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First Move with Julia Chatterley
Mixed Messages On The Trade War Fueling Market Volatility, U.S. Retail Though, To The Rescue; Walmart's Earnings And Consumer Spending Numbers Soothing Nerves; Berkshire Hathaway Increasing Its Stake In Amazon. Aired 9-10a ET
Aired August 15, 2019 - 09:00 ET
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JULIA CHATTERLEY, CNN INTERNATIONAL ANCHOR: Live from the New York Stock Exchange, I'm Julia Chatterley. This is FIRST MOVE, and here's your need
to know. Market jitters: Mixed messages on the trade war fueling market volatility, U.S. retail though, to the rescue. Walmart's earnings and
consumer spending numbers soothing nerves. And Buffets billion dollar bet. Berkshire Hathaway increasing its stake in Amazon. It says Thursday, let's
make a move.
Welcome once again to FIRST MOVE. Guys, after the volatility that we saw in yesterday's session, the choppiness quite frankly, and the losses in
U.S. markets all I can really promise you with any confidence, I think today is volatility matched with plenty of analysis.
Now, speaking of volatility, take a look at what we're seeing right now for U.S. futures. I can tell you they've been changing more often than the
weather this morning. We were higher, then we were lower. And now we are higher again. It's a carrot and stick approach. Let's call it that.
The stick -- overnight, Beijing threatening fresh tariff retaliation, if those U.S. 10 percent tariffs eventually hit, not what President Trump was
hoping for. I assume when he asked President Xi for a personal meeting on Twitter last night, but now here's the carrot. There's a statement from
the Chinese Foreign Ministry saying they hope a deal can be reached through quote, "equal footed dialogue." I'll call that let's meet halfway. We
shall see.
I'll tell you what. It follows the worst day of the year for U.S. stocks and three percent losses across the board amid all of that chatter about
the potential of -- or recessionary warning signs coming from the bond market. The bottom line here is though, one day does not make a trend, and
at some point, we need to see weaker data to simply justify the flight into bonds, the safety of bonds, and of course, a pullback in stocks here.
Now, I would agree, the manufacturing sector in the United States has a recession like feel, but it's just a small chunk of the economy, the
consumer, the services sector is also key, and there was little to fear from the earnings from retail giant, Walmart this morning.
Solid U.S. spending and an upgrade to U.S. forecasts as well, helping support sentiment. That came as the U.S. retail sales data hit much better
than expected in these numbers, too. Another sigh of relief therefore from investors.
The final point I'd make here is, U.S. stocks do tend to rise after we get recessionary warnings from the bond market. Typically, of course, you have
a Central Bank that's cutting rates. And finally Janet Yellen, even yesterday saying she he doesn't think we're looking at a U.S. recession
right now for the U.S. economy.
Let's get to the drivers because there is plenty as always to discuss. John Defterios joins me now. John, whether we look at the trade headlines,
whether we look at the moves that we're seeing, the fall in energy prices, the nervousness in stocks right now, you name it, investors are dealing
with a great deal.
JOHN DEFTERIOS, CNN BUSINESS EMERGING MARKETS EDITOR: Yes, this is a market on tenterhooks, Julia, subject to every economic report, either the
downside or the upside, and also the geopolitical shocks that you were outlining in in your opening comments there.
I would say this is a market like a yoyo, not that children use them anymore. But we're getting swung all over the place. I'm glad you singled
out that retail sales, though they were much better than expected at 0.7 percent. Think about it. Twenty four hours ago, we were talking about the
retail sales collapsing in China.
So, a very different story and why we see the market gyrations playing out here. It was interesting, the interpretation of the statement that was
coming out of Beijing, whether to meet the U.S. halfway or not. I have the official line here, and it's interesting. This is from the Ministry of
Foreign Affairs spokeswoman in Beijing, saying, "We hope the U.S. can work in concert with China. That is positive, of course, and there is
dialogue."
The two Presidents are sharing phone calls and letters, according to the spokeswoman. But after we had this market low, Julia in Asia and Europe,
we got the jolt that China was going to retaliate with the measures that are left over from the Trump administration that do go into effect in
September.
So is President Xi going to dig in his heels for the long haul? Or is this the beginning of going back to the bargaining table and trying to get a
deal before the December 15th deadline, and the second round of tariffs that will come into place? This is a big question.
It was interesting, the Australian Central Bank Governor said today, this may be a self-fulfilling downturn taking place. Janet Yellen doesn't have
these major concerns, but he does and that market was down 2.8 percent that Australia is cutting interest rates. So U.S. is holding up, but the rest
of the world doesn't look very bright at this stage.
[09:05:01] CHATTERLEY: And that is such a key question because even if the United States itself in the interim can avoid recession, can it avoid the
weakness that we're seeing in most other places around the world and I think that's key.
It's also key, of course, with the Federal Reserve here and the Central Bank, the President lambasting Jay Powell once again and saying he rose
rates too much, he should have cut them sooner right now. We've got Jackson Hole next week, which brings together the Central Bankers of the
world's largest economies.
