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Ellen Zentner, Morgan Stanley Chief US Economist, says the nearly two-year high in US continuing jobless claims represents a needed softening in the labor market. Bill Dudley, former New York Fed President & Bloomberg Opinion columnist, says there needs to be significant changes to the treasury market in order to restore strength. Chuck Grom, Gordon Haskett Senior Retail Analyst, says Walmart, Target and Burberry's earnings indicate pressure on the entire retail sector. Michael Hirson, 22V Head of China Research, analyzes President Biden's meeting with Xi Jinping and its implications for both countries. Get the Bloomberg Surveillance newsletter, delivered every weekday. Sign up now: https://www.bloomberg.com/account/newsletters/surveillance Full Transcript: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, 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. Joining us now, we're thrilled to every usually for big events, So today's a big event. It's always a big event. When Ellen Zenner joins his chief US economist, Morgan Stanley Ellen on claims, I go to the four week moving average. How do you interpret claims with this two hundred thirty one thousand statistic? And can you say there's finally a vector in place of higher claims more pain. So I hope that there's a higher vector in place. I disagree that higher claims will be more pain. We're coming off of extraordinarily low levels. As you said, we look at the four week moving average to smooth through volatility, and it has been lifting, but it is still very low. And so what does that tell me? Something that Mike and Lisa alluded to as well, normalization slowing in normalization, good god man, that's what we've been needing, and I don't see this accelerating at an extreme pace. I've been on the road the last few days in several states meeting with corporate clients. They are finally seeing some relief in terms of how tight the labor market has been in terms of the availability of the kinds of employees that they need. We're seeing not just claims rising a bit here, but I focus on continuing claims. People that have been losing their jobs are staying unemployed for a bit longer, and that's been rising since October, so it's getting more difficult to just get re employed right away. This is the kind of softness in the labor market that we have needed, and of course it takes pressure off the FED to raise rates again. Right going on extended hold, what is the distance between normalization and an outright downturn? So well, the difference is jobs stay positive, So normalization is you've got more supply coming back into the labor market, so you see participation rates rising, which we have. That is what puts upward pressure on the unemployment rate. And we've been seeing that, and if people are having taken longer to be able to get re employed, then that should produce further upward pressure on the unemployment rate. But that just takes pressure off the labor market, pressure off of businesses, off of margins. You see wages grow more slowly, and you'll see confidence build among FED policy makers that they have done enough here. I don't think we're anywhere near getting to negative job gains. I think negative jobs would mean that companies have stopped hiring. What I hear is that they're doing selective hiring, that they stop hiring, and that they start firing, and I mean firing up broadly. And that's just not what we're seeing. But I'm ever watchful, especially reading earnings transcripts, to see if that's something that's around the around the corner. I'm glad you mentioned earnings because we were talking about Walmart, and I understand their idiosyncrasies here, but they talked about potentially seeing outright deflation over the next year with consumers clearly pushing back. You do see margin pressure, you do see a market deterioration and consumer appetite over the past ninety days. How concerning is that to you about the nonlinearity of where things could be. So, Lisa, we put out a consumer survey that goes out into the field every two weeks, and one of the biggest areas of trade down that households have been doing is within stores themselves, say, going from a high priced branded good to the generic good within the store. And that means that those retailers are going to see some deflation. And we've been hearing from businesses that input costs are falling, but prices that they're charged or falling faster. And that's important because we all started to think we the economics community at large, not myself though an exception, started to think that households just have unlimited price tolerance, and that is not the case. Finances start to slow, we run through that excess savings, and you will start to trade down. The lower income groups that Walmart serves are the groups that have been standing the greatest pressure. Look at delinquency rates for the lowest income groups on credit cards on auto loans, that points to stress. Ellen Molly Smith and Alice Atkins for Bloomberg made a big splash the other day using your research, the Morgan Stanley View and the key distinction is a four point three percent unemployment rate. I hereby dubb at the Zentner four point three