WEBVTT - Government Shutdown Clouds Fed Outlook 0:00:02.520 --> 0:00:10.520 Bloomberg Audio Studios, Podcasts, radio News. This is Bloomberg business 0:00:10.520 --> 0:00:14.400 Week Daily reporting from the magazine that helps global leaders 0:00:14.440 --> 0:00:18.360 stay ahead with insight on the people, companies, and trends 0:00:18.400 --> 0:00:23.400 shaping today's complex economy. Plus global business, finance and tech 0:00:23.440 --> 0:00:27.320 news as it happens. The Bloomberg Business Week Daily Podcast 0:00:27.680 --> 0:00:31.720 with Carol Masser and Tim Steneveek on Bloomberg Radio. 0:00:32.240 --> 0:00:34.120 I want to bring in now Kay Her, she is 0:00:34.479 --> 0:00:37.640 US CIO of Global Fixed Income, Currency and Commodities at 0:00:37.720 --> 0:00:41.879 JP Morgan Asset Management. And Kate, do you think that 0:00:42.040 --> 0:00:45.040 we got anything new from this latest FED minutes? I mean, 0:00:45.320 --> 0:00:48.560 we knew that Steven Myron was an outlier, and these 0:00:48.600 --> 0:00:51.000 minutes certainly showed that. But what do we learn in 0:00:51.080 --> 0:00:53.400 terms of the debate going on inside the Federal Reserve? 0:00:53.760 --> 0:00:55.720 So Scarlett, first off, I'm glad to be here. Thank 0:00:55.760 --> 0:00:58.000 you for having me, Nora too. Second off, I think 0:00:58.040 --> 0:01:00.960 the short answer to your question is we didn't learn 0:01:01.040 --> 0:01:03.760 anything new. And I think one of the best ways 0:01:03.760 --> 0:01:06.160 to think about whether we've learned anything new is what 0:01:06.200 --> 0:01:09.280 the market's reaction is. And the market's really not giving 0:01:09.360 --> 0:01:12.280 us much of a reaction. Maybe at the margin the 0:01:12.319 --> 0:01:18.520 minutes are showing us that there was some discussion about 0:01:18.560 --> 0:01:21.640 maybe we didn't need to do anything, but it was 0:01:21.680 --> 0:01:24.000 pretty clear that we only had one dissent when that 0:01:24.160 --> 0:01:27.600 was released September seventeenth, and not a lot of new 0:01:27.640 --> 0:01:29.319 information in the minutes today. 0:01:29.880 --> 0:01:31.920 Okay, not a lot of new information. And of course, 0:01:31.959 --> 0:01:34.640 as we're looking at the trade still green across the 0:01:34.640 --> 0:01:37.000 screen right now, all across the board here when we're 0:01:37.000 --> 0:01:39.600 looking at equities in particular. But what do you think 0:01:39.600 --> 0:01:42.039 the FED should be focused on right now? 0:01:42.480 --> 0:01:45.800 It's such a great question in Aura. As everybody knows, 0:01:45.800 --> 0:01:48.240 we've got a government shut down and we are in 0:01:48.320 --> 0:01:52.760 an absence of data. So the FED or the the 0:01:52.880 --> 0:01:57.280 Bureau of Labor Services did not release the employment data 0:01:57.320 --> 0:02:01.720 on Friday. It's unlikely unless the government reopens, it's unlikely 0:02:01.760 --> 0:02:05.440 that we're going to get CPI next week. So what 0:02:05.480 --> 0:02:08.040 are we looking at? What's the FED looking at? The 0:02:08.080 --> 0:02:11.280 next major piece of data that we think is two things. 0:02:11.280 --> 0:02:14.200 I would say The first is corporate earnings start on 0:02:14.280 --> 0:02:17.360 October fourteenth, and I think that can be a great 0:02:17.360 --> 0:02:20.079 indication of what we're seeing from a bottom up perspective 0:02:20.080 --> 0:02:23.280 on the economy. The second one on a macro perspective 0:02:23.280 --> 0:02:25.600 that I'm sure the fedal look at is the Beige Book. 0:02:25.639 --> 0:02:29.239 So we've got the Beige Book coming out on October fifteenth. 