Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: Terminal and the Bloomberg Business App. David Kelly of JP
Speaker 2: Morgan Asset Management joins us now to build on some
Speaker 2: of this. David, Welcome to the program Sir. What's your
Speaker 2: initial reaction to these numbers this morning? How useful are they?
Speaker 3: Well, you know, usually.
Speaker 4: When we're on this call on CPI day, it's like
Speaker 4: the biggest news of the week. But and you know,
Speaker 4: today obviously it's the terriff news. But also I think
Speaker 4: the other big part of the infliction story going forward
Speaker 4: is the fiscal stimulus that's beginning to emerge on Capitol Hill.
Speaker 4: Because what it looks like is Okay, the tariffs aren't
Speaker 4: here and consumers are relatively quiescent right now, and we're
Speaker 4: not seeing a lot of enthusiasm there with the airline
Speaker 4: fares and so forth down. But it looks like they're
Speaker 4: cooking into this bill stimulus for twenty five, twenty six,
Speaker 4: twenty seven, and twenty eight. They're implementing a lot of
Speaker 4: the President's promises on the campaign trailer in addition to
Speaker 4: extending the tax cuts. And if that comes through, you're
Speaker 4: going to have a surge in consumer spending in twenty
Speaker 4: twenty six help by fiscal stimulus.
Speaker 3: And perhaps even later in twenty twenty five. That'll keep
Speaker 3: inflation little higher.
Speaker 4: So this is good news and inflation, but I think
Speaker 4: the signs are that inflation is going to move up
Speaker 4: in the short run because of tariffs and then in
Speaker 4: twenty twenty six because of renewed physical stimulus.
Speaker 2: And David, is that a reason to be bullish the
Speaker 2: equity market?
Speaker 4: Probably not, you know, I mean, the equity market is
Speaker 4: hard an exactuary are right now, but it's hardly down
Speaker 4: here today, and it's I mean, we've done a sort
Speaker 4: of a round trip on tariffs here, but we still
Speaker 4: end up with the higher tarif rate than we had
Speaker 4: at the start, I think we got swer long term
Speaker 4: economic growth.
Speaker 3: So in some ways the relief rally has been.
Speaker 4: Stronger than the downturn, and I think it may be
Speaker 4: a little bit overdone. So i'd still call from people,
Speaker 4: you know, longer term that the huge premium that US
Speaker 4: equity prices have over the rest of the world probably
Speaker 4: isn't justified, and so I'd still be in the diversification
Speaker 4: camp here. I do think there's you know, a tenure
Speaker 4: treasure yield at four fifty to five is probably more
Speaker 4: reasonable than a big fall from here. But I think
Speaker 4: it's too early to be really bullish about equities because
Speaker 4: of fiscal students, because you know, we're talked about a
Speaker 4: full employment economy where the Fed's going to have less
Speaker 4: reason to cut.
Speaker 5: We've been struggling all morning with whether this really is
Speaker 5: the beginning of the return to the United States and
Speaker 5: the dialing back of some of the loss of US
Speaker 5: exceptionalism types of narratives, or whether this is just a
Speaker 5: pause in the go international trade. David, you talk about diversifying,
Speaker 5: what does that mean if you think that ten year
Speaker 5: yields are going to be in a four fifty to
Speaker 5: five range and you don't really find US equities particularly
Speaker 5: attractive right.
Speaker 3: Now, Well, it does mean international equities.
Speaker 4: I mean, yes, the US equity market is almost done
Speaker 4: around trip here to date, but European equities up very strongly.
Speaker 3: International equities in general are up strongly for the year,
Speaker 3: and the dollar is down. I think that will.
Speaker 4: Continue because you know, if we will still end up
Speaker 4: with significant tariffs at the end of all of this,
Speaker 4: even though we're seeing you know, calming down, we're going
Speaker 4: to end up with higher deficits. We're going to end
Speaker 4: up with lower immigration, probably lower economic growth. So I know,
Speaker 4: you know, this is a package and agenda that the
Speaker 4: public has voted for and that's why we have elections.
Speaker 4: But it does suggest a slower trajectory in US economic growth,
Speaker 4: with higher deficits, somewhat higher inflation in the short.
Speaker 3: To medium term. None of that is really very pro US.
