Interview: State Street Global Advisors
>> the u.s. trade deficit widened in april with record oil prices and demand for foreign goods pushing the gap between imports and exports of goods and services almost 16% wider. investors will have more economic data to consider next week, including wholesale and consumer prices in may. chris probyn is chief economist with state street global advisors, joining me from boston with a closer look at economy. welcome to the program. let’s begin with the consumer price data for may and pursuer price―producer price data.
>> i think we’re likely to get positive news on inflation next week because we know that gasoline prices fell between the survey weeks, both the p.p.i. and c.p.i., helping to drag down the headline numbers assuming a modest uptick in the core, i think we’ll probably get some quite positive news on both p.p.i. and c.p.i. next week.
>> what―where is inflation right now?
>> i think inflation is probably stabilizing? i think it can go a little higher from here. it has certainly trended up from its lows. i don’t think tell continue to trend up. i think it may go a little higher and stabilize and perhaps come down a bit. that’s, of course, referring to the core. i think the headline, of course, will depend a lot upon the path of oil prices.
>> the core meaning excluding food and energy and right now we have a bloomberg survey showing 2.2% is the expected number according to economists we surveyed.% is that where you are? 2.2% inflation cutting out food and energy?%
>> yes, above .2 on the month, putting it at 2.2 year over year.
>> you said the fed may increase the pace of rate hikes in the second half of 2005. aren’t the low yields we’ve seen in treasuries, close to 4% yield on the 10-year, suggesting that bond traders aren’t so convinced we’ll have inflation or heating up economy? doesn’t that contradict the idea that the fed may be aggressive in the second half?
>> absolutely. there certainly is, as chairman greenspan said, a conundrum between the economic data we’re seeing, the rhetoric out of the federal reserve, most recently, of course, this week from the chairman himself.
>> just yesterday.
>> yes, just yesterday. and what the bond market is doing. there’s clearly a disconnect there. i think there’s a little upside risk to both growth and inflation over the remainder of this year and therefore the idea that the fed may in fact go a little quicker should not be discounted so readily by the bond market .
>> i see. so it’s the bond market that has this wrong? or is it that the fed is going to raise no matter whether there’s signs of inflation or economic growth or not, that they’re dead set on raising and will?
>> no, i don’t think they’re dead set on raising but i do believe that it’s quite likely the economy will stay in what i call the goldie locks zone, where growth, no inflation, are either too hot or too cold, like the current level of inflation we see now and growth between 3% and 4%. in that zone, i think the fed will be quite―will decide to keep raising rates at a measured pace. if we start to move outside of that, they’ll go faster.
>> i guess what i’m trying to understand is whether you think the fed has been too aggressive, not aggressive enough or appropriate.
>> appropriate.%
>> the goldie locks scenario, yes. indeed, where will the fed funds rate be at the end of the year?
>> 4.25%.
>> ok. now, let me ask you about the measured language. is that likely to be dropped soon?
>> well, it’s been watered down by the minutes. it was always taken by the market to mean 25 basis points a meeting but the minutes a few months ago suggested it means something broader than that to the fed so i’m not sure it will matter if it’s removed or not. i tend to think it will stay in for the time being.
>> for our viewers. i’ve charted a six-month graph of the euro against the dollar and it’s dropped like a rock since its all-time high against the dollar on december 30, 2004. it has moved very much downwards now at $1.21 and change per euro now. will this trend continue?
>> no, i don’t think so. clearly, there have been two developments. rates have continued to rise in this country against the backdrop of solid economic performance while rates have been steady in the euro zone, increasingly speculated to be on their way down against a backdrop of very disappointing economic performance so it’s not too surprising that the currencies would have moved in this direction.
>> the big risk you hear in the economy, people talk about a real estate bubble that may burst, everyone with a.r.m.’s and interest-only mortgages. do you see this as a threat?
>> no. i don’t believe there is a national real estate bubble. it valid to be a very large price correction to have a macro economic effect.
>> we’re out of time. our thanks to chris probyn, chief economist with state street global advisors, joining us from boston. coming up, “money & sports.” what could be the most popular segment here at bloomberg television. a collector looking for an item connected with the curse of the bambino shells out a chunk of change.
