Daybreak Holiday: Kevin Warsh, Costco, Inflation's Impact on Memorial Day

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0:37Chase for Business helps business owners like you with personalized guidance and convenient digital tools all in one place. With that guidance and your determination, you can take your business farther and help build a brighter future for your community. Learn more at chase.com slash business. Chase for Business. Make more of what's yours. The Chase Mobile app is available for select mobile devices. Message and data rates may apply. JPMorgan Chase Bank, NA. Member FDIC. Copyright 2026. JPMorgan Chase and Company. So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results.

1:13At IBM, we work with our employees to integrate technology right into the systems they need. Now, a global workforce of 300 ,000 can use AI to fill their HR questions, resolving 94 % of common questions. Not noise, proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business, IBM. Hello, everybody, and thanks for joining us for this special edition of Bloomberg Daybreak. I'm Nathan Hager. The U.S. stock market is closed for the Memorial Day holiday. Coming up this hour, as we kick off the unofficial start of summer, We'll look at why this one could be one of the most expensive Memorial Days ever with Bloomberg's Julia Fanzaris and Mark Duquette.

2:00Plus, retail in focus for investors this week. We preview earnings from Costco and Best Buy with Bloomberg Intelligence senior analysts Jen Bartaschis and Lindsey Dutch. But first, we have a special roundtable on the economy and the future of the Federal Reserve under a new chairman. And for that, we're joined by Bloomberg International Economics and Policy Correspondent Michael McKee and Anna Wong, Chief U.S. Economist at Bloomberg Economics. It's great to have the both of you with us on this Memorial Day holiday. And Anna, I'll start with you. How would you describe this economy that new Chairman Warsh is stepping into?

2:37Anna Wong:Well, he's stepping into a huge supply shock. The Iran war has led to re-acceleration and headline CPI. However, he's also stepping in Just as the headline change in CPI may be peaking, we are estimating that May, the next report is where the headline CPI will peak roughly around a little bit over 4%. However, the danger is whether there will be second round effect onto the core. But Kevin Worsh is also stepping in just as a second supply shock is about to hit, but it's not obvious right now. that's showing up in ZPI. So this second round, or I don't know, maybe like fifth round already in the last five years, is the AI-driven type of inflation in memory chips and computer software and storage drive.

3:35Anna Wong:We are seeing that peaking only in 2027. So I think generally, year-over-year inflation likely will peak in May and then step down gradually, But then we'll see another little bump toward the end of the year. And then in 2027, we'll see it incrementally rising again after falling. It's very confusing, but that's the inflation picture that Kevin Walsh inherited, a very confusing and complicated one. Well, I think you've spelled it out pretty clearly, even if it is a complicated situation here. But just to put a bottom line on it, Mike, it sounds like Chairman Warsh is stepping into an environment where 2 percent inflation might be a ways off.

4:21It's definitely going to be a ways off. The Fed minutes of their April meeting suggested that most members agreed that it's going to be a lot longer to get down to 2 percent than they had been thinking. because they're also seeing some bleed over into core rates from services and goods that they didn't expect. So it's an inflation problem that is kind of double for Kevin Warsh because both the fact that there's not much he can do about it, it mingles with the fact that his boss isn't going to be happy about it. Well, let's talk about that a little bit, Anna, because obviously Chairman Warsh was nominated after serious political pressure that President Trump had been putting on former chair Jay Powell for months, if not years.

5:19What is the challenge for Chairman Warsh to deliver on the rate cuts that President Trump has made clear he wants?

5:27Anna Wong:Well, we don't know if he's going to deliver. You know, at his confirmation hearing, he vigorously denied the idea that he has promised Trump rate cuts. And also, I think a sizable portion of market participants, including ourselves, suspect that Kevin Walsh, in fact, is a hawk at the heart of things. But the reality is the market is already doing the hiking for him. And he may be happy about that. So in the last three weeks alone, we have seen 10-year yields rising by roughly 30 basis point from 4.3 to now 4.6. And that is equivalent to almost 40 to 50 basis point of rate hikes. Basically, the market has essentially hiked twice before Kevin Walsh even came on board.

