WEBVTT - PCE, Yields, and the Tech Trade 0:00:02.529 --> 0:00:05.370 Bloomberg Audio Studios. Podcasts. 0:00:05.690 --> 0:00:06.210 Radio. 0:00:06.660 --> 0:00:07.040 News. 0:00:12.520 --> 0:00:16.660 This is the Bloomberg Surveillance Podcast. Catch us live weekdays 0:00:16.720 --> 0:00:20.220 at 7 a.m. Eastern on Apple CarPlay or Android Auto 0:00:20.280 --> 0:00:23.880 with the Bloomberg Business app. Listen on demand wherever you 0:00:23.900 --> 0:00:26.980 get your podcasts or watch us live on YouTube. 0:00:27.430 --> 0:00:29.120 Mike Rhee is going to say I shouldn't do this. 0:00:29.180 --> 0:00:31.090 Senior U.S. economist, RBC. 0:00:31.450 --> 0:00:34.070 But I got a good ADP number 14 minutes ago. 0:00:34.790 --> 0:00:36.690 And so I look at the yield and we are 0:00:36.690 --> 0:00:41.839 5.57 in the 30-year bond. Are you guys micro-looking at 0:00:41.960 --> 0:00:46.640 yields coming off 18 lines of economic data here today? 0:00:47.420 --> 0:00:49.559 I mean, you said it. There's a lot to digest, right? 0:00:49.659 --> 0:00:52.210 So you're going to have the employment data. We got 0:00:52.250 --> 0:00:55.290 the sneak peek this morning. We get the inflation data. 0:00:55.310 --> 0:00:58.529 We get the revisions to GDP. And we do get 0:00:58.570 --> 0:01:01.010 some of those other measures, I think, that are important 0:01:01.090 --> 0:01:04.750 signs for AI investment. We do think that continues when 0:01:04.770 --> 0:01:07.900 you look at things like durable goods order. So a 0:01:07.970 --> 0:01:10.860 lot to unpack. But at the end of the day, 0:01:10.940 --> 0:01:14.300 if everything is looking positive, I think you can expect 0:01:14.400 --> 0:01:15.800 that rates continue to move higher. 0:01:16.750 --> 0:01:19.030 I mean, let's just set oil aside because it whips 0:01:19.090 --> 0:01:21.630 around every day based upon social media posts here. 0:01:22.250 --> 0:01:24.240 Underlying inflation, how do you view that? 0:01:24.260 --> 0:01:28.480 Because it's there, it's sticky, and I think it's definitely 0:01:28.500 --> 0:01:29.420 got the attention of. 0:01:29.380 --> 0:01:31.400 The Federal Reserve. How do you think about underlying inflation? 0:01:32.340 --> 0:01:35.399 Yeah, we are concerned about it right now. And the 0:01:35.440 --> 0:01:37.240 way we're thinking about it is kind of putting it 0:01:37.260 --> 0:01:41.230 into three buckets. And you have your services, which we're 0:01:41.270 --> 0:01:43.830 splitting out. You have the housing component, which we think 0:01:43.870 --> 0:01:47.230 the disinflation there is largely done for this year. Maybe 0:01:47.250 --> 0:01:48.730 you get a little help next year, but for the 0:01:48.770 --> 0:01:50.110 most part, it's just going to move sideways. 0:01:50.170 --> 0:01:53.300 And that's a big chunk of the bucket. 0:01:53.980 --> 0:01:58.640 Then you have core services, ex-housing. And with the labor 0:01:58.660 --> 0:02:02.940 market doing as well as it has been, there's really 0:02:02.980 --> 0:02:08.419 little disinflation. So the wage component, what's contributing in terms 0:02:08.440 --> 0:02:11.720 of compensation there, unlikely to provide any help. And when 0:02:11.760 --> 0:02:14.410 you look at what's left to provide that help in 0:02:14.470 --> 0:02:18.220 core goods, I'm concerned because when you think about the 0:02:18.260 --> 0:02:22.280 energy story, it's freight prices that are starting to look 0:02:22.900 --> 0:02:26.820 like they're moving higher. And when you look back at 2020, 0:02:26.820 --> 0:02:29.620 they're comparable in terms of a year-over-year change. And that's 0:02:29.650 --> 0:02:31.630 going to start to bleed through into the core goods space. 0:02:32.070 --> 0:02:35.130 All of this says inflation's moving in the wrong direction. 