0:02:29.440 --> 0:02:30.959 Yeah, and I feel like the Beige Book has taken 0:02:31.000 --> 0:02:34.399 on greater importance in this period of uncertainty where we're 0:02:34.400 --> 0:02:37.200 not sure if companies are passing along higher costs to 0:02:37.240 --> 0:02:39.840 their customers or how they're dealing with it. We're kind 0:02:39.840 --> 0:02:43.080 of in an uncharted territory and every company is doing 0:02:43.120 --> 0:02:46.240 things differently based on the experience of their executives when 0:02:46.280 --> 0:02:49.160 it comes to corporate earnings. K as someone who is 0:02:49.200 --> 0:02:51.200 in the fixed income market, what do you watch for? 0:02:51.480 --> 0:02:52.400 What do you look for? 0:02:53.120 --> 0:02:54.880 Is it the banks that will really tell you the 0:02:54.880 --> 0:02:57.320 most about what kind of credit quality we have in 0:02:57.320 --> 0:02:57.919 this economy. 0:02:58.080 --> 0:03:00.240 Sure, that's a great thing to think about. I think, 0:03:00.240 --> 0:03:03.840 first off, you know, we're not entirely in unprecedented territory. 0:03:03.919 --> 0:03:06.520 We have had government shutdowns before, and when we take 0:03:06.600 --> 0:03:09.320 a step back and think about the overall impact to 0:03:09.400 --> 0:03:12.920 gross domestic product, it tends not to be that material 0:03:13.080 --> 0:03:17.079 in the grand scheme of life. So from an earnings perspective, 0:03:17.120 --> 0:03:18.600 I think we're going to be looking for a couple 0:03:18.680 --> 0:03:21.800 of things. Number One, from the banks, what's the credit quality? 0:03:21.840 --> 0:03:24.720 Look at what's the indication of the consumer. As we've 0:03:24.760 --> 0:03:28.240 seen in the macro data, we've seen some softening in employment, 0:03:28.320 --> 0:03:32.040 so is that going to flow through into reserves, into 0:03:32.040 --> 0:03:35.560 credit quality and banks? And then from the broader companies 0:03:35.560 --> 0:03:38.320 and the industrials, what are we seeing in revenue growth 0:03:38.400 --> 0:03:43.200 versus EBITDAH obviously or earnings before interest, taxes, depreciation cash 0:03:43.200 --> 0:03:45.320 flow as it were. So what are we seeing in 0:03:45.360 --> 0:03:48.400 cash flow? I think for the most part, companies have 0:03:48.880 --> 0:03:51.040 very high margins and are they going to protect those 0:03:51.080 --> 0:03:53.800 margins or are they going to pass through costs onto consumers? 0:03:54.120 --> 0:03:55.800 And then what's that going to do to demand? I 0:03:55.800 --> 0:03:57.640 think that's what we'll be look looking at. 0:03:58.160 --> 0:04:00.720 So as we head into earnings, using just around the 0:04:00.760 --> 0:04:03.600 corner here, what sectors in particular are giving you the 0:04:03.600 --> 0:04:05.480 most concern? Just based off of what you were saying. 0:04:06.320 --> 0:04:09.440 I'm a bond portfolio manager, I'm paid to worry and 0:04:09.480 --> 0:04:13.880 loose sleeve, so very thing gives me concern. You never 0:04:13.960 --> 0:04:16.040 know where you might see a pocket of distress, and 0:04:16.080 --> 0:04:18.480 it's the unexpected that are the real concerns. 0:04:19.080 --> 0:04:22.360 Well, we've seen pockets of stress in the auto sector. 