Speaker 4: And the thing is, you know, I think the US
Speaker 4: will do okay, but does it deserve to be, you know,
Speaker 4: a fifty percent premium over the rest of the world
Speaker 4: in terms of pe ratios. So I'd say international equities yes,
Speaker 4: and then also alternatives, you know, just if fixing income's
Speaker 4: not going to help you because of higher inflation alternatives.
Speaker 4: There are plenty of alternative things like infrastructure, transportation, real
Speaker 4: estate which have a degree of inflation protection. So I
Speaker 4: think people just need to broaden their definition of diversification
Speaker 4: in this kind of environment.
Speaker 5: You mentioned the feeds response, and this has been a
Speaker 5: subject of pretty heated debate and prank. Frankly, it feels
Speaker 5: like people are bifurcated on just whether this gives a
Speaker 5: FED more incentive to cut rates just for the good
Speaker 5: reasons or less incentive. From your perspective, is this more
Speaker 5: of a reduction in potential inflation in terms of the
Speaker 5: lower terrifrate than it could have been that gives the
Speaker 5: FED more of an ability to cut rates without a
Speaker 5: recession at a time where the data that we just saw,
Speaker 5: albeit messy, does point to something of a much lower
Speaker 5: pace of price increases.
Speaker 4: Well, yes, but the fence target is two and I
Speaker 4: think they're on the consumption deflation and I think Jpal
Speaker 4: put it pretty well at his latest press conference. You know,
Speaker 4: they're going to have to look at where they think
Speaker 4: inflation's going, where they think unemployment is going. And I
Speaker 4: think the both fiscal stimulus that is beginning to emerge
Speaker 4: from Capitol Hill, and then also a somewhat lower tariffs.
Speaker 4: They suggest that the risk of recession is receding here.
Speaker 4: I think it's you've probably just gone below fifty percent,
Speaker 4: so risk of recession receding. Maybe the unemployment rate ends
Speaker 4: the year four and a half percent to five, but
Speaker 4: the CPI or oh sorry, the consumption phase could easily
Speaker 4: end the year above three percent. In fact, it probably will,
Speaker 4: so probably be further from consumption to flat target than
Speaker 4: from the unemployment target.
Speaker 3: In that kind of environment, there's not much.
Speaker 4: Excuse for the Fed to cut at all because we're
Speaker 4: at you're fairly close to a neutral level.
Speaker 3: So I think the Fed will take it very easy here.
Speaker 4: And it's and it's part of the story's tariffs, but
Speaker 4: the other part is putting more fiscal stimulus and higher
Speaker 4: depthicits into twenty twenty six.
Speaker 3: Really doesn't give the Federal Reserve a reason to be easy.
Speaker 2: It's your base case snake cuts, not David.
Speaker 3: No, not quite. I think we will get at least
Speaker 3: one cut this year. By the end of the year.
Speaker 4: I think the Fed realizes they can they can edge
Speaker 4: rates down a little bit, but I don't expect to
Speaker 4: cut in June. I don't expect to cut in July,
Speaker 4: to be honest, I think they'll want to see much
Speaker 4: more of a you know, a more much more certainty
Speaker 4: around what the terrif picture really is and how much
Speaker 4: stimulus is in this in this bill before they contemplate
Speaker 4: any for any cut. So I think we're gonna have
Speaker 4: to wait some time for the first rate cut.
Speaker 2: Interesting. David Kelly, the of JP Morgan David Gosa ju
Speaker 2: not to discuss Tiffany Welding of Pimco. Tiffany, welcome to
Speaker 2: the program. We were told to ignore some of the
Speaker 2: data throughout this morning. Can we ignore this data?
Speaker 3: Well?
Speaker 1: Yeah, I mean I think there is a lot. It
Speaker 1: sounds like there's a lot going on under the hood,
Speaker 1: But the overall message is that, you know, the US
Speaker 1: economy prior to any sort of tariff pass through was
Speaker 1: just on a continued path towards normalization. After you know,
Speaker 1: after the pandemic related shocks, inflation was was elevated, it's
Speaker 1: remained elevated, and I think overall this report, you know,
Speaker 1: suggests that some of that is coming down. And if
Speaker 1: it weren't for tariffs, the outlook would be towards more moderation.