0:02:35.770 --> 0:02:38.550 Yeah. So, I mean, we'll see core PCE today on 0:02:38.570 --> 0:02:42.190 an annualized basis, 3.3%. So that's not what the Fed 0:02:42.889 --> 0:02:46.200 is looking for here. So- On the other side of 0:02:46.220 --> 0:02:49.400 the equation, the labor market, I mean, it seems pretty 0:02:49.419 --> 0:02:52.260 darn solid, right? Is there any cracks underneath the surface 0:02:52.600 --> 0:02:53.860 that we should be paying attention to? 0:02:54.260 --> 0:02:56.459 No, and we've been looking. We put a piece out 0:02:56.840 --> 0:03:00.320 last week, and it's something I look at. Some of 0:03:00.360 --> 0:03:04.720 these measures that most people don't pay attention to, things 0:03:04.760 --> 0:03:10.260 like part-time work for economic reasons, aggregate hours. And when 0:03:10.280 --> 0:03:14.139 you look at those, it's really hard to find any weakness. 0:03:14.680 --> 0:03:18.299 The aggregate hours really continues to grow. That just shows 0:03:18.380 --> 0:03:22.120 a continued demand for labor. And when you look at 0:03:22.160 --> 0:03:25.590 things like part-time for economic reasons, again, suggesting hours aren't 0:03:25.630 --> 0:03:28.970 being cut. In fact, they're being expanded. And I think 0:03:29.030 --> 0:03:33.290 despite some of the Headlines about recent grads struggling. At 0:03:33.330 --> 0:03:35.150 the end of the day, at a 4-1, it's hard 0:03:35.170 --> 0:03:37.050 to argue there's weakness in the labor market right now. 0:03:37.330 --> 0:03:39.230 Mike Reed with us as we go into the economics. 0:03:39.330 --> 0:03:40.970 Alexis will have that for you in a moment. 0:03:41.430 --> 0:03:45.080 The privilege he has of working with Francis Donald. 0:03:45.660 --> 0:03:48.140 Five days a week. Mike's got to have patience. 0:03:48.920 --> 0:03:52.800 Summarize, is it Nathan Jansen who does your Canadian-U.S. border? 0:03:53.300 --> 0:03:53.480 Yes. 0:03:53.500 --> 0:03:57.310 Are these reports, particularly PCE, affected by tariffs? 0:03:57.330 --> 0:03:57.510 Yes. 0:03:58.480 --> 0:03:59.020 Yeah, they are. 0:03:59.240 --> 0:04:02.160 And so one of the things we're thinking about is 0:04:02.900 --> 0:04:05.240 certainly on the Canadian side, how that's going to impact 0:04:05.260 --> 0:04:07.570 the Canadian economy. It's going to be more impactful there. 0:04:08.570 --> 0:04:12.430 You know, right now, based on the current environment, we 0:04:12.470 --> 0:04:16.409 do think it could reduce employment there up to about 0:04:16.410 --> 0:04:17.690 90,000 jobs. 0:04:17.730 --> 0:04:19.979 What about here? Is it part of our inflation plan? 0:04:20.980 --> 0:04:26.099 As far as the direct tariffs on Canada, not so much. 0:04:26.640 --> 0:04:30.940 We think it's more about kind of a negotiating strategy 0:04:30.980 --> 0:04:35.089 between the two sides. But more broadly, we still have 0:04:35.570 --> 0:04:39.210 tariffs that are in place. And one thing we're concerned 0:04:39.250 --> 0:04:42.050 about is the rundown of the pre-tariff inventories that we 0:04:42.070 --> 0:04:44.790 saw last year. We still think you have about a 0:04:44.850 --> 0:04:46.930 quarter or two of inventory drawdown. 0:04:46.950 --> 0:04:49.339 Inventory drawdown. Very interesting. Mike Reed with us. 0:04:49.350 --> 0:04:51.490 We're going to come back, give you the best we 0:04:51.529 --> 0:04:53.570 can on the economic analysis here. 0:04:54.290 --> 0:05:00.170 Equities lift. Futures up 11 into the report. It's Bloomberg's surveillance. 0:05:01.360 --> 0:05:04.600 And the Fed's preferred inflation gauge is out, and it 0:05:04.680 --> 0:05:09.599 shows inflation heated up in August. The personal consumption expenditures 0:05:09.700 --> 0:05:13.930 price index rising three-tenths of a percent month over month 0:05:13.990 --> 0:05:17.289 as consumers paid more for many goods and services. Year 0:05:17.450 --> 0:05:22.789 over year, though, the PCE index up 3.4%. This is 0:05:22.910 --> 0:05:27.700 less than the 3.7% expected and less than the 3.7% 0:05:27.700 --> 0:05:31.420 we saw the prior month. Let's move to core PCE, 0:05:31.460 --> 0:05:34.479 which excludes volatile food and energy prices. Month over month, 0:05:34.960 --> 0:05:38.770 rising 0.2%, so less than the 0.3% expected. And right 0:05:38.790 --> 0:05:41.870 in line with the prior month, core PCE year over 0:05:41.910 --> 0:05:45.690 year also coming in a bit softer here, up 3% 0:05:45.690 --> 0:05:51.370 versus estimates for 3.3%. The prior month was also 3.3%. 