Bloomberg The Open 08/14/2023

Bloomberg The Open 08/14/2023

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Let's get your trading week started. Live from New York City this morning. Good morning. Good morning. Equity market just a little bit softer. The countdown to the open starts right now. Everything you need to get set for the

start of U.S. trading. This is Bloomberg the Open with Jonathan Ferro. Live from New York, coming up. GOLDMAN Pencils in the first rate cut in 2024. Worries filled over China's real estate

market. And Tesla begins cutting prices once again. We begin with a big issue, sustaining life above 4%. This is not the time to panic about duration, but still, pain comes to long duration assets, but place to be all of these types of sell offs that we have seeing in the market. I think a lot of this bothered me over what we think of them as opportunities to go long Treasury. We're using duration as a hedge to a

growth shock. We still haven't seen the lagged effects of all this policy tightening. The lagged impact of Fed tightening. The Fed is kind of enamored with this soft landing view.

We don't see really any possibility for the Fed to be cutting rates until next year. The Fed is numbers forever. Do Fed officials just need to keep policy rates higher for longer? It is a roller coaster on the data front. We may have another rate hike. Doors open for a hike in November.

This fed is not done. The Fed could screw this up. Joining us now to discuss is always Prince George for a new veins Tony Rodriquez. Tony, let's start with this bond market. Yields about 4% on a ten year at about 420. Tony, how much oxygen is left up here? Well, good morning, Jonathan. Good to be with you. We would say that there's not a lot of oxygen left. We think that the previous peak that was

set in that four and a quarter area is really going to be very likely to hold here. So from our perspective, when you get the US ten year above 4%, that begins to be a very attractive area for investors to begin to take on some longer duration exposure. So whereas we were relatively defensive on duration throughout all of last year as we moved here into 2023 and we've been hitting that 4% level, that's an area we begin to like to get our duration back to neutral. We're not expecting an enormous rally from here, but we do think it's an attractive place to try some attractive income and gain a pretty good hedge against a potentially negative outcomes. Because in a negative economic shock, we do think we'll see rates fall pretty aggressively.

George, do you agree? But we would agree that adding, you know, duration in here certainly makes a lot of sense. And we've been sort of steadily doing that small incremental adds as you guys have gone up. The most important thing, Jonathan, is not so much where nominal yields are, but it's where real yields are in real yields, as we've talked about many times on the program, have moved into a in positive territory. And it's time to let the real yield kind of work its magic, so to speak, both from a policy perspective as it affects the economy, it effects borrowers, it affects economic behavior. But from an investment perspective, when you can lock in anywhere from, say, 100 to as much as 600 basis points in positive real yield as a bond investor, that's sort of the golden days for bond investing, and that's precisely what we're trying to do today. Income is back and you're getting more

yield over the last couple of ways. Can we just start with this Treasury selloff of the last month or so? George, can you walk me through what you think is behind it, this 30 basis point move in the last three weeks on a nominal ten year yield? Yeah, I think, you know, clearly the data has been it's been good and there's the hanging question over the market is really inflation growth is clearly slowing. There's plenty of headwinds that we think will mount as we move through time because of tighter policy, because of higher rates, because of those higher real yields. But the question is, is sort of what happens with inflation. It's still an open question. It's clearly decelerating. And the bet is does it reaccelerate as

we get into the end of the year? That's an unknown. And then secondly, the technicals behind the Treasury market in particular have been really weak this summer. As we know, the rating downgrade that came from Fitch, a combination of sort of extra issuance and supply, which is going to continue well into next year. And then international policy,

particularly out of Japan, all of which makes for a pretty weak technical backdrop. That's all conspired to push up rates and kind of allow us to retest those highs. We think that's actually a relatively attractive entry point because we think the fundamentals will ultimately dominate as we get through this period of of weak technicals. It's only for many reasons. You agree. I know based on what you've already told us, you go through the reasons, the yield curve, confusion at the DOJ.

If you look in elsewhere, you could point to perhaps the commodity market and the rally in crude. Can we talk about that just a little bit more, Tony, How much of a dominant factor do you think this rally in crude has been over the last few weeks contributing to what's happened in the bond market? Well, John, I think it certainly contributes to the narrative that you're going to begin to see the impact on the consumer, which right now has clearly been very, very resilient from a number of different channels, but higher energy. Price is one of those channels. So we can talk about how the access savings are being worked down. We can talk about how the labor market,

while still quite resilient and strong job growth, has decelerated from 400,000 per month last year to 200. When we look at the energy market that is beginning to reflect itself in the pump price that people are paying. So we think as we look forward, you're going to begin to see some moderation in that very resilient consumer spending strength. And so that's where I think the energy price story is going to play in the most is on the impact on consumer spending as we move through the year.

