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 an 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. Dana Peterson knows a bullmarket when she sees a chief economist at the conference board with wonderful perception on the American consumer. Dana, how do you link a quiescent inflation report like this over to retail sales on Thursday?

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 an 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. Dana Peterson knows a bullmarket when she sees a chief economist at the conference board with wonderful perception on the American consumer. Dana, how do you link a quiescent inflation report like this over to retail sales on Thursday?

Well, I think the key thing is that we are seeing inflation slowing, and it's consistent with what the fat IT expects. But as was mentioned earlier, real wages are rising and certainly it's supporting consumers or spending. But when we ask consumers how they feel, they're still complaining about inflation. They're still saying that everything's too expensive. Interest rates are rising, so that means if you want to buy that car, refrigerator is going to cost more. So I would expect that even though real wages are rising, inflation is still there and consumers are probably going to start pulling back on spending.

Well, I think the key thing is that we are seeing inflation slowing, and it's consistent with what the fat IT expects. But as was mentioned earlier, real wages are rising and certainly it's supporting consumers or spending. But when we ask consumers how they feel, they're still complaining about inflation. They're still saying that everything's too expensive. Interest rates are rising, so that means if you want to buy that car, refrigerator is going to cost more. So I would expect that even though real wages are rising, inflation is still there and consumers are probably going to start pulling back on spending.

How are real wages doing and within that are they part? I mean, is it almost circuitous where they're actually part of the inflation report as we adjust for inflation with wages?

How are real wages doing and within that are they part? I mean, is it almost circuitous where they're actually part of the inflation report as we adjust for inflation with wages?

Well, I think wages are a part of the inflation story.

Well, I think wages are a part of the inflation story.

Certainly.

Certainly.

You have a number of industries that are experiencing labor shortages, and when you look at their wages nominal and real, they're still rising pretty quickly, and I think that's showing up in the services aspect. Let's also not forget that insurance costs are rising because many of these insurance companies are suffering losses and they're raising premium. So between insurance and wages, we still have these sticky inflation measures and I don't think that's going to go away right away.

You have a number of industries that are experiencing labor shortages, and when you look at their wages nominal and real, they're still rising pretty quickly, and I think that's showing up in the services aspect. Let's also not forget that insurance costs are rising because many of these insurance companies are suffering losses and they're raising premium. So between insurance and wages, we still have these sticky inflation measures and I don't think that's going to go away right away.

So, Dana, do you think that people are a little bit overzealous about this idea that the Fed is going to come right significantly next year.

So, Dana, do you think that people are a little bit overzealous about this idea that the Fed is going to come right significantly next year.

I think they are. Indeed, the Fed tomorrow is probably going to signal yes, it's done, But don't expect rate cuts anytime soon, and don't expect that many next year. We think anywhere from fifty to one hundred basis points probably makes sense, especially if inflation, according to the SEP, doesn't get beyond two percent before the end of next year. So I still think that, yes, we can get to two percent by the end of next year. But that's really going to suggest that not many interest rate cuts are priced in.

I think they are. Indeed, the Fed tomorrow is probably going to signal yes, it's done, But don't expect rate cuts anytime soon, and don't expect that many next year. We think anywhere from fifty to one hundred basis points probably makes sense, especially if inflation, according to the SEP, doesn't get beyond two percent before the end of next year. So I still think that, yes, we can get to two percent by the end of next year. But that's really going to suggest that not many interest rate cuts are priced in.

Was transitory, right, Dana? Are we just basically seeing the right sizing of the supply side after the pandemic and that's entirely what we're seeing now? Or is this disinflation transitory? Is this basically a period of a headfake before some of the stickier elements take place in a more significant way.

Was transitory, right, Dana? Are we just basically seeing the right sizing of the supply side after the pandemic and that's entirely what we're seeing now? Or is this disinflation transitory? Is this basically a period of a headfake before some of the stickier elements take place in a more significant way.

Well, I don't know why people are surprised that inflation gave are slowing. The FED did raise rates by five hundred and twenty five basis points. This is part of the program. Certainly, we saw the housing markets slow first, and that's showing up with a significant lag in the rental components of the CPI and the PCE deflator, so that's slowing things down. Certainly, food and energy prices are determined by things external, and you know, we don't have the massive disruptions from OPEC or even wars affecting energy prices. So they're coming off, but you still have the influence of insurance costs and wages because labor shortages are here, and I think that's gonna be Those two things are going to be the challenge to getting inflation back to two percent. But we can still get there.

Well, I don't know why people are surprised that inflation gave are slowing. The FED did raise rates by five hundred and twenty five basis points. This is part of the program. Certainly, we saw the housing markets slow first, and that's showing up with a significant lag in the rental components of the CPI and the PCE deflator, so that's slowing things down. Certainly, food and energy prices are determined by things external, and you know, we don't have the massive disruptions from OPEC or even wars affecting energy prices. So they're coming off, but you still have the influence of insurance costs and wages because labor shortages are here, and I think that's gonna be Those two things are going to be the challenge to getting inflation back to two percent. But we can still get there.

Dana Peterson, Well, this is the conference where data. Please stay with us. We're going to come right back on market check here, because you saw a spike whichever way your series going, and we've sort of given it back S ANDB futures had a nice, nice pop. They've given it back up six right now. Same thing in the yield space. A tenure you'ld four point two one percent. I noticed a real yield was one ninety seven. It's come back nicely two point zero one. Perhaps we're already on the way to adjusting for the FED meeting tomorrow. Dana Peterson, what is nominal GDP? How about Chairman Poul You watch us every morning. What's your estimate here of the animal spirit of Chairman Powell's America?

Dana Peterson, Well, this is the conference where data. Please stay with us. We're going to come right back on market check here, because you saw a spike whichever way your series going, and we've sort of given it back S ANDB futures had a nice, nice pop. They've given it back up six right now. Same thing in the yield space. A tenure you'ld four point two one percent. I noticed a real yield was one ninety seven. It's come back nicely two point zero one. Perhaps we're already on the way to adjusting for the FED meeting tomorrow. Dana Peterson, what is nominal GDP? How about Chairman Poul You watch us every morning. What's your estimate here of the animal spirit of Chairman Powell's America?

