Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Joining us now is Blackroft, chief investment Officer of Global
Speaker 2: Fixed Income.
Speaker 3: Rick Reader.
Speaker 2: So, Rick, the unemployment rate goes down, but a surprise
Speaker 2: contraction in jobs. Last time we spoke for last month,
Speaker 2: you said the employment picture is stable, broadly unimpressive. Has
Speaker 2: your assessment of this labor market change since then with
Speaker 2: these numbers in hand.
Speaker 1: No, broadly not impressive. I think it is the right terminology.
Speaker 1: In fact, I I was thinking about it. I think
Speaker 1: it's actually remarkable how unremarkable the data is.
Speaker 4: Listen. I think you know when you look at you.
Speaker 1: Know, people say, well, gosh, we're not hiring many people
Speaker 1: because we have a supply issue, and you saw some
Speaker 1: of that play through today. But that being sad, you're
Speaker 1: not seeing any wage growth, so meaning there's not that
Speaker 1: demand for labor that you would expect when you got
Speaker 1: an economy that's doing as well as it's doing, and.
Speaker 4: We're going to grow.
Speaker 1: I think you're going to see six percent nominal GDP.
Speaker 1: You've got corporate top line revenue that's strong, earnings are strong,
Speaker 1: but you're seeing operating leverage for companies kick in. Like
Speaker 1: you read about I mean, you look at all these
Speaker 1: earnings reports, particularly in the tech space. Companies are growing,
Speaker 1: they're spending immense amounts of capex, but you're actually cutting
Speaker 1: people in many cases. So anyway, I think we're seeing
Speaker 1: a productivity revolution, and I think we're watching it play
Speaker 1: out month in a month out. I mean, to have
Speaker 1: only twenty thousand jobs on a three month moving average
Speaker 1: strip about healthcare, you having negative job growth on and aggregate.
Speaker 1: So anyway, I think it's I just think we're going
Speaker 1: through I think when they summarize the years from now,
Speaker 1: they're going to you're going to witness something that is productivity.
Speaker 4: People say it's Ai kicking in.
Speaker 1: I actually think it's just been a an ethos around
Speaker 1: companies growing their business and seeing how you can operate
Speaker 1: without that much employment.
Speaker 5: Well, also, you've got the fall in immigration that is
Speaker 5: probably contributing to these big declines we're seeing in the
Speaker 5: labor force. But the people who want jobs are apparently
Speaker 5: getting jobs with unemployment at four point one percent. So
Speaker 5: I assume this tells you, as well as the FED,
Speaker 5: that we don't have a problem with the labor for
Speaker 5: sight of the mandate.
Speaker 4: Yeah, I mean, I think that's right. Mike.
Speaker 1: I mean, you know, I've been pretty outamant, but I
Speaker 1: know link the FED needs to hike and A I
Speaker 1: don't think you really will solve the inflation dynamic. Part
Speaker 1: of why I think these task forces will be so
Speaker 1: powerful as you'll get into what are some complex subjects.
Speaker 1: When you break down inflation today, you look at the
Speaker 1: difference between services and goods. You think about what's still
Speaker 1: sticky and inflation, education, healthcare, insurance. So as you're moving
Speaker 1: the overnight funds rate up, really do much and you
Speaker 1: get to the point being if you're restrictive on rate
Speaker 1: and you're driving mortgage rates higher, I just don't see
Speaker 1: that as really effective trying to bring inflation down. You've
Speaker 1: got what I would argue is, yeah, maybe it's an
Speaker 1: okay labor market, but you know you still need in
Speaker 1: a particularly way of this much debt on the country.
Speaker 4: You need to grow faster, you need to put more
Speaker 4: people to work.
Speaker 1: And I think that to me is the is the
Speaker 1: philosophy that the FED has to employ today.
Speaker 2: Well on the inflation side of things, Rick, I know
Speaker 2: you've been a big proponent again, and the type of
Speaker 2: inflation we have isn't something that's fixed by hikes, but
Speaker 2: perhaps by policy, not monetary policy, but fiscal policy. Well,
Speaker 2: what is the policy you think that could start to
Speaker 2: eat away at inflation?
Speaker 3: Is it just like ending a war basically?