A key test for that is retail sales tomorrow morning. Then we get a view on the Federal Reserve and FOMC minutes coming up on Wednesday. Lots of retail earnings through the week as well. Let's catch up with andrew Jersey of Bloomberg. Before we get to the rates market.

Talk to me about the data, what you and a team are looking for from retail sales tomorrow. Yeah. So we're going to be looking at the control group of retail sales that that tends to be the GDP input that's slowly been coming down but is still reasonably robust. The expectation is for 0.5% for the control group. If we see anything above that, then I think we can retest those yield highs in ten year yields for sure.

And then the minutes obviously on Wednesday are going to be incredibly important to the market, just not so much for for the high level data, but for some of the nuance and details. You know, what is the Fed's reaction function if inflation does continue to ease? But we don't get a we don't necessarily get a hard landing. So what is the Fed's reaction function as to when they'll actually start to cut rates? This bond market move is getting tons of attention. I said earlier this morning you asked five different people what the reason is for the sell off. They'll give you five different reasons and we could pick out a few of them together. Yield Curve Confusion at the DOJ Additional supply that downgrades commodity rally.

So even the team at the moment, Ira, what do you think is the dominant race and a dominant factor underpinning this move? Well, it's not inflation. It's not inflation in inflation expectations. Just look at inflation breakevens. They've hardly moved. It's all been about real yields. And that tells me that it is more of the supply and the and the monetary policy story. It is all of those things. And it just happened to be occurring during a time when the market is fairly illiquid. You have people going on vacation, you don't have dealers wanting to take a lot of risk and you still have the market leaning pretty short, which means that you can continue to see the yields edge up toward the the cycle highs of last November.

But then we can wind up seeing a pretty dramatic pullback as some of these shorts wind up getting a getting covered later. Because remember, with yields as high as they are, it's difficult to be short for a long period of time because your carry is so negative because you have to pay that for, you know, 4.2% where the ten year yield currently is, as opposed to receiving something that on the other side.

I would say if Bloomberg intelligence are a thank you yields out this morning on a ten year by three basis points just short a full 20 on a two year up by five for 94 for 94 on a two year. 12 months ago, we were asking Fed officials what's the biggest risk right now? Doing too little or doing too much? There was a view that doing too little was the biggest risk right now, with inflation perhaps threatening to approach double figures 12 months later. A different story when you sit here now, George, what's the biggest risk? Back enough too soon or hold in too long? Biggest risk, in our opinion, is over tightening. We're at the point in the cycle where each incremental move, you know, will have meaningful repercussions. It's the danger zone, if you will, for policymakers.

And as we just pointed out, as my colleague on the show also mentioned, no inflation is coming down. We're pointing in the right direction. And so the data, you know, we're maybe getting some false signals regarding how strong the economy is. There are many mounting kind of headwinds all related to the higher cost of debt, even the consumer starting to show some cracks. So in our opinion, the risk is of of over tightening at this point in the cycle and that they could sort of just sit on hold for an extended period of time, not do much at all kind of talk the market through. And again, going back to what I said at the beginning, allow these very positive real yields to kind of work their magic. They're not quite as, you know, sort of spectacular as a as a meaningful rate rise. But they do have a considerable impact

on economic behavior as we move through time. That would moderate growth and that should also bring down inflation at a slow and relatively consistent pattern. It's only is that the conversation you expect to see play out in the minutes later this week? I do. I mean, there's definitely some

disagreement on the atmosphere between the hawks and the doves. But at the end of the day, we do think that policy is. Gone to a more equilibrium restrictive level. We think that as we continue to see some moderation, inflation, that restrictiveness increases. So those real yields begin to bite

harder as we move through the balance of this year. So we do think the risk is that they over tighten if they become too aggressive, because right now we think all the forces are in play for inflation to continue to moderate, albeit slowly. And we think the growth slowdown will be more obvious to the market and investors as you move into the fourth quarter than what we've seen so far from the growth respect. So, Toni, why are people calling for rate cuts to start in June? Bank of America might open Q2 2024. Then you have the same from Goldman Sachs, Q2 2024. What is it about that kind of period,