Well, I think you know nominal GDP is certainly if well nominal and real GDP, you're probably not going to be as strong as what we saw in the third quarter. We're probably looking at growth around you know, one percent in real terms and roughly four percent in nominal terms. Right adding in you know, roughly three percent headline inflation. So that's a slowing economy, and I think again that's part of the program. The FED wants to see the economy slow to help bring down inflation. Now, when we look at business investment, that's already slowing outside of manufacturing, where companies are bringing back product and production and they're building. Fact away from that, there's really not that much investment. The last year to drop has to be the consumer. And we know consumers are more indebted now, their interest rates on their credit cards are higher, student loan payments are coming back, and you know, consumers are quitting less and they're thinking, well, maybe the labor market's going to slow, so maybe I should also slow my spending as well.

Well, I think you know nominal GDP is certainly if well nominal and real GDP, you're probably not going to be as strong as what we saw in the third quarter. We're probably looking at growth around you know, one percent in real terms and roughly four percent in nominal terms. Right adding in you know, roughly three percent headline inflation. So that's a slowing economy, and I think again that's part of the program. The FED wants to see the economy slow to help bring down inflation. Now, when we look at business investment, that's already slowing outside of manufacturing, where companies are bringing back product and production and they're building. Fact away from that, there's really not that much investment. The last year to drop has to be the consumer. And we know consumers are more indebted now, their interest rates on their credit cards are higher, student loan payments are coming back, and you know, consumers are quitting less and they're thinking, well, maybe the labor market's going to slow, so maybe I should also slow my spending as well.

Dana, I'm just curious. We're saying that shelter prices pretty much offset the decline from oil prices. Is that sustainable or do you think that this is just sort of a lag before we start see housing costs inflect downward.

Dana, I'm just curious. We're saying that shelter prices pretty much offset the decline from oil prices. Is that sustainable or do you think that this is just sort of a lag before we start see housing costs inflect downward.

Well, I don't really look at the month on month for housing. I look at the year on year and year on year, the rental components are slowing, and it's consistent with an eighteen month lag of the Case Shiller Home Price Index. So we're seeing this happen month to month. You're going to have bumpiness, but it's a year on year growth rate or rate of inflation that we should be paying attention to in terms of what's driving headlining core inflation in the PCEE deflator.

Well, I don't really look at the month on month for housing. I look at the year on year and year on year, the rental components are slowing, and it's consistent with an eighteen month lag of the Case Shiller Home Price Index. So we're seeing this happen month to month. You're going to have bumpiness, but it's a year on year growth rate or rate of inflation that we should be paying attention to in terms of what's driving headlining core inflation in the PCEE deflator.

Dana Peterson, thank you for the brief with the conference board and under the Fed tomorrow and retail sales always important at the conference board on Thursday. I'm joining us now with terrific, rigorous mathematical analysis. Alicia Levin, head of Investment Strategy Advisory Solutions BNY Mellan. I want to talk about Jeffrey Hu's eurocall, but we'll say that for another time. You have a beautiful sentence in your report. Cash will underperform the known worlds in cash.

Dana Peterson, thank you for the brief with the conference board and under the Fed tomorrow and retail sales always important at the conference board on Thursday. I'm joining us now with terrific, rigorous mathematical analysis. Alicia Levin, head of Investment Strategy Advisory Solutions BNY Mellan. I want to talk about Jeffrey Hu's eurocall, but we'll say that for another time. You have a beautiful sentence in your report. Cash will underperform the known worlds in cash.

Discuss discuss almost six trillion in cash. If you step back and say what were the trades this year, it was aijlp ones and cash and T bills. So the question you say is if I look into twenty twenty four with an expectation that we're going into a healthy slowdown for the economy, the Fed's going to cut we think the second half of the year, not the first half, we can discuss and we have the inflation moving in the right direction. Where does cash lead you? And it doesn't lead you to the same return you had this year, and this is the time to start reallocating into other assets?

Discuss discuss almost six trillion in cash. If you step back and say what were the trades this year, it was aijlp ones and cash and T bills. So the question you say is if I look into twenty twenty four with an expectation that we're going into a healthy slowdown for the economy, the Fed's going to cut we think the second half of the year, not the first half, we can discuss and we have the inflation moving in the right direction. Where does cash lead you? And it doesn't lead you to the same return you had this year, and this is the time to start reallocating into other assets?

Where does cash go? Individual stocks? Is going to ETFs? I mean, I am fascinated within the equity space. Where does B and Y? Melon see that the cash will migrate too.

Where does cash go? Individual stocks? Is going to ETFs? I mean, I am fascinated within the equity space. Where does B and Y? Melon see that the cash will migrate too.

So we think the cash goes to equities, it should be going to bonds, Okay, should be going to bonds. And we're actually calling for a twenty percent allocation to alternatives as well because we think this is one of those.

So we think the cash goes to equities, it should be going to bonds, Okay, should be going to bonds. And we're actually calling for a twenty percent allocation to alternatives as well because we think this is one of those.

Really it's an alternative.

Really it's an alternative.

So distressed at privates, right, it's a great time for privates actually, because you're getting the repricing this year into next year and there's going to be distressed opportunities out there because of the rate piking cycle, and so that is just a nice set up in real estate as well. Nice setup for an entry of new capital into this ASSI class.

So distressed at privates, right, it's a great time for privates actually, because you're getting the repricing this year into next year and there's going to be distressed opportunities out there because of the rate piking cycle, and so that is just a nice set up in real estate as well. Nice setup for an entry of new capital into this ASSI class.

Before we get stuck into that, just talk to me about cash, how sticky that is a money market funds. When you're making these recommendations to clients, they jump in on boards or hesitant. What's the time like?

Before we get stuck into that, just talk to me about cash, how sticky that is a money market funds. When you're making these recommendations to clients, they jump in on boards or hesitant. What's the time like?

