WEBVTT - Central Bank Policy Pivots & Macro Sensitivity Risks 0:00:02.520 --> 0:00:13.760 Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg 0:00:13.800 --> 0:00:17.880 Surveillance Podcast. Catch us live weekdays at seven am Eastern 0:00:18.200 --> 0:00:21.960 on Apple CarPlay or Android Auto with the Bloomberg Business app. 0:00:22.320 --> 0:00:25.640 Listen on demand wherever you get your podcasts, or watch 0:00:25.760 --> 0:00:27.200 us live on YouTube. 0:00:27.680 --> 0:00:31.320 She is global thick, Yes, global thick, not thick thick, 0:00:31.440 --> 0:00:34.920 but global. Kahir joins us JP Morgan driving all of 0:00:34.960 --> 0:00:39.080 their process at coveragees CEEI. Oh, when do you start 0:00:39.120 --> 0:00:43.200 worrying about price? Pros? Go yield, yield yield. It's great 0:00:43.240 --> 0:00:46.760 to it's great to step into these higher yields. When 0:00:46.800 --> 0:00:50.600 do adults in the rooms start mattering about, oh, price down? 0:00:51.520 --> 0:00:54.320 Well, first of all, I'm a bond portfolio manager, so 0:00:54.440 --> 0:00:57.000 I worry all the time. That's what I get. 0:00:57.200 --> 0:01:00.320 You guys, hide it. You know your media people train 0:01:00.440 --> 0:01:03.240 you a hide it. You're so grizzled you actually ignore 0:01:03.280 --> 0:01:06.640 the media people. When do you worry about price down? 0:01:07.800 --> 0:01:09.960 You know, I think we need to take a step 0:01:09.959 --> 0:01:12.160 back here and think about what's going on in the 0:01:12.160 --> 0:01:14.760 bond market and why we have what you characterize as 0:01:14.760 --> 0:01:17.200 a route and many respects. It reminds me of the 0:01:17.240 --> 0:01:20.280 fall of twenty twenty three. So the first thing that's 0:01:20.319 --> 0:01:23.080 going on, of course, is inflation. The bond market has 0:01:23.120 --> 0:01:28.240 been very correlated with the crude oil market, so concerns 0:01:28.280 --> 0:01:31.000 about Iran, and I've got to tell you I have 0:01:31.040 --> 0:01:33.760 no insight into that, so I can't tell you the market, 0:01:33.800 --> 0:01:35.480 but the market's going to continue to worry if their 0:01:35.520 --> 0:01:37.760 spear is about escalation. I think also if we go 0:01:37.840 --> 0:01:40.520 back six months ago, people would have thought this conflict 0:01:40.560 --> 0:01:43.640 would not be going on for that. So they're absolutely 0:01:43.760 --> 0:01:48.520 inflation concerns because of crude. But on the other hand, 0:01:48.680 --> 0:01:51.360 if you look at the bond market, it's not being 0:01:51.520 --> 0:01:55.160 it's not inflation driven, it's not driven by break evens. 0:01:55.200 --> 0:01:57.560 It's more of a term premium story. And I think 0:01:57.600 --> 0:02:00.240 the two things that people are worried about are the 0:02:00.280 --> 0:02:03.360 FED and also the supply. So this is going to 0:02:03.400 --> 0:02:07.120 be the fourth record month, third consecutive record month of 0:02:07.240 --> 0:02:11.359 issuance in the investment grade corporate bond market. Concerns about 0:02:11.720 --> 0:02:16.000 spending deficit, so rising government issuance. We've got a twenty 0:02:16.080 --> 0:02:18.800 year auction this week in the US. And then the 0:02:18.840 --> 0:02:22.200 third thing is the FED. So FED didn't do anything 0:02:22.280 --> 0:02:24.320 last month and on a certain level. What we saw 0:02:24.400 --> 0:02:29.600 last week was a softening in inflation conditions and a 0:02:29.639 --> 0:02:33.160 softening in the labor market, which indicates maybe they stay 0:02:33.200 --> 0:02:38.000 on hold again this month. But the market's concerned. You 0:02:38.000 --> 0:02:40.960 see the long end continuing to back up about term premium. 0:02:40.960 --> 0:02:44.359 The market's worried about what's the Fed's reaction function? When 0:02:44.600 --> 0:02:47.120 what is the FED looking at for inflation? So I 0:02:47.120 --> 0:02:49.280 think we have two things coming up over the course 0:02:49.320 --> 0:02:51.880 of the next week that might help get some insights. 