Speaker 1: But I do think you have to discount this a
Speaker 1: little bit because we know eventually the tariff costs, which
Speaker 1: are major, you know, will be passed through to some extent,
Speaker 1: you know. Now, maybe one more point on that is
Speaker 1: I think the interesting thing is that we're hearing from
Speaker 1: some of these larger retailers, you know, as they are
Speaker 1: trying to hold the line on prices. It seems like
Speaker 1: as long as they can to increase market share, they
Speaker 1: had the ability to front run this by importing a
Speaker 1: lot of inventory ahead of time, you know, so they
Speaker 1: might have a bit more of a window before they
Speaker 1: really need to raise prices.
Speaker 5: That's said Tiffany. If you look at some of the
Speaker 5: details under the hood, there is this question about whether
Speaker 5: some of the components that contribute to the smallest increase
Speaker 5: since February of twenty twenty one are sticky, are durable,
Speaker 5: And I'm thinking of housing, which we were talking about
Speaker 5: with Emily Roland earlier, as well as the gasoline prices.
Speaker 5: How much is that going to be a disinflationary force
Speaker 5: that will be thematic through the rest of this year.
Speaker 1: Yeah, well, certainly we've seen a fall in gasoline prices,
Speaker 1: you know. I think the interesting thing is is if
Speaker 1: you look at US gasoline and other US energy prices,
Speaker 1: they have not fallen as much as global oil. So
Speaker 1: think it'll be maybe a little bit less disinflationary, you
Speaker 1: know than if you're just looking at oil prices, but
Speaker 1: you will get some benefit from that, you know. I
Speaker 1: think on the housing side, I think there's real questions here.
Speaker 1: The tariffs clearly will raise housing costs. The things that
Speaker 1: we import in terms of appliances, you know, and other
Speaker 1: inputs into building homes. Most of that comes from China,
Speaker 1: and so that will cost more, you know, and eventually
Speaker 1: that will filter through into higher rental prices, you know.
Speaker 1: Now I think near term against that, you know, we
Speaker 1: we've found evidence that the increased flow of migrants into
Speaker 1: the United States, you know, did raise rentals in sort
Speaker 1: of the lower you know, lower you know, smaller rental
Speaker 1: apartments and things like that. And we think that's why
Speaker 1: you saw, oh we are you know, moderate come down
Speaker 1: inflation come down there much slower than many people were expecting,
Speaker 1: is because you had this offsetting inflow. Now obviously that
Speaker 1: force is waning and potentially even reversing, so that could
Speaker 1: result in some faster deceleration near term and some rental costs,
Speaker 1: but I think ultimately the longer term outlook there is
Speaker 1: for stickier housing costs as a result of some of
Speaker 1: these tariffs.
Speaker 5: John pointed out that we're all kind of tying ourselves
Speaker 5: in pretzels as we try to get all these counter
Speaker 5: forces together, whether it's the immigration story, whether it's the
Speaker 5: terrorift story, whether it's what the economy was heading into
Speaker 5: all of this. You also asked me, and I had
Speaker 5: no answer about when the data would be clean, when
Speaker 5: we would get actually something that we could rely on.
Speaker 5: So I will ask you, at what point do you
Speaker 5: think that you can see sort of the new normal
Speaker 5: in the data or is that not really going to
Speaker 5: come back? Are we going to have to watch these
Speaker 5: trends sort of in parallel fashion and try to compile
Speaker 5: a picture.
Speaker 1: Well, I think that the new normal is I think
Speaker 1: we're quite a ways away from that, you know. I mean,
Speaker 1: I think the bottom line here is just taking a
Speaker 1: step back from from the headlines and things like that.
Speaker 1: The average effective tariff rate that we calculate as a
Speaker 1: result of these trade policies has increased more than any
Speaker 1: time in a century. That is a dramatic economic shock,
Speaker 1: and it will take time for that to flow through
Speaker 1: the system, you know, and we aren't going to see
Speaker 1: the quote unquote new normal on the back of that,
Speaker 1: we think for quite some time, you know. When I
Speaker 1: say quite some time, you know, maybe a year or
Speaker 1: more for the economy really to adjust, assuming these tariffs
Speaker 1: in place. So I guess to settle in and let's
Speaker 1: see what happens.