So clients are receptive to this because with the understanding that what's worked over the last twelve months is likely not to work over the next twelve to eighteen months. If you've been in markets long enough, you know that the same trade doesn't take you far every single year. And on top of that, we've hit peak rates, we've hit peak fed, inflation is slowing, cash will underperform the bond market and equities.

So clients are receptive to this because with the understanding that what's worked over the last twelve months is likely not to work over the next twelve to eighteen months. If you've been in markets long enough, you know that the same trade doesn't take you far every single year. And on top of that, we've hit peak rates, we've hit peak fed, inflation is slowing, cash will underperform the bond market and equities.

Have we seen the distress.

Have we seen the distress.

So we haven't seen distress in large cap America. We're going to see it in small cap America and other areas that don't that are relying on refunding and funding growth. So that means so, for instance, a small cap world that the Russell twenty and forty percent or non earners need to borrow to grow that debt that they're using is floating rate and comes due a lot sooner than the fixed rate debt from the large cap companies that took out loans in twenty twenty and twenty twenty one. So you're setting up a situation where you have some parts of the economy that are relatively insulated termed out their debt at low rates, like households did with mortgages, and other parts that are more exposed.

So we haven't seen distress in large cap America. We're going to see it in small cap America and other areas that don't that are relying on refunding and funding growth. So that means so, for instance, a small cap world that the Russell twenty and forty percent or non earners need to borrow to grow that debt that they're using is floating rate and comes due a lot sooner than the fixed rate debt from the large cap companies that took out loans in twenty twenty and twenty twenty one. So you're setting up a situation where you have some parts of the economy that are relatively insulated termed out their debt at low rates, like households did with mortgages, and other parts that are more exposed.

Is there any inconsistency in being bullish on risk and also expecting a tick up in distress and bankruptcies.

Is there any inconsistency in being bullish on risk and also expecting a tick up in distress and bankruptcies.

So there's not an inconsistency because this is not a blanket call. Right the way we've sort of had a rolling recession over the last twelve to eighteen months, you're going to get a little bit of that going forward. We do think there's some consolidation in the first half of the year, and actually in an election year when there's an incumbent, there's just a lot of creakiness in the market in the first part of the years. Policies get to discuss different sectors or targets. Right, just you tend to have a bit of a slow debt and probably a digestion. We're going to have a year that's up twenty two to twenty three percent by the time we finish the year here, so you know unlikely that continues in the next few months. It coincides also with if there's a slow down, it's the first half of the year, right, because incumbents tend not to like recessions when they're running for reelection.

So there's not an inconsistency because this is not a blanket call. Right the way we've sort of had a rolling recession over the last twelve to eighteen months, you're going to get a little bit of that going forward. We do think there's some consolidation in the first half of the year, and actually in an election year when there's an incumbent, there's just a lot of creakiness in the market in the first part of the years. Policies get to discuss different sectors or targets. Right, just you tend to have a bit of a slow debt and probably a digestion. We're going to have a year that's up twenty two to twenty three percent by the time we finish the year here, so you know unlikely that continues in the next few months. It coincides also with if there's a slow down, it's the first half of the year, right, because incumbents tend not to like recessions when they're running for reelection.

Is there anything that we could see in less than a half hour time that could shake your view on this sort of disinflation that allows this next leg of the cycle.

Is there anything that we could see in less than a half hour time that could shake your view on this sort of disinflation that allows this next leg of the cycle.

So it's the core, right, So energy prices look to be well tamed to the discussion earlier that you all had here about the record pumping of oil and gas in the US and also the warm winters everywhere, so oil prices seem to be well contained. If that's the case, the low oil prices will filter into every other sector. So the core prices today at four percent, we'll see what we get in a few minutes time. That's where you could get a different narrative if it doesn't come down further. But to the point about whether the FED cuts or not in March, it's just not realistic. And I'll point out in the last eighteen months the market has been overly up to miss on when the FED has cutting. If you remember we were talking about the FED cutting in August of twenty two.

So it's the core, right, So energy prices look to be well tamed to the discussion earlier that you all had here about the record pumping of oil and gas in the US and also the warm winters everywhere, so oil prices seem to be well contained. If that's the case, the low oil prices will filter into every other sector. So the core prices today at four percent, we'll see what we get in a few minutes time. That's where you could get a different narrative if it doesn't come down further. But to the point about whether the FED cuts or not in March, it's just not realistic. And I'll point out in the last eighteen months the market has been overly up to miss on when the FED has cutting. If you remember we were talking about the FED cutting in August of twenty two.

You know, the market has.

You know, the market has.

Wanted that FED cut for eighteen months now. It's always been too optimistic for where the Fed's going, and a reality is going and if the mare and if our call is right, more likely to have a soft landing than a recession. Clearly not cutting in March of twenty twenty four.

Wanted that FED cut for eighteen months now. It's always been too optimistic for where the Fed's going, and a reality is going and if the mare and if our call is right, more likely to have a soft landing than a recession. Clearly not cutting in March of twenty twenty four.

I want to go to your mass abilities here. There's a lot of Greek letters getting thrown around right now. Gamma, Gamma, Gamma and the rest of it. Alpha, beta, gamma, apps on, blah blah blah. The skew is silent out there. Explain to our audience the silence. It's some of these volatility measures.

I want to go to your mass abilities here. There's a lot of Greek letters getting thrown around right now. Gamma, Gamma, Gamma and the rest of it. Alpha, beta, gamma, apps on, blah blah blah. The skew is silent out there. Explain to our audience the silence. It's some of these volatility measures.

Show right, boy twelve a VIX of twelve. It's just shocking. But again, the VIX was about. The VIX number is really about the volatility in the bond market, and the bond market right now is just well behaved since that CPI report back in early November. So the whole market for the last eighteen months has been driven by the bond market every other asset class, and as long as that is tamed, the VIX as well will be tamed, but look, it's a risk. It means at twelve it's historically very low.