0:05:51.370 --> 0:05:56.380 Wireless telephone services and airfares driving core inflation higher. Meantime, 0:05:56.680 --> 0:06:01.400 consumer spending rebounding sharply in August, up 9 tenths of 0:06:01.440 --> 0:06:04.080 a percent in line with estimates and a lot higher 0:06:04.120 --> 0:06:06.440 than the 2 tenths of a percent rise we saw 0:06:06.500 --> 0:06:10.750 the prior month. Meantime, personal incomes up a scant two-tenths 0:06:10.850 --> 0:06:12.910 of a percent. So we were spending more than we 0:06:12.950 --> 0:06:14.590 were bringing in. So once again, a bit of a 0:06:14.630 --> 0:06:18.910 surprise here. A softer than expected read on PCE. PCE 0:06:19.130 --> 0:06:24.540 up 3% core, that is, year over year. Estimates were 0:06:24.600 --> 0:06:28.740 for 3.3%. So still, guys, well above the Fed's 2% target. 0:06:28.760 --> 0:06:30.640 But a bit better than expected. 0:06:30.680 --> 0:06:32.370 Tom and Paul. Alexis, thanks so much. 0:06:32.430 --> 0:06:35.669 Markets, the futures up 10 now, up 33. NASDAQ up 0:06:36.190 --> 0:06:39.110 half a percent as well. Yields come in and they 0:06:39.310 --> 0:06:44.050 begin to come in as people digest Alexis's report. 10-year 0:06:44.070 --> 0:06:47.910 yield in three basis points, 5.20 percent. 0:06:47.950 --> 0:06:48.590 We're advantaged. 0:06:48.650 --> 0:06:51.160 Mike Reed with us because Francis Donald and Mike Reed 0:06:51.200 --> 0:06:56.520 do nominal GDP analysis. Like nobody, major shout out to 0:06:56.560 --> 0:07:05.130 the economists who noted domestic nominal GDP. Mike, 6.1% GDP 0:07:05.190 --> 0:07:09.250 price index plus upward revision on. 0:07:09.210 --> 0:07:11.910 GDP annualized, 2.2. 0:07:11.910 --> 0:07:15.950 I'm rocking 8% simplistic nominal GDP. 0:07:16.510 --> 0:07:20.980 That's a banana republic. How do we bring that down successfully? 0:07:22.250 --> 0:07:23.990 I don't know if you can, I mean, this, a 0:07:24.030 --> 0:07:26.490 big part of this is the AI story. And if 0:07:27.410 --> 0:07:29.890 the fed is in a hiking cycle, that's not going 0:07:29.910 --> 0:07:34.730 to stop the continued investment we see in AI. As 0:07:34.750 --> 0:07:38.130 we saw earlier, look, the data for the consumer is concerning. 0:07:38.170 --> 0:07:42.510 You have spending outpacing incomes, you have inflation moving in 0:07:42.540 --> 0:07:45.480 the wrong direction. Yes, we got a weaker number than expected, 0:07:45.540 --> 0:07:48.600 but I think that's due to methodology. So looking ahead, 0:07:49.640 --> 0:07:52.910 This is just, you have forces at play that aren't 0:07:52.950 --> 0:07:55.590 going to be resolved by a hiking cycle. 0:07:55.610 --> 0:07:57.070 And you mentioned the spending here. 0:07:57.090 --> 0:08:04.180 I mean, personal income rose 0.2%. Personal spending rose 0.9%. 0:08:04.180 --> 0:08:07.540 That's not sustainable. I can't keep hitting my credit card 0:08:08.100 --> 0:08:08.540 every week. 0:08:08.440 --> 0:08:08.860 For that stuff. 0:08:09.430 --> 0:08:11.590 Oh, and that's where we're really concerned. One of the 0:08:11.630 --> 0:08:15.630 measures I like in this report is the measure of 0:08:15.910 --> 0:08:18.710 non-mortgage personal interest payments. And when you look at that 0:08:18.770 --> 0:08:20.910 as a share of disposable personal income, which is the 0:08:20.950 --> 0:08:24.720 same denominator as the saving rate, it's about 2.5%. So 0:08:24.880 --> 0:08:28.060 I'm curious to see what it is today. But when 0:08:28.100 --> 0:08:31.100 you think about what's ahead, if the Fed continues to hike, 0:08:32.080 --> 0:08:34.470 that's going to move higher. And the number that concerns 0:08:34.500 --> 0:08:37.630 me is 2.8%. If you take out the COVID recession, 0:08:37.750 --> 0:08:41.689 the past three recessions prior to that, when you've hit 2.8% 0:08:41.690 --> 0:08:44.910 of that non-mortgage personal interest payment, we've gone into recession. 