Bloomberg The Open 01/23/2024
From new york City. For our viewers worldwide, I'm Manus Cranny in for Jonathan Ferro. Equity markets showing a peak of green there holding on for the hero. That is earnings from tech. The countdown to the open starts right now. Everything you need to get set for the start of U.S. trading. This is Bloomberg the Open with Jonathan
Ferro. Coming up on the show, Don't start with another record as the earnings season starts to heat up. China considers a $278 billion rescue package. And it's GOP showdown in New Hampshire
with Trump versus Haley. We begin with the big issue attention turning to tech. It's all about earnings at the moment. Tech earnings are supposed to be up in double digits. The tech sector has done very well. Last year, we had the big boom pushing through earnings for tech. What drove the market last year was that that magnificent seven tech stocks have been able to deliver.
The bar has been set incredibly high. Expectations could be on the higher end and that could be a risk. I'm broadly positive earnings is notation is likely to be justified, but I still think they're going to be one of the fastest growing sectors. The enthusiasm for the Magnificent Seven will continue. The equity market is looking at the strength of earnings. Earnings deliver, markets can move a bit
higher. This is the most important earnings slide that we've had in in in a very long time. Joining me now is Morgan Stanley's Mike Zalis. And Winnie says that from Credit Insights. Tech, tech, tech, tech, there's a frenzy.
There really is quite a frenzy in this market this morning. And we are now down to depending on tech to deliver. When you look at risk, to me, it feels like a coiled spring. Michael, you would say we've got to thread the needle and there's very little room for error. With that in mind, how important is the
earnings in this part of the risk cycle? I think it's important. And also, I think this is a really interesting time to be looking at tech and considering A.I. in the sense that there's about $6 trillion in market cap added last year for what we call kind of AI enablers. And this is a year where kind of like the rubber should meet the road and we should be able to see if a lot of those use cases are actually going to add value as it pertains to equity market impacts, though, and translating it back into fixed income. Analyst I think the equity market is already kind of priced in a lot of ways for this idea of a soft landing.
Fixed income, less so and so does incrementally and this is driving this really, really major uplift then I think a lot of the incremental opportunity or sort of more reliable return opportunity is going to be in fixed income this year. Okay. The float the float for money markets into fixed income. And that is a narrative that's been building when good morning to you said a good chunk of the performance has already been brought forward has been brought forward in the equity market but it's been brought forward in the fixed income market. Are we richly priced on credit? Good morning to you as well and thanks for having me. So we're actually at our year end target for both the US investment grade and high yield, and we really got there pretty much by the year, the end of 2023. So we pulled forward performance by
almost a full year. Now it is quite typical to see a lot of performance realized in the first few months of the year, and I think especially true this year when you do have a back half with political risk and the Fed risk in all sorts of different storms possibly brewing, I think that the expectation was to have a pretty good January, February, and then people sitting on their hands a bit more. But the fact that we realized so much performance really in November, December of last year has left a lot of people wondering kind of where do we go from here? And we've actually been recommending to clients that we should take a pause and be tactically a bit more cautious despite having a long term constructive view on credit. Okay. So I like that phrase tactically cautious. Now, this is going to come down to the differential between what the market is pricing in cuts and what the Fed actually delivers. Let's just listen to Jan Hatzius. He weighed in on this very subject
overnight in Hong Kong. The Fed is on its way to achieving the soft landing. Obviously, no guarantees, but I like what I'm seeing, a march cut or cuts in general over the next few months. The forecasts are somewhat optional. The economy is holding up pretty well. We don't think it's essential that they that they cut here, but it would be consistent with the signaling. So let's turn that into what you both think, Michael. One narrative that's been building
through the morning with me, I had Alberto Gallo at the start of the day at 5 a.m. He said, you're going to get a couple of insurance cuts, but you're not going to get dramatic slowdown cuts. And the window closes because of politics after Labor Day. Do you think we're going to get insurance cuts or slow down cuts, Michael? Well, listen, I mean, our economists think, you know, you're not going to get the first cut until June. But I think for fixed income investors, you got to take a step back here.