0:04:22.480 --> 0:04:24.720 When you look at first brands, when you look at tricolor, 0:04:25.320 --> 0:04:28.640 what does that tell you about the state of the consumer, 0:04:28.720 --> 0:04:32.600 especially at the lower end. You know, these were two 0:04:32.839 --> 0:04:35.520 credit blow ups that took people by surprise, and a 0:04:35.560 --> 0:04:38.680 lot of people will say, Okay, there's it syncratic. There's 0:04:38.680 --> 0:04:41.839 some maybe fraud issues that are particular to those companies, 0:04:41.839 --> 0:04:44.159 and that may be the case, but these are also 0:04:44.200 --> 0:04:47.039 sectors that are very much affected by tariffs, and they 0:04:47.160 --> 0:04:49.320 are not the only ones affected by tariffs either. 0:04:49.880 --> 0:04:52.039 So I think there's a couple of things going on here. 0:04:52.080 --> 0:04:55.240 Scarlett and yes, on a certain level, tree color and 0:04:55.360 --> 0:04:56.760 apparently that's how it's pronounced. 0:04:56.760 --> 0:04:57.240 Oh, thank you. 0:04:57.279 --> 0:04:58.800 I know that's your pro tip. 0:04:58.920 --> 0:05:00.000 I've been saying try credit. 0:05:00.520 --> 0:05:01.440 Thanks there. 0:05:01.720 --> 0:05:03.800 Well, I think there's a couple of things going on 0:05:03.880 --> 0:05:06.839 treac a Lore in particular, and I'm not going to 0:05:06.839 --> 0:05:10.080 talk about specific credits, but I think we should take 0:05:10.320 --> 0:05:13.640 a step back and think about what's going on in 0:05:13.680 --> 0:05:17.080 the broader economy and broader financial markets. And the reality 0:05:17.120 --> 0:05:20.040 is there's a lot of cash slashing around. And when 0:05:20.040 --> 0:05:23.039 there's so much money slashing around, that tends to be 0:05:23.080 --> 0:05:27.840 the point late cycle where excesses happen. So that tends 0:05:27.920 --> 0:05:29.520 to be the point if you went back to the 0:05:29.600 --> 0:05:32.800 two thousands you send to see it's not uncommon to 0:05:32.800 --> 0:05:36.160 see corporate malfeasance, and it may be in these types 0:05:36.200 --> 0:05:39.640 of instances where are seeing corporate malfeasance. To answer your 0:05:39.720 --> 0:05:43.720 question with regard to the consumer, you know, we had 0:05:43.720 --> 0:05:45.640 been talking for a while about what we referred to 0:05:45.720 --> 0:05:49.080 as a CA shaped economy, and that was high income 0:05:49.200 --> 0:05:52.840 consumers with a lot of exposure to stock markets, and 0:05:53.080 --> 0:05:56.760 we're doing very well. Lower income consumers had been hit 0:05:56.839 --> 0:06:01.760 with inflation. It actually that that seems lower income consumers 0:06:01.760 --> 0:06:04.200 he seem to have stabilized some. We're more focused and 0:06:04.279 --> 0:06:08.880 concerned about maybe more prime consumers that are going to 0:06:08.880 --> 0:06:12.479 start repaying student loans or interesting defaults and type of 0:06:12.520 --> 0:06:13.920 behaviors that we're going to see there. 0:06:14.680 --> 0:06:16.640 So let's dig a bit deeper into the lack of 0:06:16.720 --> 0:06:18.680 data that you pointed out, just the bit to go here. 0:06:18.720 --> 0:06:20.840 So we have traders that are really bracing for a 0:06:20.960 --> 0:06:24.320 range of fed outcomes here, some of them even hedging flows, 0:06:24.360 --> 0:06:28.560 plate flavoring outlier dubbish scenarios, and others focusing more on 0:06:28.600 --> 0:06:31.240 the possibility that the Fed four goes a move at 0:06:31.240 --> 0:06:34.040 one meeting. How are you thinking about all this right 0:06:34.040 --> 0:06:35.640 now as it relates to the bond market. 0:06:35.800 --> 0:06:37.520 Yeah, a couple of things. I think if you look 0:06:37.520 --> 0:06:40.920 at what the market is pricing in now, a twenty 0:06:40.960 --> 0:06:44.599 five basis rate to twenty five basis point rate cut 0:06:44.640 --> 0:06:48.960 is almost fully priced into the market for the October meeting, 0:06:49.000 --> 0:06:53.239 I think is it October twenty fifth, So that's almost 0:06:53.279 --> 0:06:55.960 fully priced in October twenty ninth, twenty ninth. 