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00:00I'm John Doe and welcome to Bloomberg Markets. And I'm pretty good. Let's dive right into the price action here because you're seeing red on the screen today especially when it comes to the equity market recession fears taking over the narrative or how much of this is actually really a reaction to what we saw yesterday. And looks like that red on the screen has turned into green on the screen up about five tenths of one percent. Once again this is coming in the kind of narrative of those recession calls. The question though is it really are the fundamentals I should say really the ones that are driving the market. Take a look at the 10 year yield but that's really where you see recession fears much much stronger. The bull case for treasuries is that in the face of a slowing economy you dive right back into the safest assets in the world does the U.S. bond market. So those yields are down twelve percent. But once again perhaps a reversal from what we've seen in the last couple of days. Let's also take a look at the Bloomberg dollar index because as those yields come down the greenback does as well a little bit of weakness. They're down about three tenths of one percent. And John we should mention that oil story because once again that oil story is really a recession story. Those growth fears driving the commodity market lower. That certainly factors into our stock watch at this hour. Now broadly speaking because there hasn't been a great willingness on the part of investors to move into any sector it's still fear still seeming very company specific at this hour whether you've got a standout stock like Madonna which is up more than six and a half percent today on some vaccine related news or a DAX sign one of these examples of troubled technology companies that are now going through a big management shakeup but coming back to equity was talking about you are seeing noticeable weakness and a lot of those high flying energy stocks today whether it's a marathon or don't close to 7 percent right now or Conoco Phillips which is down more than five and a half percent. Again on that weakness we're seeing equity and oil tied to that recessionary risk. You really use that buzz word there. That's the complete full focus for investors earlier today. Fed Chair Jay Powell testified on the topic before the Senate Banking Committee. Do you agree with respect that if interest rates go too high too fast it could drive us into a recession. Certainly a possibility. It's not our intended outcome at all but it's certainly a possibility. And frankly the events of the last few months you know around the world have have have made it more difficult for us to achieve what we want which is 2 percent inflation and still a strong labor market. Joining us to discuss further Megan GREENE senior fellow at the Harvard Kennedy School and Cruel Institute global chief economist Megan. Thanks for being with us. To hear Fed Chair Powell talk about that recessionary risk right now and also to talk about a soft landing becoming increasingly challenging. What's your reaction to that. Yeah. So look I don't think there was really anything new in a chair panel's testimony today that we didn't already learn at the last FOMC meeting. So you know. Chair Powell reiterated a number of times that the Fed is really serious about getting on top of inflation. There was an admission that the Fed had been surprised by how long and inflation had stayed higher much higher than the target. And I think that's fair enough. But also you know supply side constraints continued to hit. But you know there's not much new here other than that. Chair Powell also said you know it will be really difficult to engineer a soft landing. And that's that's what many economists have been saying throughout. And I think that the Fed knows this. You know with inflation this high end unemployment this low crucially it's going to be really difficult for the Fed to hike rates aggressively be able to get rates up above the neutral rate which is about two and a half percent. That should bring down inflation. But if you have an uptick in unemployment that means companies are starting to constrain their spending. If people are unemployed they're not going to spend. That's what really causes a retrenchment and a recession. Megan the inflationary pressures are still a far cry from what we saw in the 1970s. Nevertheless Chairman Paul did actually say that he didn't want to compare himself to Paul Volcker but he is extremely committed to that price stability story. I have to ask though. Could this be or to what extent could this be Chairman Powells Volcker moment. Look I think the biggest difference between what we're facing now and what we faced in the 1970s is that this time around we have the 1970s as our historical comparison and that's put the fear of God in every major central banker. And so I do think that the Fed is really serious about getting on top of inflation. What really worried the Fed I think for the last deficiency was inflation expectations jumping up pretty significantly before the last FOMC meeting. But you know the Fed wants to keep those anchored and we'll do whatever it needs to do in order to achieve that. And so I think that's the real prize that the Fed got its eye on is maintaining anchored inflation expectations. And ultimately in the 1970s they became deep anchored. We're not there that we're not there yet in the US economy. Megan you talked about those potentially tough choices that employers will increasingly have to make throughout this economic cycle you have zeroed in on the health of the U.S. consumer. You've talked about the fact that in some cases they've had some financial firepower to deal with this. What is your current assessment of the US consumer. Look I think the U.S. consumer in aggregate is in pretty good shape. The US consumer sitting on a huge cash cushion in aggregate. Now that's not true across the income distribution right to the bottom quartile by income of households have already burned through their cash buffer and they of course tend to spend their whole paycheck unlike the top quartile which saves a lot. We know that the personal savings rate is way below its historical average of around 7 percent. It's around four and a half percent now. That means that consumers are dis saving. But we did push two and a half trillion dollars into household bank accounts and so it will take a while to burn down that cash