Bloomberg Surveillance-Steven Ricchiuto, US Chief Economist, Mizuho Securities
-David Kelly, Chief Global Strategist, JPMorgan Asset Management
-Tobin Marcus, Head of Policy & Politics, Wolfe Research
Mizuho Americas' Steven Ricchiuto & JPMorgan Asset Management's David Kelly react to the hotter-than-expected March CPI print, with differing takes on how it impacts monetary policy. Tobin Marcus, Head of Policy & Politics at Wolfe Research, discusses Japan Prime Minister Kishida's visit to Washington amid tensions over the US Steel takeover, as well as the Federal Reserve's outlook and legacy.
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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App. Now with us around the table to break this down. Missoo Steve rashutto JP Morgan's David Kelly. Steve's been talking about the FED wanting to cut, but the data is not cooperating. David Kelly, is this data cooperating?
Nope.
No.
The sound that you heard there was the door of slamming on the June Reid cut. That's gone.
I think the problem is the Federal Reserve and JP Howell wants to achieve consensus. He's only had eight meetings at fifty one meetings in which there's even being a descent, and so he's going to try and convince the committee, but he can't convince the committee of something that the committee doesn't on average want to believe. And so so he's not going to be able to get consensus around at June rate cause I don't you know if he'd even want to push one at this stage. So unless there's something very weird in these data, I'd love to see what exactly is pushing this, because there's some you know, there may be things like tobacco price or something pushing this.
I don't know.
It sounds pretty high, but it's it's definitely more inflation than FED once. I still think that they ought to normalize rates over time. I'd be happy enough if they start start to cut rates in June, but I think this means that they won't.
The words of Chairman Powell, it's too soon to say whether the recent ratings represent more than just a bump chairman power in the last few weeks stave domined to change that assessment of this stinks.
I think they they're you know, creating a problem for themselves in terms of the promises of right cuts. The inability to actually execute on him their fell would guidance has lock them into something because they want to do something that the data is not allowing them to do. I think they ought to change it. Whether they will or not becomes an interesting question. I think there's enough doves on the committee that that will be a difficult thing to sell. I think, as you know, Mike mentioned, they're more likely to hold status quo and just you know, allow the markets to do the effective adjustment for them and wait till they get to the June meeting to make any changes.
I'm struck by the fact that core inflation came in harder than expected, as well as everything else, at a time when we're seeing oil prices, when we're seeing more broad commodities increase, craises question of how much more could inflation rise. I'm wondering, from your per perspective, Steve, do you think that this data raises the proposition of a hard landing because it forces the FED to stay high even if you see some weakening on the margins.
Well, I think the answer to your question is very simple. I defined it as a hot landing, an environment in which the economy slows back towards you know, two point three two in a quarter type environment which is still above the revised CBO trend.
They don't know if anybody knows that.
But CBO raised its.
Underlying trend growth really growth from the economy from one than three quarters to two percent.
So my two and a.
Quarter two thirty lumber is still above trend. That gives you a tight labor market environment. And it certainly suggests it's going to be very hard to get inflation to the two percent level. So could inflation wind up settling somewhere around three as opposed to two, Yes, so that to me would be a hot landing, not a hard landing, But it still keeps the inflation percolating.
Check out this market move. Let's start with equity's equity futures, the Russell getting absolutely slammed down by more than three percent, or I gues s and P five hundred down by more than one percent David Kelly just months ago, the sound of the door slamming shut on a June rate cut. If you're just joining us right now, zero point four percent is the number. The estimate with zero point three might be key down in Washington, d C. Might I find a bit of time to chew over these numbers? What it's underpinning this one?
This morning.
Well, the interesting thing is that there isn't any huge jump in any category except motor vehicle insurance up two point eight percent. It doesn't have a huge wig, but it does figure into core services and that's pushed the numbers up. What you're seeing is a lot of slight increases in a lot of different areas. Rent up five tenths after four tenths last month. They were the owners you could rent the housing component unchanged at four tenths, so that's still an upward weight on the overall numbers. And we're seeing the same sorts of things throughout this seven tenths gained for apparel, you know, things that go over one percent, very little, but a lot of things moved up a tenth or two during the month, and that seems to be what's pushing this higher, and that would make the Fed concern because it suggests a broader base for inflation than just a few outliers like we've seen in the past.