0:02:51.880 --> 0:02:54.640 So tomorrow we'll get the FED minutes, and then next 0:02:54.639 --> 0:02:57.520 week we've got chair warsh speaking at Jackson Home. 0:02:57.560 --> 0:02:58.600 I feel better already. 0:02:58.680 --> 0:03:01.360 Yeah, well Tom will be at Jackson Hall, so have 0:03:01.560 --> 0:03:05.600 full reporting there along with the surveillance team. So what 0:03:05.639 --> 0:03:08.240 do you expect from the FED chairman? Do you think 0:03:08.280 --> 0:03:11.919 he will accuies a little bit to the market saying, gee, 0:03:11.960 --> 0:03:14.160 we'd like some kind of guidance, some kind. 0:03:14.080 --> 0:03:15.800 Of sense of what your reaction function is. 0:03:15.919 --> 0:03:17.280 I think the first thing to look at is the 0:03:17.320 --> 0:03:22.440 minutes tomorrow, because you remember you had nine nine members 0:03:22.480 --> 0:03:25.840 of the FOMC saying rates should be higher, nine saying 0:03:25.880 --> 0:03:28.320 they shouldn't. You had three dissenters who thought they should 0:03:28.360 --> 0:03:31.760 have hiked in June. So what did those other six think? 0:03:32.080 --> 0:03:35.080 And what's the composition of those other six people? Are 0:03:35.080 --> 0:03:37.360 they going to be voters next year? Because remember the 0:03:37.360 --> 0:03:40.839 FED governors who've been some of the dissenters, they don't 0:03:40.880 --> 0:03:42.840 all vote, So that's I think the first thing to 0:03:42.880 --> 0:03:45.800 look at. I think for Chair Wosh, he has been 0:03:45.920 --> 0:03:51.680 very process focused and process oriented. He's created several task 0:03:51.720 --> 0:03:53.920 force and they're going to look at that. And I 0:03:54.000 --> 0:03:57.200 think there's been you know, you look at the questions 0:03:57.240 --> 0:03:58.960 that he was asked and when would he move? He 0:03:59.000 --> 0:04:01.520 never just said, you know what, if inflation's too hot, 0:04:01.560 --> 0:04:04.480 we're gonna raise rates. So I think their concerns about 0:04:04.480 --> 0:04:06.800 how is the FED going to define inflation? What's the 0:04:06.840 --> 0:04:11.160 Fed's reaction function? So I think his adding some clarity 0:04:11.280 --> 0:04:14.240 to the reaction function I think can help calm the 0:04:14.320 --> 0:04:17.080 market down. And I think you know, Tom mentioned a 0:04:17.120 --> 0:04:19.520 bond market route, but I was out on last week 0:04:19.520 --> 0:04:21.680 and what did you see? The two year actually rallied 0:04:21.720 --> 0:04:24.159 eight basis points. It's the long end and I think 0:04:24.240 --> 0:04:27.239 that's where worsh can have some effect and get people 0:04:27.279 --> 0:04:29.440 confident that the FED is is not. 0:04:29.480 --> 0:04:33.520 Losing how much credit risk. Do you guys feel like 0:04:33.560 --> 0:04:35.040 you need to take these days or can you just 0:04:35.040 --> 0:04:37.600 sit there and clip these coupons from the US government, 0:04:37.640 --> 0:04:40.040 which I think is credit good. I don't know. 0:04:40.680 --> 0:04:45.119 So a couple of things there. You know, almost half 0:04:45.200 --> 0:04:49.880 of the ag is treasuries. Wow, but we find a 0:04:49.880 --> 0:04:52.800 lot of opportunities in credit risk. How much credit risk 0:04:52.839 --> 0:04:54.840 do you need to take? The interesting thing about all 0:04:54.880 --> 0:04:58.760 of this hyperscaler issuance, this AI related issuance, is that 0:04:58.800 --> 0:05:02.680 you can actually get high yields in the investment grade 0:05:02.720 --> 0:05:05.960 corporate bond market. I think that's the more interesting thing. So, 0:05:06.279 --> 0:05:09.800 you know, picking up ninety basis points one hundred basis 0:05:09.800 --> 0:05:13.560 points over treasuries in core plus without a lot of 0:05:13.760 --> 0:05:15.960 additional risk feels pretty neat to us. 0:05:16.600 --> 0:05:19.640 What's the next marginal hyperscaler look like? I mean, it's 0:05:19.680 --> 0:05:22.680 not I guess it's not your inside area. She has 0:05:22.720 --> 0:05:25.560 a team of people at Jake schuarrblan to take the 0:05:25.600 --> 0:05:28.400 phone call. Would you like some Amazon? Would you like 0:05:28.480 --> 0:05:29.200 some Alphabet? 