Speaker 1: I mean, listen to war is a big deal element obviously,
Speaker 1: not only do you get higher prices in terms of fuel,
Speaker 1: but you're you know, there's a transmission effect through that
Speaker 1: when you talk about obviously trade getting slowed somewhat. So
Speaker 1: I know why the war is a big deal obviously,
Speaker 1: So that will will change then the dynamic and people
Speaker 1: will focus on tariffs, you know, the goods inflation. You know,
Speaker 1: the US economy is not that large of an importer
Speaker 1: of goods. So yes, and I think people got really
Speaker 1: worked up about that last year. So what do you
Speaker 1: do and how do you create fiscal velocity? You know,
Speaker 1: there's a bunch of things you could do, and I think,
Speaker 1: quite frankly, deregulation is powerful. I think the idea around
Speaker 1: how do you help with housing things like zoning, permitting,
Speaker 1: et cetera. How do you get like some of the
Speaker 1: stuck student loan asset reliabilities on that young people have.
Speaker 1: How do you transition some of that? How do you
Speaker 1: help with some of that. I think there's a whole
Speaker 1: series of fiscal dynamics that can help with inflation. But
Speaker 1: I don't think moving the overnight funds right will really
Speaker 1: do it, and we've seen that before it doesn't really
Speaker 1: have that much of an impact.
Speaker 5: I guess I would ask you then in that case,
Speaker 5: because I agree that there's probably not going to be
Speaker 5: anything happening on the fiscal side because they can't even
Speaker 5: vote on an attorney general at this point, and the
Speaker 5: FAD is maybe leaning now towards a hold in September.
Speaker 5: We'll see after the Wednesday CPI report. But that leaves
Speaker 5: us with an inertial economy, And what do you think
Speaker 5: happens to the economy if there's no movement on the
Speaker 5: fiscal or the monetary side?
Speaker 3: Come in?
Speaker 1: I think, I mean, you're unbelievably good at dentalyzing this
Speaker 1: and I appreciated questions you ask a TFMC meeting, etc.
Speaker 1: On thing I will say is I'm not sure I
Speaker 1: agree with the inertial concept. I actually think the economy
Speaker 1: is operating at an amazingly strong level, and you look
Speaker 1: at the CAMPA, it's obviously a big driver of that.
Speaker 1: That from AI that's getting into you know, straight growth
Speaker 1: of the economy in so many different forms. And then
Speaker 1: you look at consumption today. Consumption you see this, you know,
Speaker 1: particularly in areas like leisure and hospitality. You see this
Speaker 1: in some of the transportation dynamics in terms of travel. Listen,
Speaker 1: the economy is operating an actually thing that was pretty
Speaker 1: amazing to me in the last two months, and some
Speaker 1: of you had a fiscal tailwind, but the actually had
Speaker 1: lower and middle income that was actually starting to accelerate.
Speaker 1: And we see that in all of we use a
Speaker 1: lot of this high frequency data. He actually saw consumption
Speaker 1: a pretty good place. So listen, I think the economy
Speaker 1: is operating an extremely solid level. You know, you would
Speaker 1: think in the second half of the year you'd start
Speaker 1: to moderate a bit post a fiscal tailwind, but boy,
Speaker 1: you know, you see this, I mean, this is this
Speaker 1: is a pretty amazing quarter of earnings reports that not
Speaker 1: not not not a pervasively across every single company or industry.
Speaker 4: But boy, I thought it was pretty darn good.
Speaker 1: And you know, part of what we look at the
Speaker 1: equity market and having a pretty good run, particularly recently,
Speaker 1: you're actually looking at multiples that are coming down because
Speaker 1: these companies are earning so fast. So anyway, I'm pretty
Speaker 1: enthusiastic boy where the economy is today.
Speaker 2: And I'm assuming that that enthusiasm over equities translates into
Speaker 2: your world of credit. Rick, you have Bank, of course,
Speaker 2: a fun that has been outperforming the broader benchmark by
Speaker 2: a healthy clip for the past few couple of years.
Speaker 2: I know last time you join you express skepticism on
Speaker 2: USIG credit. You like caring higher income. I think all
Speaker 2: of this is so interesting time at a time, Rip,
Speaker 2: where as you point out, so much is happening because
Speaker 2: of AI, especially in debt, with the huge issuance we're
Speaker 2: seeing from the hyperscalers. We've got another twenty five billion
Speaker 2: that this market easily took up from Google just this week,
Speaker 2: and at the same time we're going to get more
Speaker 2: issues from the Treasury next week. What are you thinking
Speaker 2: about where you want to place bank just given the
Speaker 2: sheer amount of issuance that continues to hit this.
Speaker 1: Market, Dan, I als say one thing about you know,
Speaker 1: because you've had a backup in rates, you're able to
Speaker 1: hit your yield target. So I mean talk about we're
Speaker 1: hitting almost seven, I mean six, you know, high sixes
Speaker 1: in terms of yield, and so a couple of things
Speaker 1: we've been doing is you actually don't need to go
Speaker 1: down in credit quality. You actually don't need to go
Speaker 1: that far down in terms of the liquidity in the portfolio.
