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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg Business Wait inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
00:00:25
Speaker 2: If you make any attention today, you know exactly the economic data that pip this morning. US retail sales broadly declining in January, indicating that consumers took a little breather after a strong holiday shopping season. So here's some numbers here. The value of retail purchases, unadjusted for inflation, decreased eight tenths of one percent from December, this after a downward revision to the prior month. This according to Commerce Department data earlier today, that drop the biggest in nearly a year. Separate data showed US factory production fell for the first time in three months in January. Following all of this, of course, is Michael Mckehe's international economics and policy correspondent for Blueberg News. He joins us right now from Washington, DC, where he's at the National Association for Business Economics conference. We're going to have more on that in just a minute, But first, Mike, I want to get to this data. The two reports that we got today, they pointed to a loss of momentum, But are they a sign that the economy is deteriorating.
00:01:20
Speaker 3: I wouldn't use the word deteriorating. The economy is slowing, and we know, of course that in January Shanalli went on vacation, so a lot of shopping didn't get done. A lot of it is probably weather related. When you look at what happened across the country in January, a lot of snow, a lot of people stayed home, and car sales really suffered. That was about half of what we saw in the decline. Another major part was building materials and outdoor stores, things that would be affected by the weather. Now there is some loss of momentum, there's no question about that. What we have to see is whether it comes back in this month in February, and that's what the FED will be looking for. But it kind of offsets the CPI numbers, which is why I think you're seeing some rallying inequities today. Because when the CPI came out, everybody wrote off the FED cutting rates anytime sooner. But if the economy's slowing down, maybe they will. So the psychology, the psychological game continues.
00:02:18
Speaker 4: But let's draw the connection between the inflation data we got and the retail sales number. If inflation is indeed hotter then you expect, Mike, then wouldn't consumers start to slow down more into the year.
00:02:30
Speaker 3: Well, there's two ways to consider this. One is that inflation is built into the prices. These are nominal numbers for retail sales. So if inflation is higher and you subtract it out to get the real figures, they're even worse than they looked. But I think the kind of inflation that we saw in many service industries it was the primary reason that we saw the CPI go up, so it may not have had as much of an effect on retail sales, which are largely good.
00:03:00
Speaker 2: Okay, Mike, Anything else in these two reports that we got earlier today that we need to make sure we understand here.
00:03:07
Speaker 3: Well, one thing I would point out is that for the first time in about nine months, we saw import prices rise, and that's even ex petroleum. Petroleum prices push them up. But we also saw some goods prices go up in import prices. The Philadelphia surveyed reported that their prices paid index went up, not much, it's still low, but it went up. So with CPI and those two things, it may be a bit worrying that inflation might be picking up. And again we just have to look at the retail sales numbers and say, maybe that's offsetting it somewhat. If the economy is slowing, then inflation should slow.
00:03:45
Speaker 4: The question yet becomes to there's a lot of economic data still ahead, Mike. Tomorrow we get producer prices as well.
00:03:51
Speaker 3: What's the expectation, Well, the expectations we get a little bit of inflation. Producer prices have run below the CPI significant for quite some time. They're in the one percent range one to two percent range on a year over year basis, so there's no reason to really think that they're going to go up significantly. If they do, we'll want to see what categories where might some inflation pressure come. Also tomorrow we get the University of Michigan's consumer sentiment numbers, and that's always important to the FED because they want to see what people's inflation expectations are. They've been moving down, they were significantly lower last month, and so if that continues, then the FED is a little less worried about what the CPI might mean.
00:04:37
Speaker 2: We got news Mike just in about the last hour that Fed Jo J. Powell is going to be testifying before the House Financial Services Committee come March sixth, this from punch Bowl. Is this a surprise at all? What do we need to understand about him testifying? And wow, less than a month.
00:04:53
Speaker 3: This is his regularly scheduled what we used to call Humphrey Hawkins testimony. He'll talk to the House Financial Service this is a committee one day, and then he'll talk to the Senate Banking Committee the next day. So it's not a surprise. It's a little bit later than usual, but we had been warned off the record that it wasn't probably going to come until March. What will be interesting is that that gets us very close to the next FED meeting on March twentieth, So we have a lot of Fed speak between now and then. That may not matter because Wall Street's going to wait and see what Jay Powell has to say those days, and I bet you we get on Bloomberg Radio and television big ratings on March sixth, at least when he first starts to give his view of the economy and what policy might be going forward.