0:05:29.480 --> 0:05:30.440 But do you have a team? 0:05:30.480 --> 0:05:32.679 And we've got a terrific team and they've been helping 0:05:32.760 --> 0:05:35.920 us navigate these deals. And I think two things. 0:05:35.680 --> 0:05:38.280 Are the same deal now as they were issued six 0:05:38.320 --> 0:05:38.800 months ago. 0:05:39.000 --> 0:05:42.440 It's a great question. Not necessarily, there's a lot of 0:05:42.600 --> 0:05:45.200 variants in these issues, in the docks and in the deals, 0:05:45.200 --> 0:05:47.160 and that's why we've got a team of research analysts 0:05:47.160 --> 0:05:49.360 to pour through each of them. You know, the first 0:05:49.400 --> 0:05:51.040 deal was said, oh, this is the gold standard. 0:05:51.080 --> 0:05:53.559 Would you like to inform there's only forty two people 0:05:53.640 --> 0:05:59.279 listening this morning, which hyperscale are to avoid? 0:05:59.640 --> 0:06:00.680 No, not going to go in. 0:06:01.520 --> 0:06:05.680 You said last time there, there we go. 0:06:06.080 --> 0:06:07.280 It was fun while it lasted. 0:06:07.360 --> 0:06:07.560 Tom. 0:06:08.800 --> 0:06:11.680 How about municipal bonds, Yeah, I think there's some interest 0:06:11.720 --> 0:06:12.520 in municipal bonds. 0:06:12.520 --> 0:06:15.279 I mean, if you live in a high tax state 0:06:15.680 --> 0:06:16.400 like Metro. 0:06:16.360 --> 0:06:19.200 Are you today I might be getting a little bit 0:06:19.200 --> 0:06:19.720 of a lift here. 0:06:19.760 --> 0:06:22.880 I mean, some of these tax equivalentials are extraordinary. 0:06:23.080 --> 0:06:25.600 Yeah, in the municipal market. The supply that Tom's been 0:06:25.720 --> 0:06:28.240 very focused on in the investment grade corporate bond market, 0:06:28.360 --> 0:06:30.719 there's been a tremendous amount of supply in the municipal 0:06:30.760 --> 0:06:34.000 market as well, and that's that's caused some softness there. 0:06:34.040 --> 0:06:36.479 But no, and I think the other point to make 0:06:36.520 --> 0:06:38.719 Tom is you're very focused on the supply side of 0:06:38.760 --> 0:06:41.640 the equation in both municipals and in corporates. But on 0:06:41.680 --> 0:06:44.480 the demand side of the equation, we've had substantial flows 0:06:44.520 --> 0:06:46.480 into fixed income. And it gets to the point that 0:06:46.560 --> 0:06:50.160 Paul made because people are finding yield. You know, hey, 0:06:50.200 --> 0:06:51.760 if the stock market is going to go up thirty 0:06:51.760 --> 0:06:55.160 five percent every year, you don't need bonds. But you know, retires, 0:06:55.200 --> 0:06:56.680 there are a lot of people that need yield and 0:06:56.720 --> 0:06:58.360 you can find it in the bond market without a 0:06:58.400 --> 0:06:59.440 lot of additional risks. 0:07:00.279 --> 0:07:02.440 JPM were going to lives at their new mans. They 0:07:02.440 --> 0:07:05.080 have a store pall where you can buy merch when 0:07:05.080 --> 0:07:07.120 you have to go out and be social, right, they 0:07:07.120 --> 0:07:10.680 sell slide rules in the stores. You're the only one 0:07:10.720 --> 0:07:12.560 in a bond team that doesn't use a slide rule 0:07:12.600 --> 0:07:17.680 because you're thick. Some in together that arching knowledge, which 0:07:17.720 --> 0:07:20.200 is there's something out there that's going to surprise us. 0:07:20.440 --> 0:07:24.880 What do you worry about? What's the August nineteen ninety 0:07:24.920 --> 0:07:28.800 eight k R nightmare thingy within the thick world? 