Speaker 4: So you know, we've been keeping it.
Speaker 1: You know, we've been adding a bit in terms of
Speaker 1: European fixed income. You know, I think emerging markets are interesting,
Speaker 1: particularly if you assume the dollar is not going to
Speaker 1: be not going to be moving aggressively. You made the point, right,
Speaker 1: I think investment great credit give the amount of supply
Speaker 1: we're going to see data center hyper skill or investment
Speaker 1: credit credit's not that interesting at all. But in the
Speaker 1: securitization market, you know they securitize assets both in commercial
Speaker 1: real estate, abs REZI. You know that that those markets
Speaker 1: are in pretty good shape. So you know, we're in
Speaker 1: an environment we don't feel like we've got to stretch
Speaker 1: a lot. You know, these real rates that today give
Speaker 1: us an amazing ability to keep our yield up without
Speaker 1: really stressing. We're running bank now with an average rating
Speaker 1: of a you know, you're hitting high sixes, like that's
Speaker 1: pretty good today. So we're trying to be in bonds
Speaker 1: we're trying to be as boring as you could be,
Speaker 1: and you know, take the risk in equities, which you know,
Speaker 1: I have a little bit of volatility to them, particularly
Speaker 1: single name.
Speaker 5: A little bit less risk maybe in the bond market,
Speaker 5: but there's such an at the appetite I guess I
Speaker 5: would say for debt, for the hyperscalers, et cetera. How's
Speaker 5: that affecting how you can sell all of these bonds.
Speaker 5: I was really surprised yesterday with the Google alphabet offering
Speaker 5: that it was so oversubscribed.
Speaker 4: You know, Mike, we're living through something.
Speaker 1: And so one of the real benefits to all the
Speaker 1: financing that has to come Data Center, Hyperscaler US, Treasury,
Speaker 1: UK Japan is we're actually going through a pretty historic
Speaker 1: demographic that is supporting this demand for yield insurance companies,
Speaker 1: life insurance, pension. So it's amazing if you price assets
Speaker 1: right on the dead side, you can place an awful
Speaker 1: lot of Now that being sad, I mean, the hyperscalers
Speaker 1: have clearly widened quite a bit, and so you're getting the.
Speaker 4: Levels I say, these real rates.
Speaker 1: If you're a pension today and think, gosh, I can
Speaker 1: defease a good portion of my liability stream. At these
Speaker 1: real rates, it brings a lot of people in, particularly
Speaker 1: if you get some spread on it and you're watching
Speaker 1: that play out, I would say, one thing I'm in,
Speaker 1: the supply is not going to stop coming. And you
Speaker 1: know next week we get a lot of treasury supply.
Speaker 1: So you know, in terms of interest rate exposure, we
Speaker 1: feel like we don't have to be in a rush
Speaker 1: to add a bunch of interest rate exposure.
Speaker 4: And just like clip coupon.
Speaker 3: All right, Rick, you're going to stick with us.
Speaker 2: We have to see how this market opens up, and
Speaker 2: would love to get your commentary on a continued market reaction.
Speaker 2: So Marcus overall are rallying, as are this bond market
Speaker 2: led by the front end as we get rate hipes
Speaker 2: price out. We are back with black Croft, Chief investment
Speaker 2: Officer of Global fixed Income Rick reader.
Speaker 3: Rick.
Speaker 2: Okay, so this basically takes, in your view, a hike
Speaker 2: off the table. I wonder about cuts though, because when
Speaker 2: we had spoken about a month ago, you said, perhaps
Speaker 2: we've still could get cuts in the back half of
Speaker 2: this year. Do you think that's still a possibility.
Speaker 1: So listen, I mean, I you know you still have
Speaker 1: a FED committee that is uh, that is generally hawkish.
Speaker 1: You still have a committee that is more focused on
Speaker 1: inflation than the labor readings. So listen, I mean, I
Speaker 1: think I think you could. It could still happen. You'd
Speaker 1: have to see some deceleration in the economic conditions.
Speaker 4: You'd have to see.
Speaker 1: You know, we think core PCE is going to come
Speaker 1: into the into the high twos down to the high
Speaker 1: twos next year. We think we're going to get in
Speaker 1: the mid twos. Can you still get it done this year?
Speaker 1: I think so? But it listen, I mean, I think
Speaker 1: you have to One thing I've learned about investing, it's
Speaker 1: not what you it's not what you think they should do.
Speaker 4: It's what they're going to do.
