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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: stand be taking a very constructive view on things, writing
Speaker 2: the rate of changes turn for the better on most fronts.
Speaker 2: This keeps us positive on US equities on a twelvemonth basis.
Speaker 2: We expect pullbags to be shallow and unsatisfying to those
Speaker 2: looking for a fatter pitch. Mike joins us now from
Speaker 2: what Mike, Good morning, Good morning Jane. I love the
Speaker 2: reson No, don't fight it. So let's talk about don't
Speaker 2: fight what? What elements of the market move shouldn't we fight?
Speaker 3: Well, it's kind of what we're doing talking about.
Speaker 4: I mean, the headlines remained very noisy and uncertain, and
Speaker 4: I think, you know, this has been the case for
Speaker 4: the whole year.
Speaker 3: Our view, as you know, has been a bit different.
Speaker 4: We came in thinking the first half would be tougher
Speaker 4: and the way to change and a lot of things
Speaker 4: like Earnie's re visions and some of the headline would
Speaker 4: be negative.
Speaker 3: And in fact that what we think happens.
Speaker 4: That all got priced in the week after Liberation Day, right,
Speaker 4: it was violent, it was a de leveraging and so
Speaker 4: now as we look at the data itself, it's all
Speaker 4: inflected higher. And so you know, don't ignore everything, but
Speaker 4: ignoring the headlines is probably a good strategy and just
Speaker 4: focus on the data has turned up for the most part.
Speaker 4: And I think, you know, I don't know where the
Speaker 4: trade negotiations are going. Nobody does, but I think it's
Speaker 4: very unlikely we're going to go back to where we were,
Speaker 4: you know, a month and a half ago, like we
Speaker 4: bottomed in terms of the pain of that initial you know,
Speaker 4: announcement and how bad those tariffs were. So unless it
Speaker 4: really re escalates in a negative fashion, I don't think
Speaker 4: the trade issue is even going to be enough to
Speaker 4: kind of take the momentum out of.
Speaker 3: This market right now.
Speaker 2: You know what the bad view sounds like. They would
Speaker 2: say that maybe some of the data, some of the
Speaker 2: innings we've seen have been flatted by pull forward and
Speaker 2: we'll get the bill for that lakes to this summer.
Speaker 2: Do you think we priced for that kind of slowed down,
Speaker 2: that weakness we could see in a summer months.
Speaker 3: That's probably right.
Speaker 4: And when we had that view too, there was a
Speaker 4: pull forward in Q one Q one of being better
Speaker 4: than they feared because you know, the numbers came down
Speaker 4: a bunch. I think the second quarter, though, is expected
Speaker 4: now to be weaker, so that's going to be the key.
Speaker 4: I think the biggest risk for the market's going to
Speaker 4: probably be either rates as we've talked about in the past,
Speaker 4: you know, north of four and a half percent, or
Speaker 4: we do go in an earning season it's not as
Speaker 4: good as you know, people were hoping for, and we
Speaker 4: have maybe a five to seven percent correction, but that's
Speaker 4: not what people kind of want. People want a ten
Speaker 4: you know, another ten to fifteen percent draw down to
Speaker 4: get better, to get more exposure, and I just don't
Speaker 4: think you're going to get that. I mean, I've seen
Speaker 4: this a million times you want it, but you're just
Speaker 4: going to have to have a shorter trigger finger.
Speaker 5: Well, you had seen retail largely buying the dip, that's
Speaker 5: who participated when you got those ruptures in April. If
Speaker 5: we're not going to get dips like that anymore, what
Speaker 5: is the willingness of institutions to continue to put money
Speaker 5: to work right now? Especially they didn't even buy the
Speaker 5: past dips we saw.
Speaker 4: Yeah, I think institutions have re risk, but there's still
Speaker 4: more to go. The one the area I think that
Speaker 4: you have to watch is the is the systematic strategies,
Speaker 4: the CTAs that price momentum money. We saw almost five
Speaker 4: hundred billion dollars of de leveraging in that period of
Speaker 4: early March through mid April, and they've re risked maybe
Speaker 4: thirty forty percent of that. So that's another bid that's
Speaker 4: sort of it's not fundamentally driven, it's just price momentum.
Speaker 3: So that's that's going to be kind of underlying bid.
Speaker 4: And then I think, you know, most institutions have re risk,
Speaker 4: but one thing I haven't talked about yet is it's
Speaker 4: people are still making the quality bet and we agree
Speaker 4: with that, meaning this isn't the beginning of a news cycle.
Speaker 3: It's once again an extension of.
Speaker 4: The existing cycle, and the Fed's probably going to be
Speaker 4: cutting at some point later this year early next year,
Speaker 4: and that really behooves the large cap quality equities.