the middle of next year? And I think the key there, Jonathan, is that you really begin to see the impact of those Fed rate increases by as we move towards the end of this year through the first half of next year. In addition to that, you have the global growth pressures that we're seeing reflected primarily in China, where we don't see those alleviating any time soon. So as those come together, as we approach the beginning of 2024, that's when the Fed can start to look ahead. And if we can, if we're correct, that by the end of 24, inflation core pieces should be back below 3%, That will begin to open the door for the possibilities of Fed beginning to cut rates. We think it'll be late the second

quarter. We think they'll be slow to cut rates, but that they will begin cutting because it's staying at this higher level. That is ultimately going to be the key to getting that inflation rate down closer to the target, which is that the name on the calendar as well. June, is that circled for you as well next year for 24? It's a good question, Jonathan. It seems, as we've seen over the cycle,

the kind of rolling six month forecast, expecting kind of the sort of meat material slowdown as well as the rate cuts that come on the back of that. So I think this is sort of conveniently pushing forecasts about a little over but about six months forward, saying sometime in the second quarter of next year, you know, is when we're going to see that, that's not necessarily our view. You know, we think we could be at this, you know, kind of extended period, all going back to inflation. If we're allowing inflation to come down organically, that takes a very long time. So we're not committed that it's this magic period of second quarter of next year. But we do expect kind of this this ongoing slowdown in activity that just actually allows the Fed to be patient. And I think that is one thing that the

market has a hard time with accepting that the Fed will sit still. One thing that we would disagree with is that once the Fed does start cutting rates, it's likely to be because of something material and it's unlikely to be sort of a slow, gradual decline in rates. When they cut rates, it's usually because there's a material problem in the system. So that that point, I think we would we would really push back against and suggest if they're cutting rates, they're probably going fast and furious and they would be taking rates down materially at that point. Jorge Barry, Tony Rodriguez, The two, if

you're going to be sticking with us, we need to talk about China in a moment. But tension out there at the moment, look at China, downside surprises around economic growth. We're talking about a bond market selling off stateside. Treasuries. Talked about this a few times this morning, eight or nine years ago, if you woke up to negative news out of China, the bond market would be rallying, crude would be selling, Gulf copper would be underperforming, crude would be down. Waking up today, more negative news out of China.

It's the other way around. Last three weeks, the last month, the Treasury market's been selling off, not rallying due to higher. And crude's up, Chris not down. Crude's up in a big way since the middle

of June, up by more than 20%. But returned to that story in about 5 minutes time. This move has gone into the open about that open about about 20 minutes away. Here's Abby and John.

And one stock that is absolutely soaring in the premarket, U.S. Steel. It is more than 30% after it rejected a greater than $7 billion buyout offer from Cleveland-cliffs.

Instead, it's saying it will begin a review of strategic options. Clearly, the company is in play and actually it's off those highs. It's now up a mere 25%. Tesla down 2.8%, weighing on futures on the news that they're allowing lower in prices of some EVs in China. And then we have PayPal up about 2.5%. We do have a report from CNBC that

PayPal is naming into its alex kris. Their new CEO would replace dan schulman. And if you recall, John, in the latest report, operating margins came under pressure. So perhaps this is one fix that investors see if it is true. Again, that's a CNBC report. Abbi, thanks for that.

Coming up on this program, mounting risks to China's economic recovery. China is suffering from a lack of consumer confidence. Very clear savings are skyrocketing. We need to see some more constructive policies out of China. Growing concern.

Over China's real estate market. That conversation up next. China is no longer going to be this big factory for the U.S. So that's changed in China. The Chinese consumer is not the American consumer, and that's especially true what the problems are going in real estate. You've got this internal problem that they've been working on for two or three years at the failing. Well, you can either keep trying to fix what's not fixable or you expand.

That was a kind of he's paid a sheer amount of concern to the Chinese real estate market with troubles at Country Garden Holdings in Focus yet again, seeking to extend a maturing bond for the first time ever and halting trading in local notes, J.P. Morgan sounded the alarm, writing this. We see higher risk of contagion not only across the sector, but also possible spillover to the wider economy. Tom Olick joins us now for more. Tom, let's talk about this a little bit more. This real estate developer, what's happening there is one thing. What's happening with the wealth manager is another.