00:05:38
Speaker 2: Yes, people want to
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watch him, and people want to see him and hear what he has to say, of course, but we want to hear what's going on at the conference that you're at, Mike, I didn't know this thing started on Valentine's Day. What happened yesterday? What's going on today and tomorrow? Down in DC, yesterday was quite interesting.
00:05:54
Speaker 3: We had a presentation from Charlie Cook, he's the guru of political analysts here in why Washington, who suggested that the Biden administration is in trouble, not because people think that Donald Trump's a great guy, but because the economy's improvements haven't registered with the average voter yet and that's got to turn around or it could be an issue for Joe Biden. That we heard from Michael Barr, who is the Vice Chairman for Supervision at the FED, who said that basically two things, He's with j Powell and slowing down and waiting to see more data as far as monetary policy is concerned. But he also addressed to all the concerns on Wall Street about NYCB and regional banks and their exposures to commercial real estate, suggesting that this was maybe a one off because NYCB had bought signature banks bad loans and that the system was under control, there was no real systemic danger that the FED was on top of it. That was kind of reinforced at a seminar today on commercial real estate, where basically the consensus was that we will see some some banks struggle with commercial real estate loans, but in general the system isn't as bad as it has been portrayed. So so far, so good. We also had Mario Draghi here today talking about globalization, and of course he's always a big favorite of everyone.
00:07:22
Speaker 2: Michael McKee gonna have to leave it there, don't have too much fun in Washington. I hope you come back tomorrow and we can see here in the office. That's Michael McKee, International Economics and Policy correspondent, joining us from the National Association for Business Economics conference in Washington.
00:07:37
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from two to five pm Eastern Listen on Apple car Play and then Brout Auto with a Bloomberg Business app or watch us live on YouTube.
00:07:51
Speaker 2: Well, here's some good news. At a mere one point nine percent, the state of Maryland has the lowest unemployment rate in the entire country, and at more than one hundred and eight thousand dollars a year, got the highest median household income in the US. And then there's the not so good news. Maryland's economy is growing at a slower rate than the US economy and its neighbors Pennsylvania and Virginia, and labor force participation has not recovered to pre pandemic levels. These figures are highlighted in a report last month from the Maryland State Controller's Office, the first report of its kind to be released. Let's get to the interview we have with us this afternoon, Maryland's Comptroller Brook Leerman. She joins us from our Washington DC
Bureau Comptroller. Welcome, It's good to have you on the program this afternoon. As I mentioned, there are a lot of good numbers in the report, but there's also a lot of challenges here. Take your biggest challenge, give us your biggest challenge. What in here concerns you the most?
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Speaker 5: Thank you so much. Tim, As you said, you know, Maryland is doing so well in so many ways. But what we saw in this report through our numbers and analysis as well as roundtables around the state, is that our labor force is constrained. You know, we have a traditionally very high labor force participation rate in Maryland and we still have a rate that is higher than the national average, but we haven't quite recovered from COVID, and so some of our economy is really constrained in the private sector growth. We're seeing good federal sector growth, but the private sector growth is constrained because of this, uh labor, these labor force challenges. So you know, we were excited to release this report so that our policy makers, our governor and others can and can really start to tackle these challenges and our economy can continue to grow.
00:09:29
Speaker 4: Now, controller what are the biggest challenges in the workforce and who is bearing the brunt of the pain here?
00:09:37
Speaker 5: So it's a good question. You know, we are really fortunate as a state to have a robust and unique set of industries in the state. You know, from federal to government to the port to unique biotech and cybersecurity and more all across the state, as well as numerous universities. What we saw in the data is that women have left the workforce at a higher rate in Maryland then nationally, So that's something that we're really focused on. We also have seen some health challenges over the years because of the opioid epidemic and so and continuing health concerns, and so we want to make sure that we're focusing gotten there as well. And then finally, I will say, you know, our population growth is so important. You know, when you're talking about labor force, it's about you know, the number of people both who live in Maryland and are participating. And we have seen lower numbers of growth in terms of population in the past few years since COVID, and so we want to make sure that there's a place for everyone in Maryland that they can afford a home, that they can send their kids to our great public schools. And so that's where we're focusing as well.