0:08:45.010 --> 0:08:48.760 So that is to say, It's really something that's going 0:08:48.840 --> 0:08:50.280 to squeeze consumers. 0:08:50.500 --> 0:08:52.949 Okay, repeat that again. That's so important. You said what 0:08:53.000 --> 0:08:54.380 is 2.8%? 0:08:54.380 --> 0:08:58.270 So it's the amount of interest consumers are paying in 0:08:58.309 --> 0:09:02.110 terms of non-mortgage payments. So things like credit card loans, 0:09:02.150 --> 0:09:04.410 auto loans, student loans, any personal loans. 0:09:04.450 --> 0:09:07.530 All the other loans we have. And that's becoming elevated. 0:09:08.490 --> 0:09:11.590 And it didn't shift lower when the Fed was cutting. 0:09:12.470 --> 0:09:15.189 And so if you continue to see consumers, to your point, 0:09:16.179 --> 0:09:19.040 use credit cards to spend. This is going to continue 0:09:19.059 --> 0:09:19.540 to squeeze them. 0:09:20.040 --> 0:09:22.000 Mike, don't be a stranger. Mike Reed with us. Thank 0:09:22.020 --> 0:09:24.500 you so much. RBC, I'm sorry, folks. 0:09:25.020 --> 0:09:28.510 RBC people, it's the Royal Bank of Canada and always 0:09:28.710 --> 0:09:32.630 will be. Mike Reed of RBC to give us perspective. 0:09:33.010 --> 0:09:36.270 Futures up 30 now. They launch a NASDAQ up four-tenths 0:09:36.770 --> 0:09:38.880 of a percent. The VIX comes in from that 16 level. 0:09:40.220 --> 0:09:43.560 To 15.76, a little bit of dollar weakness here. Haven't 0:09:43.580 --> 0:09:47.439 seen that since Eric Winograd was, you know, ages ago 0:09:47.559 --> 0:09:51.980 studying Chinese history. I mean, I'm looking here, 10-year yield 0:09:52.020 --> 0:09:55.620 in two basis points. I'm shocked a 30-year bond doesn't 0:09:55.660 --> 0:10:00.440 come in 5.56 as all sorts of good things. We 0:10:00.480 --> 0:10:03.940 have wonderful conversations today. You go from Max Kettner to 0:10:03.960 --> 0:10:08.100 Mike Reed. Now, Eric Winograd with his chief economist, Alliance Bernstein, 0:10:08.340 --> 0:10:14.120 always with important perspective. I look, Eric, at where we 0:10:14.520 --> 0:10:20.920 are in your idea that inflation– is sticky and not accelerating. 0:10:21.800 --> 0:10:23.960 I think to all our listeners, that's the key debate. 0:10:24.120 --> 0:10:24.719 Discuss that. 0:10:25.120 --> 0:10:28.280 Yeah, look, when the Fed embarks on a tightening cycle, 0:10:28.350 --> 0:10:30.870 typically it's because inflation is going up. That's not really 0:10:30.890 --> 0:10:33.170 what we're seeing here. We're just seeing it not come down. 0:10:33.530 --> 0:10:35.449 And if you look at today's data, there's more of 0:10:35.490 --> 0:10:38.990 that in there, right? The PCE index, the core PCE 0:10:39.020 --> 0:10:42.470 index are running above the Fed's target, but they're gradually 0:10:42.550 --> 0:10:44.950 moving in the right direction. And so that's a different 0:10:45.070 --> 0:10:47.080 type of tightening cycle than many people are used to. 0:10:47.090 --> 0:10:50.090 They're not trying to slow the economy. They're not trying 0:10:50.450 --> 0:10:53.829 to crimp things down here. They're just trying to accelerate 0:10:53.870 --> 0:10:54.430 this process. 0:10:54.450 --> 0:10:55.960 So what happens with the next. 0:10:55.720 --> 0:10:58.540 To the second, the third? We had someone in earlier 0:10:58.640 --> 0:11:01.500 five rate increases. It's nonlinear. 0:11:01.940 --> 0:11:06.150 When do those rate increases click in? to bring your 0:11:06.309 --> 0:11:09.110 inflation where it is down to something more acceptable. 