Is this all about the real estate market in China? Well, to quote Barbie. Jonathan, some things are happening that could be connected. First, we've got Country Garden, one of the biggest developers in China, and so also one of the biggest developers in the world on the brink of being unable to service their debts on the brink of default. Now, at the same time as that, we've got

one of China's biggest trust companies. Trust companies in China are shadow banks that take money from rich investors and channel it into high interest rate loans, often to property developers. We've got one of China's biggest trust companies unable to make its investors whole. And of course, these two things are

related. As the property sector turns down and big property developers are unable to service their debts. That increasingly is going to mean that financial companies, in this case a trust company, are unable to make whole their investors. If the problem gets more serious. We could see China's small banks unable to make their depositors whole without tapping their capital or getting support from the government. So, Tom, how wrong things do you think this actually is currently and what kind of risk, as opposed to the economic recovery which has stumbled so far this year? So on the economic recovery, Jonathan, one of the remarkable things about China this year is that even though they faced really, really serious problems in the real estate sector, they're still quite likely to hit growth above 5% for the year. Now, of course, the real truth there is

that that 5% growth is an artifact of the catastrophic growth they had in 2022. It's all strong growth from a low base, but at least in terms of the headline number, 2023, growth is going to be okay. Now, on the bigger question, are China going to be able to ring fence this problem? Well, so far that doesn't seem to be much of a desire to ring fence defaults by real estate developers. Evergrande defaulted. That was big news. Guess what? Country garden is a much bigger real estate developer than Evergrande was.

And so far, policymakers do not appear to be running to the rescue. Where would the ring fence come in? Well, my instinct is that the Chinese government has to stop the rot at the banking system. Can some trusts fall over some shadow banks? Yeah, I think that's probably okay. That can happen without tipping the economy into crisis. Can banks fall over? Probably not. So that is what I would be looking for

Beijing to step in with a fix. Let's catch up again this week, somewhat like that of Bloomberg Economics on the latest choice for Itani Rodriquez. Back with us. Tony, there is what I would describe as some kind of uncomfortable calm around this story. In China, we seem to be isolated, disconnected from it, yet we pay attention to it every single day. Tony What kind of risk does this pose to

the US economy? Watch out. As you know, the U.S. economy is relatively closed economy. So it's not going to be a dramatic impact this quarter, for example.

But that weakness, that impact of global growth that'll come from the Chinese economy decelerating from where we do agree is likely to be a five handle on growth for this year. We think next year it will be below 5% and continue to decline over the course of the next few years. That weakness in global growth is going to be part of the narrative that really allows U.S. inflation to continue to moderate as global growth sees that weakness. But the Chinese economy has had these imbalances of being over built in over leverage in real estate. We think that the government wants to see some of those imbalances reduce, so are not going to have an aggressive response strictly the property sector, but they are going to try to maintain, reduce social unrest, risk, maintain the stability of the financial system and have growth moderate slowly below that 5% level over the next few years. George BOERI, final word here.

Yeah, I think the important thing to remember is that, you know, sort of you know, China is no longer kind of the exclusive exporter to the U.S. and that's really sort of what the impact we think is countries like our neighbor to the north and neighbors to the south, Canada and Mexico kind of benefit as China needs to sort of, you know, kind of deal with fiscal policy that's not really working as expected. They can't continue to sort of stimulate like they once could and the transition to a consumer economy, it's happening.

But the Chinese consumers very different than the U.S. consumer. And so it doesn't sort of unfold in the same way. But kind of the big the big shift is, is

the demand function in the US is kind of pivoting to other suppliers of goods and services. And, you know, that's why our economy, we think, is holding up reasonably well while the Chinese continue to kind of work through some of these challenges. George BOERI, Tony Rodriquez, Tony George, great to catch up with you both. Thank you.

I ask this question a little bit earlier on this morning. What's the biggest risk right now for the Fed backing off too soon? Hold on too long. Note that Renmark in my inbox just moments ago. I continue to see the primary risk for markets that the Fed takes its feet off the brakes too soon.

I'll bring you the full quote in just a moment. Coming up in the morning, calls and later, say a share of principal asset management making a case for limited equity upside from current levels. That conversation up shortly.

Treasuries. Dam yields up. Dollar stronger. Equities struggling just a little bit over the last couple of weeks including this morning we fade equities down by 0.2%. That's the price action. Let's get you some money calls. First up, Morgan Stanley reiterating in

video as that topic, saying the recent selloff has created a good entry point Ahead of next week's results is second call from Bernstein downgrading Marriot to Market perform, recommending investors buy shares of higher instead given this compelling valuation. And finally, Barclays downgrading Mosaic to underweight seeing limited upside after outperforming the first half of the year. Coming up on this program, a big week ahead for the consumer. Retail sales and retail earnings seem a shot of principal asset management. Up next here, opening bell just around

the corner. So weeks of losses on the S&P 500, no sign of a bounce. Equity futures down by about 0.2%, fading away from the gains. Earlier on this morning for the Nasdaq, really, really interesting moment, back to back weekly losses on the Nasdaq 100 for the first time this year. If this one closed right here for the month, the Nasdaq 100 down by close to 5% for August so far. It would be the worst month of 2023 from New York this year up in the past, which in the fall and get to the bond market.