percent statistic. How do we get to a four point three percent unemployment rate that radically shifts Fed policy? I'm not expecting right close them from the Fed. The unemployment rate at four point three percent, we think is a soft landing unemployment rate in that it is driven by slower job gains and higher labor force participation. Now I understand that is a beautiful scenario for the FED. And we have them cutting next year by one hundred basis points because of normalization. That's very different than cutting because the FED thinks there's a recession. If the FED thinks that there's recession, they're starting big and they're doing a lot, and that's very different than the normalization scenario. And then overlay with that, what we're hearing Julia Coronatto leading the way on this, doctor Coronado suggesting productivity is underestimated. Do you believe that we have an underestimation of the efficiency of the American economy and that gets you to a benevolent four point three percent unemployment rate? Yees, So I do think that productivity is being underestimated. I would add, though, that productivity has not been well estimated, and so you'd have to say, well, it's being estimated you worse than before. And I'm not sure we can say that, but I think there are a lot of new ways that productivity exhibits itself in the economy that we're just not able to capture. Government data is not able to capture. But absolutely, if productivity is higher, then you can withstand higher wage growth without it being inflationary. It gives the FED more runway because it keeps it lid on inflation. And so it's really it lifts all boats. It's productivity and infrastructure or what economists go to sleep at night dreaming about, Tom, which is the reason why I think people are sort of hopeful that we're going to get that and we're going to create this soft landing and avoid something more challenging. I guess to wrap it all up, we've been talking all morning about the potential for deflation. Tom was talking about how difficult that is for any economy to handle. This was the word that Walmart used. But you're talking about normallyation. How concerned would you be to see some sort of material deflation, not disinflation. Deflation, and certain good sectors that we have been seeing on the margins over the past couple of months. Yeah, so, Lisa, good sectors. I'm not worried about it at all. We've goods prices in the US have been in deflation for a decade leading up to COVID. That's normal, right, we were importing a lot of deflation, but that's externally determined. I would be very, very concerned about a deflation scenario in the US for services, for domestically determined prices. For US to get to that broadly, you're talking about an extraordinary downturn on the magnitude of the financial crisis in two thousand and eight that would get that kind of price declines, declines in the level of prices instead. I think deceleration is in train. I think it's going to be faster than the FED is expecting. And I think I've been really pleased, and I think they should be pleased too with the progress that we see. The Newtonian mechanics of Ellen Zentner, of Morgan Stanley there and the dynamics of price change. Ellen, thank you so much for the brief. William Dudley joins us now former New York Fed president of Bloomberg opinion columnist Bill Ewan, I'm going to suggest Professor williams now holding Court in the former Dudley chair, have a unique perspective on our flows, our liquidity, our trust Sitting at the New York Fed. What is the confidence or trust deterioration you've observed. I think there is a complete trust in the New York Fed because that the Fed basically understands the plumbing of the financial system and understands what needs to be done to make sure that plumbing works always, even under times is pressed. One area of vulnerability where the Fed and the treasure you're looking at right now is the treasure market itself, because the buying of treasury borrowing has gone up dramatically and the capacity of the primary dealers to take on that uh that burden has diminished because of all the regulation on capital and leverage. So there do need to be some significant changes, I think, to the treasury market to make it more strong and resilient. And what I propose is a couple of things. One central characteringum of treasuries, so they all go through a central current party, so your risk is just to the central current party. Allows you to net out a lot of bilateral risk to a single risk to one uh end person. Second, increase the leverage the haircuts a bit so that they don't need to be increased during time to stress. Right now, you have low haircuts, and then there's there's stress, and the haircuts go up, which force people to sell. And the last thing which Mike was talking about is opening up the fens repo facility more broadly, making it so that people can take treasures and turn them into cash at any time. And if they know that, then they don't actually have to sell the treasures, you know, in anticipation of a problem. They can wait to see if they actually need the care bill if none of that gets done. Do you think the action we've seen and what you expect compromises the QT program coming