cushion before households really get into trouble. On the corporate side for what it's worth I think it's a similar story actually. So U.S. companies have built up a massive cash cushion and with rates going up and earnings going down they could get into trouble except for they've got this big cash cushion to burn through. So I'm not actually that worried about a recession over the next 12 months. It's the 12 months after that where I think the risk really increases. Megan we've got about 30 seconds here. I've got to ask you about the housing market. To what extent could a pop in the housing market or a more speedy deceleration have ripple effects across the rest of the economy. It could certainly affect the economy. A greater percentage of residential purchases this time around have happened in cash in which case rates don't matter quite as much though arguably there might be some financialization of that with banks providing proof of funds letters when the funds don't actually exist. So I do think that's a concern but we're not looking at the kind of housing engendered crisis that we saw during the global financial crisis. This time around it just will be a drag on the economy and that's the whole point of hiking rates is to kill off demand. And so if that happens that's what the Fed's trying to achieve to bring demand back into equilibrium with supply. Megan GREENE from the Harvard Kennedy School and the Kroll Institute we thank you as always. Coming up we're going to stick into that same subject and dig into the potential further unraveling of this massive housing boom. That's the topic of today's Bloomberg's Big Take. And we're gonna dive into it next. This is Bloomberg. Now you see the housing market slowing down because you see higher rates are having an effect that should have an effect on housing prices perhaps even fairly quickly so that prices won't necessarily come down but price increases will flatten out. We're seeing lower home sales we're seeing lower starts. So we're seeing a slowing in housing. This is Bloomberg Markets. I'm creating Gupta with John Erlich. When you were just as the Fed chair Jay Powell testifying earlier today before the Senate Banking Committee and the US isn't the only country seeing signs of a housing slowdown. He says the topic of today's big take. Joining us now to break it all down for Elaina she left of us senior U.S. economist for Bloomberg Economics. Elaine thank you as always for joining us. This is a conversation we've had in the markets for some time now being priced in. You also had a Bloomberg scoop I should add that hundreds are being cut or reassigned in JP Morgan's mortgage unit as housing demand began slumping during this rate search. So you can really see the effects across really all parts of both the market and the economy. But I have to ask the faster the deceleration that you're seeing what are the ripple effects they're going to see across the US economy in particular. Well I think the U.S. economy's pretty much insulated from a full blown housing crisis akin to what we saw back in 2000 7. I think it's just the thing is that real estate if you look at that homeowners equity within real estate is of the highest level since 1980s. You look at debt service ratios they're at the lowest levels. So you know households have delivered quite a lot. So the risks to the financial system from the housing market are pretty low at this point. Of course housing will slow down and it will have some spillover effects on consumption and so on. But that's the whole idea of slowing demand by raising interest rates raising interest rates as Chipotle mentioned today. Are interesting to hear you say that. Echoing some of what we just heard from Megan GREENE of Harvard as we look at some of these lovely lists housing markets around the world based on the economics work that Bloomberg has done whether it's New Zealand or Australia or here in Canada where over the last couple of years it has not been surprising. And somehow home markets to see prices increased by more than 50 percent. You know there was a trend that started going back to the financial crisis where more conservative Canadians who managed on the economic front and then saw record low interest rates for basically a decade started to get in. So could we be in a situation where the U.S. navigates relatively well but has to be keeping an eye on these global housing markets because of this uncertainty. Absolutely. I think yes you're right. Canada is among those countries that potentially see the highest risks according to the analysis that was performed by my colleague Ross Shaw at Bloomberg Economics. I think the U.S. is relatively safe in this environment. And again because I think the U.S. consumer has delivered quite a bit relative to what we saw back in the early 2000s. So I think that is an really important distinction here. Also the U.S. consumer has accumulated a lot of savings and those excess savings will provide some caution despite the fact that the savings rate in the U.S. has fallen quite a bit since the peak we saw back during the crisis line about 30 seconds here. I have to ask simply about whether or not we actually see a housing shortage continue because not just about crimping demands on the supply side as well. How long does the housing shortage. Well I think the supply being short will support housing prices to a certain extent this year because there's a lot of housing in the pipeline. But those houses cannot be finished simply because they like endorse windows you know sinks whatever because of supply shortages. So we will not see a significant improvement on the supply side which should probably prevent housing prices from going down this year at least. Yolanda. Sure. Yeah. Thank you so much Elaina. Senior U.S. economist for Bloomberg Economics on what's happening in the housing market. Coming up pain at the pump causing President Biden to rethink his energy policy. We'll discuss how his next move may not work. This is Bloomberg. This is Bloomberg Markets. I'm John Erlichman with critic Gupta. President Biden is due speaking shortly about a gas tax holiday. Bloomberg New Energy Finance points out research that says Biden's move may not lower gas prices at the pump every day. Analysts from B and E F share their research on Bloomberg Television. Tai Lu is from that group and he joins us now alongside Bloomberg's Joe Matthew to talk about the D.C. perspective. Joe why don't we actually start with that. Because we're