Speaker 5: Does it behoove companies specifically who can also weigh out
Speaker 5: some of the tariff uncertainty because this has been a
Speaker 5: big part of the narrative, right no one's making decisions
Speaker 5: cap exsually stalled unless your tech is there an element
Speaker 5: where even though we don't have tears resolved, that you
Speaker 5: get companies who just get on with it and start
Speaker 5: to put capital to work.
Speaker 4: Yeah, they got to run a business. And that's another
Speaker 4: reason why large cab quality businesses can do this. They
Speaker 4: can mitigate some of these risks, whether it's terrifs, whether
Speaker 4: it's you know, maybe the government cutting back on certain
Speaker 4: types of spending. And one of the things that is
Speaker 4: getting through this tax build that I think is still
Speaker 4: underappreciate is the tax incentives for cap X and R
Speaker 4: and D spending. We think that could add three to
Speaker 4: five percent to earnings growth or cash earnings for these
Speaker 4: large multinationals.
Speaker 3: That's a big tail. In addition to the weaker dollars.
Speaker 4: So there's just a lot of tailwinds I see from
Speaker 4: an earning standpoint, And this is almost a perfect.
Speaker 3: Environment to climb the wall of worry because.
Speaker 4: The economic data, the political geopolitical data is messy, it's noisy,
Speaker 4: it's scary sometimes. But as long as the revision factors
Speaker 4: for earnings are heading north, it's just hard for stacks
Speaker 4: to go down.
Speaker 2: When you say campex, I just think of a handful
Speaker 2: of tech companies. Do you think it goes beyond just
Speaker 2: tech leadership?
Speaker 3: Oh? Absolutely.
Speaker 4: I think this is about capital goods. I think this
Speaker 4: is not just about AI capbacks. Also, one thing to
Speaker 4: just keep in mind, the IT capbacks that's been good
Speaker 4: the last several years has really been concentrated just in AI. Okay,
Speaker 4: the traditional kind of upgrades you see in the enterprise
Speaker 4: and in the household have not been happening because there
Speaker 4: was a giant pull forward, remember in twenty twenty and
Speaker 4: twenty twenty one for.
Speaker 3: Work from home.
Speaker 4: So if you actually look at the IT capback cycle
Speaker 4: from twenty two to twenty four, it was kind of
Speaker 4: a software session. And that's another part of our thesis.
Speaker 4: We've been going through these rolling recessions. And look, to me,
Speaker 4: the big catalyst to keep in mind for broadening out
Speaker 4: is going to be when the FED starts to signal
Speaker 4: they're more dubbish. I don't know when that's going to be,
Speaker 4: but my guess is sometime in the third coorter they're
Speaker 4: going to start to signal that, and that's where you're
Speaker 4: going to get a more broadening out to the lower
Speaker 4: quality parts of.
Speaker 2: Just the Why matter, do we need it because inflation
Speaker 2: has comeing in or is it going to be because the
Speaker 2: labor market is cracking?
Speaker 4: Well, I mean, look at last fall it was both right.
Speaker 4: The labor market was cracking last summer. As soon as
Speaker 4: they signaled they were ready to step in, the market.
Speaker 3: Went up anyway.
Speaker 4: So that's why I mean, I actually think of recession.
Speaker 4: If we finally get the broad recession labor cycle, I
Speaker 4: don't think the equity markets are going anywhere near the
Speaker 4: April lows because the FED will be able to act quickly,
Speaker 4: and we're like Pavlovian, right, And if retail is buying
Speaker 4: when the FED wasn't even cutting, if they are cutting,
Speaker 4: there's going to be a big bid there.
Speaker 3: So look, there's always risks in the market.
Speaker 4: There's always something to be worried about, there's always things
Speaker 4: to be bearishan, and there's things to be bullish on.
Speaker 3: And that's our job.
Speaker 4: And I think, you know, this year we've navigated that
Speaker 4: pretty well, being in the right places. And I think
Speaker 4: we're going to continue to have to shift what we
Speaker 4: want to own, not so much how much you want
Speaker 4: to own.
Speaker 2: You've acknowledged the one thing that could be a handwind
Speaker 2: for equities. It's interest rates. He wrote about it over
Speaker 2: the weekend. What is it about four fifty that's challenging
Speaker 2: to this equity market? Because based on the running we've
Speaker 2: seen over the past few weeks, we don't see much
Speaker 2: of a challenge.
Speaker 3: Well, it's stabilized at four fifty.
Speaker 4: So we've identified this level like almost two years ago,
Speaker 4: and it's been like a charm. I mean, as soon
Speaker 4: as you cross four to fifty in the fside, the
Speaker 4: correlation between stocks and rates goes negative and vice versa. Now,
Speaker 4: I do think that we kind of want to four
Speaker 4: seventy in the April period and then they calm down again.