6:20Anna Wong:It may be, just may be that in the next six months, what he would see is a slowing economy because the tightening of financial conditions from higher yields would be biting. And also, as I said, the inflation on a year over a year basis would have peaked in May and it would be coming down. And that could provide him the cover of at least not hiking, if not cutting rates. Yeah, the sell-off in bonds, not just in the U.S., but globally, has been pretty stunning to watch over the last few weeks. It raises a question, Mike, about whether it matters for the Fed to try to catch up with where the bond market is on rates.

7:02Does it matter if the Fed keeps things where they are when the Treasury market's saying that rates need to go up? Well, if you thought they were going to be up in the markets for some time, yes, that would put pressure on the Fed. The question is, because this has been so volatile, because from one Trump headline to another, the Fed at this point is probably just going to be content to sit back and wait and see what happens not only with inflation, but with the impact of the higher rates. The question that is going to be on everybody's mind as we go forward is how much is this inflation, especially energy price inflation, going to curb demand and therefore put pressure on the labor market and growth?

7:51If it doesn't do that, then they're going to have to start thinking about rate increases, which they told us in the minutes. If it does, then that takes rate increases probably off the table. So it's a very confusing time, as Anna began the whole segment saying, and we're just going to have to watch and see what happens, which, of course, Kevin Worsh said, we don't want to be data dependent, but they're kind of data and headline dependent at this point. It seems to be that way. We're speaking with Bloomberg International Economics and Policy Correspondent Michael McKee and Anna Wong, Chief U.S.

8:27Economist at Bloomberg Economics. Let's talk about the labor market, Anna, because it seems like this low-hire, low-fire environment we've been talking about for quite some time continues to roll along. Do you expect that to continue even with rates where they are?

8:42Anna Wong:No, I don't. So I think that the labor market indeed has stabilized for several months now. We actually timed the bottom of the labor market to be around early fall, late summer last year. However, because of this low hiring, low fire regime, it is still in a very fragile state. And with 10-year yields going to 4.6%, what I have found is that whenever 10-year yields surpass around the 4.5 % mark is when rates become very restrictive. And immediately you see the housing sector responding, which we are. Many of these housing sector goods are already seeing deflation. Also, you would start seeing manufacturing slowing.

9:31Anna Wong:Right now, manufacturing is still doing very well because of the war. But if rates continue to be this elevated, the slowing is inevitable. And on top of that, we are already now seeing some signs that consumer sentiment is weakening. So I think one takeaway from this earnings season is that while the tax refunds so far this year have provided support for consumers, shielded them from the higher gasoline price, that cushion is going away by the middle of the summer. And so if rates continue to be that high through the end of the summer and the war over Iran is not resolved, gasoline prices still are at$4.3 per gallon, then we're going to see that weakening in consumption.

10:19Mike, how do you account for the relative resilience that we've seen in this labor market despite all the headwinds we've been talking about? Well, it's kind of an interesting question because, as Anna's staff has pointed out, there may be some reasons, statistical reasons and other reasons why the labor market isn't as strong as the Fed wants to think it is. But it does seem to be that everybody's frozen in place at this point. There are reasons to be optimistic about productivity rising, and certainly there's been a lot of spending on the AI buildout that's keeping GDP higher. The GDP numbers have been distorted by weird trade situations because of the AI imports and things like that.

11:07So right now, companies aren't firing. They're not hiring. They're just sort of waiting to see what happens like everyone else. And that's, again, just keeps everything sidelined, keeps the Fed sidelined for now. Interesting point, what Anna was just talking about with rates staying high. There's two things I would note. One is that oil industry analysts say the prices of oil and gasoline are going to remain high for months, that the market doesn't seem to be absorbing that idea yet. But the other thing is that there was an interesting study that came out in the last few days from one of the regional Fed banks that said when people see the central bank raising interest rates or market rates going up, they think inflation is going to follow.

12:00Now, the idea of raising interest rates, obviously, is to slow the economy and then inflation slows. But because that makes borrowing more expensive in the short run, people get more depressed when rates go up. And so, therefore, that could also have a negative effect on the economy. So that raises a question then for Anna about what the risks are for the Fed right now, whether the risks are in balance when it comes to the dual mandate, inflation and the job market. It sounds like the Fed could be in a bit of a bigger box than we might think. Is that what you're seeing, Anna?