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Speaker 2: Okay, Controller, I want to zero in on one issue that you mentioned, it's women leaving the workforce. I was really shocked to see the decline of childcare centers in this report in the state of Maryland. We are seeing that you predict by twenty twenty seven there will be only twenty seven hundred child care providers in the state, down from nearly six thousand in twenty eighteen. I've got two little kids. Childcare is front and center for my wife and I. How do you fix this in the state? Can you do that? As Controller?
00:11:12
Speaker 5: So, you know, one of the things about my job that I love is that I can partner with our governor, you know, with other our General Assembly or Speaker, Senate presidents. So as the Controller, I really serve as the elected CFO.
00:11:26
Speaker 6: Of the state of Maryland.
00:11:27
Speaker 5: And this report is about identifying some of those challenges so that our General Assembly and our governor have the information and can then formulate policies to tackle some of those challenges and seize opportunities. And this childcare one is a huge one. I'm also a mom with two children. I understand the challenge of finding childcare and it is essential that we get it right right, that we make sure that they're space in our economy for childcare providers of all types, the private settings, but also the in home care that many Marylanders and many folks who are below meeting income really rely on. And so that is certainly a focus of the General Assembly and the governor in fact mentioned it in a State of the State of the address this year.
00:12:10
Speaker 2: Do you think it's something that the state can fix on its own or do you need the federal government to help.
00:12:16
Speaker 5: I think it's going to have to be a partnership. You know, we will work with the federal government in terms of the childcare block grant program. You know, many years ago we changed how we paid in Maryland to pay more. In fact, in the Office of the Controller. Just this past year, we completely changed how, working with the Maryland State Department of Education, how we reimburse childcare providers so that we could provide repayments and reimbursements in a much more timely fashion. So we're very focused on that childcare piece to ensure that women have the opportunities that they want to work out of the home.
00:12:51
Speaker 4: I want to switch gears a little bit here, and I want to talk about something that's on the top of a lot of people's minds right now. It is tax season. I want to think about your posturing versus some of the others around you. For example, vir Junior Governor Glenn Youngkin has been of the side of saying that taxes are too high yet at state and local levels, and at the federal level, we're obviously facing a massive constraints on budgets. How do you think about the tax equation for the folks who live in Maryland.
00:13:20
Speaker 5: I think we can never enter into a race to the bottom. You know, Maryland and Maryland. We're proud of our amazing public schools. I graduated from Maryland public schools. My two children are in public schools. We have amazing state parks, we have a robust healthcare system, and so I would caution us against, you know, entering into any sort of race to the bottom. As in terms of tax policy, I think what we have to focus on is making sure that Marylanders are getting the support that they need, that our businesses are able to grow and thrive here in the state of Maryland, and that
we have the labor force available, a well educated, a well trained workforce available for employers so that they know that they can grow here over the long term.
00:14:03
Speaker 4: Curious about the race to the bottom a little more, how do you compete with other states that are participating in that race to the bottom, particularly if you're trying to build a labor.
00:14:12
Speaker 6: Force well over the long term.
00:14:14
Speaker 5: What you see is you know, although Marylanders, if you look at the age brackets, Marylanders may be moving out of state when they're younger, when they're older, we actually see you know, the prime work age workforce age Maryland people moving into the States. And that's because of our schools, it's because of our opportunities, it's because of our housing stock. Those are those folks are finding their way to Maryland because of its reputation for being such a family supporting state. And so you know, that's where we have to focus on making sure then that those Marylanders are can find the housing that they need. Right, I think where I would focus is on making sure that the housing is available so that people can grow here, thrive here, and then retire here as well.
00:15:00
Speaker 2: I want to talk about federal government employment because a relatively large portion of the state compared to other states, works for the federal government five point seven percent of Maryland total of total Maryland employment, compared to one point nine percent of total employment nationally. Obviously, it's good for stability because these government jobs are stable. But I'm wondering what the downsides are of having so many government workers. Since those jobs are so stable, doesn't mean the working population doesn't necessarily have the same rate of people going and starting their own businesses of entrepreneurship. Talk to us a little bit about that.