0:11:09.190 --> 0:11:11.350 So that's the classic challenge for central banking, is that 0:11:11.370 --> 0:11:13.949 you can raise rates today and it doesn't move inflation tomorrow. 0:11:14.010 --> 0:11:16.229 It takes nine to 12 months. And that, to me, 0:11:16.330 --> 0:11:19.569 particularly in an environment where you're trying to get inflation 0:11:19.910 --> 0:11:22.200 to move just a little bit quicker, is a recipe 0:11:22.220 --> 0:11:25.540 for a very gradual cycle. There's no urgency here, right? 0:11:25.760 --> 0:11:28.800 Inflation is not accelerating. They just need to get conditions 0:11:28.860 --> 0:11:31.079 or they believe they need to get conditions a little 0:11:31.120 --> 0:11:33.640 bit tighter to make it go a little faster. To me, 0:11:33.660 --> 0:11:36.860 that's a recipe for a constrained, gradual cycle rather than 0:11:36.880 --> 0:11:38.060 a rapid, aggressive one. 0:11:38.700 --> 0:11:38.960 U.S. 0:11:39.140 --> 0:11:43.840 Second quarter GDP was revised up to 2.2 percent annualized 0:11:43.900 --> 0:11:46.900 compared with the second estimate of 1.5 percent. Chairman Powell 0:11:47.120 --> 0:11:50.500 would say that's solid. That is solid. So, I mean, 0:11:51.410 --> 0:11:54.599 the economy is strong. But part of the cost of 0:11:54.640 --> 0:11:57.610 having a strong economy is having a certain amount of inflation. 0:11:58.490 --> 0:12:01.930 And some folks are coming in here saying, hey, the 0:12:01.950 --> 0:12:04.710 10-year yield at five and a quarter, whatever it is, 0:12:05.110 --> 0:12:07.070 that's consistent with how this economy is growing. 0:12:07.510 --> 0:12:08.370 Is that fair? 0:12:09.750 --> 0:12:11.050 I guess I would look at it and say, yes, 0:12:11.070 --> 0:12:12.860 the economy is solid. And the way I think the 0:12:12.880 --> 0:12:15.100 Fed is thinking about this is the economy is solid 0:12:15.260 --> 0:12:17.839 enough to allow them to embark on a cycle to 0:12:17.980 --> 0:12:20.220 get inflation to come down a little faster. If the 0:12:20.260 --> 0:12:22.420 labor market were weak, if the economy were weak, they 0:12:22.440 --> 0:12:24.819 probably wouldn't be doing that. They'd figure the economy would 0:12:24.840 --> 0:12:27.319 bring inflation down on its own. As far as the 0:12:27.340 --> 0:12:30.250 10-year yield, what's really interesting is if you look not 0:12:30.280 --> 0:12:32.170 just at the last rate move, but go back to 0:12:32.190 --> 0:12:34.070 the last several rate moves, all of which were cuts, 0:12:34.130 --> 0:12:36.770 by the way, right? This cycle is unusual because when 0:12:36.790 --> 0:12:39.449 the Fed was cutting rates, long bond yields were going up. 0:12:39.800 --> 0:12:41.640 And now that they've raised rates, long bond yields are 0:12:41.660 --> 0:12:44.540 still going up. So that tells us that this cycle 0:12:44.580 --> 0:12:45.240 isn't really. 0:12:45.080 --> 0:12:45.660 About the Fed. 0:12:46.840 --> 0:12:47.660 What is it about? 0:12:47.980 --> 0:12:50.240 You know, that is a mystery. And I'm sure that 0:12:50.260 --> 0:12:51.840 you have lots of people who come in here to you. 0:12:51.860 --> 0:12:53.780 There's an elephant in the room called the debt and 0:12:53.800 --> 0:12:54.260 the deficit. 0:12:54.300 --> 0:12:54.559 Sure. 0:12:55.140 --> 0:12:57.400 But that's been true for a very long time. And 0:12:57.440 --> 0:13:00.920 there's no particular reason to think it's accelerating. Well, during 0:13:00.960 --> 0:13:03.540 the entirety of this cycle, the answer to that is yes. 0:13:03.880 --> 0:13:06.059 And there is nothing that changed at the point when 0:13:06.080 --> 0:13:08.860 long bond yields started to go up. I strongly agree 0:13:08.900 --> 0:13:11.140 with you that that plays a role in this, but 0:13:11.160 --> 0:13:12.380 I don't think it's the only. 0:13:12.240 --> 0:13:13.120 Variable at play. 