out of the FED. No, I don't think so. I mean, I think the QT program basically is on autopilot as long as there isn't a lot of market disruptions. So if the market performs reasonably well, then QT keeps going. Only if we have the kind of events like we had in September twenty nineteen or market twenty twenty, we can see QT is suspended because if the market isn't working right, the last thing the Fed wants to do is done more securities in the marketplace. What's as take here, Bill, If there isn't this sort of fix that you propose or this three pronged proposal, how much are we seeing what sort of the new normal looks like with bouncing around twenty basis points on a ten year yield from day to day versus something more significant that creates a real crisis in the world's deepest and most liquid market. I think the volatility we've seen this year is not a treasure market function problem. I think the volatility we've seen this year is people trying to figure out what what's the trajectory of short term rates over the next six to twelve months, and there's been lots of changes in view as the economic data has come out. I think the problem is more when all sudden people want it dump treasuries and there's not enough capacity on their side to absorb that. That has happened a few times, and obviously it needs it needs a catalyst, and it's hard to predict what that catalyst could be, But what I want is a treasury market that can handle those kind of shocks if and when they occur. Are you saying that right now there is an inability. What do you expect will happen if there is some sort of catalyst, Well, if there's sometimes are cast One of the problems we allowed the treasury trading is handled by algorithmic traders who basically don't really provide long term liquity to the market. They just provide liquidity for a microsecond and then they move it security off to someone else, and when things get scary, they completely withdraw from the market, and then the market is really now then has to go to the primary dealer community. But the primary dealer commun has an allocated capital to this business because most of the time they're actually not doing it, so there's no one there sort of an extremist provide balance sheet capacity to sort of come the market. And that's one reason why you'd like to have the ability to take your treasury security to the FED and turn them into cash without actually having to sell them. So the Treasury is only one the FED is the only one that has a balance sheet that is actually elastic, So why not make it clear that that elastic balance sheet available on an ex anti basis as opposed to only exposts after the vice she had the problem? Bill, how does our data dependency look next year? I think we've had a celebration of disinflation in place. Is the nature or character of the Fed's data dependency different now and forward? Well, I think they're more confident that they've moved monetary policy to a restrictive level and it's actually working to bring down inflation. But we still don't know a lot of things. We don't really know if how tight monetary policy is. We don't know how long it's going to take to get inflation down to two percent. So I think the degree of uncertainty risk is a lot less less today than it was, say, eighteen months ago, when the Fed started the tightening process. But there's still a lot of uncertainty about how strong the economics can being, whether the Fed is done. What a roller coaster write this bond market has been on over the last few months, Bell, what if for? To catch up with you? SA always is former New York Fed President Bill Dutley. There an interesting thought provoking piece from Bill on the future of this treasury market. We talked to a lot of experts on this, and this is what you get if you get a double degree at the you claimed holy Cross, the College of the Holy Cross, and economics in accounting, the hyper detail, mathematics, ratios, the financial analysis of retail that Chuck Rahm has acclaimed for. He's a Gordon Haskett. I'm not going to mince words. We protect the copyright of all of our guests. Get his brilliance from Gordon A Hausket. How do you go and outperform on Walmart with a thirty pe? Explain why Walmart has a pe like a luxury goods pervader. And Walmart's been executing lawlessly for several quarters and even maybe the past couple of years, and the business mixshift and the gross market visibility. I mean, there's never been a time in the twenty years I've covered Walmart where I've been this bullish on the long term outlook. Clearly today it's interesting. It's a little bit about positioning. You guys talked in your remarks about valuation. That's a factor if you really dig it underneath the covers here, it's really less about the top line. And I think less about the back half of October commentary that the CFO recently made. I think it's more about the margin flow through that was disappointing. The US margins were disappointing. So when you have a stock at an all time high, at very rich valuations and you get a little bit but disconnect, you get this negative reaction. I think the stock will come back throughout the day and over the next couple of weeks, but today could be difficult for the stock. Can