And the big picture is that inflation's coming down. The Fed, the ECB, the Boey, they're all sort of skewed towards cutting the really the question is kind of when and what pays. That should be a really good backdrop for fixed income investors in general and in developed market government bonds in particular. And here I think we flagged at the beginning of the year we thought there was, you know, 10% plus 12 returns in that cohort. We've gotten a lot of them already, but we think there's probably still 5 to 7% to go. And just based on the idea that soft
landing or not, if central banks are cutting, maybe things in the short term are priced exactly the right way you want in terms of the probability of cuts in the near term. But over the next 6 to 12 months, we think the direction is pretty clear towards lower yields. Okay. I mean, you know, five, six, 7% is still worth taking out when he let's just close it off with you before I pivot to China. These rate cuts delayed to as late as June in your mind and then compressed. So we had been saying to expect the
first rate cut in March, which back in October felt really risky. And then we were very surprised to see how materially the Fed pivot in messaging was in December. And I think that this really highlights one of the problems the Fed has with communications and that the market is going to very aggressively price in whatever policy path they're expecting, even if the Fed is not going to go that quickly. And that does result in a loosening of financial conditions which we've seen materialize over the past few weeks. And so now we're thinking that actually
the probability of a march cut might be a little bit lower than what the market is pricing in. And we think that especially the upcoming January meeting, the messaging might be a little bit more hawkish, a little bit more disappointing, because in aggregate, at the headline level, the economic data have not really supported a potential easing. But we do think a Fed Cup comes in the first half of this year. They don't want to lose the win that they've got from Whyalla and Boston in the last week. Let's turn our attention to China. Bloomberg learning that Beijing is considering $278 billion package to stabilize its slumping equity market. Bloomberg's Mike McCarthy joins me now. So this is not a bazooka for the economy.
This is a floor for equities, Mike. Well, at least that's what they're hoping. You're talking about the U.S. cutting rates in China. They have moved monetary policy, but it hasn't moved confidence. A picture is worth a thousand words or maybe a couple of trillion yuan. Here you can see the CSI 300 and the
Hang Seng. They have lost 10% and six almost 7% on the year. And that just builds on what they lost last year. It's been an elevator down for the Chinese stock market. So people familiar are telling Bloomberg News that they are the Communist Party at least is planning a rescue package to put a floor under the market ¥2 trillion, as you said, $278 billion from offshore state owned enterprises from cash they're keeping out of the country. Brad Setser asks, why is that money out of the country that they really want to bring it back? Which is an interesting unanswered question, but they would bring it back buying onshore stocks through the Hong Kong exchange link. There is also a plan to spend ¥300
billion, $42 billion from local funds. They'd buy onshore stocks through government investment funds, primarily through Shanghai. We also heard that regulators are guiding, in their words, insurance companies against short sales. This is going to work well, along with Brad said. There are a number of other people who
think this is a questionable program. They point to 2015 when the Chinese government put money into the stock market. And as you can see, their stocks went up for a little bit. And then as soon as the stimulus went away, stocks went way down. They introduced a circuit breaker. That's the blue line there.
And that really killed the market. So given the fact that the U.S. now has sanctions on China along with other countries and the fact that the Chinese economy is really struggling, the housing market's in bad shape, a lot of questions about whether this is actually going to do anything, maybe provide a floor, but maybe not. Okay. Well, that is the debate for the equity market and the economy. Mike McKay with the very latest on China. Mike and Winnie. And Nick, it's very interesting.
I arrive in this country and we don't talk about China at all. The time zone shifts dramatically from the Middle East, London to the Middle East to here. It doesn't matter. That matters this morning. That kind of matters.
$300 billion to put a floor under the equity market, but it's not a bazooka for growth. What are the ramifications of what China does, the world's second biggest economy to invest in here, Mike? Yeah, I mean, literally the mechanics of this particular move is still something that we're sorting through. But I think the big picture is that China growth is slowing. China has sort of shifted its economic strategy anyway in a way that you wouldn't necessarily rely on it to be this major engine of global growth anyway. And it's all part of a confluence of factors that's helping to drive down the pace of inflation in developed markets. And I think feeds right back into the
idea that we could be getting good returns, i.e. lower yields over time this year through most of the job market world and government bonds. And for you, when I had one guest this morning that says China's on investible from a government bond point of view, I don't think anybody out there, given the injuries they've had from equities to bonds, would disagree. Extrapolate the move this morning for global disinflation. So I think for global disinflation, we can pretty confidently say that the Chinese government is trying to kick start their economy. They have had a lot of stimulative
efforts in place. The big difference is that these stimulative efforts that we've seen over the past six months have not jumpstarted things like they have historically. And I think that that ultimately comes back down to the property markets. And when we're thinking about the path for global inflation, commodities are going to be a pretty key aspect and one that the Fed has less control over because there are supply side constraints there. So if we still have China kind of trundling along, not necessarily really ramping back up and growth, I do think that that is pretty positive for the commodity side of things in terms of not going to overheated. You see China does moderate. It can make it into conversation. It is relevant.