Mike, thank you so much. And I'm looking right now at supercore. Someone noting that it's at four point eight percent not exactly what this Federal Reserve wants to see. David Kelly, I know that You've been really big on the inflation, the immaculatus inflation, this idea that we were going to get a landing and that it was just sort of this natural base effects that would take hold. Do you question some of that now?
Well, actually, what Michael was just saying makes me feel a little bit better about the situation. That two point eight percent in auto insurance, that's probably not.
A real number.
I mean, I mean the day last month they were saying that auto insurance rates were up twenty point six percent a year over year.
Now I know they're up.
I don't believe the negotiated auto insurance rates on a month's month basis are actually that going up that much at this stage. I also don't believe that a year from now we'd be seeing also twenty point six percent on auto insurance. We must have gone up some more. And then also, if you know rents are up, then the owner's equipment brand is up also, So that it sounds like it's still the same problem of you know, over eighty percent of the year over year inflation that we're seeing is coming from auto insurance and the government's measure of shelter costs, and both of those are very smooth, badly measured issue in things which should come down over time. I will admit that if has come you know, if this is this is too much for the FED, and they're good, they don't want to They won't want to look into more details to find a reason to custom.
The long n place that's coming down.
Is a lot of these components aren't even seasonally adjusted at the atyl micro level and the macro level. They're aggregated so we can get proper seasonal adjustment behind it. There's lots of components in the CPI, the fact that some components go one way, some components go the other way. That's why we have an index. So I don't really look into the details. I'll look at the major aggregates and the components, and what they're telling me it's inflation is not doing what they wanted on average, and this is a problem for them. You know, they've laid out a scenario and they actually lowered the bar at the March meeting to cutting rates, and the reality is the economy isn't even meeting that lower bar for them. So this becomes an ongoing quandary for them because they've created a financial market environment that's much too accommodative for what their macro scenario is and what their desire to cut rates are. And therefore they've created a problem for themselves because their forward guidance is keeping the labor market tighter than it would normally have been if they didn't have this degree of forward guidance. The dots are a bad concept. They shouldn't be there. They lead the market in a direction that they should not go. This has been a mistake since it was created by Janney Yellen. Nobody at the Fed is backed away from it the realities. I hope when they sit down and review it next year they realize this is a dumb thing and they walk away from it.
David, do you agree, Do the dots just create this, you know, problems within the financial markets?
No, I don't really. I don't have a problem with with their transparency. I do have a problem with over the active monetary policy. I think that we assume, you know, I mean, Steve, you were talking about how their monetary policy has kept the other forward guidance has kept unemployment tight. I don't think that there's their forward guidance and rates is having that much of an impact on actual macroeconomic GDP growth, because if that were the case, the fact that they've raised rates so much over the last two years autosow GDP growth down, and it didn't. So I don't think I think the FED has a big effect on financial markets. You can see that today. I don't think they're having a huge effect on the economy. I do think that some of the ways that the Labor Department, despite the fact that it's and index the way they measure inflation, is adding some bumps to the bumpiness here. These are manufactured bumps. It's kind of like you know, roadworks in New York City. It's not just podles, it's actually roadworks that's creating these bumps. So I think the Bureau of Labor Statistics themselves are responsible for some of the bumps here. I do, though, think this is a fundamentally disinflationary economy. Inflation is coming down slowly, and I just worry about an overactive monetary policy, which you've had for many years, which basically distorts financial markets for no good economic purpose.
And you talk about running a marathon, you have to fuel yourself before you break down. So if June is slamming the door. You think you slam the door against June. When do you think the FED should.
Have to slip in?
Well, I mean I personally, I think i'd rather them get going slowly and sort of send the message. So please pay no attention to this. We're just bringing, We're not easing, we're just normalizing.
I'd like them to get to sort of message that way.