00:15:33
Speaker 5: Sure, you know, we haven't seen that in Maryland. We're very fortunate to have I think this high federal employment, although it sometimes says get a little dicey when the federal government might shut down, but you know, for the most part, it's a real boom to Maryland. And we're really excited to be welcoming the FBI headquarters to Maryland in the coming years. Because we have such a robust series of research universities and the state as well well, including of course JOHNS Hopkins, the University of Maryland System and more Morgan State. We have a number of entrepreneurs and ideas and sort of that's that are coming out of those universities. We see enormous tech transfer possibilities. We also are really fortunate to have, you know, a large number of immigrants in the state of Maryland, and we see a number of immigrants who are great entrepreneurs opening businesses in the state as well.
00:16:28
Speaker 4: Com Schuller with the type of fighting, if you hill, that we've been seeing coming out of Congress. Do you share a concern with so many federal workers being in Maryland of a risk of a government shut down.
00:16:41
Speaker 5: Absolutely, you know, it's for so many reasons. A government shut down is irresponsible and challenging, you know, certainly globally, but here in Maryland it is as well. You know, those workers are having to go to work and they're not getting paid, or they're not working and they're not getting paid. It's incredibly challenging. Over the long term, they do get paid, and so the revenue does come in both to their household and to the state. The most challenging, one of the most challenging times that our economy has had relating to the federal government was actually was actually after Seaquestration. We saw real challenges after that because of the long term effect that sequestration had.
00:17:24
Speaker 2: We only have about thirty seconds left. But you were a Democratic delegate back in twenty sixteen. I got to ask you a national question about the Democratic Party. Why do you think there haven't been more competition from within the Democratic Party against President Biden given the challenges that he faces for reelection.
00:17:40
Speaker 5: President Biden and the Democrats in Congress have passed more important legislation in the past two years than I can remember in decades. I mean, from the IRA to the Chips Act to the Infrastructure Bill. I mean, the legislation that has come out is in phenomenal and it is game changing for not just the state of Maryland in the coming years, but really for our country. And so, you know, I just think the progress that has been made under the Democrats, it can't be denied. And our economy has grown as well, and so I'm excited about what's happening.
00:18:16
Speaker 2: Controller, thank you so much for joining us. That's Brooklearman, Maryland's controller, joining us from Washington.
00:18:22
Speaker 1: You're listening to the Bloomberg Business Week podcast. Listen live each weekday starting at two pm Eastern on applecar Play and Android Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, just Say Alexa playing Bloomberg eleven thirty.
00:18:41
Speaker 2: Well. US retail sales broadly declined in January, indicating consumers took a breather after a strong holiday shopping season. The value of retail purchases, unadjusted for inflation, decreased eight tens of one percent from December. This after a downward revision to the prior month. This according to Commerce Department data that we got earlier today, that drop was the biggest in nearly a year. For more on this and more when it comes to retail, let's bring in Angie Solanki, National director of US Retail at Colliers. She joins us from San Francisco. Good to have you back on the program. I want to start with today's data, but then I want to move beyond that and get to what you're seeing in your work in terms of AI, in terms of efficiencies, and really what we're seeing in the future of retail.
But were these numbers at all a surprise to you that we got a little earlier today. What are you seeing in your work?
00:19:31
Speaker 7: Yeah, I mean, if we look at the numbers, you know, it's a reasonable start to twenty twenty four. It's just you know, our January numbers, it's not fatal. If we really look at core retail in terms of increase, it was about two point eight percent, so that's pretty healthy. And if we really look at you know, back two to three years, you know what we've seen from retailers is really that operational efficiency and how they're looking forward in terms of utilizing different tools and platforms to increase their EFFICI season margins going for.
00:20:01
Speaker 4: A big question that a lot of investors have too is if they're using money to invest in things like AI to increase operational efficiency, how much of that money is turned around and used to pay employees? For example, do you need to raise prices for consumers in order to invest more? How does the equation work at the end of the day.
00:20:24
Speaker 7: Yeah, you know, it's really dependent upon each of the retailers. So each retailer will have a slightly different business model. But what we have seen or are monitoring, I should say closely, is using AI from an operational efficiency perspective can be a savings of sixty to seventy percent.
00:20:41
Speaker 6: Then what happens is we start.
00:20:43
Speaker 7: To layer on and I'll use grocery as the category or segment as the example, is that you then can offer additional products through a private label system. So when you do that, you're actually seeing a better margin increase. So operational efficiencies margin increases allows that retailer to actually provide, to your point earlier better wages.
00:21:07
Speaker 2: What's the what are the inputs that that give them the data that allow them to make these decisions to have these efficiencies.