Mike sees us when he says, stay with me, We've got more work to do. Let's look at what's going on under the hood. Abigail Doolittle is with me for the movers and shakers.
Abby. Well, we are potentially looking at a fourth update for the S&P 500 in a row. Very small gain at this point, but we have one big gainer into that open. United Airlines up 6.6%, heading to, I believe, its best day of the year. Right now, they beat earnings by nearly
20% revenues. They beat you. They offered new guidance. That wasn't the massive profit slash that we saw out of Delta. In addition, growth is just right, not strong enough that it can actually support fare hikes.
D.R. Horton not so much, down nearly 5%. They posted weaker than expected new home orders. A look forward into what people want to do in terms of buying homes, but also look back on those 8% mortgages. The stock was up over 65% over the last year. Just not good enough that those results
show. And then down 2.3% profits for this quarter of 60 to $0.65 shy of the 70 cent estimate. All of this, of course, ahead of the break up. They're spinning out their aerospace and energy businesses later this year in a bid for a multiyear turnaround. Okay, Andy, thank you very much. Come fly the friendly skies, obviously at work for United.
Coming up, GOP presidential hopeful Nikki Haley is getting ready for a make or break moment in New Hampshire. Republicans have lost the last seven out of a popular votes for president. That is nothing to be proud of. We should want to win the majority of Americans.
But the only way we're going to do that is if we elect a new generational conservative leader. We head to Manchester for the latest Bloomberg team on the ground. This is Bloomberg. We should want to win the majority of Americans. But the only way we're going to do that is if we elect a new generational conservative leader. I voted for Donald Trump twice. I was proud to serve America in his administration. But rightly or wrongly, chaos follows him.
You know I'm right. Chaos follows him. Showdown Time. Donald Trump. Nikki Haley heads ahead in the New Hampshire primaries.
Polling showing the former president has a commanding lead over the former U.N. ambassador. Another blowout win for Trump could all but secure this nomination to New Hampshire.
We go Kailey Leinz is on the track. So there's already been a little bit of overnight voting. And what is it called, Little Dixie. I'm learning so much about America. It's killing me.
So where do we start? Actually, good day. It's Dixville Notch, man. It's only six votes were cast there roughly around midnight. All six actually went to Nikki Haley. But we're not entirely sure that that's how the rest of the votes in the Granite State are going to go today. Yes, this is a two person race. What Nikki Haley says she wanted all along.
The question is going to be come tomorrow morning, once all the votes are in, will it still be a two person race? Because Haley has said New Hampshire, given that large chunk of independent, undeclared voters here, is her best chance to eat into Trump's lead as the front runner and presumptive Republican nominee. The thing is, she and her team, her surrogates like Governor Christie Nuno, have suggested all she really needs is a strong second. The polls suggest that that second may not actually be that strong. Suffolk University and the Boston Globe
have a daily tracking poll running today. Trump is ahead by 22 points, with 60% saying they will vote for him. Only 38% will vote for Haley. Now, a large part of this may come down to turnout. The secretary of state here in New
Hampshire, David Scanlan, has said more than 320,000 voters could show up to the polls today, which would be a record for a Republican primary here in the Granite State. And it will likely be a higher turnout vote that strategist think could make more. So a break in Haley's favor. Yes, it there's warmer here in New Hampshire than it was in Iowa by about 45 degrees. That could play a factor. But it's not just weather.
It also is enthusiasm. And data consistently, consistently shows that Trump supporters are far, far more enthusiastic, more energized to get out and vote for him than Haley supporters are for her. So we have to consider that. And one final note.
I would say manageable isn't just the Republicans having a primary today. It's Democratic primary day as well. Incumbent President Joe Biden is not on the ballot, as he and the DNC have said. South Carolina should be the first primary because of its more diverse voter base.