Speaker 4: I think the market is getting comfortable that they have
Speaker 4: enough tools, because you know, the Treasury Secretary has talked
Speaker 4: about that to keep it four fifty or below if
Speaker 4: they need to, And I think we talked about this
Speaker 4: last time I was here. Four seventy five is like
Speaker 4: the worst place because that's where markets get really nervous.
Speaker 4: Five percent I actually get bullish because then I know
Speaker 4: that they're going to come and intervene with either liquidity
Speaker 4: injections or they're going to use these other tools that
Speaker 4: the treasure secretary has talked about. So we're, you know,
Speaker 4: we're we're optimistic that that could be managed. And in
Speaker 4: other words, that risk could be a risk for five
Speaker 4: or seven percent, but ultimately that risk will get managed.
Speaker 2: To do you get CLIENTSOSKC and you now about the
Speaker 2: dead oceans, asking the equity strying to just about the
Speaker 2: dead otions that take place in the week.
Speaker 4: Well, I really ask the equity folks, But I mean
Speaker 4: people do ask about it.
Speaker 3: For sure.
Speaker 4: I mean, and once again we have seen many auctions,
Speaker 4: soft auctions for the last two or three years, seen
Speaker 4: this occur and then.
Speaker 3: They get control of it. Again.
Speaker 4: I don't want to dismiss the risk from the back
Speaker 4: end of the market that is still to me. The risk,
Speaker 4: I mean, is the risk not only for markets. It's
Speaker 4: the risk for the US, like we have too much
Speaker 4: debt and this is a focus. And if we don't,
Speaker 4: I mean ultimately, if we don't you know, cut the
Speaker 4: budget over time like and maybe the market is now
Speaker 4: giving them a lead like okay, we'll give you twelve months,
Speaker 4: you know, but if we don't get serious about you know,
Speaker 4: budget reconciliation and actually reducing the size of the budget
Speaker 4: over time, this is an issue that's going to stay
Speaker 4: with us.
Speaker 2: Mike Wilson of Morgan Stanley three words out of the weekend,
Speaker 2: don't fight it. Don't fight this market, Mike, Thank you, sir.
Speaker 2: They appreciate it. Joining us now to continue the conversation.
Speaker 2: Hendra to Trace of Veda pantas Hen, Welcome to the program.
Speaker 2: So this was frame quite simply yesterday going into the room,
Speaker 2: we would tell the US would push to drop some
Speaker 2: restrictions on their site in order to ease the limits
Speaker 2: on rare earth shipments from the Chinese side. Now, I
Speaker 2: guess we've got two. Now, either that's proving more difficult
Speaker 2: to do as we go intoday two or they're shooting
Speaker 2: for something much bigger than just that. Is there reason
Speaker 2: to believe it's one and maybe not the other.
Speaker 1: Well, I'd like to offer a third alternative and connect
Speaker 1: a few dots here. I don't think we're talking about
Speaker 1: tariffs anymore, and.
Speaker 6: I think that's something that this street is.
Speaker 1: Coming to understand right now, and China has already grasped,
Speaker 1: which is that when we got a CBO score suggesting
Speaker 1: that these tariffs that are in place today are generating
Speaker 1: two point eight trillion dollars in revenue, and the White
Speaker 1: House starts immediately putting out memos incorporating that threshold into
Speaker 1: their public presentations on the state of the tax bill
Speaker 1: and the reconciliation package.
Speaker 6: We're not negotiating for tariffs to come down.
Speaker 1: The tariffs that are in place today are very likely
Speaker 1: to continue across all nations, not just China, but Japan,
Speaker 1: South Korea, the EU, and they're going to also see
Speaker 1: sectoral tariffs on pharmaceuticals, semiconductors, trucking, aircraft in the months ahead.
Speaker 1: Being negotiated are the extraneous issues that, of course, since
Speaker 1: the Geneva meeting, both sides have ratcheted up, whether that's
Speaker 1: on limiting student access to the United States for Chinese
Speaker 1: students or the Huawei chips or AI or rare earth magnets.
Speaker 1: They're expanding the scope of this war and no longer
Speaker 1: negotiating just the tariff rates.
Speaker 6: I think that they're looking for an excuse.
Speaker 1: To get past Liberation Day, which in this case is
Speaker 1: in August, and come up with any reason to keep
Speaker 1: tarifrates where they are while they fight on different fronts.
Speaker 5: Henrietta, can they use tariffs as a crutch then? Can
Speaker 5: they use the terriffs in the negotiation or are you
Speaker 5: suggesting that they are just completely to one side. They
Speaker 5: will remain and that's not going to be touched for
Speaker 5: the foreseeable future.