Over the previous three weeks, we've climbed 30 basis points on a ten year yield. We had some we had another three basis points in approach for 20 on a ten year at four 1855. Getting back to that level, getting very close. The post SVP failure high in the bond market. The cycle high for this cycle previously back to October.

That 430 getting closer aren't we off the back of that yield move. Dollar stronger against everything in G10 including the euro the euro a break of one of nine. We're negative by 0.6% on the euro right now 1.87 against the dollar and in the commodity market that's another curious one, a rally of more than 20% for the middle of June. We take some back with negative three quarters of 1% at $82 and about $0.60 about 50 seconds into the session. We're negative here by 0.2% on the S&P.

On the Nasdaq, we're down by about 0.4. What stock to watch at the open as U.S. Steel shares surging after rejecting a $7.3 billion takeover bid from rival steelmaker CLEVELAND-CLIFFS. US still calling the offer, quote, unreasonable. Despite representing a 43% premium to Friday's closing price. Abby has more.

Hey. Hey, John. And this has the stock on pace to for its best day ever going back more than three decades since it was first a publicly traded company back in 1991, up 25%. So clearly, the the company and the stock are in play. The fact that they rejected that unsolicited $7.3 billion bid from Cleveland-cliffs suggests that perhaps they think and also that language you were just talking about unreasonable suggests that maybe they think that they can get more there.

Apparently there are other offers on the table. They the board acknowledged the receipt of a number of those offers for parts or all of the company. So it's very unclear what strategic alternative they will, in fact, pursue. But one thing is clear, this was a $200

stock back in June of 2008. In the depths of the pandemic. It was a 454 stock, as in $4.54. So down tremendously the board and investors are probably looking to unlock value right now at roughly $29. It's close to the highs over the last decade or so, John. But again, investors probably wanting to unlock more from U.S. Steel and the fact that there are pursuers, suitors out there suggest that they will be successful in doing so perhaps this year.

Abby, thank you. That stock is up by more than 26%. Here's another one for you. AMC wins court approval of a stock conversion plan, clearing the way for its recapitalization efforts as it faces possible bankruptcy. Simone Foxman has the story. Hey, Sam. Hey, John.

Yeah, the shares down the most in well over two years after a judge approving the settlement that it had reached with shareholders or after the bell on Friday, this stock conversion plan, they want to increase the number of shares it contemplates. Also, it says the company will also convert those private equity units into common shares as of later this month. The whole idea is to shore up capital reserves, pay down debt and invest in growth plans. Judge in Morgan Morgan Reserve and excuse me in Delaware Chancery Court approving that plan late Friday. There were some concerns that this would dilute the shares of common equity holders, but she found that giving them additional shares mitigates these concerns. We are seeing the impact of the dilution

of these stocks. However, in the market this morning, these private equity units, preferred equity units catching up, narrowing the distance between those common shares, they are rising today. Thank you, AMC, they're down by 34%. I want to draw your attention to this one. Hawaiian Electric Industries plunging at the open here in the US, trading off the back of some concern that its power lines might be linked to the deadly Maui wildfires that we've all witnessed over the last week or so. A stock is getting absolutely hammered at the open one to watch through today on Bloomberg TV, and I'm pulling back radio. Let's turn to the auto sector.

Tesla rolling out a new round of price cuts in China, according to a post on its wipe account, reigniting fears of a price war following similar moves by a host of automakers in Asia just last week. And what, though, has more. Morning at good morning, Jonathan. Tesla is down more than 3% at the open. The trim in china is 1900 US dollars to the model y long range and performance that equates to a 4.5% trim on the long range and a 3.8% trim on the performance. So and as you and I have. Discussed on this program using the

lever of price cuts has been normal for Tesla in the first half of 2023. The concern, though, is twofold, as you point out. A note from Evercore and Chris McNally saying that this could presage cuts in other regions like in the United States, in Europe, and in turn lead to a price war for EV players globally. You look at the market reaction in China, names like bhiwadi, Falling Li auto X Pong, all seeing that up.