We may we may not see Jay Powell speak, the question is, in the face of market pressure, of Presidential pressure, what can and what should and
what does he say here?
DEFTERIOS: You know, it's interesting, Julia, I remembered following Paul Volcker in Washington, the tough job that Alan Greenspan had; Janet Yellen,
of course, and those who have followed her. Jay Powell though has a very difficult position, because it's very unusual, you have a President, giving
him a verbal lashing every time there's problems in the financial markets. That is exactly what happened.
And how does he nuance the fact that the U.S. consumer remains strong, as evidenced by the retail sales? We'll hear more from the industrial sector
later in the day, but the rest of the world is looking very tired.
Again, 24 hours ago, we were talking about the collapse in industrial production in China. We're talking about the golden decade in Germany
drawing to a close. That is Europe's largest economy. The top five economies in the world look very weak.
And then certainties are going to reemerge again, with Brexit, Hong Kong still in play, and we have the tensions in the Middle East. So these are
factors that could tip us into much slower growth outside the United States.
CHATTERLEY: Yes, and can the United States remain resilient? John Defterios, thank you so much for that very much in line with what we're
seeing here. And let's get to some good news. Walmart earnings beating estimates in the second quarter. Premarket, we're seeing the stock up some
six percent right now. They also raised their forecast.
Clare Sebastian joins me now. Clare, it's a bigger question over whether this is a broader sign about the strength of the U.S. consumer right now or
a specific story for Walmart, but whichever way you look at it, these were solid numbers.
CLARE SEBASTIAN, CNN BUSINESS CORRESPONDENT: Yes, Julia, I think it's actually both. Walmart obviously got the scale, which many retailers
don't. They are, in their words, extremely well placed, for example, to mitigate the impact of the tariffs, which gives them a lot of strength
there.
They said, on those tariffs that they've already reviewed those lists that came out two days ago from the Commerce Department. They do see more of
their goods on there than the previous list, but they are well placed to mitigate them, and they're going to look at price rises on an item by item
basis.
But this was a very strong set of results, Julia, driven not so much by the number of transactions from customers going up, but by higher ticket
prices. Those were up 2.2 percent in the U.S. Each customer spending more e-commerce; another really good story up 37 percent in the U.S. that
continues to be driven partly by the expansion of grocery, which is an area where Walmart really does have the power to lead.
They've now expanded their pickup to the 2,700 locations nationwide; 1,200 do one-day delivery. So, this is really an area in the words of their e-
commerce chief where they have a unique strength. So, a lot of good stories there.
And they updated their guidance for the full year, which in this climate, I think is a really strong move. Walmart does not want to be the kind of
company that over promises and under deliver, so they have to be pretty confident in that even with their overhang from the tariffs.
CHATTERLEY: Yes, you make such a great point. Even given the uncertainty, they're still willing to do that, though admittedly, many analysts were
expecting this. Can we compare and contrast what they're seeing in the United States and the strength that they're seeing there with the
international because they were always expected to outperform in the United States? What are they seeing internationally here, Clare?
SEBASTIAN: Yes. I mean, the size of the Walmart U.S. business, it dwarfs every other part of their business massively. It's almost like the
contribution of Amazon Web Services to Amazon's overall top and bottom line.
And frankly, the operating income from the U.S. is 77 percent overall, and in terms of the guidance, while they are revising up overall, they are
revising down slightly the sales internationally.
But one element, Julia, that I thought was really interesting was that even with what's going on in the trade war and the potential for that to
exacerbate the slowdown that we're seeing in China, Walmart says it saw comparable sales, same store sales in China up three percent overall.
So I think they continue to show some strength. I think nine out of their 10 international markets, same store sales growth. So this is despite the
fact that it isn't as strong as the U.S., still fairly strong.
CHATTERLEY: Yes, fantastic. Clare Sebastian, thank you so much for that analysis. On now to the bellwether, arguably of the Chinese retail sector,
Alibaba's revenues and profits beating estimates this morning, too.
Paul La Monica has more details on this. You have to feel a bit sorry for Alibaba. Their share price has been pummeled this year as a result of the
trade war, but these earnings are pretty solid once again.
PAUL LA MONICA, CNN BUSINESS REPORTER: Yes, I think it shows that for now, Julia, the Chinese consumer is still spending, particularly the more
affluent Chinese consumers and this follows on the heels of JD.com, Alibaba's big online retail rival reporting solid results earlier in the
week. So that's great news, I think for those two companies and the state of China retail following on what Clare just said with Walmart as well.
[09:10:16] LA MONICA: Walmart actually has a stake in JD. It shows that consumers broadly are maybe a little bit healthier than we thought. But
with Alibaba, you also have to factor in their massive Cloud business.
They are trying to go toe to toe with Amazon and Microsoft, and the strong revenue gains there, I think suggest that Alibaba Cloud is doing a good job
of attracting smaller and mid-sized businesses to set up shop on Alibaba so that they can sell their goods around the world.
And that's great news for obviously Alibaba, and all these mid-sized retailers that want to do business in China, as well as the U.S.