0:06:56.000 --> 0:06:58.880 Sorry, I mean, how can you not know? Easy? How 0:06:58.920 --> 0:07:01.000 could anyone not? That's kidding. 0:07:01.080 --> 0:07:06.560 So the market's pricing almost an entire rate hike in October, 0:07:06.600 --> 0:07:09.440 and then on the December tenth meeting, the market's pricing 0:07:09.440 --> 0:07:12.480 another let's call it twenty basis points something like that. 0:07:12.760 --> 0:07:16.000 But I think the other interesting aspect is that volatility 0:07:16.040 --> 0:07:18.280 in the rates market has been very low, So you 0:07:18.360 --> 0:07:21.880 get this base case that the Fed continues to ease. 0:07:21.960 --> 0:07:23.960 And if we go back to the Fed minutes and 0:07:23.960 --> 0:07:27.480 what the Fed said on the last meeting on September seventeenth, 0:07:27.640 --> 0:07:30.800 is that they are saying that they intend to do 0:07:30.920 --> 0:07:33.440 two more cuts this year, And that's the base case. 0:07:33.960 --> 0:07:37.560 I think in periods of economic uncertainty, and the government 0:07:37.600 --> 0:07:40.880 shut down is perpetuating that uncertainty because we're not getting 0:07:40.960 --> 0:07:45.400 regular economic data updates. Then I think that logically follows 0:07:45.400 --> 0:07:48.840 that people worry about tail risk outcomes and they look 0:07:48.880 --> 0:07:53.280 at unusual patterns in behaviors or in particular markets and 0:07:53.320 --> 0:07:55.280 worry about what they could glean from those. 0:07:56.440 --> 0:07:58.000 So we don't have any data right now. 0:07:58.040 --> 0:08:01.840 What we do have are the government auctions of US 0:08:01.920 --> 0:08:05.280 treasuries because we need to raise money. So that continues. 0:08:06.960 --> 0:08:09.800 Is the risk of a tail event tapering off a 0:08:09.800 --> 0:08:12.600 little bit here. For a while, people were monitoring every 0:08:12.640 --> 0:08:15.680 single auction with baited breath, and it feels like we're 0:08:15.840 --> 0:08:17.080 excelling a little bit here. 0:08:17.360 --> 0:08:20.200 We still monitor them with baited breath, and I think, 0:08:20.200 --> 0:08:22.200 off the top of my head, today's auction at one 0:08:22.200 --> 0:08:25.840 o'clock was something like ninety one percent end users and 0:08:25.960 --> 0:08:28.320 something like a tale of zero point four or five 0:08:29.040 --> 0:08:32.800 basis points. So you're right, that's a strong auction, and 0:08:33.000 --> 0:08:36.040 I think that has settled down. I think concerns about 0:08:36.520 --> 0:08:39.400 the US government US treasury as a safe haven have 0:08:39.600 --> 0:08:44.480 abated as people have gotten more comfortable with the macro 0:08:44.559 --> 0:08:46.760 environment and the geopolitical environment. 0:08:46.800 --> 0:08:49.720 So safe haven here, maybe abating, But what do you 0:08:49.760 --> 0:08:51.080 think is the next story here? 0:08:52.760 --> 0:08:55.439 Next story? Gosh, I don't know. I'm not the reporter 0:08:55.520 --> 0:08:58.040 on this. We're just we're just I want to leave 0:08:58.040 --> 0:09:00.400 that to you in the market. In the market, I 0:09:00.440 --> 0:09:02.079 think it's probably earnings. I think it's going to be 0:09:02.440 --> 0:09:05.680 you've got earnings kicking off on. Look, as you all said, 0:09:05.720 --> 0:09:09.160 in the absence of any macroeconomic data being released by 0:09:09.160 --> 0:09:11.160 the federal government, I think people are going to obsess 0:09:11.200 --> 0:09:15.680 about every single earnings release and anything that they can 0:09:15.720 --> 0:09:18.640 glean from that. Specifically in as you all know, there's 0:09:18.679 --> 0:09:22.640 been an extraordinary amount of investment in AI and looking 0:09:22.800 --> 0:09:25.000 maybe starting to look for returns on that, look at 0:09:25.040 --> 0:09:27.480 that investment cycle. So I think that's going to be important. 