00:21:14
Speaker 7: I mean, if you stop and thinking about AI right, we're we're kind of in its you know, infancy as it relates to retail. There's a lot of discussion around it. There's you know, still adoption around this. We're seeing AI used definitely from a distribution perspective, so in the supply chain, but also where we're able to take AI step further because we've been harvesting or I should say retailers have been harvesting pos or point of sale data through transactions, whether it's online or offline in the store.
00:21:41
Speaker 6: So when they're.
00:21:42
Speaker 7: Collecting that data, they have the ability to start utilizing the AI overlay to start to find kind of you know, themes around personal customization areas of where there's seems from product so far faster than a different product. So that is helping from an efficiency perspective.
00:22:00
Speaker 4: How do you think that the year is going to play out? You know, the thing that's really top of mind right now for investors is that data we saw from retail sales just this morning being worse than expected. If the consumer starts to become more strapped this year, what are the things that many retailers are not really thinking about at this moment to prepare for that.
00:22:21
Speaker 6: That's a great question.
00:22:22
Speaker 7: So there is a little bit of what I'm calling the you know, credit card hangover from December. There was quite a bit of spend in December, so people are being much more cautious. We have definitely seen big ticket items, you know, look at it, you know, a bit of a decrease in terms of sales and spend. But where we have seen a shift an increase in spend has been actually in the restaurant and bar scene. So it's the allocation of funds. Now, looking forward into twenty twenty four, we're going to be very you know, called it optimistically cautious. I know we've used that word quite a bit, but I think last year was one where we were really focused and monitoring every single movement within retail. This year, I think there's more of a consciousness around how people are spending where they're spending, but it's going to be very value driven and I don't see that changing through throughout the year.
00:23:14
Speaker 2: Where where specifically are you seeing weakness and dare I ask if you're seeing any recession right now?
00:23:21
Speaker 6: Recession.
00:23:21
Speaker 7: No, we're not definitely forecasting recession as of today. What we will, what I would suggest is that we're really seeing in terms of, you know, a decline in sales as a you know, electronics. We're going to continue to see some softness in you know, kind of that tech device sector. But from a F and B perspective, I think we're going to still be We're a little.
00:23:44
Speaker 6: We're still bullish in that sector.
00:23:46
Speaker 7: We actually survey over five hundred retail professionals within our organization to say, where are you seeing across the US and your respective.
00:23:55
Speaker 6: Local markets the most movement from.
00:23:57
Speaker 7: A least transaction perspective, and it's definitely in the restaurant space.
00:24:02
Speaker 4: Now, another thing we talk about a lot over here at Bloomberg is the cost of real estate right now in retail space, and there are a lot of retailers that really expect to expand a physical footprint. How costly is that expansion plan?
00:24:18
Speaker 7: You know, it is market driven. I think you know what we're seeing, you know, some.
00:24:22
Speaker 6: Of the challenges is it goes back.
00:24:25
Speaker 7: To construction cost, workforce as well as when you look at where we are from an occupancy perspective in the more urban suburban markets and secondary markets. Rents have continued to climb and those are going to be you know, at some point, there's there has to be a tipping point, right because there's only so much a store can generate in terms of sales. So we have to work collectively landlords and retailers to make it much more a partnership so that it is
the stainable and there isn't this like you know, flip and we're starting to see some struggle or challenges with high rents.
00:25:08
Speaker 2: What about in terms of you know, we've talked a lot about real estate on this program over the last few weeks, and one thing we talked about earlier this week with the co CEOs of the design and planning firm Gensler, is repurposing office space that isn't being used right now, repurposing that to housing. I'm wondering what you're seeing on the retail side right now and the way that you're seeing retail being repurposed. Can you offer any thoughts there about what you're seeing and if you're starting to see that being converted to different uses.
00:25:43
Speaker 7: So what we're seeing in terms of retail converting to you know, it's retail converting to other types of uses. So you're seeing this a lot in the mall sector. So you're starting to see some of the larger boxes where you have an opportunity to upgrade in terms of the overall mix of types of products or I should say uses within the project. So you're starting to see some concepts such as hotels coming in, So you're starting to see hotel operators coming in. You're also starting to see and these are one alike. Consider malls. These are you know, malls that may have slightly higher vacancy maybe you know they have a seventy five to eighty percent vacancy versus the class triple A malls. And so we're seeing hospitality. We're also seeing healthcare, so healthcare large healthcare organizations seeing advantages and or benefits right as it relates to if I can bring create a convenience to my end user and patients in this situation, and even you know, the doctors and the staff, et cetera. You're allowing these people to come into a no because typically retail malls are in accessible areas, they have great accessibility in an ample parking.