Show right, boy twelve a VIX of twelve. It's just shocking. But again, the VIX was about. The VIX number is really about the volatility in the bond market, and the bond market right now is just well behaved since that CPI report back in early November. So the whole market for the last eighteen months has been driven by the bond market every other asset class, and as long as that is tamed, the VIX as well will be tamed, but look, it's a risk. It means at twelve it's historically very low.

What would you expect from cham and Pound tomorrow.

What would you expect from cham and Pound tomorrow.

I think it's his one chance to push back?

I think it's his one chance to push back?

This is it right?

This is it right?

This is it is one chance, So I would expect something like that was the easing of financial conditions can't be too pleasing for the Fed in their fight, and they will definitely fight back, I think against that first half rate cut that we're seeing here. I mean, so you know, you don't want to say, you know, calling victory too early, but he will definitely fight back here.

This is it is one chance, So I would expect something like that was the easing of financial conditions can't be too pleasing for the Fed in their fight, and they will definitely fight back, I think against that first half rate cut that we're seeing here. I mean, so you know, you don't want to say, you know, calling victory too early, but he will definitely fight back here.

It's crystal ball type stuff. So I forgive me, But you think the market listens to him anymore? Is that a credible threat? Given what we're all seeing in the data?

It's crystal ball type stuff. So I forgive me, But you think the market listens to him anymore? Is that a credible threat? Given what we're all seeing in the data?

You know, the data has been very kind to risk assets. So A thirty today is really the key, more so CPI than Powell. But I expect Powell to push back against all this excitement. And look, the risk in the market is that everybody's expecting a soft landing, right, that's the risk. Where were we all a year ago recession?

You know, the data has been very kind to risk assets. So A thirty today is really the key, more so CPI than Powell. But I expect Powell to push back against all this excitement. And look, the risk in the market is that everybody's expecting a soft landing, right, that's the risk. Where were we all a year ago recession?

A year ago, two months agot, two months ago? Take cay?

A year ago, two months agot, two months ago? Take cay?

Did she just say we're going to cash. Is that what I heard? Even of inflation?

Did she just say we're going to cash. Is that what I heard? Even of inflation?

You you asked me that every time. So we are never in cash because.

You you asked me that every time. So we are never in cash because.

Here we go, as she tells, a domestic to my right and domestic to my own.

Here we go, as she tells, a domestic to my right and domestic to my own.

But let me let me just say this. A year ago you said to how do you avoid going five percent in cash? And I say, well, we do relative allocations.

But let me let me just say this. A year ago you said to how do you avoid going five percent in cash? And I say, well, we do relative allocations.

We never go to cash.

We never go to cash.

And we were over allocated to US large cap because if I'm worried about recession, where do I want to be and that's US large cap. So that was a great allocation for our clients.

And we were over allocated to US large cap because if I'm worried about recession, where do I want to be and that's US large cap. So that was a great allocation for our clients.

This year. You wanted to be in the nast night one hundred forty eight percent yet today, which is just absolutely bunkers.

This year. You wanted to be in the nast night one hundred forty eight percent yet today, which is just absolutely bunkers.

That is nuts. Timely is a key idea there, maybe the inertial force of disinflation back to wherever anybody chooses that we should have had very sophisticated in this analysis. Is Lindsay joins us this morning. Lindsey, thank you so much. And on this moment of inflation, if you will, what I find fascinating is getting the last mile. Let's say we're three point eight, getting to two point eight is a whole different story than what we've seen the last months.

That is nuts. Timely is a key idea there, maybe the inertial force of disinflation back to wherever anybody chooses that we should have had very sophisticated in this analysis. Is Lindsay joins us this morning. Lindsey, thank you so much. And on this moment of inflation, if you will, what I find fascinating is getting the last mile. Let's say we're three point eight, getting to two point eight is a whole different story than what we've seen the last months.

Absolutely, the last one hundred two hundred basis points is always the most difficult. And to your point, it's not just the nominal level of inflation, but it's the underlying momentum of disinflation that the market is really looking for. We want to be convinced that we're on that sustainable downward trajectory, and if we look at the third quarter with that recent backup and then sideways movement, that's not convincing that we are on this sustainable timely trajectory back to two percent. So my concern is the longer the Fed remains on the sideline and slow plays inflation, the bigger the risk the Fed will have to come back in and take further action and maybe slow the economy more than they would have otherwise needed to if they'd simply dealt with inflation the first time around.

Absolutely, the last one hundred two hundred basis points is always the most difficult. And to your point, it's not just the nominal level of inflation, but it's the underlying momentum of disinflation that the market is really looking for. We want to be convinced that we're on that sustainable downward trajectory, and if we look at the third quarter with that recent backup and then sideways movement, that's not convincing that we are on this sustainable timely trajectory back to two percent. So my concern is the longer the Fed remains on the sideline and slow plays inflation, the bigger the risk the Fed will have to come back in and take further action and maybe slow the economy more than they would have otherwise needed to if they'd simply dealt with inflation the first time around.

Let's get into it. Where are the improvement's coming from over the last twelve months. Where have they come from?

Let's get into it. Where are the improvement's coming from over the last twelve months. Where have they come from?

We've seen some widespread improvements in terms of inflation, it's moved over from the good side into the service sector widespread, but again, a lot of that downward momentum a welcomed gauge as we move into the key holiday spending season is from energy prices, and so when we talk about the reversal there, that's probably not a long term sustainable trend. We could see bounce back up in the first quarter, again forcing the Fed's hand maybe to take further policy action.

We've seen some widespread improvements in terms of inflation, it's moved over from the good side into the service sector widespread, but again, a lot of that downward momentum a welcomed gauge as we move into the key holiday spending season is from energy prices, and so when we talk about the reversal there, that's probably not a long term sustainable trend. We could see bounce back up in the first quarter, again forcing the Fed's hand maybe to take further policy action.

One thing we've asked regarding the FED is how much of the improvement in inflation is down to the FED reserve and how much of that is just a natural rebanacing of the economy. It's come from the supply side. I know it's tremendously difficult to gauge, but if we're going to talk about the prospect of higher interest rates from here, we also have to have to understand what higher interest rates have done so far over the last twelve months. What have they done.