But yes, I do think that they also tried to get to normal before they need to, because someday we're going to be sitting around this table and the FED is going to be at a high level and suddenly the floor has fallen out for some shock or something, and so we're facing the possibility recession. Then the FED says, oh, we've got lots of ammunition, we can get rates fast. But I have never seen that one work out well. If the FED has to cut rates a lot in an inn aggressive responsive way, it always hurts the economies. I'd rather they just gradually get back to a normal place. But obviously this morning's data doesn't help them do that.
I keep watching the markets right now, and after we got this out of an expected print across the board, yields continuing to climb almost really pushing up toward that five percent level, four point ninety three percent the highs of twenty twenty four. I'm also watching the Rustle two thousand and Steve, I love your idea of this. You say, a hot landing, and this raises a question of what this landing is going to look like if you do see some of the smaller companies continuing to be pressured given the fact that the FED really just lost their excuse to cut in June. As we heard from David, that was a sound of the door slamming shot on a June rate cut.
Yeah, again, this is the problem the Fed's created. So the reality is smaller companies get squeezed because they don't have the pricing power, but they're getting cost in the wage cost environment, and that's squeezing the profitability. And this is something I think the FED really thinks they're attempting to do. They're attempting to create an environment where, you know, David kind of I'm in the camptend.
Longer term, there.
Are global deflationary stories. The problem is there are a lot of domestic cyclical inflationary stories, and it's a battle between the global deflation versus the domestic cyclical, and this is a battle that's been going on, and the currency has been somewhat of equilibrated between the two of them. But the reality of the situation is the domestic cyclical dominates more than the global deflationary over time. And the other thing is the FED keeps on missing the importance of fiscal policy in this equation. It's not only monetary poles see that continues to stimulate the economy, it's fiscal policy that continues to stimulate the economy. And therefore, the federal reserves concept of what their neutral rate is the natural rate that they're looking for are stored, I think is incorrect. I think our start is substantially higher. I think the level of rates that needs to be in environment in order to bring inflation down is substantially higher than the Fed is assuming. And I do believe the market prices the dots, and that's a problem. The market takes a look at the dots and says, the dots are this, and this is what we price in as soon as it happens. So the forward structure of rates anticipates the dots, and that's a problem, which is why they should be eliminated.
Let's talk about the price of fiscal policy right now. Can we bring up the bond board. This move at the front end of the yield curve. We're talking about a twenty basis point move on a two year yield. We took out four rights, we took out four ninety. We're at four ninety three forty nine. We're up fourteen on a ten year ares year round number four fifty on a US tenure this morning, four fifty twenty nine past that three to foreign exchange, the dollar is stronger against absolutely everything. Dolly m took out one fifty two. The europe broke lower to about one oh seven eighty five. We're negative zero point seven percent there. And if you are just joining guess we said earlier this morning, it's quite now wait until late thirty. This one's allowed, David, let's talk about it. This is an email I got just moments ago. Of course, CPI month of a month was point three five nine, which gets rounded up to two point four. Yeah, you know, you come in a little bit lower. You get rounded down to point three. Does that make a difference to you? Does that change the conversation in any way, shape or form.
No, no, But I think the other thing is in any inflationary between two and three percent, I on the consumption stage, I regard as basically okay. I mean that I think the fad is a little too focused on getting too precisely two percent, just as I think they were in the last deck in trying to raise rate it's up to two percent. I think, trying to you know, manipulate monetary policy, get rate inflation right down to two percent. I think they're a little too forceful in that. So no, I don't I don't worry about it too much. What I look at two things. One, yes, we've got a lot of demand, but we've got tremendous labor supply.
I mean, we've seen increases.
We're a fifteen years high on the day before's participation rate for the working age population. We've got massive immigration, which is generating labor supply.
Year of year. Wage growth at the slowest level since June twenty twenty.
One, so we don't really have a problem there. And then in the longer term, in the quality competition, just the and the lack of you know who've had virtually no strike so far this year, the lack of any union pressure to push up wages. All that suggests to me this is fundamentally disinflationary economy. I tend to agree with Steve that there are cyclical forces which are making it just a little sower coming down. But I know I'm fine with the idea that inflation is going to be drifting down and there's going to be a time when we're all sitting around this table wondering what the Fed's going to do to push it up.