0:07:30.400 --> 0:07:35.560 You know, there's the worry that I have is, you know, 0:07:35.600 --> 0:07:39.040 the term premium continues to increase and the FED loses 0:07:39.080 --> 0:07:40.160 control of the long. 0:07:40.000 --> 0:07:40.920 End, I worry about it. 0:07:40.920 --> 0:07:44.400 They become un anchored, they become un anchored. Inflation expectations 0:07:44.440 --> 0:07:46.560 have not been unanchored. I mean, that's the big one. 0:07:46.600 --> 0:07:52.440 Do inflation expectations become unanchored? And is there concern about 0:07:52.440 --> 0:07:55.600 the FED reaction function? I think the softness we've seen 0:07:55.760 --> 0:07:58.440 in the inflation data, the fact that we have not 0:07:58.640 --> 0:08:02.440 seen any wage inflation, gives me some comfort about that. 0:08:03.000 --> 0:08:05.120 The other thing that I always worry about, Tom, when 0:08:05.160 --> 0:08:08.679 you look at what causes nightmares, what causes you loose sleep, 0:08:08.760 --> 0:08:13.720 is where have we had excesses in markets? So you 0:08:13.760 --> 0:08:17.200 know we've worried about, you know, different forms of lending, 0:08:17.240 --> 0:08:20.560 where are their excesses? Those are the things that I 0:08:20.600 --> 0:08:24.560 worry about looking for those excesses, looking where we might find. 0:08:24.480 --> 0:08:26.760 Thank you so much for coming by today, Kate, the 0:08:26.840 --> 0:08:32.559 JP Morgan Asset manager. Stay with us. More from Bloomberg 0:08:32.679 --> 0:08:34.720 Surveillance coming up after this. 0:08:41.960 --> 0:08:45.559 You're listening to the Bloomberg Surveillance podcast. Catch us Live 0:08:45.600 --> 0:08:48.640 weekday afternoons from seven to ten am. E's durn Listen 0:08:48.679 --> 0:08:52.240 on Applecarplay and Android Otto with the Bloomberg Business app, 0:08:52.440 --> 0:08:54.160 or watch US live on YouTube. 0:08:55.080 --> 0:08:59.160 Martin McCormick is Chief Foreign Exchange strategist Bemo Capital Markets 0:08:59.160 --> 0:09:02.720 a bank of Montrual. Can you make a week dollar 0:09:02.880 --> 0:09:05.800 call giving yield upset Mark McCormick. 0:09:07.400 --> 0:09:08.360 I wouldn't make it yet. 0:09:08.800 --> 0:09:10.839 I think we can make it maybe later in twenty 0:09:10.880 --> 0:09:12.839 twenty seven or at some point. But I think this 0:09:12.920 --> 0:09:15.440 is a kind of prime time for the dollar. I 0:09:15.440 --> 0:09:18.760 think big thing is like what's really driven the dollar 0:09:18.920 --> 0:09:22.559 lower recently? I'd say it's positioning and the market's kind 0:09:22.600 --> 0:09:26.280 of like re engagement with goldilocks. I really don't think 0:09:26.360 --> 0:09:28.800 it's about rates. Rates is kind of like settled down 0:09:28.840 --> 0:09:30.319 a little bit. But yeah, at the end of the day, 0:09:30.360 --> 0:09:32.920 the market has re embraced risk. It's kind of. 0:09:32.840 --> 0:09:34.120 Like moved into that direction. 0:09:34.679 --> 0:09:36.839 And yeah, I think what we'll see the rekindling of 0:09:37.240 --> 0:09:40.640 pickup in US growth, ed hikes for second half and 0:09:40.640 --> 0:09:41.400 a stronger dollar. 0:09:41.559 --> 0:09:43.040 Let me get this out of the way, because Paul's 0:09:43.040 --> 0:09:46.920 got more intelligent questions with a week again, where did 0:09:46.960 --> 0:09:49.320 they re intervene? Is it a one sixty or do 0:09:49.320 --> 0:09:51.520 they got to pop higher to a week or again 0:09:51.600 --> 0:09:54.440 before they step in a third, fourth, eighth time. 0:09:55.920 --> 0:09:57.480 I think they got to let it go weaker, right, 0:09:57.520 --> 0:09:59.720 They just did it last time at one sixty four 0:10:00.120 --> 0:10:01.880 right on one sixty five. And if you kind of 0:10:01.880 --> 0:10:04.599 think about the situation that was at hand, FED was 0:10:04.640 --> 0:10:07.960 meeting that week, it was a live meeting. BOJ was 0:10:08.440 --> 0:10:11.160 meeting that week, did nothing, and the market was getting 0:10:11.240 --> 0:10:13.800 very bullish on the US rate story and also on 0:10:13.840 --> 0:10:16.199 the dollar stories. Well, I think, you know, we had 0:10:16.360 --> 0:10:18.920 we'd been traveling in Tokyo with the week before as well, 0:10:19.000 --> 0:10:21.360 and