they compete with Amazon or Darra I never said this before, Chuck Grum, But can they beat Amazon? I don't know if they can beat Amazon, but they can definitely compete. And I think the physical assets of their four thousand plus stores in the country really provide them with being really close and being able to connect with their customers. So Walmart plus there's a lot of opportunity there. So can they beat Probably not, but can they compete one hundred percent? Chuck, you said that margins disappointed, and that's really interesting At a time where people are wondering when are consumers is going to start pushing back on price increases? Is this an indication that Walmart is seeing that that time is now and then order for them to compete, they've got to take a hit on the margins. Well, I think almost uniformly, you know, consumers are pushing back on price and that's why prices are coming down almost across the board. And can we cover Home Depot, we cover TJ, we cover you know Hard, you know, Macy's, Walmart, They're all talking about prices starting to flatten out and retreat. I think the US margins were softer because of the GLP influence on the on the margins because of the drug. It's a lower margin product. It was a higher sales in here in the quarter. And when you have discretionary sales be softer, those are higher margin categories for Walmart. So it's really a mixed factor. It looks like obviously the calls at eight o'clock and the callbacks are later in the day, so we'll get more clarity later in the day. But looking at what it looks like now, I think it's more of a mixed factor. You know, we were talking earlier about what's good news or bad news for the broader economy. When Walmart does headly or well in terms of which consumers are shopping, there is there any read through based on the earnings that we've gotten from retailers about whether we're seeing a division between haves and have nots, about whether we are seeing any broader trends in terms of how the consumer is evolving, Which areas are going to be bright spots and which won't. That's a great question. I think it's really too early to tell. I mean, you look at Walmart's numbers, they're up, you know, comp up five, Target yesterday down five. You know, you look at Macy's down six or seven. Here, it looks pretty uniform. I think there's pressures across the board. It's not really like the high end doing well. You guys talked about Berbery earlier. We'll get more color from Nordstrom next week. I think it's pretty uniform across the board. And you know, we've been talking about our consumer surveys being weak, traffic being weak. Today's numbers and the reactions here over the past forty eight hours have really nothing to do with the top line. The top line and the sales are pretty much in line with where people thought. It's a positioning and it's the margin flow throughs for certain companies. What's the future of Nordstrom's the family dynamic and also the attempt to be luxury. I guess what I is an amateur, I'd say is accessible luxury. Is nord Strum a sleeper for five years out? I think it's a great concept. I think the rack has really been their achilles heel over the past several years. So if they could get the rack fix. I think the fact that they all have a huge presence of full line stores across the country is actually a tremendous asset piece of v Coals or Macy's, which have got hundreds of stores. So I think it's I think it's a viable concept. They need to get the rack fixed, and that's what people and investors have been waiting for. Chuck, what's the rack? It's a ro off price division. And what do you mean by fixed? What's wrong with it? Well, when you look at you know, you look at TJ and Ross comping up, you know, load of mid single digits, and you see the rack comping down. It's just it's been broken. I mean it's their business hasn't been good. It seems like there's been some cannibalization across the store base. We're not exactly. Sure, there's been some merchandise issues. They've tried to price up when when the consumer wanted to be priced down. But yeah, the North From viable for sure. But the rack division, the off price division, I'm sorry, we're not clarifying earlier. Is really the No, It's okay now, I know, I'm just just for people who are trying to follow. Have you noticed, Chuck that the off rack the rack is actually close to the Nord from stores. Have you noticed that, which is kind of odd. Yeah, I mean I could tell you my wife, We'll tend to go to the rack now a lot more than a bowl line. So that's what I'm talking about. The cannibalization factor of that is probably maybe the issue here, and maybe they need to close more rack stores, but you know, ironically, they're trying to grow more right now. So we're old rated, we're kind of we're kind of perplexed on some of the strategies there. For the time being, it's trying to be TJX and knowst them at the same time with the same grand it's hot to do, Chuck, Thank you, Chuck Goldenske, thank you mate. Right now and these important meets we're making jokes about it. Come on, this is important. Michael Hurston joins and I had a China research a twenty two v AT research. Michael, thank you so much for briefing us this morning. What did you What