You've said a few times that this disinflationary trend, which has hit some bumps in a route over the last few months, had nothing to do with the Federal reserve. When you just talked about the labor market, you talked about forces that had nothing to do with the federal reserve. Why doesn't that play into what Governor Water is saying, which is based I mean, why do any think it's all what Kashgari is saying it white cup rights this year? Why doesn't that just plan to that idea.
Because you're starting the wrong place.
If the federal reserve was at a neutral level, I think the neutral level of federal fund rate is a lot higher than two point six percent, But if they were at say four, then yeah, they should just focus on their golfkin. They do not have as much impact on the economy.
Day to day as they think.
They spent a decade try to speed the economy up, failed, then they now they've been trying to sew the economy down failed. It's clear that they're in a very rough stream with a very tiny paddle, and they are really not moving the boat at all. And so what they can do though, with a lot of this active monetary policy is just rough. Financial markets miss priced assets last decade. We miss priced housing terribly, and now a large chunk of younger Americans can never buy a house because home prices are just too high.
But we've got normal mortgage rates.
We've mispriced a lot of speculative assets, you know, meme stocks and megacap stocks of some kinds, and you know, and cryptocurrencies all were you know, these things were funded because the carrying cost of crazy it was zero. So I wish the Federal Reserve would pay more attention to what they do to financial markets with their manipulation of interest rates, and let's worry too much about what they're doing to the economy.
That effect, we played the ship game. Can we play the will gang? What do you think they will do? I think they'll I think they'll skip. I think they'll skip in June.
I think they will set that up and then probably at the moment, I think they probably set up for September and December two rate cuts this year.
Can I just jump in there because I think I totally disagree with David just said a minute ago in terms of what's driving this thing and about monetary policy returning to some natural rate or neutral rate, and what that neutral rate should be. The reality is the Federal Reserve was trying to stimulate the economy when there was a dead overhang. The dead overhang was weighing heavily on the economy, and Federal Reserve is doing what it was supposed to do off setting that dead overhang with very very low subsidy levels of interest rates. COVID cleaned out that dead overhang. Now there is no dead overhang. Balance sheets are exceptionally healthy. The economy has back its animals, and therefore the Federal Reserve needs to be taming back on those animal spirits by keeping the level of short term interest rates high enough not to allow the economy to get too excessive in its growth rate to create a substantially higher rate of inflation that then gets embedded in the system. This is the mistake the Federal Reserve made in the sixties that created the seventies. And I think they've learned from that, and hopefully they've learned from that and realized not to succumb to the idea that there is some natural rate or some neutral rate that we have to get back to, where if monetary policy just gets back to some lower level, we're all fine. The reality is they have to fight against the animal spirits that are created from an economy that has very healthy balance sheets, low corporate debt servicing burdens, low household debt servicing burdens, and a tight labor market that's feeding the engine of the consumer economy.
David, I think you're talking about Wall Street animals and mainStreet animals.
I mean, I think that think it is main Street. I hate to tell you a lot of it has the same effect. The companies drive their share prices, they keep their employees. All those things matter. What happens in terms of the start hat matters. What happens in terms of Main Street.
We just disagree.
I don't think the monetary policy is as effective on the economy as I But.
Let's talk about where Wall Street meets Main Street, right they we're going to have a real Wall Street response to this. We already are seeing it right now, and there's going to be a one two punch because we see the price action right now, and then at one pm we're going to get an auction of ten year notes. It's really going to test the appetite of a market that's looking very skittish. Steve, how vulnerable is this market to a real upset that will actually disrupt some of this easy money conditions and this sort of happy talk that we've been hearing all year.
Well, the reality is these moves tend to be somewhat partially reversed out by the end of the day. I understand the ten year auction is coming and it will probably be a sloppy auction as a result of it. But I think the more important point to understand is what this says to the average CEO in this country is inflation is hot. Why am I not raising my prices? Okay, I maybe getting squeezed on my margins. I've got to get double digit earnings I've got a tight labor market, inflation is up, other people are raising theirs.
