's this
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  Speaker 1: neutral interest rate that they think once they get to
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  Speaker 1: that neutral rate, then um, you know, they will no
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  Speaker 1: longer be stimulating the economy. And so the big question
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  Speaker 1: for next year is once they get to that neutral rate,
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  Speaker 1: which will probably happen next year they think it's around two,
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  Speaker 1: then do they keep going and actually starting to outright
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  Speaker 1: restrict economic growth because they're worried about unemployment being too low,
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  Speaker 1: um and maybe inflation you know, going higher. So we
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  Speaker 1: don't really see any indication that j. Powell and these
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  Speaker 1: prepared remarks really feels like that's you know, going to
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  Speaker 1: be necessary because it's going to be asked about the
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  Speaker 1: trade war. Yeah, so that's uh, that's also something that
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  Speaker 1: you know, could could definitely have implications. He kind of,
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  Speaker 1: you know, very briefly touches on it in these prepared remarks,
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  Speaker 1: but doesn't really say anything you know, about what it
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  Speaker 1: means in particular. So that could be interesting line of
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  Speaker 1: questions as well. Carl, come on in here. We're going
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  Speaker 1: to be a lot of questions also about the labor market,
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  Speaker 1: which is sort of confusing. We have this very low
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  Speaker 1: unemployment rate and really muted wage gains. How could he
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  Speaker 1: be surprising on this? I mean, do you think that
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  Speaker 1: he's going to say anything of note here well, in
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  Speaker 1: the prepared remarks, he says moderate wages, say the job
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  Speaker 1: market is not causing high inflation. So I think he's
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  Speaker 1: going to echo this theme that maybe there still is
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  Speaker 1: more slack in the labor market than what the three
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  Speaker 1: point eight or four point zero percent unemployment rate, that
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  Speaker 1: what otherwise have you believe? And I suspect he'll play
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  Speaker 1: the role of economic cheerleader in terms of indicating that
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  Speaker 1: death through the fence policy and maybe also tipping his
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  Speaker 1: hat to tax reforms. We're actually seeing labor force participation
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  Speaker 1: potentially at least leveling out, if not the edging higher
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  Speaker 1: as a strong economy, as coaxing workers back in office
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  Speaker 1: sideline in plain English, the participation rate. One thing that
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  Speaker 1: people talk about is why has the unemployment rate for
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  Speaker 1: working age men in particular remained higher than it was
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  Speaker 1: right before the last downturn, and particularly the prime working
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  Speaker 1: age men in the US. And people are wondering, you know,
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  Speaker 1: is this because of the opioid epidemic? Is this because
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  Speaker 1: of the high incarceration rates? Is because because of discrimination
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  Speaker 1: childcare costs? Um do you expect him to to sort
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  Speaker 1: of weigh in on that at all? I mean, does
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  Speaker 1: that matter from economic perspective, certainly from a social perspective
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  Speaker 1: it does. I think those are all factors, but I
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  Speaker 1: think even more importantly as the dynamics of what has
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  Speaker 1: been driving the economy. Uh. And so what you certainly
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  Speaker 1: see uneven distribution of employment by sectors. UH. For example,
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  Speaker 1: the construction sector tends to hire a lot more males
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  Speaker 1: and females. And certainly construction activity has been a aggered
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  Speaker 1: in this cycle as the housing sector really struggled to
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  Speaker 1: recover up from the bust. And so, you know, everything
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  Speaker 1: you mentioned is correct, But I think also just the
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  Speaker 1: composition of growth is a very relevant He'll probably be
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  Speaker 1: asked about this. I don't think that there will be
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  Speaker 1: upmarket moving responses. Uh. You know, as he'll he'll cite
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  Speaker 1: many of the factors that I've mentioned. Just now, Matt,
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  Speaker 1: what if you could just comment on some of the
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  Speaker 1: other FEDER officials, For example, Neil cash Cary recently talking
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  Speaker 1: about the yield curve. Do you think that the chairman
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  Speaker 1: power will get questions referencing Neil cash Cary. Yeah, you know,
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  Speaker 1: I can't imagine the yeld curve is to top of
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  Speaker 1: mine for a lot of these senators. But on the
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  Speaker 1: other hand, it is you know, a three hour hearing, right, So,
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  Speaker 1: I mean that is something that could come up, um
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  Speaker 1: at some point. Certainly it's the talk of the town
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  Speaker 1: on Wall Street. Everybody's looking at this yield curve flattening
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  Speaker 1: almost flat. Um. Obviously historically, uh, that has sort of
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  Speaker 1: been followed by recessions, and so low of people are
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  Speaker 1: worried about that. I mean. The interesting thing about FED
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  Speaker 1: officials talking about that so much is, you know, to
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  Speaker 1: some extent, they do control not only the short term
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  Speaker 1: interest rate, but where that long term interest rate settles
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  Speaker 1: as well, because if you think it's sort of the
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  Speaker 1: average of you know, expected short term interest rates over
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  Speaker 1: the next ten years, then they can kind of affect that.