Hong Kong or China listed shares impacted overnight here in the US. Other pure play names like Rivian and Lucid are also lower at the open. The second concern that analysts will have is Tesla's bottom line and the impact of further price cut. Some gross margins.

Remember when the mix of Tesla's deliveries is is skewed towards domestic China deliveries? It has been supportive of margins in the past, but Elon Musk and Tesla's position has been very clear they're willing to sacrifice the bottom line, use price cuts as a ladder to open pockets of demand at lower price points in order to protect that target growth rate of 50% annual growth year on year. It's a common piece of Tesla's playbook, Jonathan, of volume over margins. He's talked about it continuously. Just briefly, is this more about the global TV market or is there something specific about China as some of the weakness there for that industry? You know, we talk about this so often about how in China there are many more domestic players offering a much wider range of pure battery electric options to consumers. It is a more competitive market. The 3.8% trim on the performance or 4.5% on the the Tesla long range is in line with prior cuts. It's not a severely deep cut to prices. And indeed, if you look at the cuts of the first half of the year, some of them have been much deeper, higher single digits or even double digit cuts here in the United States. So that bear that sort of the uniqueness

of the China market in mind at Thank you, sir. Let's stick with these. We can tell you that this morning with Nikola announcing plans to recall over 200 trucks and temporarily stop sales after several battery fires, the CEO stating at Nikola, we take safety very seriously and we'll continue our transparency as we learn more as a story. Okay.

So, hey, John. Yeah, to get specific here, the EV maker's calling back about 209 of its trade trucks. That's after a third party investigator found that a coolant leak was the likely culprit behind a fire at Nikola's Phoenix headquarters back in June.

And in addition to that recall, like you mentioned, Nikola is also going to temporarily pause its sales. It did say that its vehicles can remain in operation, but it advised its customers and dealers to park outside until a fix is ready. I don't know if that's reassuring. You can see the shares currently off by about 12%.

And today's plunge follows a pretty stellar run for the shares. Actually, if you look at the past three months into Friday's close, Nikola shares were higher by about 154%. But zooming out for the context, Nikola is down over 80% from its 2020 IPO. John, thanks for that.

About 8 minutes into the session. At the moment, equities are lower. No drama here. We're down by 0.2% on the S&P. On the NASDAQ, we're down by 0.3. For those of you who like round numbers, very, very close to for 20 on a ten year, the high of the session is right now for 1992. We're getting closer and closer. There is a sell off in the bond market and it's been one over the last month, over the last three weeks, a 30 basis point move on a ten year yields are up today on that maturity by five basis points to just short of for 20 on a two year up six basis points. They're two for 95 yields just pushing higher over the last month or so. Same issue of principal asset management

recommending investors stay flexible given the changing macro environment. She writes this As the economic slowdown moves closer, our positioning will be adjusted to take advantage of the emerging opportunities. We shift equities from slight underweight to neutral.

Given the US recession and any equity pullback will likely be short and shallow, the following recovery will likely be swift, requiring a nimble and active response from investors. Senior, I am pleased to say, joins us now. Saima, I want to begin in the bond market for 20 on a ten year on my screen right now. We're through that level on a two year. We're up six basis points to about 4.85

for 96. Seema, what's behind this move in the bond market over the last month? You, me, to give you one of the five different answers separately, please do. Well, from our perspective it's it's where do these these I guess the key thing is about expectations for a soft landing and with that there's rising hopes that maybe or rising concerns about that inflation could end up being stickier, leading to maybe further Fed hikes down the line. So not in the immediate future, but

further down the line that maybe the Fed gets loses control of the inflation fight. I've got to say I do not buy into that. I think that we are going to see a drop in yields as you get closer to an economic slowdown. I think the inflation story will be maybe some moderate back down to 2%, but it will be contained. So I think that this is actually an opportunity to add duration rather than being too concerned where exactly this is going to go.

So at the ten year, at the 30 year, how long along the curve are you going to go seamer? So I think you can look a little bit at the barely but further out as well as a reading on the ten year point. I will be looking at the short end for right now. We are expecting a rate cuts in 2024, not this year. So that's a little bit further out. So it's really at that very intense point that we'd be adding duration, same as this had been happening with a rally in the commodity market in the background as well. One question we've got coming into this week is just on retail, on earnings there. How resilient is the consumer against a

backdrop of commodity starting to increase again and rates still pretty elevated levels. So they're clearly resilient today, but that doesn't mean that they're going to stay resilient going forward. So we do think the headwinds are something to build up. You've obviously got the excess savings, which I know is beat a narrative for a while, but it is now starting to come through with the existing business, starting to be exhausted by the end of this year.