Speaker 1: I think they can go up. I don't think that
Speaker 1: they're going to come much further down. Thirty percent, as
Speaker 1: we all recall, is obviously way lower.
Speaker 6: Than the President initially wanted.
Speaker 1: He gave best at the go ahead to drop rates
Speaker 1: down to eighty. We know that anything above fifty percent
Speaker 1: is effectively a embargo on trade, and thirty percent, you know,
Speaker 1: cargo is just.
Speaker 6: Now starting to get back to where it was in before.
Speaker 1: April second, or before Trump took office. I don't think
Speaker 1: they're going to go much lower than thirty percent. Again,
Speaker 1: that revenue score of two point eight straight is just
Speaker 1: too attractive. So the threat is permanently there of tariff's rising,
Speaker 1: and I believe they will on a sector basis. And
Speaker 1: I was speaking with another former USTR recently and he
Speaker 1: suggested that one or two nations could be made an
Speaker 1: example of Nicaragua.
Speaker 6: For example.
Speaker 1: But for the most part, these tariffs are here, they're
Speaker 1: here to stay, and we're going to have to fight
Speaker 1: on other fronts.
Speaker 5: What does that say about negotiations with other countries? Henrietta,
Speaker 5: When the ninety day pause comes due in July, is
Speaker 5: it your expectation that we also get a resumption of
Speaker 5: higher levels of tariff, something like we saw in Liberation Day.
Speaker 6: I don't think so. For most nations.
Speaker 1: I think that the administration is looking for an excuse
Speaker 1: to extend the July ninth date out into the future.
Speaker 6: I don't have a good sense of.
Speaker 1: How long they want to extend it out into thirty
Speaker 1: sixty ninety days.
Speaker 6: But one thing that I.
Speaker 1: Really can't square is that the Liberation Day of two
Speaker 1: point zero July ninth is well before.
Speaker 6: When I anticipate the tax bill passing.
Speaker 1: So you have this awkward dance between Republican lawmakers trying
Speaker 1: to pass this bill on the Hill, and the July fourth,
Speaker 1: you know, fourth of July rally that the President is
Speaker 1: helping to have, and then the July ninth expiration date.
Speaker 1: So I think the dates are a little bit fuzzy
Speaker 1: and they don't really quite have a streamlined narrative. The
Speaker 1: tariffs and the tax bill haven't quite blended perfectly, and
Speaker 1: I wonder whether that might come into the conversation.
Speaker 2: There's one more piece of a parzzle at the moment,
Speaker 2: as you know, the White House increasingly distracted by what's
Speaker 2: happening on the West coast in Los Angeles, Henrietta, do
Speaker 2: you take the point, maybe make the argument that they're
Speaker 2: much more comfortable with that story developing in Los Angeles,
Speaker 2: and maybe that takes some heat off the passage of
Speaker 2: the bill, the tax bill in Washington.
Speaker 6: Oh yeah, they got to love it. And the timing
Speaker 6: is perfect.
Speaker 1: Tomorrow or Thursday, the Judiciary Committee is putting out their
Speaker 1: one hundred and seventy five billion dollar package that is
Speaker 1: going to spend.
Speaker 6: Money on immigration.
Speaker 1: And one of the things that has been lost in
Speaker 1: the last week of Elon Musk and.
Speaker 6: Donald Trump feuding over Twitter is that the whole package.
Speaker 1: The reason we're doing one big, beautiful bill and set
Speaker 1: it too is because there's a tremendous amount of dessert
Speaker 1: in this bill. There's three hundred and fifty billion dollars
Speaker 1: in funding for the military and immigration, and that's.
Speaker 6: What's going to carry this bill over the finish line.
Speaker 6: I've only seen one Senator come out against those spending levels,
Speaker 6: and that's Rand Paul.
Speaker 1: And even he wants some level of spending, it's seventy
Speaker 1: five billion. He just doesn't think we need the full
Speaker 1: one hundred and seventy five billion.
Speaker 6: So I one hundred.
Speaker 1: Percent expect for this immigration conversation, the raids in LA
Speaker 1: sending in the National Guard advances. My odds that the
Speaker 1: OBBB gets signed into law.
Speaker 2: When all is set and down, how different will that
Speaker 2: bill look to what was passed in the House.
Speaker 6: It's going to be substantially more deficit increasing.
Speaker 1: I'd say at least four hundred billion dollars more in deficits.
Speaker 6: The saltcap is not going to be as generous.
Speaker 1: The IRA tax credits cannot be cut back as much
Speaker 1: as they have been. This is just a tremendous job
Speaker 1: growth in Key states that need it include Alaska, North Carolina,
Speaker 1: where there's that risk for publican members, it's.