there was a there was a discussion about actually 0:10:21.400 --> 0:10:23.600 getting to one seventy. So I think what they try 0:10:23.640 --> 0:10:25.480 to do is cut it off at one sixty five. 0:10:25.840 --> 0:10:29.280 To me, that's kind of their number. But I still 0:10:29.320 --> 0:10:31.880 think again, if fundamentals move in a direction worth a 0:10:31.920 --> 0:10:35.520 stronger dollar, and FED is hiking rates are higher, a 0:10:35.520 --> 0:10:37.760 Boj's dragging their feet, we can still kind of get 0:10:37.760 --> 0:10:40.160 to that one sixty five potentially one sixty five to 0:10:40.200 --> 0:10:41.840 one seventy level mark. 0:10:42.080 --> 0:10:46.200 Give us a history lesson here. Do interventions ever really 0:10:46.480 --> 0:10:48.479 work kind of intermediate longer. 0:10:48.280 --> 0:10:53.880 Term they do if the fundamentals are kind of moving 0:10:53.880 --> 0:10:57.000 in that direction to begin with. I would argue the 0:10:57.080 --> 0:11:00.280 problem with what's going on in Japan is, you know, 0:11:00.400 --> 0:11:03.640 partly it's an energy shock. We've been dealing with kind 0:11:03.679 --> 0:11:06.720 of terms of trade shock since twenty twenty two, Japan's 0:11:07.000 --> 0:11:10.439 a major importer. The other weak link that Japan has 0:11:10.520 --> 0:11:14.120 right now, it's also an LNG importer. So again, if 0:11:14.160 --> 0:11:17.440 you think about what's come offline, look at the natural 0:11:17.520 --> 0:11:20.440 gas futures that are traded in Asia, look at Henry Hub, 0:11:20.520 --> 0:11:23.600 and then look at the natural gas futures in Europe, 0:11:23.760 --> 0:11:26.440 and you'll see that countries that have to accept these 0:11:26.520 --> 0:11:30.880 prices are dealing with challenging problems for their manufacturing sector. 0:11:30.960 --> 0:11:34.160 So Japan, Germany, they're all dealing with that. So I 0:11:34.160 --> 0:11:38.600 would highlight again energy shock plus relative rate differentials plus 0:11:38.679 --> 0:11:42.360 diverging economies, and again in an environment where the US 0:11:42.440 --> 0:11:45.760 is generating good growth and good inflation and Japan is 0:11:45.920 --> 0:11:49.360 importing inflation from energy and also from a weaker currency, 0:11:49.840 --> 0:11:53.319 they're at different places. So again I would say if 0:11:53.320 --> 0:11:57.480 they try to intervene and they're going against fundamentals which 0:11:57.520 --> 0:11:59.520 are pushing for a week or again, they're kind of 0:11:59.600 --> 0:12:01.880 put playing a band aid and trying to buy time. 0:12:02.360 --> 0:12:04.439 The last time they intervened in a. 0:12:04.360 --> 0:12:06.760 Couple of years ago, it worked because the FED was 0:12:06.760 --> 0:12:09.800 on the verge of cutting so great differentials worked with it, 0:12:09.880 --> 0:12:12.560 So again, I think they're just trying to buy time here. 0:12:12.840 --> 0:12:15.640 So Mark, I'm looking at the DXYU next ninety nine 0:12:15.679 --> 0:12:17.680 spot six, I kind of feel like it should be 0:12:17.840 --> 0:12:22.000 higher relative to our trading partners. Is that a fair 0:12:22.120 --> 0:12:23.880 assessment or are we kind of at where we need 0:12:23.920 --> 0:12:24.080 to be? 0:12:25.520 --> 0:12:28.120 We're targeting one O three, So I kind of agree 0:12:28.160 --> 0:12:30.200 with that. I think, you know, a big piece here 0:12:30.440 --> 0:12:34.160 is that the news flow went against the dollar very 0:12:34.200 --> 0:12:36.520 quickly in a short period of time, and I think 0:12:36.559 --> 0:12:40.360 it went coming into it. People were very wrong the 0:12:40.400 --> 0:12:43.520 dollar again this year, and everyone bought into it very quickly, 0:12:43.880 --> 0:12:45.880 and all the things they wanted to happen didn't happen. 0:12:45.880 --> 0:12:49.120 The market got fomo on a July fed hike, the 0:12:49.160 --> 0:12:51.480 market got very excited about US data. But now it 0:12:51.559 --> 0:12:53.839 started to kind of dial back a little bit. 0:12:53.880 --> 0:12:55.720 I would say, it's cool, not collapsed. 