We do think that consumers will be having to dip into credit cards and really to pull back on spending. The other part of this is, of course, the student loans. And then, as you said, inflation, food prices, oil prices, all of these things are going to be cutting into consumer spending. It has taken a while, I would argue. I note that from a lot of people that they believe that the lives have been very short. I would argue that the lack of actually been extra long this time. And one of the reasons is this huge amount of excess savings that has helped cushion consumers and actually to some extent, corporates as well. With that in mind, Saima, when we hear

from the likes of Target Wal-Mart later this week, Wednesday, Thursday, respectively. Do you expect to hear more about trading down and less about pricing power? I do. I think pricing power is really becoming an increasing issue. And in fact, when you start to think about how to invest, it's not necessarily about sectors or styles or anything like that.

It's really about focusing on which companies do have that pricing power as inflation continues to come down, as you get an economic slowdown, which of the companies going to be able to withstand this kind of economic pressures? So, yes, I do believe that that's going to be an increasing narrative going forward, not just this, of course, earnings season, but the next one's coming up. So I take it you wouldn't be a buyer of this story if the equity market continued to broaden out and to buy this cyclical play not just in bonds but also in stocks? I don't buy into it. I think that there is a lot of very positive investor sentiment. The soft landing has really become the

consensus view. So there is going to be some broadening out into how long that can be sustained, I think is very questionable because, as I said, we are expecting the economic downward forces to start kicking in through Q4. And whether you want to call that recession or slowdown, I think we're kind of it's somewhere in the middle of that balance. But that will mean that things like small cap will be challenged. Now, for us, I'd say once you start to see those challenges and once you start to see the labour market start to unwind a little bit, then that will be the best opportunity to increase your exposure to things like small cap. I don't think this is the right timing, but there will be opportunities in the coming quarter or next two quarters where you can start to put a lot of that money to work.

Russell down today by point 8%. Seema, I promise to fill a quote from no dot serve remark earlier on in the program. I want to share it with you because it's almost a counterpoint to the kind of things that we're talking about currently. He says, I continue to see the primary risk for markets is the Fed takes its feet off the brakes too soon. You either believe a period of below potential growth is necessary to quell inflation or you don't. He says given the inflation tailwinds from housing, motor vehicle, airplane assemblies, inventories and consumption, the US economy is nowhere near a below potential growth situation. He goes on to say and finishes with this

line. The Fed continues to breathe life into the idea that rates might be cut early next year. Not good. Samer, what would you say back to that?

God, I have a huge amount of respect for Neil and he makes some really strong points with somewhere in the middle there, actually. But what we're saying is that although the economy is resilient today, it's going to slow down. And we do point to the idea that you need to have an economic slowdown if you're going to take out the pipeline behind inflation today. But we think that's going to come down slightly, slightly down the line. So for us, the Fed stays on hold right now. You do start to see rate cuts coming

through in Q1 of next year, like Q1 are some of those recessionary for a start to actually come to fruition. But I do buy into a lot of what you said. The economy is very strong. The Fed does need to keep very, very aware and on top of that data. But to us, that means keeping rates on hold where they are rather than raising them further. Saima, thank you for the update. See my share of principal asset management.

Have you seen the equity market had a contrast with the likes of no data and others, just subtle nuances. About 14 minutes into the session, Let's go cross assets together, equities down, just a touch in a bond market. Much more interesting moves Treasuries down, hot yields up six basis points on a two year, four 9610 year in and around 420 right now at five basis points.

So yields higher, pushed that through the fixed market dollar a whole lot stronger euro dollar negative by 0.6% session lows break a1091 to wait 82. Coming up. Also about a week away, debates for presidential candidates. They're taking a swipe abundant omics

biting omics is a failure. Despite all the happy talk coming out of washington DC, you can tell there's an election coming up because all of a sudden democrats of the White House are telling you how their policies are all working. But we have a national debt the size of our nation's economy. That conversation up next. I never. Biden nomics is a failure. Despite all the happy talk coming out of

Washington, D.C., by defined by the nomics as the poor get poorer. When I take a look at the Biden administration and where where they're headed in the wrong direction. I don't just mean course correction. I mean a 180 degree turn. Republican presidential candidates taking a swipe at U.S. war fighter nomics.