So there is a write in campaign instead for the president and other candidates in the mix as well, like Congressman Dean Phillips, the Democrat from Minnesota. So there is a question as well to what kind of showing President Biden could put up here in the Granite State today and whether or not that number, if it is low, suggests that he is a weaker candidate as we move forward to what very well could be a general election matchup between him and former President Trump. Yeah, he's banking on the right answer. And of course, the right honorable from Minnesota could indeed scoop up a few votes and sort of rock the Democratic cradle. Katy, thank you very much. Katie lines that in Manchester. Mike zeese us and when he says are my
guests so here we are. We're careering in theory towards a Trump on the ticket. That's sort of what all the polling is showing. But what was pointed out to me this morning, which was interesting, it's perhaps more important we're going to deal with the fiscal side. You're both bond at heart bond and
credit investors. So the risk is the political risk is not just Trump in the White House, but a Republican Congress, which has a much bigger impact on the fiscal scenario and therefore the bond float. Mike Yeah, yeah. So listen, I think it's important not just to know which party takes control of the White House, but also Congress. And if you if you have a scenario where one party is in complete control, that opens up a lot of fiscal expansion opportunities in a scenario where Republicans are in complete control, you could pencil in a decent amount of fiscal expansion by extending expiring tax cuts and Jobs Act provisions. That said, there's cross-currents even
in that situation because there's potential tariff policies on the table. Candidate Trump something about a blanket 10% tariff, and there's uncertainty around what it would mean for international commitments for the U.S. that could snarled supply chains and the like. So I think you could put some expansion on the table in that hypothetical. I think it's necessarily a straight line to make some strong conclusions yet anyway about what it would mean for the bond market. Okay. Said look, it is still a bit early and I grant you, you know, you're dealing with slightly more known quantities both in terms of rhetoric, policy style and ability to execute winning. You know, here we all were at 412.
We could have a very different narrative coming from the Trump campaign if the polls are to be. Believe between now and the end of the year. Would that shake the bond market or is it just too soon to get the bond market ready to blink? Do we just trade 375 to 325? So we do think that there is some near-term risk to the upside, especially in long term yields if the fiscal conversation becomes front and center again, which it clearly was last early August when there was the Fitch rating downgrade, we had Treasury or funding announcements much punchier than expectations. So if we have a return to expecting perhaps a Republican sweep or a Trump as president again, then you might see some loss of confidence again around the fiscal side of things, especially for investors outside of the US.
And one of the the big differences in the potential Trump presidential campaign this year versus in the past is that yields are objectively higher around the globe, which means that non-U.S. investors have opportunities to put capital to work at pretty enticing yields, not in U.S. treasuries. And that is something that we see as a meaningful short term risk as many clients are positioned for yields to remain pretty rangebound in the near term. The one thing I want to close off with both of you, when you let's start with you, which is we simply are not really pricing any kind of a hard landing.
There is this narrative of soft landing, 1995, no landing, etc., but hard landing. We just finished a conversation of J.P. Morgan Asset Management. They ascribing 35% probability to a hard
landing. Is it in your cast of characters or what percentage would you ascribe to a hard landing winning? So we have a hard landing in the 15 to 20% probability range. But I think even more importantly is we have the potential for a stagflation type outcome also in our cast of characters. And that to us is the worst case scenario for fixed income or for us corporate credit, because that means that yields are going to be maybe even higher for even longer than people are anticipating.
And you're going to see this rolling default cycle that's going to be much more challenging to manage and much more difficult for the Fed to manage. They don't have necessarily a playbook for stagflation. They do have one for a hard landing. Okay. An interesting differential, Mike, let's just finish it off.
Wrap it up and 40 seconds that the hard landing stopped for you. Yeah, I mean, soft landing your base case, but hard landing is probably the next most likely. I mean, right now in our base case, we like, develop market government bonds and corporate credit. If hard landing looked like it'd be more likely that was leaning more on government bonds than on credit. Even there, we think corporate credit in
the U.S. would probably still do pretty well, are coming in with relatively clean balance sheets. But but certainly we want to avoid high yield more in that scenario. Okay, Tim, thank you very much. That's Mike sees us.