Speaker 6: Going to change quite a bit.
Speaker 2: I'm going to trace if I depart, I to thank you.
Speaker 2: So here's the like this this morning. One hundred and
Speaker 2: nineteen billion dollars in treasury notes up for auction this
Speaker 2: week as try to look to gage appetite for US debt.
Speaker 2: Tony Rodriquez a Neuveine writing long duration is attractive as
Speaker 2: a hedge for equities and broader risk assets. Tiny joint
Speaker 2: us Now for more, Tonyk Mornic.
Speaker 7: Come morning, Jackthon.
Speaker 2: Could you think that more comfortable correlation does return that?
Speaker 8: Are you seeing signs of that?
Speaker 7: We are seeing signs of that.
Speaker 9: You've seen that in some of the little hiccups we've
Speaker 9: had in the equity market, and we think about why
Speaker 9: that's taking place, is that we finally have a yield
Speaker 9: level that's reasonably attractive, and you also have markets that
Speaker 9: we would argue are fully valued. Whether you look at
Speaker 9: the equity market where you look at risk assets, it's
Speaker 9: hard to argue anything's super cheap. So now when you're
Speaker 9: looking at the economy slowing down, rates being high, an
Speaker 9: investor is looking for income and a hedge. We think
Speaker 9: you'll see that rally and treasuries because we think that
Speaker 9: will really reduce any inflationary pressure that comes into the
Speaker 9: economy through wage pressures, and therefore rates can fall in
Speaker 9: a really negative outcome, which is not our base case,
Speaker 9: but in that tail risk, we think it will serve
Speaker 9: as a good head.
Speaker 2: That's the risk version test for the treasury. Let's talk
Speaker 2: about the supply test for the treasury market this week.
Speaker 2: Four fifty close to that on tens, close to five
Speaker 2: percent on thirty sufficient levels to bring in that demand
Speaker 2: when we get those auctions this week.
Speaker 9: Yeah, we don't think they're cheap enough to bring in
Speaker 9: access demands, so you're not going to get the strongest
Speaker 9: auction statistics you've ever seen. Who we think we're at
Speaker 9: fair value, so we're not expecting to see a failed
Speaker 9: auction this time. But we haven't really seen that right
Speaker 9: so bit the coverations has been okay, the tails have
Speaker 9: been average. We're expecting a similar story, but everybody's on
Speaker 9: alert for that first auction that actually, you know, shows
Speaker 9: a really negative soft outcome.
Speaker 5: It seems like we've been on alert for a while, Tony,
Speaker 5: and it has yet to happen. Where it has happened
Speaker 5: is abroad. You saw weak auctions from Japan and that
Speaker 5: was enough to move around the US treasury market. How
Speaker 5: fragile and how exposed are we still to international results
Speaker 5: from auctions and just more generally higher bond yields across
Speaker 5: the ocean.
Speaker 9: Yeah, they're very correlated markets. We've seen term premium rise
Speaker 9: across multiple global markets, right, we've seen yields rising, so
Speaker 9: very integrated. So we are sensitive to that. But the
Speaker 9: good news is that you've seen policymakers also respond to that.
Speaker 9: So the bankers Japan responded to that, so they're quantitative tiding.
Speaker 7: They might slow that down.
Speaker 9: We saw the US Treasury Secretary say that they may
Speaker 9: consider adjusting some of their supply you expectations over the
Speaker 9: coming months. So policymakers are responding to the potential for
Speaker 9: soft demand and longer duration assets and that's supportive.
Speaker 5: Is that not a problem though, that policymakers have to
Speaker 5: respond Tony. This is usually the thing you see in
Speaker 5: emerging markets that there's not enough demand for longer term debts,
Speaker 5: so you get changes, or you get inability to actually
Speaker 5: issue longer term debt is the very actions within the
Speaker 5: then selves. The fact that they have to do it
Speaker 5: a problem.
Speaker 9: Yeah, we don't think it's a problem, but we do
Speaker 9: think it's reflective of the fact that the fiscal pressures
Speaker 9: that we are seeing globally that dominated really by the
Speaker 9: US right now in terms of six to seven percent deficits,
Speaker 9: those are going to be something that has to be
Speaker 9: reckoned with.
Speaker 7: It's just that.
Speaker 9: Unlike in emerging market countries where that debt balloon pops
Speaker 9: and you get an immediate crisis, the debt balloon in
Speaker 9: a country like the US is more like Japan in
Speaker 9: the nineties, where the air comes out slowly. So the
Speaker 9: US is not going to, in our minds, have some
Speaker 9: sort of immediate sharp crisis, but it will have this
Speaker 9: kind of slower weakening that takes place from elevated rates
Speaker 9: that are a weight on growth, that take away some
Speaker 9: of the supply and ability for companies to finances attractively,
Speaker 9: and so that just places a dampener on growth broadly.