Speaker 2: Do you think you have a best guess right now,
Speaker 2: any kind of guess, any kind of tall you whatsoever,
Speaker 2: on the nature of that shock, Tiffany. I get that
Speaker 2: it's a policy shock, but it's an inflationary shock, a
Speaker 2: disinflationary shock, a growth shock, a negative supply shock. What
Speaker 2: kind of shock is it?
Speaker 3: Well?
Speaker 1: I think it acts like all of those that you mentioned,
Speaker 1: you know. And I think the bottom line is is
Speaker 1: because we haven't seen the type of a policy like
Speaker 1: this in quite some time, you know, we don't exactly
Speaker 1: know how it's going to filter through into the economy.
Speaker 3: You know.
Speaker 1: Again, we have the best guess about that, which is
Speaker 1: that we think you will get some price level adjustment
Speaker 1: that occurs because firms have to pass on the additional
Speaker 1: costs of tariffs, and they will do so eventually that
Speaker 1: will result in a real income squeeze because you don't
Speaker 1: see wages adjust as quickly. We ultimately think over time
Speaker 1: wages could adjust. But during that real income squeeze, that
Speaker 1: just means that real consumption you know, is hit by that,
Speaker 1: and there's some knock on second round effects from that.
Speaker 1: As volumes start to decline because prices are higher, you know,
Speaker 1: then that just means you potentially need to you know,
Speaker 1: to hire less people. You'll you'll probably get some margin squeeze.
Speaker 1: It could be detrimental to investment trends in the United States,
Speaker 1: you know. I think the magnitude of these things and
Speaker 1: how they play out over what time frame, you know,
Speaker 1: I guess is really the question here, you know. And
Speaker 1: then how inflation expectations adapt to all of this. I
Speaker 1: think the real concern from the Federal Reserve, for example,
Speaker 1: is that we've come off of a period of elevated inflation,
Speaker 1: you know, and having another shock that should be a
Speaker 1: one off, sort of temporary thing, can result in inflation
Speaker 1: expectations drifting higher, can start to creep into wage negotiations,
Speaker 1: and can result in more persistent inflation. I think that's
Speaker 1: what the Fed is concerned about.
Speaker 2: Appreciate yours take has always Tiffany Wilding there of pimcoat
Speaker 2: with us now for more montca Cuera of Mulk and
Speaker 2: Stanley Monica, good morning, get to see you.
Speaker 6: Good morning.
Speaker 2: Let's get to the congressional math and numbers. How narrow?
Speaker 2: How tight are the margins in the House.
Speaker 6: I'm very tight. They only have, you know, just just
Speaker 6: that fifty one percent majority that could get this budget
Speaker 6: reconciliation built through, Which is why it's so important that
Speaker 6: you know, the Salt Republicans and the fiscal hawks you know,
Speaker 6: all come together and get a deal. This I think
Speaker 6: slows them down in their effort to get a bill
Speaker 6: to the President by that Memorial Day. You know, we're
Speaker 6: thinking maybe they get it through committee by then, but
Speaker 6: we're already seeing those hiccups and things that are going
Speaker 6: to slow the pace of this. So we're still looking
Speaker 6: much further out into the summer.
Speaker 2: You now, did how many with the solution? How do
Speaker 2: you please Salt Republicans and the fiscal hooks simultaneously.
Speaker 6: I think that's a really good question. I think it's
Speaker 6: gonna be very hard to do. What you're likely to
Speaker 6: see is more movement on the tax revenue side. You
Speaker 6: can get some wiggle room on salt if say, for example,
Speaker 6: you put in caps on corporate salt deductions, right for example,
Speaker 6: So for those corporate spaces. Now there's lots of other
Speaker 6: options that they could explore as far as raising taxes
Speaker 6: on the margins, like maybe addressing the carried interest loophole.
Speaker 6: So again this is still early days. While we have
Speaker 6: a blueprint and we see where the priorities are, there's
Speaker 6: a lot of negotiation that still has to happen. And
Speaker 6: that's really exemplified by those two issues.
Speaker 5: Which of some of the campaign promises from President Trump,
Speaker 5: do you expect to have a harder time getting through
Speaker 5: to the final draft.
Speaker 3: Yeah.