was the unexpected that you saw last night? Besides a dictator faux pap by the president late? What was the unexpected of the meeting? Nothing too unexpected, frank, which I think is good. Maybe the Chinese readout perhaps was a bit more positive than I was expecting, and that really reflects what has been a bit of a excuse me, a recalibration in China's official tone towards the US over the last few weeks. But other than that, I would say, no big surprises, Okay, no big surprise is great. What's next? When's the next meeting? Is the President travel to China to make it too well? I think that's actually a really important point, Tom, because this is basically the last high profile meeting that the two leaders are going to have before the next US presidential election. So this kind of sets the parameters for the next year, and those parameters really are trying to find stability, not allowing a crisis to take place over something like Timewan and then just making incremental progress on some of the key issues in the relationship. But if you think about it, the closer we got to the US presidential election, the harder it will be for Biden to do anything that's seen as being soft on China. And of course, why would chi Jinpang make concessions to the US when he doesn't know who the next president will be. So I think that's where we are. That's why this was kind of an important window for the two leaders to meet. Did the dictator comment mean anything to you? Not really. I don't want to dismiss it entirely. I think it probably was perhaps not the positive tone to go out on, But I think in the grand scheme, given how much work both sides did to try to make this meeting happen, I don't think it's going to color too much on the Chinese side. What did you make of the meetings that Xijimpang had with US executives apples, Tim Cook for example, a whole host of others, and then a private meeting with Elon Musk. What's your takeaway of how different the business view on China is from the US government's view on that country. I think there are a few very prominent US firms that have this special position in China where and that would put Apple and Tesla very much as the two bell Weathers in that category. They have managed this straddle between the US and China. It's not an easy straddle on either side, but they're kind of a special category. If you look at the broader set of US firms in China, it's really a mix between those who feel like they have a decent market in China and those who are really upset about China's policies. And so I would put Tesla and Apple in this kind of special category, and so it's no surprise that they got some special attention from CHICHIPI do you have a sense of who needs who more? Of whether Tesla and Apple need China more than China needs them and the jobs that they provide. It's an interesting question. I would say for the companies they need app they need China more. But if we're talking about Apple and Tesla, they are very important bell Weathers for how the business community looks at the playing field in China, and not just the US business community, that's Europeans, Japanese, you know, global companies in China, which is why I think Beijing actually has to tread very carefully with things like, for example, potential retaliation against Apple. So yeah, the companies need China work, but these are quite important that Chi Jinping looks to try to revive confidence in China's economy and China's investment environment. Michael, A question we haven't brought up yet. I've been remiss on this is Hong Kong. Is Hong Kong going to evolve into something that we don't see right now? Is there a Hearson Hong Kong out there that's going to be different. I think Hong Kong, really, and I was just there last week, is in this somewhat gradual transition from a global hub to really more of a pure capital gateway to China and is increasing becoming more of a Chinese city. That is still an interesting position for it to play. And a number of China watchers that I've had discussions with recently have made the point that they think Hong Kong is going to remain an interesting city as the political environment in China states very tight and in some cases even titans further so, Hong Kong losing its status as a global financial center, but still quite an important city in the context of in particular context of China. So what's the alternative for those people whining and dining with mister g last night. What city do they go to? I think if we're talking about the financial sector, you know, it's a number of places. Singapore obviously has has gained a step, even Tokyo has become more important as a regional financial center. If we're talking about the multinationals there, you know, it's wherever they can get capacity and wherever they can get the logistics right. So in many cases is you know, you mentioned Vietnam earlier, Vietnam, Fishary, but it's also Mexico. It's a lot of countries. Michael, we got to leave you that. Thanks for Aminus, Michael Hesson that have twenty two vave research. Thank you very much. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Easter. 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 BloombergSee omnystudio.com/listener for privacy information.