CHATTERLEY: Absolutely. The further diversification of the business, too, which also helps. Paul La Monica, great to have you with us. Thank you so
much for that.
All right, let me bring you up to speed now with some of the other stories that are making headlines around the world. Beijing warns its quote
"prepared for the worst" when it comes to handling the unrest in Hong Kong. Paramilitary units are at the border with the territory armed with riot
shields and batons, apparently ready to move in, if necessary, after weeks of violent protests. CNN's Matt Rivers is in Shenzhen, China which is of
course adjacent to Hong Kong. Listen in.
MATT RIVERS, CNN INTERNATIONAL CORRESPONDENT: We're here along the mainland China Hong Kong border; right across the water there it would be
Hong Kong, and yet on this side of the border, there has been an influx of several thousand new temporary residents that really has been generating
quite a stir.
I'm talking, of course, about several thousand members of the People's Armed Police that will be China's paramilitary force that had been
temporarily deployed, as CNN has seen firsthand.
They've been deployed to a sports stadium just a few miles away from where we are right now. We saw armed personnel carriers, we saw them setting up
shop for probably a stay that would last several weeks with things like mess tents and cots that have been set up.
And we also saw paramilitary members walking around holding riot shields, holding batons and helmets. The kind of equipment that you might imagine
they would carry should the decision be made to send military forces across this border and into Hong Kong.
That would be of course, the decision that Beijing could legally make under its own law, should it decide that the protests that have been going on in
Hong Kong for so long need to be quelled by the military.
Now, we need to be very clear when we're talking about this, there is zero sign -- zero sign -- of an imminent deployment of those forces. And that's
for a good reason because Beijing, according to just about every expert we've spoken to does not want to send forces into Hong Kong, because simply
put, the consequences would be disastrous -- economic, political, diplomatic, even military consequences for Beijing that so far, they have
made the calculation that sending forces in to quell the protests, it's simply not worth it at this point.
That did not stop the Chinese Ambassador to the United Kingdom, though, at a press conference today reiterating the often stated stance of the Chinese
government that the government has the right to do that, to send military forces in and they are prepared to do that should it get to a worst case
scenario.
Now all of this is happening as President Donald Trump, well, he is linking the ongoing trade dispute between China and the United States to what is
going on in Hong Kong. He has tweeted recently, in the last day or so saying that Hong Kong -- the Hong Kong situation should be humanely
resolved by Beijing before a trade deal can be struck.
And then he also said that he believes his good friend, President Xi of China could step in and humanely solve the situation, if he were to choose
to do so. The President doing what he often does there, linking the ongoing trade dispute with another issue.
We've seen him do it with North Korea and the trade war before; and now we're seeing him do it with Hong Kong. The Ambassador for China to the
United Kingdom was asked a question about that, and he simply responded by saying that China would never abandon its own principles about Hong Kong
for the sake of a trade deal.
So China, they are clearly not willing to publicly link what's going on in Hong Kong to a trade deal as President Trump is doing. But whether the
President of the United States weighs in or not, this situation on the Hong Kong-China border, the Mainland China border with Hong Kong, it is ongoing.
There are troops that had been deployed not far from where we are, and where this all goes from here, even if a deployment is an imminent, well,
that's the big question and no one really has an answer to yet. I'm Matt Rivers, CNN, on the Mainland China-Hong Kong border.
CHATTERLEY: Just one of the big questions hanging over markets right now. Let's move on. Britain's opposition leader plans to call a vote of no
confidence in the new Prime Minister Boris Johnson.
Jeremy Corbyn says he wants to stop Prime Minister Johnson's government from leading the U.K. to a no deal Brexit. Corbyn didn't say when the vote
would happen. Parliament returns from its summer break in September.
[09:15:08] CHATTERLEY: I call that cutting it fine. All right, we're going to take a quick break here on FIRST MOVE, but still to come, retail
therapy. The U.S. consumer goes for spend over save in June, but is the summer splurge enough to restore confidence in the U.S. economy?
And not your normal inversion. The bond market signals are about the distorted yield curve and bond buying rather than the real recession risk
says Mohamed El-Erian of Allianz. We will be discussing later in the show.
(COMMERCIAL BREAK)
CHATTERLEY: Welcome back to FIRST MOVE live from the New York Stock Exchange here on Thursday's morning session as we countdown to the market
open. Volatility the name of the game here for U.S. stock market futures. Futures fell earlier on after China's threatened to retaliate if we see
fresh U.S. terrorists applied; then they turned around after China seemed to say that they wanted to meet the United States halfway on trade.
Then we got strong U.S. retail sales data and then Walmart's earnings, of course helping sentiment hereto. What we're looking at right now is the
financial sector in particular, looking to bounce after we saw the financial sector for the S&P 500 yesterday, falling into correction
territory.
What about the bond markets? Because that was the real focus, of course, in yesterday's trading session. We've got the yields on the U.S. 10-year
bond trading a little bit higher here. It's up to 1.58 percent. The 30- year bond yield as well, also off session lows. That hit record lows in yesterday's trading session.