12:39Anna Wong:I think the Fed's challenge right now is to forecast the economy correctly. And the Fed has lost a lot of confidence over their own forecasting capability. And when the central bank does not believe that it can forecast things, then it acts in a very belated fashion. So, for example, if it forecasts, if it wrongly believes that inflation is not transitory right now, and they go ahead and hike as the market is now priced in for them to hike, and it turned out that it is transitory after all, and the bite of that hiking will hit the economy next year, This actually jeopardize is one way of thinking about why the administration is attacking the central bank.

13:30Anna Wong:And so the central bank is under pressure to forecast correctly. And I think Kevin Warsh role here is to, aside from thinking about monetary policy, and obviously he cannot do much because he's just one person. and he's facing a majority of the FOMC who leans hawkish. But what he can do is to go in and reform the institution and increase the forecasting capability of the Fed. And hence, maybe that could distract the debate and the headlines for a while away from him not cutting rates as Trump wanted, but focus on what he is doing to reform the Fed. What a complicated start to the Kevin Warsh era.

14:21Thanks to both of you for this. Great having you on with us. That's Bloomberg Economics Chief U.S. Economist, Anna Wong, and Bloomberg International Economics and Policy Correspondent, Michael McKee. Up next, we're going to turn our focus from the economy to earnings, what to expect from Costco and Best Buy. It's 20 minutes past the hour. I'm Nathan Hager, and this is Bloomberg.

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17:07Welcome back to this special edition of Bloomberg Daybreak. I'm Nathan Hager. The U.S. stock market is closed for the Memorial Day holiday. We turn our focus now to earnings. We've heard from about 90 % of the companies in the S &P 500 so far, but we do get some key reports this week from a couple of high-profile retailers. Let's start with Costco. They report Thursday. Jennifer Bartaschus covers the membership-based wholesale giant. She's a senior retail staples analyst for Bloomberg Intelligence and is with us now. And I'll just put this out there at the beginning, Jen. I'm a Costco member. I'm there like every other week.

17:44And every time I go in there, it's like a line all the way to the back of the meat section just to get out the door. That's got to be good for their results, right? I mean, just to see that kind of foot traffic, is that still what we're seeing? Absolutely, Nathan. You know, Costco is just an engine that doesn't quit. And when you look at the traffic into their stores, it's consistently strong. And part of the current backdrop in the environment right now is really playing into Costco's strengths. And what I mean by that is people are looking for value. And so when you're looking for value, you're looking to maximize the benefits of that membership and the good prices that Costco offers.

18:26And when I go buy my Costco's, there are several near me, the lines for fuel are incredibly long right now. So people are looking for that value. They're going to Costco for that solution. And when they're there for fuel, they're probably also going into the warehouse. And that all tees up well for what they're going to report this week. Yeah, let's talk about the fuel because, of course, they do sell it, but at a discount, right? So what does that mean for their margins? Well, what's interesting about fuel sales is that it's usually retailers sell fuel more for the loyalty perspective than for the profit that they generate off of it.

19:04And so right now, a lot of the fuel that's being sold was bought before the prices went really high. So that means, you know, generally speaking, fuel margins should be pretty strong. Now, as that inventory gets replaced at higher costs, we're going to see some volatility there. And either way, the higher fuel prices at the pump translate into higher sales that are being driven off of the fuel business. And that's always good for the top line. Where do you see those sales coming? I mean, Costco has such a broad mix of products that they offer. Are they selling some of the bigger appliances that you see at the front of the store, or is it more about the food?

19:45What are you expecting? Right now, for quite a while, Costco's sales had skewed a little bit more to consumable categories. But in the last two or three quarters, we've seen a much bigger uptick in terms of bigger ticket items. And we're at the point of the year where people are buying for the summer, right? And so if fuel prices are high and people maybe scale back on travel plans or they do plan to do a little bit more staycations. You got to think that there's going to be some differences compared to summer and spring quarters of the past, right? Considering where the macroeconomic environment is right now.

20:24Do you expect any changes based on that? Not necessarily huge changes. What we've seen historically, when we've had periods of very high gas prices, it takes a little bit of time for consumers to genuinely change their purchase behavior because most consumers can weather a short-term kind of shock in terms of higher gas prices at the pump. But the longer the higher gas prices last, the more that consumer behavior does shift. And the shift that we typically see is that people will start to consolidate trips. So that instead of seeking, you know, a few items at a bunch of different retailers, they start to favor retailers where they can buy more of the items they want in the same place.