And when he sees that calls for the markets and I'll give you a slew of morning calls in just a moment. Which is holding on to a slightly broader bid to the Russell two size and the rest of the market's holding on for Netflix and the other tech numbers to come in, Let me give you some of your morning calls that are going to set the agenda. We've got the analyst recommendations. This is what we've got for you. First up, JPMorgan cutting this
recommendation on Coinbase to underweight. Analysts say the enthusiasm around crypto ETFs could deflate. Next up, Chevron getting a downgrade by TD Cohen to market perform. The analyst says that the steel may not contribute to the oil giants bottom line until 2027. And finally, satellite radio company
Cyrus Ex. And it's getting a downgrade from Wells Fargo to underweight the analysts see weak subscription revenue coming up on the show. Kalvin C of BNP Paribas discusses why he believes the market is pricing an overly optimistic earnings season.
Equity markets quite literally holding on by their fingernails when they hear of that are the technology earnings at Look at that. See, he's up in the opening bell ago. That matters probably more to the sentiment you got Mr. Johnson. Equity markets are, as I say, trying to trade higher. You've got these bond markets debating
where they go next in terms of you. Let's see what Netflix delivers. The numbers are already doing deals this morning. We'll talk more about that in a moment. Euro dollar that is dying beneath a 1% ten year U.S. trade flat, a full 1320. A lot of the juice is already in the equity market and in the bond markets. That is the narrative from our panel of gas this morning.
Oil drops by 7/10 of 1%, 7425. There is one stock to watch at the open. United, the airline beating on expectations for this year. The outlook despite the hurdles being presented to them by Boeing come fly the friendly skies with Abigail Doolittle and united's.
I plan to be flying those friendly skies in the not so distant future. Managers love to travel as far as shares of United, they're flying high, to excuse the pun, the best day since April of last year. A relief rally in some ways because Delta not so long ago, in terms of their quarter, they guided down relative to profits.
That's the opposite of what United did, as you just mentioned. So the quarter that just was, they put up earnings of $2 per share, 20% or thereabouts better. They beat on revenues relative to the guidance. They gave new guidance for 2024 of $9 per share to $11 per share. The estimate, the consensus at 945. So the midpoint above that, some analysts saying it's very important, especially given all the problems with the MAX planes, the fact that they were able to maintain and give guidance that could potentially be better than what the Street was looking for, that that is really very positive.
In general, analysts are positive saying that this was a strong beat for the end of the year. That guidance seems very solid and that one analyst in particular over at Citi, Stephen Trent, saying that this is further evidence that the US network airlines, the big airlines have traded places with the discount carriers. As for the stock performance coming into this United Airline underperforming, two of those other big airlines down about 21% relative to Delta down 5%, and American Airlines down 16%. But probably now after today's big performance, at least right now, that's probably trading a little bit more even to American Airlines. But still some work to do to fly positive on the air.
Okay. I mean, thank you very much. That stick on the earnings on Johnson Johnson beat most of the estimates with medical device sales and former revenue driving the profit. Katie Greifeld is with me now. Johnson Johnson steams ahead. What drove the numbers? Well, there was actually a lot of good news here. You take a look at the shares, you're not necessarily seeing that. But to get specific, fourth quarter earnings, they actually beat most expectations.
That was thanks in a big part to medical device sales and better than expected pharma revenue. Two areas with plenty of high margin opportunities, which bodes well for Johnson and Johnson. CFO John Walk also said that Joe Walk, rather, he said that quote, Large M&A does not scare us and that the company is considering a pharma deal. So a lot of movement going on at JNJ shares currently lower, though, as you can see, by about 2%. We'll see how long that lasts given if you take a look at the sell side, pretty positive on this report. Citi, for example, saying that the strength in the firm's medical devices unit bodes well for peers. You also have Jp morgan saying that the
numbers highlight healthy underlying trends for Jay and Jay's business. So stay tuned. But currently down by more than 2%. Okay, We'll keep an eye on that. Katie, thank you very much. And tune into our interview with the CFO at 10:40 a.m. Eastern Time. What level of AI overlay can he put into
Johnson Johnson that might help the stock? Different earnings outcome for Dr. Horton. The homebuilder reported weaker than expected quarterly orders amid high rates. Talya Kenny Javits joins me now with more details on 4.43%. So a bit of pressure there. That's right manner. So quarterly earnings came up 35%. That's down year over year. That sounds like a lot, but it was an easy comparison and the number came below expectations.
EPS also disappointed, but at the same time, the US homebuilder was very optimistic about this upcoming selling season this spring. They also slightly increased forecast revenue for the full year. So 2023 was a very challenging year for the US housing markets. Rates were elevated and it's pretty much understandable because who wants to buy a new house when mortgage rate was about 8% and if you bought it, especially during the pandemic when rates were at 2%.