Speaker 9: So it's a slower kind of pain than necessarily a
Speaker 9: sharp disruption.
Speaker 2: You said risk and says with fully value, does that
Speaker 2: include credit and high yield?
Speaker 9: Yeah, we think it's fully valued. In terms of reflecting
Speaker 9: what are strong fundamentals. So we're not expecting a lot
Speaker 9: of price performance from tightening spreads, right, We think the
Speaker 9: carry the yield is pretty attractive. You can kind of
Speaker 9: earn that seven and a half percent type of return,
Speaker 9: which is comparable to equities with a lot less risk,
Speaker 9: and it's reflective of solid balance.
Speaker 7: It's good cash flow. Right.
Speaker 9: Defaults that are going to rise, but not very much.
Speaker 9: Where we're a little hesitant because spreads are only fair
Speaker 9: is to.
Speaker 7: Go down to the deepest end of the pool.
Speaker 9: So triple C credit risk might do great if the
Speaker 9: economy really performs well, but that risk reward is not
Speaker 9: as attractive as sitting and double bee credit higher single
Speaker 9: bee credit, where again fair compensates you for good fundamentals
Speaker 9: and strong technical conditions.
Speaker 5: You could fool yourself into thinking, though, that there's no
Speaker 5: concern with the junkiest of credit, just given the issuance
Speaker 5: we've seen, I think for May was the strongest amount
Speaker 5: of junk bond issuance since October. There's demand there and
Speaker 5: there's also taking advantage of a lull. But is it
Speaker 5: a false sense of calm? Are we tricking ourselves into
Speaker 5: believing that it is calmness, especially for the more risky
Speaker 5: edges of the market, especially headed into July where tariff
Speaker 5: deadlines come due.
Speaker 7: Yeah, we bring up a good point.
Speaker 9: So a lot of companies typically they fail because of
Speaker 9: lack of liquidity and necessarily business fundamentals. It can't they
Speaker 9: can't work through, So that liquidity is very important. The
Speaker 9: hial market had been kind of having below normal supply,
Speaker 9: and now that's kind of accelerated a bit, but it
Speaker 9: hasn't gone to an excess level. In our minds, it's
Speaker 9: just gotten back to a normal supply demand relationship. We
Speaker 9: think that's healthy. We think that liquidity is going to
Speaker 9: remain in place. So that's part of why we think
Speaker 9: the default story. While we'll see an increase, it's not
Speaker 9: going to be a sharp rise unless you get a
Speaker 9: really negative kind of exogenous shock which could come from tariffs,
Speaker 9: could come from geopolitical absent that the underlying fundamentals for
Speaker 9: cash flow and the liquidity conditions are pretty supportive of
Speaker 9: kind of remaining at these fair value levels.
Speaker 2: I've known you for a long time. Just listening to
Speaker 2: you hear it feels as if April never happened and
Speaker 2: looking at where markets are price at the moment, it
Speaker 2: looks like April never happened. Does anything changed for you fundamentally?
Speaker 9: Yeah, well yes, what has happened is that the kind
Speaker 9: of fragility that exists is greater today. So we thought
Speaker 9: we'd be growing at two percent coming into this year
Speaker 9: without the April news, then you can kind of absorb
Speaker 9: a punch, whether it was oil prices, geopolitical. Now we're
Speaker 9: thinking one percent growth, so that at one percent, any shock,
Speaker 9: a disruption to a auction for example, that can now
Speaker 9: push you into recession. So that tail risk has increased
Speaker 9: for us, So recession risk twenty percent coming into the
Speaker 9: year thirty five percent now still not base case, but
Speaker 9: enough to say what gets tipped over into default in
Speaker 9: that environment. It's those triple C weeker credits. So if
Speaker 9: they survive, we avoid recession, they're going to do fine.
Speaker 7: But if we have that little.
Speaker 9: Hiccup, that's where you want to be a little bit better,
Speaker 9: higher in quality, a little higher in liquidity, to give
Speaker 9: your room to be able to adjust to those weaker conditions.
Speaker 2: It's got it, Tony, a free siat It as always
Speaker 2: Tony Rodriguez, there a new vein on fixed income. Let's
Speaker 2: how to get the Deutsche Bank is with this around of
Speaker 2: table macamonic, it's going to see you, sir. Let's talk
Speaker 2: about whether it's too early to see that kind of
Speaker 2: inflation we impanc from the terrace tomorrow or not?
Speaker 8: Is it so?