0:12:56.120 --> 0:12:59.679 And again, positioning kind of turned very long dollar in 0:12:59.760 --> 0:13:01.920 a work period of time, and so I think the 0:13:01.920 --> 0:13:05.040 market just kind of lacks the patients it wanted to 0:13:05.120 --> 0:13:07.439 kind of this trade to kind of extend a little 0:13:07.440 --> 0:13:10.439 bit longer. And so I think again, I think if 0:13:10.440 --> 0:13:13.240 you look at where fundamentals are and then some of 0:13:13.280 --> 0:13:15.520 the things that we track in terms of macro the 0:13:15.559 --> 0:13:18.120 market regime, which I would argue is the most important piece. 0:13:18.640 --> 0:13:21.120 My market regime tells me in terms of asset allocation, 0:13:21.160 --> 0:13:23.320 it's higher rates, weaker growth, flatterer curves. 0:13:23.640 --> 0:13:25.120 Dollar outperforms that environment. 0:13:25.200 --> 0:13:28.120 So I would say, again, yeah, we're targeting one oh three, 0:13:28.280 --> 0:13:29.800 but I would say that's the peak. 0:13:30.600 --> 0:13:32.720 So we're targeting a peak dollar for this quarter. 0:13:32.800 --> 0:13:34.440 And then I think the market's really going to start 0:13:34.480 --> 0:13:35.880 to move on to two different themes. 0:13:36.000 --> 0:13:39.280 Your one degree move from like leaning forward and actually 0:13:39.360 --> 0:13:42.480 listening to the worst speech in Jackson Hole, which I 0:13:42.480 --> 0:13:45.600 believe we're going to have, But what will Mark McCormick 0:13:45.760 --> 0:13:49.680 listen for? It provides confidence to the system. 0:13:51.960 --> 0:13:54.120 I think what's most important. We've been traveling a lot 0:13:54.120 --> 0:13:56.120 to see clients, and I feel like people are spending 0:13:56.200 --> 0:13:59.840 a tremendous amount of time trying to measure inflation. You know, 0:14:00.120 --> 0:14:02.720 a core PCE to this decimal point is that this 0:14:02.800 --> 0:14:06.240 indicator is that the median stripped? Is it the Dallas indicator? 0:14:06.760 --> 0:14:10.480 If you measure all inflation together, it's running above three percent. 0:14:10.600 --> 0:14:12.360 I think what people are missing the forest through the 0:14:12.400 --> 0:14:18.560 trees here is that the macro drivers of inflation, industrialization, electrification, 0:14:19.120 --> 0:14:25.640 fiscal dominance, energy policy, even geopolitics, these are all inflation there. 0:14:26.320 --> 0:14:27.960 So the thing that I would argue is that. 0:14:27.960 --> 0:14:30.520 Like what I the vibe that I'm getting from Warsh 0:14:30.680 --> 0:14:34.480 is that he's thinking more about what's driving inflation and 0:14:34.560 --> 0:14:37.480 trying to move away from precisely measuring a particular level 0:14:37.520 --> 0:14:40.240 of inflation the Fed's going to move at So that's 0:14:40.360 --> 0:14:42.280 and the other thing I would argue is that financial 0:14:42.320 --> 0:14:46.240 conditions are easy. People keep talking about the backup in yields, 0:14:46.240 --> 0:14:49.200 and despite the backup the yields, the Bloomberg Financial Conditions 0:14:49.200 --> 0:14:53.080 Index has eased, So the FED is not tightening. They're 0:14:53.120 --> 0:14:56.000 actually again, you're adding more fuel to the fire. So 0:14:56.560 --> 0:15:00.680 I'm looking for how worsh and how like central banks 0:15:00.680 --> 0:15:04.120 are thinking more about these global drivers of inflation that 0:15:04.200 --> 0:15:06.920 have changed dramatically in the last five to ten years 0:15:06.920 --> 0:15:09.240 and where they think those things are going, because I 0:15:09.280 --> 0:15:11.520 would rather think about rates as a factor and how 0:15:11.520 --> 0:15:15.720 it influences markets in general, rather than trying to get 0:15:15.720 --> 0:15:18.280 the level of the FED write and trying to measure 0:15:18.320 --> 0:15:20.600 exactly what level of inflation you're looking at. 0:15:20.680 --> 0:15:23.760 Mart McCormick Thank you so much, Chief FX and BMO 0:15:23.880 --> 0:15:30.160 Capital Marcus stay with us. More from Bloomberg Surveillance coming 0:15:30.240 --> 0:15:31.240 up after this. 0:15:38.480 --> 0:15:42.080 You're listening to the Bloomberg Surveillance Podcast. Catch us Live 0:15:42.160 --> 0:15:45.280 weekday afternoons from seven to ten am Eastern Listen on 0:15:45.400 --> 0:15:49.040 Applecarplay and Android Otto with the Bloomberg Business app, or 0:15:49.200 --> 0:15:50.720 watch US Live on YouTube. 