Question is, what is going on and what should we be listening to as we look at these signals? Let's get some context.
Brian Rehling is the Co-Head of Global Fixed Income Strategy at Wells Fargo Investment Institute. Brian, fantastic to have you with us.
We were making the point yesterday on the show that if we look at the last five recessions, we've always seen this kind of signal coming from the
bonds market. But we can also get that signal from the bond market and not see a recession 12 to 18 months or so later.
So how closely -- how important is the signal that we got yesterday, admittedly, just for one day?
[09:20:22] BRIAN REHLING, CO-HEAD OF GLOBAL FIXED INCOME STRATEGY, WELLS FARGO INVESTMENT INSTITUTE: Well, I think overall, the inverted yield
curve is very meaningful, especially when it is sustained, or quite deep in terms of inversion. And while a lot of the focus yesterday was on that 10-
year versus the two-year, I actually think, if you look at the three-month versus the 10-year, it's an even more important indicator. And that's
actually been inverted since May.
So there are definitely a lot of flashing warning signs in the bond market and those continue.
CHATTERLEY: A lot of people would look at this and go, look, we now have $16 trillion worth of bonds around the world, trading with negative yields.
There's a lot going on, the global economy is slowing.
When you look around the world, the safest place looks to be the U.S. bond market, and so just the technicals here, of people buying U.S. bonds,
perhaps would create signals that might otherwise not have been there. Do you agree that's a fair point, given that the broader distortions that
we're seeing in bond markets around the world?
REHLING: I mean, as you mentioned, at the beginning, you know, inverted yield curves that preceded recessions, here now, for almost 50 years. The
last really false positive was back in the 60s. And there's been a lot of different regimes throughout those years.
So there's always a reason why this time is different. And those reasons are valid. This time could be the one time that's different. But I sure
wouldn't bet real strongly against history. I do think there are a lot of concerning signs in the bond market today.
CHATTERLEY: Talk to me about the longer bonds as well, the 30-year bonds, because we did see that bond yield hit an all-time low yesterday. How
closely should be watching this potentially, too, as a sort of indicator of further economic weakness to come?
REHLING: I think it's a great indicator of long-term growth expectations, right? I mean, if you have the 30-year, around two percent, and inflation,
let's say it even averages as it has lately a little under two percent.
So 1.7 to 1.8, here in the U.S. I mean, your real yield there is extremely small, so people are willing to buy those -- lock up their money for long
periods of time with the expectation of very little real return. So that's very indicative, I think of expectations out there that growth in the
future could be challenged.
CHATTERLEY: There are a lot of people though are looking at the situation here and saying, actually, the fundamentals don't reflect the weakness, the
signal that the bond market is saying about future growth expectations. Is the market ahead of the fundamentals?
And actually, if we see the data coming in like today, for example, with stronger than expected retail sales that we have to see some kind of
correction in the bond market. And perhaps those warning signals disappear again.
REHLING: It's possible. Yes, I would definitely say the bond market is ahead of the data. Clearly, the data that's coming in is not as bad as the
bond market indicates the future could be.
But the really key thing for me to watch is, does this yield curve inversion reverse, right? Because even today, when we had strong retail
sales, you did not see, you know, long bonds selling off more than the short term, right? So you didn't see any type of real reversal of the
inversion.
And so that tells me that the bond market is really looking past this near term data, looking to global weakness looking to how the trade dispute may
develop in the future and the impact it may have, and the bond market is not convinced things are going to turn around.
CHATTERLEY: Yes, bond market investors are incredibly stubborn right now, because you see the same thing on days when U.S. stock markets rally. We
don't see a subsequent fall in bond prices and the pickup in yields here, as you would expect in perhaps healthier times. And I use that word very
carefully here.
What can the Fed do? Because bond market investors think the Federal Reserve is going to cut here. What's the probability that we do see the
Federal Reserve enact significant cuts and we do get down to zero perhaps even?
REHLING: Well, I think the bond market is saying the Fed needs to cut. I think we're clearly going to get a cut in September.
I think the key here is, we said that data. If the data starts to slow, then we'll see the Fed come in and probably multiple cuts. And yes, if it
really slows and it looks like we're going to move into recession, you know, moving down to zero is probably almost a certainty.
But I think what we have to see for the Fed to catch up with the bond market is we actually have to see some of that data that comes in in real
time start to turn a little bit.
[09:25:22] CHATTERLEY: Alan Greenspan was quoted this week as saying, he wouldn't be surprised. There's no reason why we couldn't see negative
rates in the United States the same way that we've seen in other countries around the world. What do you make of that? And what should investors be
doing today? What should they keep an eye on in particular?
REHLING: Well, I definitely think that's possible. I would agree with him. You know, in the next recession, whenever it does come, I think it's
very likely, it is almost a certainty we will put in new all-time lows in those -- in the 10-year. We're already putting a new all-time lows in the
30-year. So, to get close to zero or even negative is definitely a possibility, not a certainty.