Speaker 10: I think from a broad based perspective, it likely is.
Speaker 10: I think if you look back to the to the
Speaker 10: previous CPI, you began to see it's showing up in
Speaker 10: some of the data points, but that's been offset by
Speaker 10: some of the discretionary services item.
Speaker 8: Whereas we've seen weakness such as airfares.
Speaker 10: You saw it in the PPI data last month, and
Speaker 10: it typically takes a few months for that really to
Speaker 10: begin to show up into the CPI, And so our
Speaker 10: baseline expectation is you get a little bit more evidence
Speaker 10: of it in tomorrow's print, but really it takes the June,
Speaker 10: July and then August day to get to get stronger
Speaker 10: evidence of TAFT pass through.
Speaker 2: What would you need to see to say, you know what?
Speaker 2: I think this would be sustained, This could be sticky.
Speaker 2: It's not a one off shock.
Speaker 8: So I think it's going to be hard in this environment.
Speaker 10: I think typically what you know if you go back
Speaker 10: to what we saw the post code environment. Initially, there
Speaker 10: was this view that it might be transitory or temporary,
Speaker 10: and that view was dominated by the fact that it
Speaker 10: was narrow on a few items used cars, other core
Speaker 10: goods at that.
Speaker 8: Point in time.
Speaker 10: I think to think about it being stickier, you want
Speaker 10: to see it broadening out across the basket. So probably
Speaker 10: not just in core goods items that you can readily
Speaker 10: identify for tarff effects, but other items. So, for example,
Speaker 10: as you get vehicle tariffs, you're likely to see car
Speaker 10: repair pick up with some lag. Carncent insurance inflation is
Speaker 10: going to pick up alongside of that. I think those
Speaker 10: are the effects that you'd want to see to get
Speaker 10: some sense that it's a little bit stickier than anticipated.
Speaker 5: There was an expectation that in this ninety day pause
Speaker 5: with China that you'd see a lot of shipments come in,
Speaker 5: that people would front run in and make the data messy, etc.
Speaker 5: We haven't really seen that. There hasn't been a lot
Speaker 5: of action in the ports. Is this still an economy
Speaker 5: and suspended animation and when does that change?
Speaker 1: If so?
Speaker 10: I think for a lot of ways it is now
Speaker 10: now a lot of this halting or stalling out is
Speaker 10: just give back for surgeon imports that we had head
Speaker 10: in Q one, and so particularly in the trade data,
Speaker 10: you've had this massive volatility where net exports where very
Speaker 10: weak in Q one, are going to be very strong
Speaker 10: in Q two, lifting the GDP data. But I think
Speaker 10: the market kind of understands that. I think, but we're
Speaker 10: now in an environment of where's the pass through to
Speaker 10: the other components of especially what the Fed cares about
Speaker 10: the labor market. Are we seeing layffs take place and
Speaker 10: hiring dip so far?
Speaker 8: I think the answer is not.
Speaker 3: Yes.
Speaker 10: Last week's jobs report was mixed, but resilient enough I
Speaker 10: think for the market. And then second secondarily when we
Speaker 10: begin to see it in the inflation data again, I
Speaker 10: think we've seen in the PPI data so far, still
Speaker 10: waiting to see it for the CPI. We're not surprised
Speaker 10: that you haven't seen it yet. Our baseline expectation, if
Speaker 10: you go back to twenty teen twenty nineteen, is that
Speaker 10: it was always going to take until the June, July,
Speaker 10: and August data to see the effect.
Speaker 5: I just want to flag some of the language you
Speaker 5: used when you asked, has there been weakness in the
Speaker 5: labor market? You said not, yes, you didn't say no.
Speaker 5: Are there pockets of weakness that you're looking at that
Speaker 5: you're concerned might bubble up into something more concerning?
Speaker 10: I think you still have this labor market which has
Speaker 10: been identified by a low hiring and firing environments. You know,
Speaker 10: if you look at the JOLTS data last week, the
Speaker 10: hiring rate remains low, but layoffs remain extraordinarily low as well.
Speaker 10: That's always been a fragile equilibrium. Now nothing has broken.
Speaker 10: That equilibrium has persist persisted, But there was worries, at
Speaker 10: least initially that the Tarft shock, the uncertainty that's come
Speaker 10: along with it, if financial conditions were tightening, that could
Speaker 10: lead to the layoffs that could kind of break that
Speaker 10: fraguile equilibrium with the labor market weakening more materially. We
Speaker 10: didn't see that last week, but I think that's still
Speaker 10: a risk as you look ahead.