0:15:51.200 --> 0:15:56.120 Lizzan Saunders one Chief investment Strategists Charles Schwab with us. Now, 0:15:56.440 --> 0:15:59.960 how does an equity view change lizen sounders given price 0:16:00.200 --> 0:16:01.600 down yield up. 0:16:02.840 --> 0:16:05.400 Well, we've been writing about this and we've talked about 0:16:05.400 --> 0:16:08.600 it before, Tom, you and I about a change. 0:16:08.320 --> 0:16:09.120 In eras here. 0:16:09.160 --> 0:16:12.520 You know, we exited definitively the Great Moderation Era that 0:16:12.600 --> 0:16:15.680 went from the mid to late nineteen nineties up until 0:16:15.960 --> 0:16:19.240 the twenty twenty two inflation spike, and that was an 0:16:19.280 --> 0:16:23.560 environment where you had mostly disinflation, fairly benign inflation risk, 0:16:23.720 --> 0:16:28.160 relatively limited inflation volatility as well as limited economic volatility. 0:16:28.400 --> 0:16:30.560 That ship has sailed, and I think what we're in 0:16:30.640 --> 0:16:32.920 now is something that looks a little bit more like 0:16:33.000 --> 0:16:35.120 what we've been calling the temperamental Era, which is the 0:16:35.160 --> 0:16:37.960 period from the mid sixties to the mid nineties. The 0:16:38.000 --> 0:16:40.840 big difference between them is the relationship between bond yields 0:16:40.880 --> 0:16:43.760 and stock prices. So in the temperamental era you had 0:16:43.760 --> 0:16:48.320 a very very consistent relationship where when bond yields went up, 0:16:48.360 --> 0:16:52.680 stock prices went down. That's because what was driving yields 0:16:52.760 --> 0:16:54.880 was more on the inflation side of the spectrum, not 0:16:54.960 --> 0:16:57.520 the growth side of the spectrum. Great moderation growth was 0:16:57.600 --> 0:17:01.280 driving yields, So higher yields, higher stiff prices. I think 0:17:01.320 --> 0:17:03.560 we're reverting back to something that looks a little bit 0:17:03.560 --> 0:17:04.760 more like the temperamental era. 0:17:05.440 --> 0:17:08.600 So I guess that calls into question, maybe even more so. 0:17:09.040 --> 0:17:11.120 We need to have a strong view and where rates 0:17:11.119 --> 0:17:13.879 are going. How do you guys feel about that at SCHWAB. 0:17:15.400 --> 0:17:18.399 So it's not just the level of rates that I 0:17:18.440 --> 0:17:20.959 think matters as a feeder into the equity market, but 0:17:21.040 --> 0:17:24.520 the speed of the move also the shape of the 0:17:24.600 --> 0:17:27.720 yield curve. So right now, I think the direction and 0:17:27.800 --> 0:17:32.040 maybe more recently this speed cruise to the disadvantage of 0:17:32.080 --> 0:17:34.600 the equity market, but the shape of the yield curve 0:17:34.720 --> 0:17:37.840 right now is still relatively positive. I think the net 0:17:37.880 --> 0:17:40.760 of all of this is that we have to be 0:17:41.440 --> 0:17:44.520 a little bit more creative when it comes to diversification, 0:17:44.680 --> 0:17:47.640 because when you have bond yields and stock prices moving 0:17:47.640 --> 0:17:50.239 in the opposite direction, that means or bond yeah, that 0:17:50.280 --> 0:17:53.320 means prices. Bond prices and stock prices are moving in 0:17:53.359 --> 0:17:56.159 the same direction. And that's why you're seeing interest in 0:17:56.240 --> 0:17:59.919 diversification in other areas, whether it's within the fixed incomes 0:18:00.080 --> 0:18:03.600 fear and then move into corporate debt or even into 0:18:03.680 --> 