Speaker 6: So one of the things that we've talked a lot
Speaker 6: about is the note tax on social security benefits. This
Speaker 6: is a huge sort of campaign proposal that was bringing
Speaker 6: a lot of seniors to the table that actually can't
Speaker 6: even be addressed in budget reconciliation because of the rules
Speaker 6: of the parliamentarian rules around it. So we think that
Speaker 6: if something like that is going to come up, it's
Speaker 6: either going to be a twenty twenty six campaign proposal
Speaker 6: or later in the year. Things like the no tax
Speaker 6: on tips, no tax on overtime, and now the senior's
Speaker 6: bonus are all on a temporary basis. So while we're
Speaker 6: getting a little bit of fulfillment on that campaign piece,
Speaker 6: it is still limited, and so that's important to just
Speaker 6: keep in mind.
Speaker 5: There's also the promise that there's going to be revenues
Speaker 5: that aren't necessarily written into the budget that come from tariffs.
Speaker 5: And this has been a pretty big proposal from a
Speaker 5: lot of Republicans that have argued we're not even including
Speaker 5: the pay fors that come from these levees.
Speaker 3: V Al budget lab.
Speaker 5: Estimated that all tariffs to date in twenty twenty five
Speaker 5: would bring in roughly two point three trillion dollars of
Speaker 5: the next decade if they were to remain in place,
Speaker 5: even accounting for some of the negative economic effects. How
Speaker 5: much is this going to be the quiet arguing point
Speaker 5: behind the scenes.
Speaker 6: I think that that loses steam as they've put in
Speaker 6: these pauses and capitulated.
Speaker 2: Even if you look.
Speaker 6: At the deal with China right now, where we've gone
Speaker 6: back down to that thirty percent TERI free if that expires,
Speaker 6: it would bump up to fifty four percent, So speaking
Speaker 6: of campaign promises, it would be right in line with
Speaker 6: Trump's campaign promises. What that means for this budget is
Speaker 6: that the potential revenues that could be used to offset
Speaker 6: aren't necessarily going to be there. In the same way,
Speaker 6: you're still going to be looking more at that seven
Speaker 6: hundred billion level that was first you know, analyzed. I
Speaker 6: think Yale also put out an analysis about that prior
Speaker 6: to the April announcement.
Speaker 2: This is a move in targative course, But what is
Speaker 2: your base case now for trade? What does policy look
Speaker 2: like by year end?
Speaker 6: By year end, I do think we get that that
Speaker 6: ten percent universal tariff. I think you have a fifty
Speaker 6: four to sixty percent on China. What's been interesting is
Speaker 6: how much we've capitulated on almost every single negotiating piece
Speaker 6: with China even to get us to that thirty percent
Speaker 6: right now. So there could be an additional wiggle room there,
Speaker 6: But I do think that we might actually end up
Speaker 6: right where Trump wanted us right and at the end
Speaker 6: of the year at that ten and sixty with some
Speaker 6: you know, very specific reciprocal tariffs that you know would
Speaker 6: impact other Asian countries.
Speaker 5: Do you have any sense of what was gained in
Speaker 5: some of these negotiations, particularly on the US side from China.
Speaker 6: Well, the only thing I think we know right now
Speaker 6: is that we're now going to be able to send
Speaker 6: over Boeing planes, right. That that's really the big you
Speaker 6: know give back. Plus they reduce their teriff weight on
Speaker 6: us to about ten percent on a on a temporary
Speaker 6: basis during that ninety day window, So we got a
Speaker 6: little bit back, not you know, anything significant over the
Speaker 6: long run. But I think that that just again highlights
Speaker 6: that while we're getting some certainty, we're starting.
Speaker 3: To see the the.
Speaker 6: You know plan get fleshed out, we are still very
Speaker 6: much in the sausage making process, and that this is
Speaker 6: not final. And so it does really get back to
Speaker 6: that you know, broader sort of call for us that
Speaker 6: you know, while markets are up, that is still market volatility, right,
Speaker 6: and so we're still in that Q one through Q
Speaker 6: three sort of market volatility window. And once we get
Speaker 6: this budget finalized, I agree with you know, besn't there's
Speaker 6: going to be a lot more cularity. Discussion isn't going
Speaker 6: to be about taxes anymore. We can pivot to other
Speaker 6: things and then it's going to be about that growth,
Speaker 6: that pro growth policy.