going to get into the nitty gritty here on the economics. But in terms of the Democratic or Republican support for a maneuver like this what are you hearing right now. Not a lot of support to be honest with you. While Americans might love this idea. Maybe you know taken a dollar or so off a gallon of gas it doesn't have the Democratic and Republican support on Capitol Hill to make it happen. The president's going to talk as you mentioned next hour. And we keep hearing that he was working on a decision about this. The fact is though Congress must approve of this idea. Three months suspension of the federal gas tax. It's 18 cents a gallon the White House says. You combine that with states lowering their taxes or suspending them altogether which are bigger than the federal ones and prompts the big oil companies to start producing more. And we're going to have a meeting tomorrow on that at the White House that we've been talking quite a bit about. It could lower prices by as much as a dollar. The other side of this is of course and we've by the way been down this road before. It's been proposed a number of times over the years. Number one oil companies might not pass that savings along to consumers. And too if prices do come down. Do they not inspire people to drive more create higher demand and send pre-tax prices back up to where they were. Well John I'm glad you mentioned energy companies. I just spoke to the heads of one of the largest ones in this country. Candidates know this. Who happens to be in Washington to talk about Canada's energy opportunity this week titled How to Listen to what he had to say about the potential impact of the gas tax. Yes. So I think you understand the desire to take whatever action is possible to drive down the price to consumers. And obviously that is a positive step albeit a very small step given the scale of it in when compared to the price of a gallon of gas right now in the U.S.. So so Ty Lue Alex for BOVESPA is calling it a small step if it ultimately comes to be. Yeah I definitely agree with that. Unfortunately it really feels like a Band-Aid approach to a much bigger and structural problem that we're seeing right now. The fundamental reasons behind we have this really really elevated gasoline prices. It's because one way if every high crude prices for crude is trading at one hundred five dollars per barrel this morning which is about 30 dollars higher than what we saw about a year ago on the edit about about I think 70 cents per gallon into gasoline prices. And the second reason is because we have a very we should have a lot of refining capacity in the US in the past year. I think which shut off around 1 million barrels per day of refining capacity. And right now is frightening. Utilization rates were running north of 90 percent already. So that's really not a lot of juice. We can much more choose. We can get all of these refiners. Ty I believe it looks like it was like 18 cents on the gallon. I believe that was the actual gas tax. I have to ask though is that enough to really make any sort of difference. I think you do something at the margin but not quite a whole lot. A couple months ago American Auto Association did a survey the say so for those forgotten gasoline prices at the pump a lot of consumers who start to change the behavior. So this seems to be the price point for all of fun people. S psychology mindset. Now the average gasoline prices right now at the gasoline station across the U.S. is around five dollars right under five dollars per barrel. Look at it. And so if you take 20 cents off that you're pretty far away still from the four dollars kind of pivot point in people's mind. So it does a little bit but not close enough to get us there. So Joe hearing all of this from Ty and obviously the CEO Sanofi is at the end of the day. Would you anticipate at least four Republicans gearing up for midterm campaigns right now for them to move it all away from this argument that there has been a challenge to say the least for the White House to get gas prices under control. It's hard to say. I'll remind you as well that even Speaker Nancy Pelosi has not been a fan of this idea. She called it SHOWBIZ. And it reminds me of 2008 when this was proposed by Hillary Clinton and Senator John McCain back then on the campaign trail. They were running for president. Barack Obama called it a gimmick. And more than two hundred and thirty economists signed off on a letter expressing that it would not work. One thing I'm going to add to this one of the concerns that Speaker Pelosi has this is the Democratic leader in the House of course typically on the same page as the White House is that this would take money away from the Highway Trust Fund. That's where the federal gas tax goes. And at a time when we're prioritizing infrastructure spending that would be counterintuitive. Joe let me stick with you here 30 seconds. Of course we also know the Biden nation is dealing with a pretty scathing letter coming from the Chevron's CEO Mike Worth to which he said I can't believe that their feelings get hurt so quickly. Also really emphasizing refining capacity. Can you speak a little bit about the relationship between Joe Biden and the shale industry right now. Well certainly not very good. And of course the president is talking like that and being sarcastic at times referring to Exxon making more money than God when he is actually going to be asking them for help. Tomorrow there's gonna be a meeting at the White House with the heads of the major oil companies in which the White House will ask them to do as they like to put it their patriotic duty and pump and refine more. Without that component prices will not come down as much as the White House is hoping. All right Joe thanks so much and our thanks as well to Ty Lu from Bloomberg New Energy Finance. And with Joe of course you can hear every day weekday his radio program Sound on 5 p.m. New York Time Bloomberg Radio. Of course we have been watching those oil prices under pressure. Just one of the market stories we've been watching on this Wednesday. Christie for critic Gupta. I'm John Erlichman. This is Bloomberg.

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Bloomberg Markets: Americas Full Show (06/22/2022)

Kriti Gupta and Jon Erlichman bring you the latest news and analysis tackling Powell's testimony and the housing market. Guest today: Megan Greene of the Harvard Kennedy School. (Source: Bloomberg)

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