One thing we've asked regarding the FED is how much of the improvement in inflation is down to the FED reserve and how much of that is just a natural rebanacing of the economy. It's come from the supply side. I know it's tremendously difficult to gauge, but if we're going to talk about the prospect of higher interest rates from here, we also have to have to understand what higher interest rates have done so far over the last twelve months. What have they done.

I think the FED can take responsibility for the improvement that we've seen on the demand side. It's certainly not the supply side, not the good side of things, as you talk about the recalibration in the aftermath of reopening the globele economy. But on the demand side, we have seen the consumer pull back. Momentum has slowed from double digit growth down to eight, down to six. We're now at low single digits. Consumers are still spending, but at a remarkably lower pace, So that loss of momentum I think we can attribute to the Fed. But clearly they haven't done enough to see below trend job growth, to see below trend spending activity, and certainly not enough to get that prolonged period of below trend top line activity to ensure a return back to stable prices.

I think the FED can take responsibility for the improvement that we've seen on the demand side. It's certainly not the supply side, not the good side of things, as you talk about the recalibration in the aftermath of reopening the globele economy. But on the demand side, we have seen the consumer pull back. Momentum has slowed from double digit growth down to eight, down to six. We're now at low single digits. Consumers are still spending, but at a remarkably lower pace, So that loss of momentum I think we can attribute to the Fed. But clearly they haven't done enough to see below trend job growth, to see below trend spending activity, and certainly not enough to get that prolonged period of below trend top line activity to ensure a return back to stable prices.

Just wait.

Just wait.

That's Mike Wilson's message, and what we hear from certain executives, like that of Hasbro, seems to be something similar. They are seeing a deceleration in consumer appetite. We heard the same from Walmart. How do you pair that idea with some of the recovery that you're seeing in services and other areas that you think could fuel inflation again next year?

That's Mike Wilson's message, and what we hear from certain executives, like that of Hasbro, seems to be something similar. They are seeing a deceleration in consumer appetite. We heard the same from Walmart. How do you pair that idea with some of the recovery that you're seeing in services and other areas that you think could fuel inflation again next year?

Well, this is the big concern. Do we wait on the sideline and hope that inflation slows or do we take further action to ensure that price is slow. And from my point of view, I don't think the risk is that the FED tightens too much, but that the FED doesn't tighten enough and allows inflation to become further entrenched, and this is really the mistake that they made on the front end. If we go back to the initial start of the tightening cycle, they held onto that transitory language too long. They allowed inflation to become too ingrained, and we're now trying to deal with it, particularly on the wage side. These ingrained levels of price pressures that are complicating this process to get us back to two percent inflation.

Well, this is the big concern. Do we wait on the sideline and hope that inflation slows or do we take further action to ensure that price is slow. And from my point of view, I don't think the risk is that the FED tightens too much, but that the FED doesn't tighten enough and allows inflation to become further entrenched, and this is really the mistake that they made on the front end. If we go back to the initial start of the tightening cycle, they held onto that transitory language too long. They allowed inflation to become too ingrained, and we're now trying to deal with it, particularly on the wage side. These ingrained levels of price pressures that are complicating this process to get us back to two percent inflation.

What should they look for to be confident that they can start using.

What should they look for to be confident that they can start using.

Well, One, a downward sustainable trend. This back and forth, sideways movement doesn't instill confidence. But second, we need to see broad based improvement in some of the most sticky components, particularly wages, and last Friday's employment report didn't give us that confidence. We're still talking about four percent annual wage growth. We have come down from peak levels, but that's not enough to suggest that we've done enough in terms of tightening.

Well, One, a downward sustainable trend. This back and forth, sideways movement doesn't instill confidence. But second, we need to see broad based improvement in some of the most sticky components, particularly wages, and last Friday's employment report didn't give us that confidence. We're still talking about four percent annual wage growth. We have come down from peak levels, but that's not enough to suggest that we've done enough in terms of tightening.

On behalf of three hundred and thirty one point nine million Americans, Can you explain the USDA, The Department of Agriculture tells us in October we had three point three percent food inflation. No one is experiencing that food inflation is just shocking at the grocery store, it restaurants, Johnny, had you had a sixty eight dollars stake the other night? Whatever. But the answer is the reality. This is what I get twenty four to seven. The reality of inflation's totally different than the verbiage of people like you. What's a divide there?

On behalf of three hundred and thirty one point nine million Americans, Can you explain the USDA, The Department of Agriculture tells us in October we had three point three percent food inflation. No one is experiencing that food inflation is just shocking at the grocery store, it restaurants, Johnny, had you had a sixty eight dollars stake the other night? Whatever. But the answer is the reality. This is what I get twenty four to seven. The reality of inflation's totally different than the verbiage of people like you. What's a divide there?

Want?

Want?

Well, I take a lot of the differential is the wholesale prices versus what we're experiencing as the end consumer. Because we're not going down. We're not buying the fish at the market. We're buying the fish at the restaurant or at the grocery store, and that is the pipeline of price increase that the consumer is feeling. And so three percent food inflation, no, we're not feeling that. We're feeling more like fifteen twenty percent food inflation. But from the Fed's perspective, again, they're looking at the broad based components of inflation that regardless of where in the pipeline they want to look, we're still above two percent. We haven't gotten back to price stability. There's more work to be done. Despite the market's consistent overreaction and constant calling for rate cuts, FED officials are still talking about reaching that sufficiently restrictive level.

Well, I take a lot of the differential is the wholesale prices versus what we're experiencing as the end consumer. Because we're not going down. We're not buying the fish at the market. We're buying the fish at the restaurant or at the grocery store, and that is the pipeline of price increase that the consumer is feeling. And so three percent food inflation, no, we're not feeling that. We're feeling more like fifteen twenty percent food inflation. But from the Fed's perspective, again, they're looking at the broad based components of inflation that regardless of where in the pipeline they want to look, we're still above two percent. We haven't gotten back to price stability. There's more work to be done. Despite the market's consistent overreaction and constant calling for rate cuts, FED officials are still talking about reaching that sufficiently restrictive level.