Why don't I just raise my prices?
You know?
And that becomes the self fulfilling prophecy of creating the inflation environment. And this is where the rubber actually meets the road, because if I'm sitting there in that executive office and I'm looking at my stock getting hit, I want to drive up my stock price. How do I drive up my stock price? Do I go out and suddenly start firing workers?
What do I say?
Everybody else is raising prices?
Why or I?
And this really feeds to this question, David, that a lot of people are expecting margin expansion this year and where is it going to come from. It's going to come from some of these price increases. So is that one of the theses kind of underpinning some of the rally that we've seen inequities?
Well, I hope not, because it would lead to higher inflation. If CEOs do that and they say, Okay, now's the time to raise prices, or if workers ay, now's the time to demodo age increase, the thing is, we wouldn't have come down from nine percent to three percent on three point four percent three point five percent at CPI. That wouldn't have occurred if businesses were actually able to do this and workers were actually able to do that. What was seeing if you look at the infliction when we get the data and we look carefully here, or we're still going to be in a situation we're eighty percent of that inflation that we're looking at right now is simply the government's measure of shelter costs and auto insurance. You look at energy, food goods, everything else. It's not particularly inflationary. And that has to say that we've got a competitive economy in which, yes, everybody wants to raise the priceis that are scared to.
It's fantastic conversation, Steve. I'm afraid I've got to wrap it up for getting the Stavis plan, David Kelly to the both of you, Thank you. Prime Minister Kashida arriving in Washington for the country's first state visit to the US in nine years. Hanging over the visit, Nippon Steel's plan taker over of US steel Tomy Marcus of Wolf Research Rights. In this, Japanese officials suggests they believe their best play is the state quiet and work with the Committee on Foreign Investment to try to secure a positive recommendation, avoid putting Biden on the defensive, and see if the situation improves after the election. Tobin joins us now for more that's hope, and as we know, a big element of this is to try and secure the vote in places like Pennsylvania. Is that working.
At the moment, I would say it's not working yet.
Biden's still behind in the polls across the blue Wall states that he needs to win, pulling very tight in Pennsylvania and Wisconsin, a little bit more pro Trump in Michigan. But I think all well within kind of competition distance for both candidates.
So you know, it has not worked yet, but it is understandable. I think that the Biden and the Biden.
Campaign are looking at that swath of political territory with a very keen.
Eye to hope.
Do you sense these Japanese understand or are we at risk of isolating some of our allies?
I think they get it.
I mean, I think that we've seen in the response to this situation from Prime Minister Kashia and officials around him, in the wake of Biden coming out sort of surprisingly strongly against the deal a few weeks ago that they understand there's no real percentage in pressing him on it. At this point, the company is still very gung ho on the deal. I mean, you know, you're still seeing lots and lots of you know, advertising lobbying focused on on DC types kind of touting the economic benefits of the deal. They're continuing to try and engage with the union, even though the USW seems very dead set against the deal. So it's not as if the Japanese side in general has given up, but I think you are seeing at the governmental level they're not making it their number one priority. The summit this week is much more focused on security issues and defense cooperation, where I think the mutual interests are more aligned, and you know they will try to get a good outcome here, but know.
That it's not a foregone conclusion.
When it comes to the SAFIUS review, what the ministration is looking at is whether or not there is this connection to China. Do you think that's warranted?
I think this is all downstream of politics.
I think if you were doing a purely neutral, staff driven Safeists review with no concerns about politics whatsoever, if this were a company that did not have United States in the name, that had a kind of iconic legacy to it. I don't think authentically that there would be problems. I mean, as we're seeing in the summit. More broadly, Japan is probably our most important ally in the Indo Pacific, one of our most important allies globally. I think Japanese control of US companies in general is not a big security concern.
Steal a little bit of a special case, but I do.
Mostly think that we are seeing an exercise in mitigating the kind of potential political liability of allowing this again.
Quote unquote iconic US company.
To be acquired by foreign entity, regardless of where that's domicile.