In terms of what investors should be doing, well, I think one, obviously, kind of you always diversify. Diversify your bets, don't bet on any one
particular outcome. But within fixed income, you want to be moving up in quality. So make sure you're buying better bonds, and not really reaching
for yield is going to be the temptation for investors with very low rates.
And I don't think you, you know, move out of long term bonds here either now. I'm sure that you're not going to load up on them at these levels.
But you know, keep that good profile, because, you know, a two percent 30- year, historically, obviously, it looks awful, with all-time low rates, but if rates move down significantly, there can still be really good returns
there, and it's a good way to balance the risks in the market because that's the type of security that's going to be really well if we do see
more risks. Yes.
CHATTERLEY: Brian, fantastic to have you with us. Brian Rehling there. The market open is next. Stay with us.
(COMMERCIAL BREAK)
[09:30:00] CHATTERLEY: Welcome back to FIRST MOVE here at the New York Stock Exchange. That was the opening bell for Thursday's session. U.S.
stocks higher after what has been an overwhelming morning of news, and we're only just getting started. Let's call it a case of halfway hopes.
China's Foreign Minister says it hopes that the United States will meet them halfway on trade. We'll see about that, but for all the choppiness
that we've seen in markets, I think always context here, important.
We're around six or seven percent away from record highs. Before today's session, the S&P 500 was down only what? One and a half percent over the
past five trading sessions. So just bear that in mind.
Yes, we've seen a lot of choppiness within that. Obviously, far bigger moves for individual stocks, but in aggregate for the S&P 500 and the
NASDAQ and the Dow here, just seven percent away from record highs.
We are seeing losses in Europe, however. U.K. stocks right now the weakest, down over one percent. Noise is of course the potential
confidence vote in the new Prime Minister Boris Johnson having an impact there in particular.
Let's take a look at the global movers here this morning as well. Cisco under pressure as we kick off the session. The networking company lowering
its guidance after a sharp slowdown in China where sales dropped some 25 percent in the last quarter.
They say Chinese customers are turning away from U.S. suppliers. Right now, down some seven percent in the session. What about G.E. as well?
Also under pressure. A report by an independent investigator claims the industrial giant is hiding the extent of its financial problems.
The man behind the report, Harry Markopolos made his name by pulling out Bernie Madoff years before Madoff was convicted of fraud. Right now, that
stock down five percent early on in the session.
And what about Walmart as well? We've already discussed a couple of times on the show. The U.S. retailer raising its forecast for sales in 2019
after the quarterly numbers jumped. Right now that stock up some six percent.
And what about over in Hong Kong? Just take a quick look at this. Tencent under some pressure. The Chinese gaming company warned of a difficult
economic environment despite beating estimates with a 35 percent jump in profit.
So a real flavor right now of what's going on in the retail sector. Let's bring it back to the United States, and focus on what we've seen this
morning. Brian Nagel is Senior Analyst covering retail and e-commerce at Oppenheimer, and he joins us now. Brian --
BRIAN NAGEL, MANAGING DIRECTOR AND SENIOR ANALYST FOR RETAIL, OPPENHEIMER: Thanks for having me here.
CHATTERLEY: Happy to have you here. Talk me through Walmart because whichever way you slice and dice this, this looks like a solid earnings
report coming from these guys.
NAGEL: No, I totally agree. Look, I think the Walmart report was extraordinarily well-timed given all the concerns out there.
CHATTERLEY: Absolutely.
NAGEL: So the key number is 2.8 percent comp in the U.S., which was a combination of continued better traffic, as well as better ticket and then
the company raising its guidance slightly, raising its guidance for U.S. sales this year.
You get all of these concerns out there, all of these macro related concerns, Walmart, the biggest retailer, very much a middle market type
company is basically saying with today's report, "Things are fine."
CHATTERLEY: You see, this is quite fascinating, the way that you posed that as well. The first thing, given all the uncertainty that we've now
got over tariffs, hitting things like shoes and apparel, for example, that fine, a huge chunk has been delayed from September to December, but they
have the confidence to raise guidance here is interesting.
To what extent is this a bellwether for the broader U.S. consumer retail sector here versus being a specific story about Walmart and the things
they're doing with e-commerce and the business more broadly.
NAGEL: Well, it's both. There's a lot of interesting individual initiatives at Walmart. But given its sheer size, given who it serves,
it's also a bellwether, and frankly, as I look at a lot of retailers, another colleague of mine covers Walmart closely, but I look at a lot of
retailers. Walmart, for me is the best barometer of the overall health of U.S. consumer.
CHATTERLEY: So nothing in this report suggests to you, look, we're seeing weakness or deterioration in the U.S. consumer right now.
NAGEL: Not at all. I mean, again, 2.8 percent comp, we did a 2.9 in Q1 and that number again, that's a big number, given the sheer size of
Walmart.
CHATTERLEY: How important was the decision to delay tariffs from September to December from the White House this week?
NAGEL: For retail, I think it's a big deal. And you know, if you look at the tariffs, and we've been studying this very closely, the tariffs that
have come to date have largely been non-consumer related.