0:09:27.600 --> 0:09:31.959 I think to Scarlett's earlier question, always credit quality, return 0:09:32.000 --> 0:09:35.880 of capital to shareholders, increases, and dividends, looking at flows. 0:09:35.920 --> 0:09:38.640 I think that's that's that's the next story. 0:09:38.720 --> 0:09:41.199 But yeah, where do you want to be on the 0:09:41.280 --> 0:09:41.760 yield curve? 0:09:42.640 --> 0:09:44.559 Yeah, we still like the belly of the curve. 0:09:44.720 --> 0:09:45.920 Everyone loves the belly of the curve. 0:09:45.960 --> 0:09:46.920 Everyone loves the belly. 0:09:47.679 --> 0:09:49.839 Is just fun to say that the belly of the curve, 0:09:49.960 --> 0:09:53.800 right income Geese. But yeah, I think we think that 0:09:53.960 --> 0:09:56.680 the we think that the rates are going to continue 0:09:56.679 --> 0:09:58.960 to be pretty range bound here between three seventy five 0:09:59.000 --> 0:10:01.200 and four and a quarter, and we continue to like 0:10:01.280 --> 0:10:06.000 high quality intermediate duration credit. You know, as my dear 0:10:06.040 --> 0:10:09.439 colleague Ian Steely says, spreads are tight, but yields are right. 0:10:09.440 --> 0:10:11.840 And that's that's really what the what the driver is 0:10:11.880 --> 0:10:15.400 for investors. You know, they're not investors who are thinking 0:10:15.440 --> 0:10:19.440 about investing for pension funds, endownment funds, individual investors. They 0:10:19.480 --> 0:10:21.439 care more about what the yield is, not what the 0:10:21.880 --> 0:10:22.439 spreads are. 0:10:23.600 --> 0:10:25.160 So, of course, as we mentioned, the belly is what 0:10:25.200 --> 0:10:29.040 everyone's talking about. But is there any sort of opportunity 0:10:29.240 --> 0:10:30.520 on the other end. 0:10:31.720 --> 0:10:33.960 I mean, there are always opportunities, but where we would 0:10:34.280 --> 0:10:36.199 are most comfortable in the yield curve is really in 0:10:36.240 --> 0:10:36.640 the belly. 0:10:37.600 --> 0:10:39.480 What about gold, I'm curious what you think about the 0:10:39.520 --> 0:10:42.960 relationship of gold to fixed income These days, gold continues 0:10:43.000 --> 0:10:46.760 to zoom higher, now sixty one dollars an ounce and 0:10:46.880 --> 0:10:48.160 just pierce four thousand. 0:10:47.880 --> 0:10:48.640 Dollars this morning. 0:10:48.640 --> 0:10:49.080 Insane. 0:10:49.240 --> 0:10:52.120 Yeah, so, and there seems to be very little that 0:10:52.160 --> 0:10:54.959 people can identify that's going to stop this momentum. It's 0:10:55.040 --> 0:10:58.280 driven by inflows into gold ets and also central bank buying. 0:10:58.760 --> 0:11:01.000 How does that playoff. 0:11:00.600 --> 0:11:02.480 Of what's happening in treasuries or doesn't. 0:11:03.200 --> 0:11:06.400 So you've just hit on a key aspect of it, Scarlett. 