And when you talk to Japanese officials, they say, actually uniting these two companies would be a force against China. So we're at risk in Washington to create this boy that cried wolf situation when it comes to national security concerns.
Yeah, I mean, you heard rom talking about this a moment ago, and the clip that you played like, it's not unique to the US.
It's not unique to this situation. For there to be a political.
Considerations or you know, even economic considerations around protecting kind of domestic champions and various sifting industries.
So you know, again it's not I think the ideal situation.
It's not what you'd want as you're trying to deepen both economic and security cooperation with Japan.
But I do think that they that they get it.
It's not derailing the other efforts to knit a tighter relationship. Again, the sort of suite of deliverables that are being rolled out around the summit, I think both sides feel quite good about in terms of Japan's you know, sort of continued shift towards being a full spector and geopolitical actor in the Ino Pacific, you know, sort of undergoing their own military modernization and preparing to cooperate a lot more with the US and to touring China.
Tovid it's getting a lot harder to distinguish politics from policy at this point, and I do want to get your thoughts ahead of an interview that we have later on with an analyst for strtigis where he came out and John mentioned this quote. It's fascinating to me Washington has committed to run the economy at full employment at all costs until the election and the FED is looking for every excuse possible to cut to aid this cast. Would you agree with that assessment? Is that kind of the feeling that you hear from the clients that you speak to.
So I will say it's a very active debate among my clients and other folks in the DC space, the extent to which FED decision making this year is politicized. I don't really agree with the notion that the FED is putting its finger on the scale for the sake of an electoral outcome.
I've sort of heard that talking point a lot. I don't really think it's right.
But I think Powell's very clear political incentive is to ride off into the sunset as a person who defeated this outburst of inflation. I think he cares a lot more about his legacy, about you know, not being the next Burns and he does about getting reappointed, or the sort of inevitable political attacks that will face from both sides depending on when they cut. You know, if they cut in June or July, they'll be criticized for cutting too early and too much. If they cut in September, it will be criticized for cutting too close to the election. If they wait until November December, it will be criticized for holding rates high, you know, sort of longer than necessary in a way that hurts Trump. So if he doesn't, damned if he doesn't. I think in terms of the political incoming he's going to face, you know, I think that their incentive is to try and actually navigate the you know, genuinely challenging set of empirical questions that they're facing around the appropriate path for rates. Not that they'll do it correctly necessarily, but I do think that we are seeing their sort of authentic best effort to try and manage both sides of the dual mandate.
There is this question though, of course, of whether the FED comes under attack in terms of it's legitimacy in another administration, whether it has sort of an incentive to preserve more of a status quo.
Do you believe that?
I mean, this is sort of one of the theses, one of the sort of conspiracy theories underpinning this, which is the reason why we hear this so much.
Right, I mean, you know, if you gave Powell trucierum, would he prefer Biden to Trump?
Probably?
But I again, I don't he is a registered Republican. It's not as if he's sort of somebody whose track record would suggest that he's going to sort of move heaven and earth to get Biden reelected. Generally, when we look backwards at the record of what FED policy has actually been in election years in the period since Nixon and Burns, we don't see any good evidence that there's any sort of historical pattern around election interference. They're no more likely to get cuts and hikes in election years, you see. You know, the deviation between the tailor rule and actual FED fund rates in election years is, you know, if anything, more hawkish than than it is in non election years. So, you know, I think there's not a lot of empirical track record to point you on this, and I don't really think it makes sense for Powell. You know, again, he's towards the end of his career. I'm sure he would like to get reappointed, but I do think he cares much more about not sort of mismanaging the situation and going down in history as the person who allowed like a big reacceleration of inflation totally failed at these sort of you know, historically important job that he's facing at this kind of inflection point, so you know, and again in terms of the legitimacy of the FED, they will face quite st our political attacks no matter what they do, and so I don't think they're trying to solve through that.
Yew makes a ton of sense, well said, I don't buy this.
I hear it a lot like the theory is definitely out there, but I'm not on board.
Lose lose time of Marcus of Wolf Research, super diplomatic and active debate. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.