So now mortgage rates are coming down big. US homebuilders are using incentives. They have an opportunity to provide lower rates for customers somewhere around 5%, and it helps them a lot. So as mortgage rates moving down. We see this increase in US homebuilding sentiment in January. It spiked by the most this or by the most in nearly a year. And we see that it's still actually
slightly below pre-pandemic levels. During the earnings call, the company also said that they will continue using incentives and they are ready to reduce prices for homes and also reduce square footage when necessary just to boost sales. There you go. Trying to get those houses off the lot, of course is deal would not Dr.
Horton Irishman doesn't go a long way in New York does it. Natalia, thank you very much. Another earnings number for us to keep an eye on. Procter and Gamble, the consumer goods company missing estimates as volume continues to slip. So where was the slippage? Simone Foxman gives the details.
Stock at five and a half percent higher. SIMON So talk us through it. Yeah, there were some mixed messages here, but the analyst classic clearly reading the positive ones and that's why we're seeing shares up well over 5% this morning. This is the maker of bounty paper towels, downy fabric softener. Saw that organic revenue mess. That was where we saw some pressure. Beauty sales up 1%. Everyone had expected that they would be up 3.8%. Baby and family care also falling short of estimates and the company complaining of a slower than expected recovery in China.
All of this weighing on overall sales. Overall net sales, 21.4 billion. The expectation had been 21.6. That said, the positivity here, all because the profits were really okay. They were still able to boost prices 4% year on year margins, significantly better than expected, and their profit outlook for the full year ending June 30. That was also on the high end of estimates.
They've been talking about 6 to 9% growth, now saying they're going to see 8 to 9% EPS growth, even though their sales are going to be on the lower side of expectations for retailers broadly, we are seeing them try to play off a weary consumer that's overall spending less with juicing their margins and overall delivering higher profits. That was what's happening here. Bloomberg Intelligence saying this profit beat easing commodity costs and improved volume trends, all of those things are underpinning their confidence on the company achieving its guidance. Citi also saying these were solid results and that optimism being reflected in early trading that us. SIMON Thank you very much, Simone Foxman Let's turn to our gas now and its carbon. I'd be happy about weighing in on
earnings. It gave it to another newspaper, but we won't hold that against them. Here we go. The market is looking for reacceleration in earnings growth to 12% this year from 3% last year. And this looks a little bit too optimistic in the environment when we expect growth to slow. Colvin, good morning to you. So I've been saying all morning I'm sort
of channeling the song from the 1980s by holding on for the hero that is the earnings specifically from tech. Really to give us a little bit more alpha, you are doubtful. Why are you why are you committing this crime of doubt? Sure.
Thanks for having me. Mattis. Our main message is that we think the markets are too optimistic for this year. If we look across asset classes, including in equities. It looks like the markets are perfect, perfectly priced for a soft landing in the United States. We expect that landing to be a bit bumpier. We're expecting growth to essentially be flat in the first quarter, looking for a small contraction in the second quarter. And that is in an environment that we
think is going to be quite difficult for the markets to meet their earnings expectations. As you said, the markets are looking for an acceleration of earnings this year from 3% to 12%, which we find hard to see in an environment where growth is slowing. Now, you did say to another newspaper, despite all the enthusiasm that we've seen in stocks right now, we're inclined to go the other way.
Now, what does that mean? Does that mean depressed or does it mean short? Does it mean hesitancy translate for me? Sure. There are different ways that we like protecting the downside. One is options at the moment are quite cheap, so we like buying downside protection as well.
There are certain pockets of the market we think that make overwriting strategies look quite attractive. In other words, if you cannot go short the market, you can own your stocks, but at the same time sell topside calls and that allows you to collect some premium, earn some income while at the same time being in the market again, as we don't expect the markets to trade significantly higher from here. We think those kinds of strategies make a lot of sense for investors who need to stay invested in the market. And to a certain extent, we're having a debate this morning and every morning about the timing and the type of rate cuts that come. So this morning, so far, I've had we're going to get insurance rate cuts from the Fed, and maybe that's two cuts. And then the window closes as of Labor
Day for them. Does that sound about a base case for you because you're quite bearish in terms of the number of cuts and the timing? That does not really resonate with our own views. Our own view is that the Fed starts its cutting cycle in May of this year. They cut 25 basis points at that meeting and they cut 25 basis points for every meeting for the rest of the year.