0:11:06.520 --> 0:11:09.040 So there are obviously two components of any market, supply 0:11:09.120 --> 0:11:12.040 and demand, and you just hit the two main components 0:11:12.080 --> 0:11:15.120 of demand and that central bank buying, and that's the 0:11:15.120 --> 0:11:18.880 ETF buying. I think the ETF wrapper is providing people 0:11:18.920 --> 0:11:22.760 with an easily accessible way to buy gold instead of 0:11:22.840 --> 0:11:26.240 buying bullion and storing at someplace. So you've got an 0:11:26.240 --> 0:11:29.199 increase in demand for gold. On the other side, if 0:11:29.200 --> 0:11:31.559 you look at the supply of gold, it's really been 0:11:31.760 --> 0:11:35.720 pretty constant, So you've got this mismatch between supply and demand. 0:11:36.080 --> 0:11:39.560 I think in terms of the relationship that we've seen historically, 0:11:39.600 --> 0:11:43.400 gold has been correlated with real yields. So when you 0:11:43.400 --> 0:11:46.760 see real yields come down, gold prices go back up. 0:11:46.840 --> 0:11:49.360 So why is that the opportunity cost is lower? If 0:11:49.360 --> 0:11:51.760 you can't get a high rate in treasuries or in 0:11:51.880 --> 0:11:55.360 risk free assets, then maybe gold becomes more attractive. Well, 0:11:55.360 --> 0:11:58.920 what we've seen really post pandemic. That relationship has broken 0:11:59.080 --> 0:12:01.960 has broken down, and I think it's really a function 0:12:02.040 --> 0:12:04.320 of the supply and demand. But I think the point 0:12:04.360 --> 0:12:06.559 would be that that's broken down really over the last 0:12:06.600 --> 0:12:10.160 five years. So I don't read anything different in gold 0:12:10.280 --> 0:12:15.360 pricing about you know, US exceptionalism or the dollar flight 0:12:15.640 --> 0:12:18.160 to currency or anything like that. I think it's old 0:12:18.240 --> 0:12:20.040 fashioned supply and demand fundamentals. 0:12:20.120 --> 0:12:22.199 You don't see it as part of the debasement trade 0:12:22.200 --> 0:12:23.480 that everyone keeps talking about. 0:12:23.640 --> 0:12:25.480 Not really now, you don't buy into that. 0:12:25.640 --> 0:12:27.600 I guess someone who's the global head of fixed income, 0:12:28.160 --> 0:12:29.800 you know, probably doesn't see. 0:12:29.679 --> 0:12:31.320 Much value in that, but had to ask it. 0:12:31.880 --> 0:12:33.120 I mean, do you think we have more room to 0:12:33.160 --> 0:12:34.920 run here on gold? 0:12:35.520 --> 0:12:37.640 You know? My only strong view on that is I 0:12:37.720 --> 0:12:39.800 like it as jewelry, as you can see from my necklace. 0:12:40.640 --> 0:12:41.000 I don't. 0:12:41.040 --> 0:12:43.480 I'm not enough in the leeds on supply and demand 0:12:43.480 --> 0:12:46.120 to gold to have a strong view on that. I 0:12:46.160 --> 0:12:47.719 think I've got a good handle on what's going on 0:12:47.760 --> 0:12:50.600 the fundamentals and why we've seen prices going, but I'm 0:12:50.600 --> 0:12:52.959 not a technical analyst on gold and whether we've got 0:12:53.000 --> 0:12:54.000 more room to run? 0:12:54.120 --> 0:12:56.040 All right, Kay, Always appreciate your joining us. 0:12:56.040 --> 0:12:57.520 Thank you so much for coming into studio. 0:12:57.559 --> 0:13:01.920 Okay, her is us CIO Global Fixed Income, Currencies and 0:13:01.960 --> 0:13:05.280 Commodities at JP Morgan Asset Management. 0:13:06.679 --> 0:13:07.440 Stay with us. 0:13:07.480 --> 0:13:10.480 More from Bloomberg Business Week Daily coming up after this. 0:13:14.520 --> 0:13:18.360 You're listening to the Bloomberg Business Week Daily podcast. Catch 0:13:18.440 --> 0:13:21.160 us live weekday afternoons from two to fives. During that, 0:13:21.360 --> 0:13:25.280 listen on Applecarplay and Android Auto with the Bloomberg Business app, 0:13:25.440 --> 0:13:27.319 or watch us live on YouTube. 