0:13:13.420 --> 0:13:16.740 Yes, we're running irresponsible fiscal policy. To have a 6% 0:13:16.740 --> 0:13:20.260 of GDP budget deficit in an economy that is strong 0:13:20.330 --> 0:13:22.670 or solid or stable or whatever you want to pick 0:13:23.170 --> 0:13:26.470 doesn't make any sense. You combine that with policy volatility 0:13:26.490 --> 0:13:29.630 and unpredictability, right? You have tariffs on, tariffs off. You 0:13:29.650 --> 0:13:32.810 have oil prices up. You have oil prices down. Geopolitics on, 0:13:32.850 --> 0:13:36.620 geopolitics off. the Treasury Department changing its issuance calendar, we're 0:13:36.640 --> 0:13:39.760 intervening in FX markets. All of those argue for higher 0:13:39.800 --> 0:13:42.010 risk premium as well. So when I look at where 0:13:42.050 --> 0:13:44.110 the long bond yield is, I don't think it's any 0:13:44.429 --> 0:13:47.569 one explanation. I think it's a smorgasbord of all these 0:13:47.630 --> 0:13:49.770 different variables that are combining to put it there. 0:13:50.770 --> 0:13:54.469 Chairman Warsh is just absolutely adamant about getting that inflation 0:13:54.490 --> 0:13:57.390 number down to 2%. Based upon my two semesters of 0:13:57.450 --> 0:14:00.380 economics at Duke, I feel like I'm an expert, I 0:14:00.410 --> 0:14:04.060 don't see the real magic of 2%. I mean, we're 0:14:04.300 --> 0:14:08.060 at 3% core PCE today that just got reported. Maybe 0:14:08.080 --> 0:14:10.780 that's where our economy is. I mean, we're reshoring all 0:14:10.820 --> 0:14:13.880 this stuff. We're cutting immigration, so we've got some wage inflation. 0:14:14.160 --> 0:14:15.760 I don't know. Maybe that's the new number. 0:14:16.230 --> 0:14:19.030 So the magic of 2%, and you're right, there's nothing 0:14:19.070 --> 0:14:21.510 magical about 2%. When the Fed picked 2%, they picked 0:14:21.590 --> 0:14:23.790 it because it seemed like a reasonable number and because 0:14:23.850 --> 0:14:25.390 the New Zealand Central Bank. 0:14:25.250 --> 0:14:26.350 Picked 2% first. 0:14:26.410 --> 0:14:29.010 It's not like there was some deep mathematical analysis that 0:14:29.050 --> 0:14:30.590 concluded 2% was optimal. 0:14:30.950 --> 0:14:32.910 But now that you've picked it, that's the target. 0:14:32.960 --> 0:14:34.380 And in order to retain their credibility. 0:14:37.720 --> 0:14:40.140 They feel like they need to adhere to that 2% target. 0:14:40.680 --> 0:14:43.180 I believe and have believed for a long time that 0:14:43.400 --> 0:14:46.109 in the grand scheme of things, they'll be satisfied if 0:14:46.190 --> 0:14:48.710 inflation runs between two and two and a half, as 0:14:48.750 --> 0:14:52.890 long as inflation expectations stay contained, precisely because there is 0:14:52.970 --> 0:14:55.950 no magic to 2%, right? What they're really looking for, 0:14:56.270 --> 0:14:58.350 what any central bank is really looking for is the 0:14:58.410 --> 0:15:01.480 idea that when households and when businesses make their plans, 0:15:01.880 --> 0:15:03.500 they don't think about. 0:15:03.340 --> 0:15:04.500 Inflation, right? 0:15:05.400 --> 0:15:08.920 And that's what they're targeting. And I suspect that for 0:15:08.960 --> 0:15:12.680 most people, the difference between 2% inflation and 2.25% inflation 0:15:13.020 --> 0:15:14.800 is a rounding error that they won't perceive in their 0:15:14.820 --> 0:15:17.500 daily life. But in order to get back to that point, 0:15:17.880 --> 0:15:20.479 the Fed believes that they need to reinforce their credibility. 0:15:20.500 --> 0:15:23.340 And that's what they're doing by starting what, again, what 0:15:23.380 --> 0:15:25.760 I expect to be a limited tightening cycle, but by 0:15:25.820 --> 0:15:26.820 raising rates at this point. 0:15:27.140 --> 0:15:28.320 Eric Winograd, thank you so much. 0:15:28.350 --> 0:15:30.830 With Alliance Bernstein this morning out of Dartmouth with all 0:15:30.870 --> 0:15:34.130 of his good academics here. And to have back-to-back Mike 0:15:34.190 --> 0:15:36.650 Reed and Eric Winograd is what it's about. 