00:27:02
Speaker 6: And then you're also providing.
00:27:03
Speaker 7: Other benefits where if there's you know, shopping opportunities, food opportunities.
00:27:07
Speaker 6: So we are seeing that occur. You know, interesting thing.
00:27:11
Speaker 7: That you said, and we just published this which is kind of this retail office interdependency and that relationship more in the urban markets. You know, what we're now seeing is this new trend, and that trend is with small businesses.
00:27:26
Speaker 6: I'm really excited about that because.
00:27:28
Speaker 7: You're starting to see small businesses pop up more and more, and I think landlords are giving them an opportunity to take a vacant in space and really activate that and warm and up for.
00:27:38
Speaker 2: That's that's interesting to hear. Yeah, that's interesting to hear, especially because in terms of new jobs that are created, small businesses account for a huge portion of those. Hey, Angie, we got to leave it there. Angie Solanki is National director of US Retail at the real estate firm Callier. She joins US from San Francisco, A journal.
00:28:02
Speaker 3: Now about you let me drive?
00:28:03
Speaker 2: Oh no, no, no, no, who's.
00:28:06
Speaker 8: Alright?
00:28:07
Speaker 1: Please, I'll do the travels.
00:28:09
Speaker 6: Excuse wait, I don't want to drive. It's a good question.
00:28:15
Speaker 1: Try this is the drive to the clothes do commer pick.
00:28:21
Speaker 6: We'll buy around each.
00:28:22
Speaker 1: Other dawn on Bloomberg Radio.
00:28:24
Speaker 2: We'll just amount eighteen minutes to go until the close of creating here. We just heard an update from Charlie Pellett and Bill Maloney that we're seeing some late day buying. The S and P five hundred off its session highs, but still up half a percentage point. The NASDAC up more than one tenth of one percent. Will the Dow up eight tenths of one percent. Let's get our drive to the clothes with Megan Horneman, chief investment officer at Verde's Capital Advisors. She joins us from Hunt Valley, Maryland. Megan, good to see you.
00:28:50
Speaker 1: How are you.
00:28:51
Speaker 8: I'm great? How are you?
00:28:52
Speaker 2: We're doing well. Thanks. Trying to make sense of the kind of conflicting data that we got this week and last week that shows that inflation came out a little hotter than expected, retail sales coming in a little lighter than expected, all on the heels of that jobs report that came out last Friday that showed that hiring in January was robust. What's on your mind.
00:29:14
Speaker 8: Right now. I'm a little bit concerned about the inflation. I'm not so much concerned about what's going on with the retail sales. Again, it was a disappointing January. Don't forget we had a pretty big jump in December, so this could be some give back. There's some nuances with the seasonality as well, But the inflation is the bigger concern. And the reason that's concerning me is we've warned for a long time that inflation can be a bumpy road down. It's not a straight line down. The Feds made it pretty clear that they're more concerned about inflation than they are about the economy. So there's a lot of people, and you know, expectations for these rate cuts this year, and I'm afraid that might be a little optimistic given that inflation data that.
00:29:54
Speaker 2: We saw, even still optimistic, Yeah.
00:29:57
Speaker 8: You're still looking instead of seven rate cuts. I mean, I don't even know where that came from seven rate cuts to now maybe down to four rate cuts. But if we get some more of this volatility and inflation, the Fed could remain on hold this entire year.
00:30:10
Speaker 4: Well that's what I was thinking a lot about. What if we get no rate cuts and indeed, what would it take to see another rate hike? I mean, how much risk is there a reacceleration of inflation at this rate.
00:30:23
Speaker 8: I think there's a risk. I'm not ready to say that there's a chance that they could have to hike again this year, but there is a risk. We haven't seen the full effects of what's going on in the Red Sea. We know that shipping costs, these are all skyrocketing. Will get some more information from the producer side. If you look at the ISM Services index that we got for January, that price is pay component jumped up to sixty five. That was a pretty big jump there. So these are things that are showing us that that's sticky inflation. The FED has warned us about the service side housing wages. This is still a problem and we may not be able to save. Were completely out of the wood there, And.