0:13:27.960 --> 0:13:31.280 All right, let's head over back to Europe because we 0:13:31.400 --> 0:13:33.560 now have some more details coming out of France, and 0:13:33.600 --> 0:13:36.200 I want to bring in Stephen Carroll. He is, of 0:13:36.200 --> 0:13:39.720 course the host of Bloomberg Daybreak Europe, and Stephen is 0:13:39.760 --> 0:13:42.040 an expert on authings France. He's certainly my expert on 0:13:42.080 --> 0:13:44.000 all things Frans. We go to him constantly for the 0:13:44.040 --> 0:13:45.840 latest and there's been a lot to stay on top 0:13:45.880 --> 0:13:50.240 of here. Stephen Sebastian Lancorneu, who is the outgoing Prime 0:13:50.240 --> 0:13:53.680 Minister of France, says that Emmanuel Macron, the President of France, 0:13:54.040 --> 0:13:56.720 can name a new prime minister in the next forty 0:13:56.720 --> 0:13:59.000 eight hours. He can do that, he may not do that. 0:13:59.559 --> 0:14:05.840 Where does leave us what does this mean for his government, Scott. 0:14:05.880 --> 0:14:08.120 Things are a little bit clearer now than they were 0:14:08.360 --> 0:14:11.600 earlier today, but not much. What we know is that 0:14:12.000 --> 0:14:14.240 the theory that fresh elections could be called for the 0:14:14.320 --> 0:14:17.760 National Assembly looks less likely than it did this morning. 0:14:17.920 --> 0:14:21.400 For example, what Sebaston mccorney was just said on French 0:14:21.440 --> 0:14:24.200 television is that he believes there is now a political 0:14:24.240 --> 0:14:27.320 situation that allows Emmanuel Macron to name a new prime 0:14:27.320 --> 0:14:30.560 minister and take the next spin on this wheel that 0:14:30.600 --> 0:14:33.120 we've been on since June of last year of trying 0:14:33.400 --> 0:14:36.800 to build a minority coalition in Parliament that's able to 0:14:36.880 --> 0:14:39.760 pass a French budget. Now, he did this after the 0:14:39.800 --> 0:14:43.600 forty eight hours of intense consultations with political leaders from 0:14:43.640 --> 0:14:47.760 across the political spectrum, not all parties, but most, and 0:14:47.840 --> 0:14:50.080 what he was trying to do was see if among 0:14:50.200 --> 0:14:53.920 those groups he could find enough support for central ideas 0:14:53.920 --> 0:14:58.040 that he believes that could lead to a budget. Essentially, 0:14:58.080 --> 0:15:00.280 he wants somebody else to take the reins from here, 0:15:00.320 --> 0:15:02.440 That's what he's told to the President Emmanuel Macron. He 0:15:02.480 --> 0:15:04.800 came to this interview this evening on French television straight 0:15:04.840 --> 0:15:07.160 from the Elise Palace where he spent an hour and 0:15:07.240 --> 0:15:09.800 forty minutes with the President briefing him on what he'd 0:15:09.840 --> 0:15:13.440 learned over the past two days. He now expects the 0:15:13.440 --> 0:15:16.360 President to name somebody else to take on the job 0:15:16.440 --> 0:15:19.480 to lead those discussions. He was asked repeatedly, should it 0:15:19.480 --> 0:15:22.320 be a candidate from the Left Party, He said, it's 0:15:22.360 --> 0:15:23.760 up to the President to decide. Should it be a 0:15:23.800 --> 0:15:27.720 technocratic prime minister, It's up to the President to decide. 0:15:27.760 --> 0:15:29.680 He has made it clear, though, is that nobody's going 0:15:29.680 --> 0:15:32.720 to be in this government should have presidential ambitions for 0:15:32.760 --> 0:15:35.440 the twenty twenty seven presidential election. 