The Bloomberg Financial Conditions Index, a Gold and Sachs Index somewhat the same, all show accommodative structures right down part of that as a buoyant stock market as well. Into this meeting and with this report in ninety minutes, are we restrictive or accommodative?

The Bloomberg Financial Conditions Index, a Gold and Sachs Index somewhat the same, all show accommodative structures right down part of that as a buoyant stock market as well. Into this meeting and with this report in ninety minutes, are we restrictive or accommodative?

Now, well, that's the question. Are we really as restrictive as the Fed things? Have we reached that sufficiently restrictive level? And some of these indices say no, we have not done enough.

Now, well, that's the question. Are we really as restrictive as the Fed things? Have we reached that sufficiently restrictive level? And some of these indices say no, we have not done enough.

And when you are you talking about a rate increase.

And when you are you talking about a rate increase.

I think it's not out of the reabilities that we see a further rate increase if we see stability and inflation. And then as we move the calendar page into twenty twenty four, we see a little bit of an uptick. I think that could force the Fed's hand to take one final rate increase to convince the market that three is not the new two, Orange is not the new black. We have to get back to two percent inflation, and they will not tolerate an above trend level.

I think it's not out of the reabilities that we see a further rate increase if we see stability and inflation. And then as we move the calendar page into twenty twenty four, we see a little bit of an uptick. I think that could force the Fed's hand to take one final rate increase to convince the market that three is not the new two, Orange is not the new black. We have to get back to two percent inflation, and they will not tolerate an above trend level.

Why is two so important because that's.

Why is two so important because that's.

The balancing level of inflation that allows the economy to continue to accelerate without moving into a hyperinflation scenario, but also keeps the economy afloat and avoiding the deflationary scenario. So it's a delicate balance that the FED is trying to walk. And we don't have to pinpoint exactly two percent inflation. Remember it's the longer term average. So as we fail to reach two percent for the better part of a decade going into the pandemic, arguably the FED may be willing to tolerate slightly higher inflation. But again it's about that downward trajectory of momentum that we haven't established.

The balancing level of inflation that allows the economy to continue to accelerate without moving into a hyperinflation scenario, but also keeps the economy afloat and avoiding the deflationary scenario. So it's a delicate balance that the FED is trying to walk. And we don't have to pinpoint exactly two percent inflation. Remember it's the longer term average. So as we fail to reach two percent for the better part of a decade going into the pandemic, arguably the FED may be willing to tolerate slightly higher inflation. But again it's about that downward trajectory of momentum that we haven't established.

I just wonder if become too focused TOM two myopically focused on this one hundred basis points. I remember from the other side of it at one, searching two and all the effort that global central banks went to to try and get inflation up TOM one hundred basis points. Whether the effort requires get us down from three to two would be equally damaging and get a different why.

I just wonder if become too focused TOM two myopically focused on this one hundred basis points. I remember from the other side of it at one, searching two and all the effort that global central banks went to to try and get inflation up TOM one hundred basis points. Whether the effort requires get us down from three to two would be equally damaging and get a different why.

There's been a lot of study on this, starting with Blanchard and Stiglets at the IMF off of seven eight, and of course it's been rekindled three or four times for it Olivia Blonchard's book last summer address. This directly linked into fiscal policy. And the answer here is how much work does it take? And the answer is no, one knows. And the other answer is it's got to have a price. It's got to have a cost at some point. To me, Lindsay's job is to aggregate everything that's out there. And my answer is we're disaggregated America. We've got to halves technologically laid. They don't care about inflation. They're off skiing somewhere.

There's been a lot of study on this, starting with Blanchard and Stiglets at the IMF off of seven eight, and of course it's been rekindled three or four times for it Olivia Blonchard's book last summer address. This directly linked into fiscal policy. And the answer here is how much work does it take? And the answer is no, one knows. And the other answer is it's got to have a price. It's got to have a cost at some point. To me, Lindsay's job is to aggregate everything that's out there. And my answer is we're disaggregated America. We've got to halves technologically laid. They don't care about inflation. They're off skiing somewhere.

Who's that pine Tree?

Who's that pine Tree?

You know, they're off at Pine Tree, Vermont wherever. The rest of America's flat on their back.

You know, they're off at Pine Tree, Vermont wherever. The rest of America's flat on their back.

I'm not going to say.

I'm not going to say.

It's something to say and we can move on now.

It's something to say and we can move on now.

Okay, you want to move on?

Okay, you want to move on?

Now?

Now?

About you this week? O?

About you this week? O?

Yes, it was the first.

Yes, it was the first.

That's what that was. Why am I missing the inside jokes this morning?

That's what that was. Why am I missing the inside jokes this morning?

Lookause you weren't here yesterday, Chris.

Lookause you weren't here yesterday, Chris.

Look it was great.

Look it was great.

I enjoyed it.

I enjoyed it.

I'm feeding into the you know.

I'm feeding into the you know.

Consumption of America, economy.

Consumption of America, economy.

Strong America. Nice, Lindsay, thank you, that was a clinic. Thank you, Verty was thank you very much, Lindsay. PX to that of stay four.

Strong America. Nice, Lindsay, thank you, that was a clinic. Thank you, Verty was thank you very much, Lindsay. PX to that of stay four.

Right now. On oil. Christian Maylik joins us Managing director of Global Head of Energy Strategy at JP Morgan. On oil, John, we did this yesterday for you. We missed you so much a gallon of patrol from peak down thirty two percent. And I guess that's part of the inflation story. Christian. Two years ago you were modeling out oil demand led by emerging market it would put a bid to oil. Is that theory still in place, that em and developing economies will find a bid, have stable or increasing demand on oil and lift the price.

Right now. On oil. Christian Maylik joins us Managing director of Global Head of Energy Strategy at JP Morgan. On oil, John, we did this yesterday for you. We missed you so much a gallon of patrol from peak down thirty two percent. And I guess that's part of the inflation story. Christian. Two years ago you were modeling out oil demand led by emerging market it would put a bid to oil. Is that theory still in place, that em and developing economies will find a bid, have stable or increasing demand on oil and lift the price.