So we're looking for a 150 basis points of cuts this year. And while that may seem a lot, the Fed is only forecasting three rate cuts for this year. We don't think it's that extreme, especially when we're thinking about policy in real terms rather than nominal terms. We're expecting quite significant deceleration in inflation this year. And as that occurs, the rate cutting
regime that we envision basically keeps real rates steady. In other words, it's not adding a ton of accommodation into the market, but the Fed didn't cut consistently. We think in the back half of this year it would push real rates higher, which would actually tighten conditions, which is something that the Fed probably wants to avoid in a scenario, again, where we see growth slowing down this year. So if that's your view in terms of rate cuts beginning in May, we go one each in each meeting then how do you think this plays out then for the curve? Because that is a series of rate cuts not predicated on any massive implosion in growth.
I'm presuming it's the fabled soft landing and behavior and inflation. How do you see the curve refracting then? Sure. So for this year, we don't think the markets are that mispriced. We're forecasting 150 basis points of cuts. The markets are forecasting about 135. So we're not too far off where I think the best opportunity on the curve lies is not for 2020 for pricing, but where the markets have priced for the end point. In other words, the terminal level of cutting. And what's really interesting to me is
that the markets have pulled forward rate cuts quite aggressively over the last few months into this year, but that end point has been pretty steady and we're currently around 3.35%. And we've been hovering in that three and a quarter to three and a half range for quite some time. That's another sign to me in the rates market that the markets are again very optimistic because the Fed's view of where neutral policy setting is rates that are neither restrictive nor easy is a two and a half percent. So the market's expecting the Fed to end close to three and a half suggests that in the rates market as well, the markets are looking for a very soft landing.
We expect that landing to be a little bumpier than the markets expect, which is why our own forecast is that the Fed ends its cutting cycle at 2.75%. Therefore, because of that, we like positioning in the belly of the curve and we like steepness looking for five year to outperform the ten year. Yeah. And this is a building narrative not
just now but certainly before Christmas and onwards, which has been, you know, go for the belly of the curve. I look at risk and to a certain extent there's there's a phrase that we had over Christmas time, there's weaponised FOMO. And to a certain extent, I want to get a sense from you, do you think that these markets look as if they're being careless or reckless in any way in how they're pricing equity risk? I wouldn't say the markets are careless or reckless. What I would say is that the markets are optimistic and the markets are very positioned in a way that is quite different from last year or last year. Positioning was light. Earnings expectations were weaker,
especially as everyone was looking for a recession, while at the same time protection was well bid this year. Basically, everything's flipped on its head. We're positioning us now long. We think that earnings expectations are too lofty, while at the same time that reach for protection isn't there. So an indicator that we look at is skew
in the S&P 500, the cost of puts relative to calls. That's at a historically low level suggesting that investors are not looking for that protection in this overly optimistic market environment we think is one that suggests room for correction lower. Okay. And that if we scaled back a little bit on that, maybe all those those hedges, as you say, will work if you ride the calls out of the money calls and maybe pick up a little bit of cheap volatility and let's see how it plays out. Currency BNP Paribas. My guess this morning on markets. Netflix will deliver their numbers, kicking off the big tech earnings after the close.
They will still continue deliver growth, of course, supported by these structural talent that is artificial intelligence. Big tech, better deliver on Bloomberg. Look back. It's not just last year, but in the past five years, Right? The compounded annual growth rates of these mega-cap tech companies has been great, ranging from 15% to even 30% EPS growth. So I do think that this earnings excitation is likely to be justified. They will still continue to deliver growth, of course, supported by these structural talent that is artificial intelligence. Gentlemen, we have obviously Brewin Dolphin giving our outlook for the tech earnings season that's really going to kick into high gear. Netflix brings the bacon home today
getting a boost after announcing they're going to pair up with wwe eve, the first big move into live events. Netflix are paying $5 billion for the exclusive rights to wrestling content and this potentially more good news on the way. The analysts expect Netflix to beat its own forecast for subscriber growth when they report after the bell. Geetha Ranganathan joins me now. So we caught up a little bit earlier and you've got some pretty punchy numbers pencilled in for subscriber growth. Let's start there. Yeah, absolutely.