00:31:00
Speaker 4: How lagged is a lot of this data If you think about, for example, one thing that struck me this week was the mortgage rate climbing the most you've seen in two months here, and interestingly that came before we saw the interest rate jumps this week. Right, we saw the yield rise meaningfully this week in the two year and the ten year. So how much more pain is there in terms of the impact of higher rates and kind of how cyclical is this problem at this point?
00:31:28
Speaker 8: Yeah, it takes a while for the full effects of the FED rate hikes to be felt in the economy. And what you're seeing is this kind of this dispersion where the FED has done such an aggressive rate hiking cycle. But if you look at things like financial conditions because of the rise and equities because of low volatility, because credit spreads are so tight, you're actually seeing financial conditions. Some of these indices that are out there, financial conditions are the easiest they've been since before the FED started raising rates. That's a problem the FED has said. I think the problem the Fed did is they got dubbish in December and that sparked kind of a resurgence in from economic data. And that's very easy to reignite inflation. And then you put on top of that the fact that we have these issues in the red Sea. This is a concern for inflation. Don't ever take one month of anything for a trend. Here, Well, we're going to look at some of the underlying data, some leading indicators, and we'll take it. We'll see if this continues month after month to get a better idea. But it is a risk that we could see inflation kind of stall here with the progress we've made.
00:32:34
Speaker 2: So what are you seeing in terms of your own predictions for the year, Megan, Are you thinking that, Okay, this is just a blip, this CPI figure, or are is the Fed on track to actually successfully bring inflation to its two percent target.
00:32:52
Speaker 8: I think that they're on track to get it to their two percent target, but not as quickly as most anticipate. I think that it's going to be really difficult to get to where we are now down to that two percent. I don't I'm not as optimistic that we'll see that this year. I think that maybe a twenty twenty five story. One of our themes for this year was that the Fed was walking a very fine line and that reinflation was a risk. We saw that coming into the year they were so dubbish. In December, equity markets took off, you saw
spending from consumers take off, you saw consumer confidence pick up again. Those were things that concerned us about reinflation being an issue, And then you have to look at how the what are the markets pricing in If the markets weren't sitting at record highs, then we might say, hey, they're not you know, they're being a little bit more realistic of where we are and what the Fed Kenny can't do. But the market just continues to notch these record highs this year, and it's disregarding a lot of these signs in the economy.
00:33:50
Speaker 4: So what do you think investors are ignoring now as the engage in markets. You look at a lot of these industries near all time highs and a lot of exuberance in certain parts the market. After everything you've said about kind of the miscalculation and the market about rate cuts and some concerning economic data that we're seeing, how should investors be thinking about positioning.
00:34:14
Speaker 8: So what we're doing is, first thing is holds extra cash. We are, as I mentioned, the Fed may be on hold for longer than most are pricing in the market. So holding extra cash isn't at the end of the world. At this point, you're getting five percent on your cash level. So holding extra cash and being able to take chances when there's when the volatility in the market arises, which we expect. The other thing is we just did this in the beginning of the year. Look at your portfolios, look at where you should be your asset allocation is has it deviated? It definitely has deviated in some of those areas like growth when you're looking at your portfolios, so rebalance, rebalance where is necessary. That's something that is important to do. We're being patient, We're waiting for opportunity in the market. There will be opportunities. I just think right now the market is looking a little bit frothy, a little bit too optimistic and pricing in this perfect landing, perfect inflation story for twenty twenty four.
00:35:12
Speaker 2: Hey, just forty seconds left. What kind of opportunities are you talking about here? Are you talking about opportunities of like a one and a half percent pullback or something more significant?
00:35:20
Speaker 8: Something more significant on the large cap space for sure, But there is opportunities, we think in the small and MidCap space because they're pricing in. I think of a lot of the downside risks. So if you can withstand the volatility that can arise as the economy continues to weaken, I think that over the long run, you'll be rewarded in that small and MidCap space.
00:35:40
Speaker 2: Hey, Megan, love it when you join us. Really do appreciate you taking the time this afternoon. That's Megan Horneman, chief investment Officer at Verdant's Capital Advisors, joining us from Hunt Valley, Maryland.
00:35:50
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