If anything, Hey, Tom, I think it's strengthened. There is demand in the world that we just simply cannot see. So when we try modeling demand from the scale of one to ten, we're going from seven to nine. There's demand that's negative that's going to be positive. So, in other words, there's demand in the am world penetration of energy poverty that we see today where they would love to consume any form of energy in order to high grade there migrate themselves out of poverty, whether it's lights in the street, whether it's being able to get to work.

If anything, Hey, Tom, I think it's strengthened. There is demand in the world that we just simply cannot see. So when we try modeling demand from the scale of one to ten, we're going from seven to nine. There's demand that's negative that's going to be positive. So, in other words, there's demand in the am world penetration of energy poverty that we see today where they would love to consume any form of energy in order to high grade there migrate themselves out of poverty, whether it's lights in the street, whether it's being able to get to work.

So that demand, that.

So that demand, that.

Intrinsic demand that is not visible is so significant that we don't see demand peaking. I don't think we'll see demand peaking in our lifetimes, particularly as em demand growth continues to surprise the.

Intrinsic demand that is not visible is so significant that we don't see demand peaking. I don't think we'll see demand peaking in our lifetimes, particularly as em demand growth continues to surprise the.

Upside, which is really counterconsensus considering people are talking about peake demand for quite a while. Christian, let's go through the outlook that you just put out for next year, talking about how prices could stay around here or go a bit lower as you do have US production reaching all time records, offsetting some of the cuts. But then what what happens in the second half.

Upside, which is really counterconsensus considering people are talking about peake demand for quite a while. Christian, let's go through the outlook that you just put out for next year, talking about how prices could stay around here or go a bit lower as you do have US production reaching all time records, offsetting some of the cuts. But then what what happens in the second half.

Right, Well, it's interesting.

Right, Well, it's interesting.

I think we've had a lot of discussion around these additional barrels that we don't see necessarily coming from the US, shil coming from deep water, and look credit where it's too.

I think we've had a lot of discussion around these additional barrels that we don't see necessarily coming from the US, shil coming from deep water, and look credit where it's too.

These guys have done a.

These guys have done a.

Great job in delivering additional productivity and therefore more production. I think the key point that we make from the second half going into next year is that these are all additional barrels. There's are tens of thousands of barrels and not millions of barrels. There is no massive quantitum of volume that we don't know about that's coming into the market over the next two to three years, and that ultimately means that it's not a but when does the market titan?

Great job in delivering additional productivity and therefore more production. I think the key point that we make from the second half going into next year is that these are all additional barrels. There's are tens of thousands of barrels and not millions of barrels. There is no massive quantitum of volume that we don't know about that's coming into the market over the next two to three years, and that ultimately means that it's not a but when does the market titan?

Even as we see potential surprises.

Even as we see potential surprises.

So I've obviously seen a lot of discussion around surpluses next year, and we can talk about OPEC. But in the end, the biggest asset test, or the litmus test if you like, in terms of when do we know the market is Stanto titan When OPEK led by Saldi as volume into the market. That's not a negative, that's a positive.

So I've obviously seen a lot of discussion around surpluses next year, and we can talk about OPEC. But in the end, the biggest asset test, or the litmus test if you like, in terms of when do we know the market is Stanto titan When OPEK led by Saldi as volume into the market. That's not a negative, that's a positive.

What's been most surprising to you this year, Christian? Because so many people got the call wrong the oil prices would be substantially higher. Why are people so confused by what's going on and crude?

What's been most surprising to you this year, Christian? Because so many people got the call wrong the oil prices would be substantially higher. Why are people so confused by what's going on and crude?

It's a great question. I think there's a lot of couple of reasons. Let's just unpack that. First of all, there's a lot of dark inventory led by Russia, Iran, there's way Olibya. That is exactly why this time last year we went bearish despite our super psycher call, who went bearish into the first half of this year simply because there's a lot of volume that we just couldn't see. At least the shale we can see it. This was an inventory that was in excess. So that's the first point in terms of the sort of volatile that we saw. The second is the risk premium, which is introduced through the conflict in the Middle East, where there was concerns around potentially widening of that conflict, and that curally created a bit to the upside. I don't think the premium is going to weigh something we need to keep an eye on now if we go into if we're thinking about that in the context of how do we see all prices going into next year. I think probably the biggest learning curve for us in terms of discovery is the marginal cost for oil. I've seen a lot of discussion around to surpluses and deficits.

It's a great question. I think there's a lot of couple of reasons. Let's just unpack that. First of all, there's a lot of dark inventory led by Russia, Iran, there's way Olibya. That is exactly why this time last year we went bearish despite our super psycher call, who went bearish into the first half of this year simply because there's a lot of volume that we just couldn't see. At least the shale we can see it. This was an inventory that was in excess. So that's the first point in terms of the sort of volatile that we saw. The second is the risk premium, which is introduced through the conflict in the Middle East, where there was concerns around potentially widening of that conflict, and that curally created a bit to the upside. I don't think the premium is going to weigh something we need to keep an eye on now if we go into if we're thinking about that in the context of how do we see all prices going into next year. I think probably the biggest learning curve for us in terms of discovery is the marginal cost for oil. I've seen a lot of discussion around to surpluses and deficits.

In some ways you're gonna be critical. You can make it what you want.

In some ways you're gonna be critical. You can make it what you want.

The reality is what you can't change is the marginal cost of oil that has gone up.

The reality is what you can't change is the marginal cost of oil that has gone up.

It's gone up significantly.

It's gone up significantly.

In fact, if you look at the curve structure in the last seven years, it's basically moved higher over time.

In fact, if you look at the curve structure in the last seven years, it's basically moved higher over time.

And so why is that relevant?

And so why is that relevant?