0:18:08.119 things like investing in the whole buildout of kind of 0:18:08.160 --> 0:18:13.200 the sports ecosystem. So I think it requires a thinking 0:18:13.200 --> 0:18:16.359 about diversification that is a little bit more complex than 0:18:16.400 --> 0:18:19.600 it has been an environment where sixty forty tends to 0:18:19.640 --> 0:18:21.200 work in a more simple way. 0:18:21.840 --> 0:18:25.280 Earnings Corporate America has certainly been doing its part, Lizan, 0:18:25.400 --> 0:18:28.320 with some better than good in the second quarter, better 0:18:28.359 --> 0:18:31.400 than even in the first quarter, which we're pretty stellar themselves. 0:18:31.720 --> 0:18:34.360 How sustainable is this level of earnings growth? 0:18:34.400 --> 0:18:34.760 Do you think? 0:18:35.960 --> 0:18:39.440 Probably not long term sustainable, And that's maybe the reason 0:18:39.480 --> 0:18:44.040 why you're not seeing analysts extrapolate the thirty percent plus 0:18:44.080 --> 0:18:49.359 surprise factor for the second quarter into quarters consistently out 0:18:49.400 --> 0:18:52.919 We've got that differential between where earnings are now and 0:18:52.960 --> 0:18:56.440 depreciation catching up as it relates to the AI spend. 0:18:56.480 --> 0:18:59.280 I think that has to be taken into consideration. This 0:18:59.359 --> 0:19:02.359 is the first time ever we've seen a parabolic ascent 0:19:02.520 --> 0:19:06.480 like this. In earnings July first, the consensus was for 0:19:06.640 --> 0:19:08.960 twenty four percent growth for the second quarter. We're now 0:19:09.000 --> 0:19:12.320 over fifty percent. That move up from a growth rate 0:19:12.400 --> 0:19:16.240 change perspective is unmatched other than coming out of the 0:19:16.280 --> 0:19:19.760 two most recent recessions where the base effects accrue to 0:19:19.800 --> 0:19:22.639 the benefit of that surgeon earning. Because that's clearly not 0:19:22.680 --> 0:19:23.520 the case this time. 0:19:23.560 --> 0:19:25.800 Lizzie Saunders, we're going to continue with her. She's of 0:19:25.840 --> 0:19:29.560 course with Charles Schwab here futures deteriorate negative thirty six. 0:19:29.600 --> 0:19:32.920 I'm not to a sixteen vix yet. As Lizanne suggests, 0:19:32.960 --> 0:19:36.280 there's a contained feeling to this, even with a backup 0:19:36.400 --> 0:19:38.840 in yields four point one to nine in the two 0:19:38.880 --> 0:19:42.720 year rounded at four point seven four percent on the 0:19:42.800 --> 0:19:45.359 ten year. The thirty year we had a five point 0:19:45.400 --> 0:19:48.680 three three right now comes into a five point three two. 0:19:48.760 --> 0:19:51.960 Robin Brooks has been wonderful on this. Publishers like eight 0:19:52.080 --> 0:19:54.960 charts on on Twitter of all the different governments. He 0:19:55.119 --> 0:19:58.640 leads with US and France is the most fragile. That's 0:19:58.640 --> 0:20:01.480 his opinion. I'm not giving my opinion here, but there 0:20:01.520 --> 0:20:05.600 it is some economic data out. Import prices come in 0:20:05.680 --> 0:20:10.480 below survey. They're up bigly, but not like what was expected. 0:20:11.000 --> 0:20:15.040 Housing starts a little soggy, to say Les, there's some 0:20:15.160 --> 0:20:18.440 energy on the screen here as we look at that, 0:20:18.520 --> 0:20:21.159 with yields coming in a little bit. We continue with 0:20:21.240 --> 0:20:25.600 Lizenne Saunders of Charles Schwab Lizen. How far out is 0:20:25.640 --> 0:20:28.639 your view when you started out? I remember this, she 0:20:28.720 --> 0:20:31.760 was fifteen, She's on lu Ru Kaiser. She's just killed 0:20:31.840 --> 0:20:35.240 it for mister Schwab and all that you could look 0:20:35.240 --> 0:20:38.479 out three years. How far out are you and Kevin 0:20:38.640 --> 0:20:39.800 modeling right now? 0:20:41.160 --> 0:20:43.240 I think you still need to look out over a 0:20:43.320 --> 0:20:46.359 multi year period of time. The problem is that that's not 0:20:46.400 --> 0:20:49.440