0:15:38.550 --> 0:15:39.150 Stay with us. 0:15:39.450 --> 0:15:42.670 More from Bloomberg Surveillance coming up after this. 0:15:49.950 --> 0:15:53.560 You're listening to the Bloomberg Surveillance Podcast. Catch us live 0:15:53.640 --> 0:15:55.720 weekday afternoons from 7 to 10 a.m. 0:15:55.760 --> 0:15:56.160 Eastern. 0:15:56.260 --> 0:15:59.560 Listen on Apple CarPlay and Android Auto with the Bloomberg 0:15:59.580 --> 0:16:00.180 Business app. 0:16:00.400 --> 0:16:02.100 Or watch us live on YouTube. 0:16:02.460 --> 0:16:02.920 This is Joe. 0:16:02.940 --> 0:16:05.450 I've been saying for like three weeks, get Nordvik. Get Nordvik. 0:16:05.900 --> 0:16:08.310 You can't get Nordvik. He's still recovering from the World Cup. 0:16:08.690 --> 0:16:09.840 Jens Nordvik joins us. 0:16:09.910 --> 0:16:13.230 Exciting data with his wonderful work on foreign exchange, but 0:16:13.270 --> 0:16:18.450 it's really broadened out. Does foreign exchange tell us, inform us, 0:16:18.990 --> 0:16:23.960 is the deepest system about fixed income, about commodities right now? 0:16:23.980 --> 0:16:27.320 I think it's pretty clear that the epicenter of what 0:16:27.340 --> 0:16:29.680 has been happening over the last couple of weeks, couple 0:16:29.700 --> 0:16:33.600 of months, really, has been the fixed income market. And, like, we. 0:16:35.150 --> 0:16:39.480 We merged Exanta data with Vanda earlier this year to 0:16:39.500 --> 0:16:42.540 get the equity coverage as a part of what we 0:16:42.620 --> 0:16:46.560 offer and even the equity space. All the questions are 0:16:46.620 --> 0:16:50.950 fixed income related now. When is this dramatic rise going 0:16:50.970 --> 0:16:53.650 to stop? When is equity going to be okay again? 0:16:54.170 --> 0:16:55.590 I think that epicenter is very clear. 0:16:55.610 --> 0:16:58.670 Do you need dollar to break as a change agent? 0:16:58.730 --> 0:16:59.390 Do you need to see DXY go $ 199. 0:16:59.290 --> 0:16:59.350 94? 0:16:59.330 --> 0:17:00.690 Does it need to finally break? 0:17:05.490 --> 0:17:09.630 So I think we're in this kind of really interesting environment, right, 0:17:09.710 --> 0:17:13.679 where currency markets haven't really moved that much, except the 0:17:13.740 --> 0:17:17.460 Korean won that has been on this crazy AI, maybe 0:17:17.500 --> 0:17:22.400 not crazy, understandable AI trend. But I think what we're 0:17:22.440 --> 0:17:26.620 looking to in currency markets is we're going to get 0:17:27.070 --> 0:17:30.890 to a point where the fixed income markets are going 0:17:30.910 --> 0:17:33.550 to be at a kind of breaking point where we're 0:17:33.570 --> 0:17:35.760 going to have to have some kind of intervention, right? 0:17:35.780 --> 0:17:39.020 We can't have 30-year yields continuing to go up, you know, 0:17:39.180 --> 0:17:41.060 every few months, 50 basis points. It's not going to 0:17:41.080 --> 0:17:43.980 be sustainable. And we've seen it already in the U.S., right? 0:17:44.280 --> 0:17:45.940 Scott Besson came in and said we're going to try 0:17:45.980 --> 0:17:49.609 to stabilize with the buybacks. You discussed it earlier this morning, right? 0:17:49.630 --> 0:17:52.330 It hasn't really had a huge impact so far, right? 0:17:52.369 --> 0:17:53.050 But eventually. 0:17:53.740 --> 0:17:57.460 we'll have to have some type of backstop from central 0:17:57.500 --> 0:17:59.689 bank balance sheet to other balance sheet to stop it. 0:18:00.090 --> 0:18:02.330 And that will be when the currencies react, right? Because 0:18:02.369 --> 0:18:05.209 that's when the market can see, okay, there's a liquidity 0:18:05.250 --> 0:18:08.370 that's coming in to stop the yields rising, and that's 0:18:08.410 --> 0:18:10.600 going to then move into the currencies. We're not there yet, 0:18:10.930 --> 0:18:12.719 but I think this year is a transition year where 0:18:12.740 --> 0:18:13.580 we'll get to that point. 