Speaker 2: Agenda, deregulation, tax counts, et cetera, something that Treasury Secretary
Speaker 2: would like us to spend a little bit more time on.
Speaker 2: I think away from trade, we would be.
Speaker 5: Happy to you if everybody wasn't trading around every single
Speaker 5: headline like a whack a mole in every single hour
Speaker 5: or day. And that's really the ultimate question. How do
Speaker 5: you get to that when there still is that uncertainty
Speaker 5: of is it just blowing planes? What happened to the
Speaker 5: rare earth's minerals. There's some discussion that maybe permitting is
Speaker 5: going to be easier for US companies, but unclear.
Speaker 2: I think it's a pretty safe assumption right now that
Speaker 2: ten percent baseline tariff is going to nowhere, based on
Speaker 2: the comments we've heard from the administration over the past
Speaker 2: few days. Monica, good to see you. I want to
Speaker 2: conquiror there of Morgan Stanley to extend the conversation with
Speaker 2: us now. Scana Montgomery, Knick of Barclay Scylli, Good mornings here,
Speaker 2: Good morning, you're a dollar this morning one a left
Speaker 2: and yesterday the biggest one day moved lower since the
Speaker 2: day after the election, good news for the dollar. How
Speaker 2: bad is the bad news for the Europeans.
Speaker 7: Yes, well, this is the issue right it's the euro
Speaker 7: has largely been trading as a liquid alternative to the dollar,
Speaker 7: and so yesterday it saw a lot of downside because
Speaker 7: it's a lot of upside when the dollar was under
Speaker 7: pressure as well. I think for the Euro itself, the
Speaker 7: domestic outlook isn't great from a growth perspective. You're bouncing
Speaker 7: terroriff's versus fiscal policy right now. Terrors are more growth
Speaker 7: negatives and the fiscal we've had so far as positive,
Speaker 7: so you need another kind of boost there before you
Speaker 7: can get more positive on the Euro. And I think
Speaker 7: the other issue is, you know, as the price segment
Speaker 7: before alluded to, it's really hard to get a trade
Speaker 7: deal with Europe because you're negotiating with a number of
Speaker 7: country but you also have these non tariff trade barriers
Speaker 7: that make it very hard. And you saw that even
Speaker 7: with the US UK agreement, there wasn't a lot of
Speaker 7: detail there, it was just an outline. So it seems
Speaker 7: like that will be a headwind certainly for the air
Speaker 7: going forward.
Speaker 5: The trade wars in the past couple of weeks has
Speaker 5: been treated as more of a problem for the United
Speaker 5: States than the rest of the world, including Europe. Is
Speaker 5: this the tipping point where that discussion changes and you
Speaker 5: actually see more downside for the euro versus the dollar
Speaker 5: because that narrative is going to flip on its head.
Speaker 7: Yeah, I think it's something we certainly need to consider.
Speaker 7: Part of the story for the dollar was that you
Speaker 7: had this turn in the soft data that meant that
Speaker 7: you had fed expectations reevaluated quite strongly, and that weighed
Speaker 7: on the dollar a lot. And so you could say
Speaker 7: to some extent, because you had that turning consumer and
Speaker 7: corporate confidence, that fed into dollar weakness. Whereas you've not
Speaker 7: had tariffs imposed on Europe for very long, so you
Speaker 7: haven't seen it feed into the data in the same way,
Speaker 7: and you haven't seen that corresponding weakness. So potentially there's
Speaker 7: more growth worries priced in the US and elsewhere. And
Speaker 7: I'll give you Canada as an example of what could happen.
Speaker 7: Because Canada had tariffs imposed early, you saw that turn
Speaker 7: and confidence that's turned into the hard data, and they've
Speaker 7: had a couple of labor market reports that have been
Speaker 7: very weak.
Speaker 5: As a result, how much do rate differentials also start
Speaker 5: to matter again at a time where people are pricing
Speaker 5: in maybe fewer rate cuts by the fetch reserve. At
Speaker 5: the same time, if the ECB might be prompted to
Speaker 5: cut more in the face of weakness.