That last bucket -- the $300 billion is much more consumer related. And the concern -- that's why I spent a lot of time with Best Buy, you know, so
I talked to the CEO and the CFO of Best Buy, what they're basically saying is, "Look, we can manage through individual price adjustments here and
there. But if you have all these price adjustments coming at once and coming ahead of the holiday season, that would be problematic for the
consumer."
[09:35:08] NAGEL: And I think it was very -- I think that was reflected in the comments yesterday from Macy's.
CHATTERLEY: Yes.
NAGEL: You know, their CEO also said that the consumer at this point is not really prepared to take on these extra costs in tariffs.
CHATTERLEY: Did they give you any sense of what kind of price rises we would have seen there? What kind of amount would have to be passed on of
these tariffs directly to the consumer? Because they simply couldn't -- where they will house them themselves, absorb them themselves?
NAGEL: It's hard to say. I mean, generally speaking, what I've seen so far, we've been watching this closely as well, is that a 10 percent tariff
means maybe eight percent price hike, okay. What that extra two percentage points is they're leveraging their supply chain.
But again the point I've been making to my clients a lot is retail is a much smarter business today than it was five years ago, that it was 10
years ago. These retailers, these high quality companies really understand price elasticity, where they can take price, where they can't take price.
So they're looking at these increases, and they're saying, okay, where can we adjust our pricing so as to maintain our margins? Now, another point
I'll make is 10 and 25 are two very different numbers. Ten percent is manageable, 25 is much more difficult.
CHATTERLEY: Yes. So you have to watch what you're doing as far as the magnitude of these tariffs is concerned. What about adjusting supply
chains? Because the President's argument is, look, these tires are hurting China.
They're having an impact in China, because U.S. companies look at their supply chains and go, "Okay, how can I perhaps get out of China?" Look at
the Philippines, look at Vietnam, for example. What are you seeing from those that you speak to about, one, what they've done already or what they
potentially could do to adjust their supply chains out of China?
NAGEL: So it's a great question, and I follow a wide array of retailers. What I would say is, every retailer I talk to you is to some extent,
examine how they can get out of China.
Now, for some it's much easier than others, because there's some -- there's products like you mentioned, we're talking about shoes. I mean, shoes,
it's actually -- it's a more complicated manufacturing process. That's more difficult to move.
There are others where simply the manufacturer that these retailers have been working with. That manufacturer is picking up, moving out of China to
another country.
CHATTERLEY: I mean, China surely wants to stop them doing that and would offer them some kind of concession to say, you know, "Please don't go.
We'll cut our prices. We will perhaps help you with the tariffs." Or are we not seeing that? Is there a negotiation going on here?
NAGEL: See that, I have no idea. That's because that's -- I'm just talking to retailers. They're talking to their suppliers. I'm sure it's
going on.
CHATTERLEY: Yes.
NAGEL: I have no -- I don't know.
CHATTERLEY: No. This is going to be fascinating to see. It's also something that's upcoming, so perhaps, it is part of the negotiation that
we're seeing right now.
But to sum up, the bottom line is and my takeaway from this conversation is, we should remain confident in the strength of the U.S. consumer.
NAGEL: The U.S. consumer is in good shape. Now, look at what drives consumer spending. I'll say a couple of things. Jobs. I mean, the U.S.
economy, if we're looking at the non-farm payroll report, U.S. economy is at roughly 1.2 million jobs here in 2019. Unemployment is at 3.7 percent.
Wages as of the last report growing 3.2 percent. Those are really solid numbers.
And also, another thing I've seen, this is more touchy feely in nature, but the U.S. consumer has turned much more hardened to noise.
CHATTERLEY: Yes.
NAGEL: And we've seen this. I mean, I think it's probably the consumer and the population in general. But the consumer doesn't react as much as
noise. Now, there's a tipping point that's why we have to be careful of that tail wagging the dog type phenomena that the market, the volatility,
geopolitical --
CHATTERLEY: Bond market recession warnings, as you saw splashed all over the headlines yesterday. These are important points for the consumer.
NAGEL: That's right. You have to watch it. But right now, most consumers are saying, "I'm employed. I'm getting paid more. There are jobs out
there. I feel good."
CHATTERLEY: I feel good, too. Thank you for this conversation. Great to have you with. Brian Nagel there, Managing Director and Senior Analyst for
Retail at Oppenheimer.
All right, we're going to take a quick break here on FIRST MOVE, but up next, how real is the risk of a U.S. recession? We'll discuss with Mohamed
El-Erian, Chief Economist at Allianz.
(COMMERCIAL BREAK)
[09:42:00] CHATTERLEY: Welcome back to FIRST MOVE. Let me give you a look at what we're seeing in early trading here in the United States on Wall
Street. We've been tilted a little bit to the downside in the last 10 or 15 minutes or so.
Keep an eye on the price action today. It's going to be interesting. We have mixed messages. Let's call it the carrot and the stick. As I said
earlier from China, overnight, Beijing saying it will retaliate against any fresh U.S. tariffs, but also it hopes to work in concert with the United
States to settle their differences. Are you confused?