So, you know, expectations going into the fourth quarter madness are pretty high. This is a seasonally strong quarter good solid content lineup. And of course, they have their two big initiatives which have been in place through most of this year. One is, of course, the new advertising tier, which is, you know, a much more economically priced. And the other one is the password sharing crackdown. And both of those initiatives are not
only expected to yield new subscribers, but going into 2024. It's going to be about how they play up the revenue reacceleration story. And you brought up an excellent point with the raw deal because that really goes that really speaks to their scale or the ambitions that they have for their advertising business. Live wrestling, there was a there was a huge cheer went up in the newsroom every two weeks there that said wrestling reigns in the New York newsroom gave it. Thank you very much, Keith. A rock anthem that Bloomberg Intelligence will bring you those Netflix numbers, of course. And let's stick with the deal. The WWE Nick Khan, WWE president joins us in the next hour.
So that's going to be a fascinating insight. Ed Ludlow is standing by. In terms of what else we've got in the pipeline of Bloomberg Technology. So I said it at 9 a.m.. I'll say it again. You know, we are holding on for the
hero, and that is technology. Yeah, I think the big theme for the earning season is The Magnificent Seven is still going to account for the large bulk of EPS growth for the S&P 500, for example. But this week we kind of start in earnest. The chip sector is really important to watch.
Texas Instruments is a maker of very basic chips. They go into very many end markets, but they also are seeing shrinking bottom line, because many customers have been working through a build up in inventories. And then you look at Intel later in the week, the first time that they're due to report both revenue and profit growth in the post-pandemic era. But the thing they both have in common is the outlook for the 24 2024 TSMC'S capital spending plans for this year.
They're the biggest contract manufacturer of chips, made us confident and then go back to the Magnificent Seven. Tesla is first up this week you know record quarterly sales expected. But again look to the bottom line. That seems to be where we're going to be most focus because they had to heavily discount and incentivize in the final three months of the year with analysts expecting a drop in EPS excuse me, of about 39%. And Tesla has this target of 50% annual
growth, which means that they should guide us towards 2.7 million EVs in 2024. The straight things that guide to 2.2. And but the broader story with EVs has been that we will still have growth in global sales this year, just not the growth we expected. And of course being the market incumbent and the leading pure play in EV, Tesla is the best barometer of that. So buckle up madness. It's an exciting week. They let me out of my box and I'll do my
thing and you'll do it very well. Thank you very much. Bloomberg Technology and Ludlow. That Calvin C is with me, BNP Paribas, for its final thought. You know, there is this view by strong tech with balance sheets. They are money in a rising rate environment.
Here we are going into cutting rate environment. Will that embolden the growth to value narrative? Thanks, Maness. A lot of the equity rally that we've seen over the last few months has in large part because of the macro environment. And what I mean by that is we've seen a large rally in rates over the last few months, and a large rally in rates has meant essentially that these earnings in the equities market has been discounted back at a lower level. What's notable, though, is the driver of
the rates rally and the driver, the rates rally has largely been improving inflation. So inflation, lower rates, lower equity markets. Love that Going forward. However, we think that significantly lower rates from here, the driver is going to change. And with the markets already pricing the Fed to cut essentially at 25 basis points a meeting for the year for rates to go lower, we need the market to be pricing 50 basis points of meeting and we think a necessary prerequisite for the markets to get there is that growth needs to weaken quite significantly. So the main message here is that lower rates from here we don't think is necessarily going to be that equity markets supportive because the driver is likely to change.
Okay, let's see how the year pans out to sales. You know, it's still fresh in the air. Nobody really has that crystal ball cabin. Thank you very much.
Currency on the markets right here on Bloomberg. My bid for Brett this morning. Rustle up a half of 1%. 80% of the companies that have reported in America for the fourth quarter, they've beaten in terms of profits. That's the notes hot off the UBS scribe from Selita. Marcelo, let me get you up to date with the trading diary. This is what you're going to watch for
the rest of the week today. It is all by politics. New Hampshire primary plus Netflix with Bang that drum several times. We get those numbers Wednesday. It is more tech earnings, Tesla and IBM. What are the price cuts at Tesla? Thursday it is macro monetary policy. ECB is on the blog and we will get a read on the growth story in the United States for the GDP. American Express hits the tape on Friday. Equity markets at the moment are bid.
This is about banking on earnings from Netflix, from Tesla. Equity markets are bid up. That was down to the open. Thanks for joining us on Bloomberg.
2024-02-01 02:52