Speaker 7: Well yeah, this is another reason that you should really
Speaker 7: have euro dollar be a lower level, because rate differentials
Speaker 7: tell you, and you can look at different points on
Speaker 7: the curve, but they tell you that euro dollars should
Speaker 7: be closer to one away than where it is currently.
Speaker 7: And for us, we think those rate differentials should be
Speaker 7: more in fear of the dollar. Even in terms of
Speaker 7: we think the FED will be restrained by inflation. You
Speaker 7: won't have unemployment rises you might have otherwise because you
Speaker 7: have the supply side of the labor market constrained by immigration.
Speaker 7: And so that means we see the FED cutting only
Speaker 7: twice this year. And in contrast those other economies, because
Speaker 7: they don't get the price level adjustment of tariffs, they
Speaker 7: haven't retaliated at the same time, they have lower oil prices,
Speaker 7: they've had a stronger currency, and there's likely going to
Speaker 7: be the supply glut from China. That means disinflation is
Speaker 7: more likely in these other places, and so for Europe
Speaker 7: that means we see the ECB cutting towards one twenty five,
Speaker 7: and that's a big gap to the US.
Speaker 2: The damage done to the US dollar is multi dimensional.
Speaker 2: It's not just about what's been happening with one thing,
Speaker 2: it's across several different dimensions. How reparable is that damage
Speaker 2: done with a simple truce between the US and China
Speaker 2: over the weekend? Yeah?
Speaker 7: I think over the weekend that was a big positive
Speaker 7: surprise for the US because the expectation was terif rates
Speaker 7: would be significantly higher than the levels we've gotten, and
Speaker 7: we've actually gone from an average effective TERIF rate as
Speaker 7: the beginning of last week of twenty five percent to
Speaker 7: fifteen percent. So that's a big upside surprise for growth
Speaker 7: for the US economy. At the same time, you've had
Speaker 7: the soft data term with the hard data's holding out
Speaker 7: quite well, and because of that, you could have a
Speaker 7: more supported dollar environment. I think for US fear value
Speaker 7: for euro dollars somewhere closer to one oh seven. You
Speaker 7: have that gap because there was somewhat of a risk
Speaker 7: premium priced in, but that risk premium, well, it might
Speaker 7: be a little bit sticky it can come off if
Speaker 7: you have more policies from the US administration that seem
Speaker 7: practical or more pool growth, and that means you could
Speaker 7: also have more into US assets, especially if other assets
Speaker 7: aren't as attractive.
Speaker 2: The dollar diversification, as you know, it's been a conversation
Speaker 2: that predates the trade story. We've been seeing that diversification
Speaker 2: at the central bank level to gold now for a
Speaker 2: number of years is enough to unwind some of that.
Speaker 2: Would you push back that far?
Speaker 7: I mean, I think we'll see how it evolves if
Speaker 7: it is truly an unwined story from dollar assets, and
Speaker 7: it can take a while to play out, and you
Speaker 7: might get kind of rounds of depreciation the dollar as
Speaker 7: a result of it. But it's very hard to undo
Speaker 7: a decade of policy that's been very flivable for the US,
Speaker 7: and you're only seeing like little changes here and there
Speaker 7: at the margins, and the flows don't really support a
Speaker 7: broad on wine from the US to elsewhere. The only
Speaker 7: place you really see it is in the Cophort data,
Speaker 7: so in central bank reserves, those are diversified away from
Speaker 7: the US. But it's been very slow over the last
Speaker 7: five years. It's been about a percent a year that
Speaker 7: you've seen diversify away. That was accelerated somewhat by the
Speaker 7: Russian invasion of Ukraine because it was shown that the
Speaker 7: USB US as a weapon. But since then you've also
Speaker 7: had big sycle upswings in the dollars, so it's not
Speaker 7: a detriment in terms of the story of the dollar.
Speaker 2: More broadly, we could come back to the same question
Speaker 2: that we were asking several weeks ago, is this a
Speaker 2: negotiation or the new rules of the game that lead
Speaker 2: to a system level shark? And it just feels like
Speaker 2: a lot of people now going with a former and
Speaker 2: certainly not the latter.
Speaker 5: Talking about maybe this isn't a system level shark, or
Speaker 5: we ultimately have the same trading system that we had before,
Speaker 5: just with slightly higher terrorists.
Speaker 2: Skyler, it's good to see you, Thanks for dropping by.
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