Well, the good news is, we have someone joining us now to explain away that confusion. Mohamed El-Erian, Chief Economic Adviser at Allianz, always
fantastic to have you on the show, sir.
Let's talk about retail first and the U.S. consumer because I think if we're talking about recession risks in the United States, we have to hone
in on services, on the U.S. consumer. Are you comforted, one, by the conversation I just had? I think you were listening, but also the data
that we got today?
MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISER, ALLIANZ: Yes, I am. They point to a household sector that remains strong. And as you say, the consumer is
the most important driver of economic growth. And that in turn speaks to the reality of a solid labor market.
The U.S. continues to create monthly drops above what you would expect this late in the cycle and wages are going up by about three percent. So yes,
the household sector is fine. The business sector, which is much more exposed to the rest of the world is facing a lot more headwinds.
CHATTERLEY: I mean, if you look at some of the manufacturing data, in particular, as you said business investment, then you can perhaps pull out
recessionary sense is here -- warnings.
As a proportion, though of the economy, it's far smaller, but it's a sign. Just take what we're seeing for those two pieces, specific pieces of the
economy and back that to the message that the bond market was sending, or some more worried about the bond market sending yesterday, particularly in
the twos-tens with that yield curve inversion.
Are we getting mixed signals here? Because it doesn't feel like the data matches with the bond market signals right now.
EL-ERIAN: You're absolutely right. If you look at the economic data, they suggest a slowdown in the U.S., but nothing near a recession, and the
slowdown comes from the business sector.
But as you point out, it is simply not big enough to put us into recession, and it's not collapsing, it's just slowing down.
But if you look at the inverted yield curve, that signals something else. The right signal comes from the economy. The yield curve signal is
distorted by a couple of things; one, Central Bank policies, especially in Europe.
When the European Central Bank has negative interest rates as its policy rate and tells us it is going to go more negative and tells us it is going
to buy more bonds that takes a whole interest rate structure down, and as you know, the $16 trillion of bonds trading at negative yields. So, that's
the first distortion.
[09:45:06] EL-ERIAN: The second distortion is the fact that the U.S. outpaces Europe. And yet that bond markets are very interconnected, which
means that more capital comes into the U.S. looking for returns pushing interest rates in the U.S. down.
So if once you adjust for these two distortions, the signals coming out of the yield curve of a slowdown, not of a recession.
CHATTERLEY: So I guess the counter to that would be -- and to point, the $16 trillion worth of bonds trading with negative yields for a reason,
because we all seeing a global slowdown, there's concerns, there's the need for great stimulus around the world in order to keep the momentum going
that we've got.
Can the United States remain resilient, decoupled in the face of a broader global slowdown? Because I think that also was fueling the fear yesterday,
too with the German, the Chinese data on top of other countries that we see slowing?
EL-ERIAN: Undoubtedly, the global economy is slowing, undoubtedly. And Europe in particular is slowing really fast, and what we saw out of
Germany, which you just mentioned, is pretty disturbing because Germany is the powerhouse economy. Germany is a predictable economy. It is a stable
economy, and it's slowing down really fast. It's gone into contraction in the second quarter.
So yes, the global economy is weakening. Yes, that's going to be a headwind for the U.S. economy. But it doesn't mean the U.S. economy goes
into recession. I think we have to make that distinction, that the U.S. economy is relatively close.
Now, if you have an open economy, small open economy like Singapore, they have just radically revised down their growth projections. They know what
it's like to be very sensitive to the rest of the world. The U.S. economy, not markets, economy is less sensitive.
CHATTERLEY: The President yesterday was not blaming the tensions, the concerns caused by the trade war. He blames the Federal Reserve for hiking
rates in December and not cutting rates soon enough.
Right now, we've got Jackson Hole next week. What do you expect Jay Powell to say if he doesn't decide to speak, one about recessionary risks or the
potential for recessionary risks, but also about the economic outlook, because when he mentioned mid -cycle adjustment, fear reentered the market,
he's got a fine balancing act to achieve here, and it's a tough one.
EL-ERIAN: Yes, like you say, a very fine balancing act, and it's a really tough one. I don't know what I would advise Chair Powell to do. The Fed
is increasingly in a lose-lose situation. It is being held hostage by markets, it is under increasing political pressure. And whatever they do,
they may end up causing problems.
So for example, if they succumb to the pressure coming from markets and the political side, and cut interest rates aggressively, when the economy
doesn't call for that, that will undermine their credibility and credibility is critical for a Central Bank.
If alternatively, they resist the pressure coming from markets, they will disrupt markets and exposed themselves to even greater political pressure.
So it really is a lose-lose situation, and it reflects the fact that for too long, Central Banks have carried the bulk of the policy making burden.
CHATTERLEY: Yes, and it's going to be a continuing problem. I'm just not sure where it ends. In the short time, though, Mohamed, what's the bigger
risk here? Is the bigger risk the ongoing noise surrounding trade tensions between the United States and the risks that we don't see a deal? Or is
perhaps the bigger risk here that we talk ourselves into a recession, particularly as far as the United States and the United States consumer is
concerned, in particular?