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Listen Market briefing --- Bob (fast)
Chart of the day --- Tom (slow)
see about .1% at 10,512, while the s&p 500 fell about .25% at 1198, just below the 1200 level it crossed down through during the day. the nasdaq down .67 % the biggest mover, the move to the downside. stocks up, the s&p up for three of the last four weeks on a weekly basis and eight of the last 11 weeks. the yield on the 10-year treasury note is once again above 4% after falling to a low of 3.88% on june 1. for a look at where the yield may be heading, we turn to our “chart of the day” segment and joining me now, as always, with that segment, news editor-at-large, tom keene, here on my left, joining me on set.
>> we’ve had week after week after week of tumultuous news and this is finally almost a normal week. but we come into friday sort of quiet, which is a nice change. i thought we’d look at the 10-year note, here it is, 2002 to 2005. excuse me. big yield down. the yellow line is 4%. what the big debate here is, we came down, touched just under 4%. that’s right, bob, right there. we come up today to, rounded up, 4.5%. there’s a titanic debate going on, do we go lower, do we sustain to a lower yield, or the optimists of the economy saying, look at this channel going back two years, three years, will we revert back into that channel and that’s the polarity heading into midyear 2005.
>> is it generally the fed comments yesterday to congress―the fed chairman’s comments yesterday to congress where he expressed it’s not historical for the fed to be raising rates and the long-term treat stay low. did that push yields higher?
>> clearly the chairman’s testimony moved the markets . the futures market lifted up a little anticipating more fed increases away from president richard fisher of the dallas fed suggested herer in the week, remember, the eighth inning idea, just four or five days ago. but certainly the chairman’s testimony moved the future pricing up to higher yields.
>> the chart you talked about, i see the red lines and the upward trend in yield, which is not -- people lately have been talking about, we can’t believe 3.88. your point is in some regards an upward trend. what is the distinction between those that believe we are looking at higher yieldsversus 3.75, maybe?
>> the tension is always inflation, price change. simply put, if you believe in higher inflation, yields will run higher. but something else is going on here. what we see more and more in the notes by economists is discussion of growth. david lynch reit raiting a low-growth environment while john ryding saying, look for high growth. that’s the distinction with inflation.%
>> moving on, looking at the rally in shares of u.s. retailers. the s&p 500 retailing index climbed 11% in the past seven weeks but discounters like wall art are trailing luxury retailers or higher-end will sellers of good and some investors say that gap in performance is growing, the subject of today’s “gating stock―“taking stock” segment with ari levy. tell me how people are explaining the divide between luxury and discount retailers?
>> what we’ve seen is that you’ve had a 5% rally in the s&p 500. you’ve had a 10% rally in the retailing group. wal-mart not part of that group, only up about 1%. they’re saying the high oil prices we see between $50 and $55 a barrel are having an inordinate effect on the lower end retailers, the wal-marts and dollar stores, saying that higher oil and gas prices are a tax for all consumers but a relative tax. the―when you look at incomes on the higher income earners, they’re actually seeing―their wages going up and the hourly wage earners are relatively flat, doing a battle with inflation in terms of growth so it’s a relative tax.
>> the gap between have’s and have not’s, if you will, is expanding?
>> right.
>> we’re getting c.p.i. and producer price index next week. what kind of data might give further insight into the distinction?
>> investors i spoke with on the retail side are looking more at the retail sales numbers. we’re looking for monthly retail sales numbers, expected to decline for the first time since august.% also, consumer confidence numbers. consumer confidence probably dropped or rose but less than the previous month and so, again, what this is saying, wal-mart, the world’s biggest retailer, has an inordinate impact on those numbers so if you break them out, it’s the lower-end retailers hurt the most.
>> that said, wal-mart has underperformed target. we’ve done stories about target and other discounters have done better than wal-mart lately. let me also ask you about signs that higher end retailers are getting too pricey. they’ve done so well, but do people believe they’re too expensive to buy?
>> if you look at the nordstrom and coach’s, nordstrom shares have more than tripled and coach shares have more than doubled so certainly investors may take a pause before buying those shares but if you look at price-to-earnings ratios, they’re about where they have been over the past five years so if you really focus in that space, these shares may still not look too expensive.
>> thank you for joining us. when we come back, more business news.