21:11So that kind of behavior obviously benefits companies like Costco, just as it benefits companies like Walmart and Target, where there's a broad assortment and people can actually do a complete shopping trip to meet all of their needs. I'm kind of curious about whether Costco could be looking for ways to juice profit in some way, considering that they do try to keep the prices for their items at a reasonable level. But in terms of trying to get more of a profit down the line, do you see Costco thinking about things like raising membership prices, making it a little bit more expensive to get people in the door?

21:51Is that something that could be coming down the line for Costco customers? Probably not anytime soon. Costco really, they hold a very, very consistent schedule of when they raise membership prices, and it's roughly every five years. So we just had a membership price increase not that long ago. So they probably won't pull on that lever right away. And instead, they have always consistently talked about the fact that they're okay with some volatility from quarter to quarter with regards to their margins or their level of profit because they put the consumer first. And so what we may see is a little bit more margin pressure in the next quarter and maybe the next towards the end of this year, just as they try to absorb some of the higher costs to keep things competitive and priced right for their customer base.

22:46And if things extend for too long, then we may see some adjustments in what they have. But the beauty of the model of Costco is that they can change what they offer in the stores. So if any one item or category becomes too expensive, they can simply shift into something else. And their shoppers love it because at the end of the day, part of the charm of Costco is that treasure hunt mentality. And you don't know exactly what you're going to find when you get there, but you're excited when you find it. And so they have a lot of flexibility to help offset pressures that arise in the business with regards to costs that they can do.

23:26And it plays right into what their customers value most about their format. Yeah, I mean, there are often changes to the inventory in Costco, but it seems like a couple of things that never change are the$1.50 hot dog soda combo and the$4.99 rotisserie chicken. Are those ever going to change? I think that those are the last things Costco ever wants to change because it's that sense of stability, that sense of reliability. And they sell millions and millions of chickens and hot dogs every year. And there is something to be said for the volume of what you sell. But I think they happily would take a loss in those areas if they had to in order to keep that value perception intact.

24:15Now, this is definitely the time for a hot dog. Thank you, Jed. Good having you on with us. That is Bloomberg Intelligence Senior Analyst Jennifer Bartaschus. And again, look for those Costco earnings. They are due out on Thursday. Also on that day, we get results from a big consumer electronics name. That would be Best Buy. And we've got another Bloomberg Intelligence Senior Analyst with us to preview those results. It's Lindsey Dutch, who covers retail and consumer hardlines for BI. Great having you with us. Of course, Best Buy has been guiding for just a 1 % increase in same-store sales this quarter.

24:50I read your latest note. You're saying even that may be too much to expect. Why? So the guidance for 1 % same-store growth really assumed an increase in both March and April, compensating for a decline in February. And those gains were sort of predicated on tax refunds, you know, going to some of those consumer electronic purchases. And with elevated gas prices, you know, we think that demand might have been muted. We also heard from some early reporting retailers like a tractor supply who specifically called out that they saw that tax refund money was really going towards essentials and paying down debt rather than splurging sort of on a big ticket item.

25:34That's a big surprise considering in the past you think about those tax refunds going to some of those big ticket items. So what can we expect from the guidance going forward from Best Buy? What are you looking for? So I think when I look across the board at my coverage and think about the consumer, it sort of seems that the higher income consumer is still hanging in there. We're still seeing some resilience there. But the lower income consumer might be pulling back even further with these elevated gas prices. So for Best Buy, I think we have to see where the first quarter comes in. The comps are going to get a little bit harder as we get further into the year.

26:13Last year, we had the launch of Nintendo Switch 2. That drove a big gain in gaming. Computing has been strong. Phones have been strong. But they've been carrying growth for a couple of years now. So the comps are getting harder. And Best Buy really needs a rebound in demand for TVs and appliances to really get back on the growth track. Are you expecting to see that kind of rebound in some of those bigger ticket items on the consumer electronics side? So I think the timing on the rebound is tricky and it might be a bit delayed. You know, we heard results from Whirlpool and they indicated that demand for big ticket appliances is down.