EL-ERIAN: They are equally important risks. And I'm glad you raised them both, because they're equally important. And we've got keep that on the
radar screen.
I think the bigger issue, whether it's a trade talk, whether it's Central Banks losing effectiveness, whether it's the distorted markets, is that we
are getting closer to the point where if we don't get a comprehensive policy response, the global economy will dip into recession.
And the Central Banks can't save us anymore, and I think that's really important to realize. In the meantime, markets are going to become more
volatile because we don't have an anchor of solid fundamentals nor do we have an anchor of confidence in Central Banks. So expect a lot of
volatility in the weeks and months to come.
CHATTERLEY: Yes, lost leadership. What should investors be doing, Mohamed, at this moment?
EL-ERIAN: So first, they have to ask the question, "How do I react in this volatility?" Because the worst thing that can happen to an investor is
doing the wrong thing at the wrong time.
[09:50:07] EL-ERIAN: You know, markets are still -- the U.S. markets in particular are still up for the year. So if you cannot stomach this
volatility and you think you'll end up doing something silly, this is the time to reduce risk.
If you're looking to increase risk, don't go into the heavily trafficked segments of the market. Look for dislocated opportunities, emerging
markets, have certain dislocated opportunities and look for places that are naturally hedged. And I think that's where the opportunity is. It is very
opportunistic. It's not about just buying the market like it's been for the last few years.
CHATTERLEY: Yes, you've got to be far more calculated. Mohamed El-Erian, thank you so much for joining us on the show. Always great to have you on.
All right. We're going to take a quick break here on FIRST MOVE, but after the break, Warren Buffett's Berkshire Hathaway reckons Amazon shares are
still a buy. Speaking of buying, we will have all the details next.
(COMMERCIAL BREAK)
CHATTERLEY: Welcome back to FIRST MOVE. Warren Buffett's Berkshire Hathaway says it's raised its stake in Amazon. The investment company
first disclosed in May that it began buying Amazon stock, and with the shares it has added in recent weeks, it now has a stake worth almost $1
billion.
So more on this, Clare Sebastian is back with us. Clare, keeping you busy this morning. Talk us through this because it tells you I think how their
relationship with tech companies is evolving within the company, but also another vote of confidence arguably in the U.S. consumer here, as well as
Amazon.
SEBASTIAN: Yes, absolutely, Julia. There was a time when Buffett wasn't really that interested in tech stocks. But he, you know, bought Apple a
few years ago. He has been increasing his stake there.
And now after initially buying Amazon, I think it was not him that did it, it was one of his associates that originally did that investment back in
May. He is now adding to his stake.
And I think if you look at Amazon stock, it does sort of make sense. The stock is up 17 percent so far this year, but it's down about 13 percent
from its record highs, and it's down about seven percent rather from the middle of May, when Buffett originally made that investment.
So, it might be that he sees this is a good time to pick up, you know, I am not going to call it a bargain at $1,700.00 a share, but perhaps slightly
cheaper and it's a vote of confidence in Amazon's investment cycle that we see it at the moment.
Its last earnings report was slightly mixed, because they are spending so much money on one-day delivery. Clearly, he is optimistic. That is going
to yield future growth.
CHATTERLEY: Yes, it's quite fascinating, isn't it? And particularly in light of Amazon's earnings as well in this muted reaction that we got.
It's a boost of confidence, I feel like at a very important point, one in the cycle; two, given the sensitivity on the economy right now, but also
for the big tech stocks that have provided leadership for so long hereto. I think is an important signal, perhaps.
SEBASTIAN: Yes, important. And also this comes at a pretty difficult time for Berkshire Hathaway. Their own stock is down about four percent this
year. They've had real trouble with one of their most significant investments which is Kraft Heinz.
[09:55:09] SEBASTIAN: They've had -- so they've announced, you know, billions of dollars in write downs. They had to restate earnings from
prior years. They delayed their recent earnings report. That stock is down 41 percent this year.
Buffett looking at losses on paper of hundreds of millions of dollars there. So I think diversifying away from some of that and moving into
these higher growth companies does sort of makes sense.
Plus, he has been on the record in the past saying that he kind of missed the boat when it comes to Amazon that he perhaps should have bought
earlier. And he, you know, he called Jeff Bezos incredible. He said that the business is a miracle. So clearly, he is still standing by that.
CHATTERLEY: Yes, let someone else buy it. I think that's the argument here within the company. Clare Sebastian, thank you so much for joining us
on that story.
All right. Let me give you a look at what we're seeing right now for U.S. markets. I promised you volatility at the start of the show, and that is
exactly what we're seeing.
Look at that, right now, a pop higher. I think, again, I'll reiterate volatility and choppiness today to be expected. We'll be back in a couple
of hours' time with "The Express," but for now, that's it for the show. You've been watching FIRST MOVE, time to go make yours.
(COMMERCIAL BREAK)
[10:00:00]
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