0:18:14.119 --> 0:18:15.940 Jens, just looking at your notes here, and as you 0:18:16.040 --> 0:18:20.359 talk about the long end moving higher, you talk about 0:18:20.400 --> 0:18:23.220 a corporate bond deal that may be impacting the paramounts 0:18:23.260 --> 0:18:26.660 in the market was $ 52 billion worth of investment grade, 0:18:26.700 --> 0:18:29.220 high yield bank loan, a lot of paper coming into 0:18:29.240 --> 0:18:33.820 the market, but I've never heard or seen anybody discussing 0:18:33.840 --> 0:18:37.609 whether a corporate bond deal could impact the broader treasury market. 0:18:37.920 --> 0:18:41.450 No, I think it's, it's when the markets are so 0:18:41.630 --> 0:18:45.189 on edge, as we're seeing right now, like the catalyst 0:18:45.250 --> 0:18:47.730 kind of broadens out and even smaller things can actually 0:18:47.750 --> 0:18:51.449 kind of destabilize the market. So, Obviously, there's a lot 0:18:51.490 --> 0:18:55.169 of focus on the hyperscale issuance, which is now starting 0:18:55.210 --> 0:18:58.439 to compete in the long end with the US Treasury 0:18:58.480 --> 0:19:03.959 market as being an equally important issuer from the US Treasury. 0:19:04.119 --> 0:19:06.510 It's something that a couple of years ago, if I've 0:19:06.550 --> 0:19:08.760 said that on- Do you agree with that? When we 0:19:08.800 --> 0:19:12.010 do the projections into 2007, it looks like the issuance 0:19:12.119 --> 0:19:16.270 above 10-year, because the data centers are very long-term financing projects, 0:19:16.770 --> 0:19:19.750 it could be of roughly the same magnitude as the 0:19:19.790 --> 0:19:22.130 Treasury is. Yeah. If I come here and said this 0:19:22.150 --> 0:19:23.750 a couple of years ago, you'd probably kick me out 0:19:23.810 --> 0:19:26.169 of the studio saying, okay, what are you smoking? 0:19:28.690 --> 0:19:32.189 But this bond sell-off, it's been a global issue. It's 0:19:32.210 --> 0:19:35.470 not just the U.S. So what is that telling you? 0:19:36.560 --> 0:19:39.880 Yeah, so we've seen it over the last couple of years, right, 0:19:39.940 --> 0:19:43.790 that global bond markets are so tied to the U.S. 0:19:43.850 --> 0:19:47.750 that it's quite hard to see any decoupling. But I 0:19:47.810 --> 0:19:49.590 do think if you look at the curve shapes, you 0:19:49.609 --> 0:19:53.180 can see. like the most extreme example is Switzerland, right, 0:19:53.200 --> 0:19:55.740 where they have no debt. You don't have curve steepening there. 0:19:55.780 --> 0:19:58.969 So there is some differences. And I would also say 0:19:59.010 --> 0:20:01.370 if you look at this week, right, and even today, 0:20:01.990 --> 0:20:05.200 like which curves are steepening, The U.S. curve is still 0:20:05.220 --> 0:20:09.359 steepening today. The French curve is still steepening today. So 0:20:10.480 --> 0:20:14.390 that does seem to be a trend where, OK, global 0:20:14.430 --> 0:20:16.750 bond yields are correlated, right? But the slope of the 0:20:16.790 --> 0:20:19.790 curve is more problematically steep in the places where the 0:20:19.850 --> 0:20:21.250 debt issues are the most severe. 0:20:21.510 --> 0:20:23.210 Jens Nordvik with us with the Castani. 0:20:23.230 --> 0:20:24.750 We're going to continue with him coming up. 0:20:25.590 --> 0:20:29.490 Lisa Abramo is with Ken Griffin on his very important 0:20:29.530 --> 0:20:33.280 day for Pittsburgh's Carnegie Mellon as they look to Miami, 0:20:33.320 --> 0:20:36.000 I'll give you a treatment on there in a moment. 0:20:36.140 --> 0:20:39.960 We are advantaged to have Jens Nordvig with us with 0:20:40.000 --> 0:20:45.850 these headlines. Let me go through these bombshell headlines. BMW 0:20:45.990 --> 0:20:51.770 of Germany targets shedding a fifth of managers for AI. 0:20:52.730 --> 0:20:56.979