Because if the marginal cost of all is going up, it's getting more exponsive to produce, whether it's because of cash return for the major's supply chain, bottlenecks, etc. Then we can look at the time when all went to seventy dollars in April through the banking crisis and take heed from that. That potentially does start to look like a flaw.

Because if the marginal cost of all is going up, it's getting more exponsive to produce, whether it's because of cash return for the major's supply chain, bottlenecks, etc. Then we can look at the time when all went to seventy dollars in April through the banking crisis and take heed from that. That potentially does start to look like a flaw.

We're in discovery.

We're in discovery.

I'm not going to try to call that as a hard floor, but that to me sounds like a rather than flaw. As we think about going into next year in terms of the range, and that's why we've talked about seventy to nine. To use the range, it'll be volatile, but let's not forget that the marginal cost of wars going up and that typically is.

I'm not going to try to call that as a hard floor, but that to me sounds like a rather than flaw. As we think about going into next year in terms of the range, and that's why we've talked about seventy to nine. To use the range, it'll be volatile, but let's not forget that the marginal cost of wars going up and that typically is.

The early leading indicator of an up cycle.

The early leading indicator of an up cycle.

This confidence, Christian, that you have goes beyond twenty twenty four. You and I have talked about this before. Talk to me about why it is that you can make this call and push it out beyond twenty four into twenty five.

This confidence, Christian, that you have goes beyond twenty twenty four. You and I have talked about this before. Talk to me about why it is that you can make this call and push it out beyond twenty four into twenty five.

There is no significant volume of oil coming to the market in the next in the rest of the decade. All the vordum that we know, we can see if there's additional upside fair enough, they could create volatility to oil, but there's no major quantum, not like the North Sea in the eighties, not like shale in the last ten, ten to twelve years. And so with that in mind, it's just a matter of time for the markets significantly tighters. And as the market titans, we expect the second half the decade we'll see severe tightening.

There is no significant volume of oil coming to the market in the next in the rest of the decade. All the vordum that we know, we can see if there's additional upside fair enough, they could create volatility to oil, but there's no major quantum, not like the North Sea in the eighties, not like shale in the last ten, ten to twelve years. And so with that in mind, it's just a matter of time for the markets significantly tighters. And as the market titans, we expect the second half the decade we'll see severe tightening.

That is the point where.

That is the point where.

The only real quantum of volume that we can rely on and lean into is Opek. So when people tell me Opek is cutting, it's a bit like the eighties. They're getting weaker. I sort of reverse this and think almost like the Art of War here, they're retreating in order to advance. They're going to take share of demand, grow of the future when all the big volume out there has diminished. And again I've stressed big because I'm not saying that we won't see more volume, but not in the millions of barrels that we need to meet that future demand growth, which is at least going to be three hundred and seven hundred million barrows by twenty thirty, if not higher.

The only real quantum of volume that we can rely on and lean into is Opek. So when people tell me Opek is cutting, it's a bit like the eighties. They're getting weaker. I sort of reverse this and think almost like the Art of War here, they're retreating in order to advance. They're going to take share of demand, grow of the future when all the big volume out there has diminished. And again I've stressed big because I'm not saying that we won't see more volume, but not in the millions of barrels that we need to meet that future demand growth, which is at least going to be three hundred and seven hundred million barrows by twenty thirty, if not higher.

What's the signal that you take from the consolidation that we've seen on the US side of things in places like the PERMEA.

What's the signal that you take from the consolidation that we've seen on the US side of things in places like the PERMEA.

Yeah, it tells me two things. One that they're died.

Yeah, it tells me two things. One that they're died.

These companies are now struggling to significantly raise productivity on the land the open, So they're having to now pay a premium using paper to gain more land in order to take productivity and efficiencies that they've got apply it to the thing that the land they've got they've acquired and raised.

These companies are now struggling to significantly raise productivity on the land the open, So they're having to now pay a premium using paper to gain more land in order to take productivity and efficiencies that they've got apply it to the thing that the land they've got they've acquired and raised.

So this is definitely a narrative of efficiency.

So this is definitely a narrative of efficiency.

It's a narrative of increased productivity, but it's sort of a double ed sort. It's telling you that they don't have it themselves in their own portfolio. They're sort of maxed out on productivity, which is clearly bullish.

It's a narrative of increased productivity, but it's sort of a double ed sort. It's telling you that they don't have it themselves in their own portfolio. They're sort of maxed out on productivity, which is clearly bullish.

But equally that means that there's more wood to chop.

But equally that means that there's more wood to chop.

On what they bought in terms of the acreage to raise the productivity to the standard that they're on for example Exon. So while that means we'll see potentially more volume hit the market over the next two to three years, we wouldn't underestimate the productivity gains. It feels to me as a short, short duration call to the upside, because what these deals are telling you is that beyond twenty five twenty six, we're now seeing a significant reduction in new inventory that can hit the market, and therefore I'm not necessarily going to call a peak on shale. Shale continue to go. We actually need shale. We don't more prices going in a run and very quickly one hundred and fifty. But shale as a sort of as a basin that's going to grow every year by a million and a half.

On what they bought in terms of the acreage to raise the productivity to the standard that they're on for example Exon. So while that means we'll see potentially more volume hit the market over the next two to three years, we wouldn't underestimate the productivity gains. It feels to me as a short, short duration call to the upside, because what these deals are telling you is that beyond twenty five twenty six, we're now seeing a significant reduction in new inventory that can hit the market, and therefore I'm not necessarily going to call a peak on shale. Shale continue to go. We actually need shale. We don't more prices going in a run and very quickly one hundred and fifty. But shale as a sort of as a basin that's going to grow every year by a million and a half.

Based on where your price. I think those days are over.

Based on where your price. I think those days are over.

Now we're a sort of in steady state and we'll see additional volume, but not significant.

Now we're a sort of in steady state and we'll see additional volume, but not significant.

Hey, Christian, you're one of the best. Appreciate it as always, Christian Monica of JP Moulgan.

Hey, Christian, you're one of the best. Appreciate it as always, Christian Monica of JP Moulgan.

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. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen and this is Bloomberg

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. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen and this is Bloomberg