Speaker 2: You mentioned something in a recent note about interest rates
Speaker 2: maybe stabilized around four to four point five percent. Can
Speaker 2: we sell on that story? Just remind us sure. I
Speaker 2: thought it was a fascinating note. Do you think we've
Speaker 2: adapted fully adapted to an interest rate with something close
Speaker 2: to four percent, And what does that tell you about
Speaker 2: how much this Fed might cut if we see some
Speaker 2: weakness down the road.
Speaker 10: Yeah, so I think the main chart of that piece
Speaker 10: was showing if you look at where the FED funds
Speaker 10: rate has been, we've been at four point three percent
Speaker 10: since December. If you look at headline PC inflation at least,
Speaker 10: it's at two point one percent, basically within spinning distance
Speaker 10: of the Fed's target. And you look at the unemployment rate,
Speaker 10: we've been stuck at four point two percent for several months.
Speaker 8: At this point, that four point.
Speaker 10: Two percent is exactly aligned with what the FED thinks
Speaker 10: the long run unemployment rate is.
Speaker 8: And so if you look at that chart, it looks like.
Speaker 10: You've settled into what you know, economists would call a
Speaker 10: steady state for the economy. It actually looks like you've
Speaker 10: simulated the economy through a model where you're at kind
Speaker 10: of equilibrium and everything is working its way out. Now,
Speaker 10: we've been in the high ur star camp for a while.
Speaker 10: We've we pegged at the nominal nurturate between three and
Speaker 10: a half and three and three quarters, So we've always
Speaker 10: expected this cutting cycle to be shallower, But we're just
Speaker 10: proposing the possibility that there's not much evidence that we're
Speaker 10: very far away from neutral at the moment.
Speaker 2: This conversation was kicked to the sidelines because of the
Speaker 2: Tower of story over the last few months. I get
Speaker 2: all that, but it's the FED moving towards you. Do
Speaker 2: you see the FED moving closer towards you in the
Speaker 2: come in meetings?
Speaker 10: I think so, and we'll get maybe some evidence of
Speaker 10: that next week. We'll get the dot plot next week,
Speaker 10: where I think there's broader expectations that the FED will
Speaker 10: signal on more hawkish stance. We'll be looking at the
Speaker 10: long run dot. Does that continue to migrate higher? My
Speaker 10: guess is that it does so. They've been at three
Speaker 10: percent for the long run nominal neutral that probably continues
Speaker 10: to move higher. I think the balance of estimates that
Speaker 10: we look at are kind of closer to three.
Speaker 8: And a half percent.
Speaker 10: But I think to really fully embrace the idea that
Speaker 10: neutral is materially higher, you have to get beyond the
Speaker 10: tariff concerns that the uncertainty shock that we've had and
Speaker 10: have a labor.
Speaker 8: Market that still looks resilient three to four months at.
Speaker 2: Essentially took us the next Wednesday. Let's sit on next Wednesday.
Speaker 2: How useful is the rest of the SCP from the
Speaker 2: Federal Reserve.
Speaker 10: I think it's an environment where you know, the Chair
Speaker 10: Pale likes to, I think, downplay the signal from the
Speaker 10: SCP when it's kind of convenient. This will be environment
Speaker 10: where it's probably very convenient. I think the market will
Speaker 10: you know, if they only show one cut next week,
Speaker 10: which I think is broadly anticipated, the market will move
Speaker 10: to what a next year's forecast show. Does inflation rise
Speaker 10: a little bit? Are they showing some stickiness there? Are
Speaker 10: they showing less cuts through next year? I think that
Speaker 10: that could signal kind of a more hawker stance. But
Speaker 10: I would also anticipate that chairpal kind of tries to
Speaker 10: walk that back in the press conference.
Speaker 8: I think they don't know.
Speaker 10: You don't have huge confidence about what policy is going
Speaker 10: to do this year because they're still terre related to uncertainty,
Speaker 10: fiscal policy uncertainty. A view towards next year about policy
Speaker 10: is going to.
Speaker 2: Be it's not going to be there very much at
Speaker 2: twenty twenty six. Does that complicate signal? I think the
Speaker 2: top of the.
Speaker 10: Federals f I think for now there are kind of
Speaker 10: more focused on the near term, and so there's sending
Speaker 10: a strong signal that they're in a wait and see mode,
Speaker 10: that they're well positioned to respond to risks. And I
Speaker 10: think that signal will continue, you know, certainly over the
Speaker 10: summer months, as perhaps you get some evidence of who
Speaker 10: President Trump may.
Speaker 8: Appoint to the board.
Speaker 10: I would expect that in replaceman of Governor Coogler in
Speaker 10: January that that could be the next potential FED chair.
Speaker 8: Certainly the market focus will will shift to that.
Speaker 2: Malaseli if Bank Matt appreciate the time. This is the
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