The president leading an administration wide effort to celebrate the one year anniversary of the Inflation Reduction Act. Traveling to Wisconsin Tuesday and hosting an event at the White House on Wednesday. Vice President Kamala Harris highlighting the erase clean energy tax credits in Seattle while Secretary Yellen delivers remarks from Las Vegas later today. Writing in comments released on Friday, workers are better off than they were last year. Real average hourly earnings have grown over the past 12 months, meaning that wage gains are outpacing inflation.

Let's get some team coverage. Katie Lyons of Mario Parker. Mario, that's what they're selling is the electric bayonet. No, not right now, Jonathan. Electorate is not buying it, even though Biden is touting it. And as of right now pinning his White House re-election strategy on the economy, voters give him poor marks on it. And as you mentioned in the segment

prior to this one. This is why you see why you see Republicans attacking him for it on the campaign trail. Katie, why is it falling on deaf ears? Well, this is the question, John.

I spoke with Cliff Young, the president of US public affairs over at Ipsos, which is a polling firm. And he essentially said price pressures may be easing in terms of the extent to which prices are going up. But Americans are still feeling pinched in their pocketbooks and as a result, they're feeling surly about the economy. So as the Biden administration is

touting how great things are, people aren't necessarily feeling great in reality, which may be why there is this disconnect between what we are seeing in economic data and what American people are suggesting they feel about this administration, hence this ten state tour that the president and his surrogates are embarking on, really trying to double down on the messaging that they have been good stewards of the economy through legislation like the Inflation Reduction Act. And we have to consider what states they are traveling to here as well. Janet Yellen, for example, speaking late this afternoon afternoon from Las Vegas, Nevada, has the highest unemployment rate in the country at 5.4%. But at the same time, as you read there,

her talking about wage gains outpacing inflation in leisure, leisure and hospitality, which is huge in Las Vegas. That is where some of the wage gains have been the strongest. So perhaps that's why she's doubling down on that messaging there. And we also expect her to say, according to her prepared remarks, that she does believe there is a path to continuing to reduce inflation while maintaining a healthy labor market.

Mario, we heard that from Republican candidates. We've heard that from Carly. What we're likely to hear from the treasury secretary, I think we know what we're going to hear from Republican candidates on this issue as well on the debate stage next week. Mario, what we don't know is who will be on that debate stage. And one man in particular hasn't really shown his hand. Mario, is the former president going to show up or not? And how close to the event do we need to know by? Well, he has to let the RNC, the Republican National Committee, know within 48 hours. We're talking about of course, we're

alluding to one Donald J. Trump, the former president who is also a former reality star. So he's trying to keep us on the edge of our seats as to whether or not he's going to show up.

Right. Polls show to Kaley's Point, polls show that he has a wide lead over the rest of the field right now. So it may not make sense strategically for him to show up at the debate. From what I understand from sources within Trump world, it's 99% certain that he will not debate. They're holding out that 1%. Now that 1% is loaded, because we're thinking about that ego that Trump has and whether or not he wants to see the stage to some of his competitors and see essentially see the spotlight as well. That's an important 1%.

Mario, thank you, sir. Alongside Katie Lance, 30th here. Thank you to team coverage down in Washington. Let's return to the markets about 22 minutes into the session. Equities just a touch lower with some sector price action is Abby and relative to those sectors with the s&p 500 down ever so slightly, we have more sectors lower but mainly small moves. The upside and downside the worst sector on the day utilities down. Actually it's a greater decline at this

point, down 9/10 of 1%. That's actually in a way risk on only because that's a defensive sector that is suffering because of yields being higher on top. We do have two of the megacap tech sectors, tech and communications services, both up less than half a percent over the last month, though, John, it's really interesting because utilities, this is one of the worst sectors, but so too is technology and consumer discretionary. So we really have this picture as the two year yield is backed up by 20 bips and the ten year yield by 40 bips sectors getting hit on all sides, both safety and offense. Abby, thank you. Your training diary up next. It's 25 minutes into the session. Early days for Smallcaps getting

hammered. At the moment, the Nasdaq just about positive and the S&P down five 0.1% as the price action. Here's the trading diary coming up 5 p.m. today, yellen, the treasury secretary, discussing the inflation reduction act in las vegas, nevada. U.S.

retail sales come out on Tuesday. Plus, some feds speak in the mix as well. Target reporting results before the opening bell on Wednesday. Plus, the Fed minutes coming on Super

Wednesday, followed by Wal-Mart earnings on Thursday, along with another round of initial jobless claims from New York City. Looking forward to come from the week with with you will get my words out. This was the countdown to the open. This is going back.

2023-08-22 15:32

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