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  Speaker 1: And so if you look at their long run neutral
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  Speaker 1: rate that we were just talking about earlier, that's right
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  Speaker 1: between two seventy five and three percent, that's exactly where
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  Speaker 1: the ten year yield is as well. So UM, I
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  Speaker 1: think the FED, you know, FED officials kind of need
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  Speaker 1: to think about the yield curve and and the extent
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  Speaker 1: to that to which that is just reflecting what they're
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  Speaker 1: telling people they are going to do with interest rates
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  Speaker 1: and whether that should really be so concerning to them.
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  Speaker 1: Um that markets seem to be getting the message. All right,
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  Speaker 1: Dave come back in here with respect to equity markets,
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  Speaker 1: do you expect them to have any reaction to anything
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  Speaker 1: that fed Powell could say? For example, if he says, look, uh,
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  Speaker 1: we don't necessarily think that the yield curve of a
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  Speaker 1: setting the same signals that has in the past. We're
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  Speaker 1: gonna keep raising rates at a study uh and slow pace,
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  Speaker 1: but we're going to stay on our trajectory. What does
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  Speaker 1: that do to ataquities? Well, I mean, there is certainly
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  Speaker 1: the potential for a movement, although let's face it, Uh,
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  Speaker 1: you know, the chair power would be perfectly happy if
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  Speaker 1: nothing moved. In response to what he was saying that
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  Speaker 1: he's simply reinforced where people are going in in terms
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  Speaker 1: to in terms of interest rate policy. Here, I mean,
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  Speaker 1: just to give you some idea, we so sort of
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  Speaker 1: a brief flip up to the highs of the day,
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  Speaker 1: and he has some P five hundred after those initial
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  Speaker 1: headlines came out. Uh, and now you're you're seeing stocks
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  Speaker 1: and bounce around. Uh. Still not quite higher, though they've
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  Speaker 1: made up a lot of their early losses. So you know,
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  Speaker 1: if that's the outcome, then I suspect the policy makers
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  Speaker 1: would be perfectly happy with that. Matt, just a little
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  Speaker 1: bit about inflation. Uh, milk, eggs, bread, You've been following
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  Speaker 1: the basics, Yeah, absolutely, so you know that's uh, that's
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  Speaker 1: really good news. Right. So the prices of milk, eggs
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  Speaker 1: and bread, as you mentioned, seemed to be coming down
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  Speaker 1: a lot, and so that was a really big criticism
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  Speaker 1: of the Fed in the early years of this expansion,
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  Speaker 1: when we did have a little bit of inflation, it
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  Speaker 1: was a lot of that um, you know, uh inflation
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  Speaker 1: that was driven by dollar weakness. It was really hitting
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  Speaker 1: you know, low end consumers right where it hurt the most,
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  Speaker 1: and the grocery basket. And so while the Fed was saying, oh,
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  Speaker 1: you know, we have to keep policy easy, Um, we're
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  Speaker 1: not worried about inflation, everybody's looking at their grocery bill
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  Speaker 1: and saying, well, you know, how can you kind of
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  Speaker 1: be taking this position and build Dudley famously got in
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  Speaker 1: trouble when he said, well, you know, look at iPads, right,
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  Speaker 1: the price of those has come down a lot. And
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  Speaker 1: he said that in twenty eleven and someone at the
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  Speaker 1: town hall said, well, you can't eat an iPad, so
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  Speaker 1: that certainly is not the case anymore. It's an interesting
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  Speaker 1: kind of Yeah, I mean, Carl coming on the US
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  Speaker 1: economy if you can. Industrial production report out today for
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  Speaker 1: the month of June. Estimates were for a gain of
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  Speaker 1: a half a percent, actually up six it actually top
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  Speaker 1: Actually manufacturing was stronger. But we have to really pass
• 10:02
  Speaker 1: through the details here because there was a fire at
• 10:04
  Speaker 1: a part supplier in the auto sector, and so we
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  Speaker 1: saw a swoon in May and then a sharp rebound
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  Speaker 1: in June. The moral of the story is the Q
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  Speaker 1: two factory output data looks good. Uh. The Q two
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  Speaker 1: consumer spending data look great. Uh. And we're looking at
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  Speaker 1: a quarter that will probably a register g d P
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  Speaker 1: gain of if not in the high threes, maybe even
• 10:26
  Speaker 1: in the low four percent territory. But we shouldn't get
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  Speaker 1: too excited about one single quarter because we will see
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  Speaker 1: a moderation in the second half of the year. Uh.
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  Speaker 1: There's this usual whipsaw between a week Q one and
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  Speaker 1: we have to break in here. A Jerome Palifa draw
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  Speaker 1: Reserve chair is now starting his testimony before the House.
• 10:45
  Speaker 1: Let's listen in Thanks for listening to the Bloomberg P
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