Speaker 1: And today the structure of that committee clearly is in
Speaker 1: the we're going to fight inflation and and use the
Speaker 1: rate tool to be that that tool. Do you get there?
Speaker 1: So listen, I think they still could. I just think
Speaker 1: hiking doesn't make a lot of sense today.
Speaker 5: Interpret Wednesday for me, though, the CPI we saw a
Speaker 5: big drop in market expectations, sort of a need jerk
Speaker 5: move after the labor report. What's it going to take
Speaker 5: to move one way or another in the fixed income
Speaker 5: markets on Wednesday with CPI.
Speaker 4: Yeah, that's a great question, Michael.
Speaker 1: And so you know you've gotten a couple of softer
Speaker 1: prints on inflation recently. You know, we think we're in
Speaker 1: this mode of getting point two's type of type of
Speaker 1: numbers when you look at Core.
Speaker 4: And and you know even you know, I was.
Speaker 1: Looking at the numbers for Core PCEE maybe a little
Speaker 1: under the point two monthly reading. So you know, listen,
Speaker 1: if you got something significantly aberrational to that, you know,
Speaker 1: that would certainly move markets. Listen, if if the number
Speaker 1: came in significantly higher, which would be incongruous with what
Speaker 1: you've seen over the last couple of months, Listen, you
Speaker 1: know it's the FAG going to be on alert for that. Yes,
Speaker 1: I think so, you know, you know it's better than
Speaker 1: anybody and I think this, I think this. You know
Speaker 1: what the chairman has stated, what Chairman Wars has stated,
Speaker 1: it's not just one number that he's laser focused on.
Speaker 4: He's looking at the pet and happily of.
Speaker 1: Readings and our senses, inflation is slowly moderating. But it'll
Speaker 1: be interesting to see those report, like you said, that
Speaker 1: comes out Wednesday.
Speaker 2: I do wonder Obviously, yields are coming in now, but
Speaker 2: we have had a thirty year yield that has been
Speaker 2: stubborn and stubbornly moving higher above five point two at
Speaker 2: one point. Now it's obviously below five twenty. Do you
Speaker 2: think that this market is at all reflecting its concerns
Speaker 2: about credibility over the FED and chair warsh?
Speaker 1: You know, I'm a little surprised that the at the
Speaker 1: concern around you know, whether it was the last of
Speaker 1: them CE meeting or you know, you know, some of
Speaker 1: what I.
Speaker 4: Thought was a little bit harsh on credibility.
Speaker 1: I think, you know, I think reduced forward guidance is
Speaker 1: not terribly intimidating from to market participants. So you know,
Speaker 1: I don't really think, you know, can we get more
Speaker 1: from the FED in terms of the metrics they're looking
Speaker 1: at in terms of the structure of what is going
Speaker 1: to be important to them going forward? I think so,
Speaker 1: And I think we'll get more details around that. Listen,
Speaker 1: any I think it is we're getting a lot of
Speaker 1: supply of products. You know, you're pushing real rates up
Speaker 1: because you're getting a financial transmission that is historic in
Speaker 1: terms of whether it's fiscal supply that's coming from not
Speaker 1: just US, but obviously you know pressures and whether it's
Speaker 1: UK Japan, plus the amazing amount of supply we're getting
Speaker 1: into the credit markets.
Speaker 4: So I think it's more that than it is anything else.
Speaker 1: And like y'all have said, I mean, we still have
Speaker 1: some stickier inflation that is keeping these rates up. So anyway,
Speaker 1: those are where I would put the what's the influences?
Speaker 2: Hey, Eric, just super quickly because we're about to talk
Speaker 2: to our tech reporter. I love about all the AI
Speaker 2: debt coming and we talked about it just a moment ago.
Speaker 3: You talked about what it does with the IG market.
Speaker 2: Do you think it changes the attractiveness or the pressure
Speaker 2: on the treasury market at all? Getting all that supply
Speaker 2: from the AI hyperscalers.
Speaker 1: I mean, I mean when you whenever you push that
Speaker 1: much supply on the market, you think about there's a
Speaker 1: crowding out effect. I mean, listen, the US Treasury is
Speaker 1: still the behemoth in terms of issuance, but you know,
Speaker 1: you take what's coming in IG set backs on the
Speaker 1: backside of it through data center. So yeah, I just
Speaker 1: think we're getting a lot of supply and all markets,
Speaker 1: including government bonds are reflective of that.
Speaker 2: Hey, Rick, we always appreciate your time, especially on a
Speaker 2: job's Friday.
Speaker 3: Black Rocks Rick reader