0:15:35.840 --> 0:15:36.520 It looks like. 0:15:36.600 --> 0:15:40.320 He's pointing towards a sort of technocratic arrangement, but very 0:15:40.400 --> 0:15:43.760 much involving the politicians who are in the National Assembly now, 0:15:43.760 --> 0:15:46.160 who are on the political scene to be able to 0:15:46.200 --> 0:15:49.280 put that compromise together, because they have some pretty big 0:15:49.320 --> 0:15:52.120 issues they have to decide, and the calendar on this 0:15:52.160 --> 0:15:55.760 budget is already running very very tight. So the rush 0:15:55.840 --> 0:15:58.160 is to try and get something done in time that 0:15:58.200 --> 0:16:01.320 can be passed through Parliament and actually keep the public 0:16:01.360 --> 0:16:04.280 finances running over into next year, avoiding the sort of 0:16:04.320 --> 0:16:06.960 emergency measures that we saw at the end of last year, 0:16:07.000 --> 0:16:08.560 which as we know, didn't go down very well on 0:16:08.600 --> 0:16:09.320 the bond markets. 0:16:09.840 --> 0:16:12.640 Can investors force the hand of the centrist parties who 0:16:12.760 --> 0:16:15.480 must decide whether to play ball with Lacornell or for 0:16:15.560 --> 0:16:19.000 that matter, Macrum. 0:16:19.320 --> 0:16:21.320 Look, that's a really good question, because what we've seen 0:16:21.400 --> 0:16:24.080 so far is a little bit of tension in markets, 0:16:24.080 --> 0:16:26.760 but not something that our own economists or any of 0:16:26.760 --> 0:16:29.040 the market analysts that we've been speaking to would describe 0:16:29.120 --> 0:16:32.320 as a fiscal or financial crisis in France. This is 0:16:32.320 --> 0:16:35.640 still a political crisis. We have seen the spread of 0:16:35.720 --> 0:16:38.800 bond deals between France and Germany widen, although it did 0:16:38.880 --> 0:16:40.920 actually tighten a little bit today when the corn New 0:16:41.000 --> 0:16:43.920 signaled this morning that he had been making some progress 0:16:43.960 --> 0:16:47.240 in these talks. Realistically, looking at it for markets right now, 0:16:47.400 --> 0:16:51.760 nothing's really changed in the past week, or really since 0:16:51.800 --> 0:16:54.200 the middle of the summer when the last prime minister 0:16:54.280 --> 0:16:57.640 from Sobereru proposed his budget. They're still in this phase 0:16:57.640 --> 0:17:01.080 of negotiation. There are still signals that a compromise could 0:17:01.120 --> 0:17:04.119 be found. When markets will run out of patience with 0:17:04.200 --> 0:17:06.919 France is very much an open question. You don't have 0:17:07.080 --> 0:17:09.800 the cliff edge of a government shut down in France 0:17:09.840 --> 0:17:11.439 in the way that you do in the United States, 0:17:11.440 --> 0:17:13.960 because the way it works as the system runs into 0:17:14.160 --> 0:17:16.679 sort of keeping the lights on measures where taxes are 0:17:16.680 --> 0:17:19.520 collected and public services operated. That's not a situation any 0:17:19.520 --> 0:17:22.399 politicians want to be happening. It's not a situation the 0:17:22.400 --> 0:17:25.160 public wants to happen either. But the cliff edge moment 0:17:25.240 --> 0:17:28.359 looks that little bit further away, at least for now. 0:17:28.480 --> 0:17:30.840 The situation that markets were most worried about is what 0:17:30.880 --> 0:17:35.800 fresh elections could could produce national assembly elections or in 0:17:35.840 --> 0:17:38.840 an extreme case, a fresh presidential election. Both of those 0:17:38.960 --> 0:17:41.880 look off the cards this evening, but things are moving 0:17:42.000 --> 0:17:45.040 very quickly, and who am Manual Macron could pick in 0:17:45.119 --> 0:17:47.000 forty eight hours time is going to be a very 0:17:47.000 --> 0:17:48.040 interesting question. 0:17:48.000 --> 0:17:48.760 So very quickly. 0:17:48.840 --> 0:17:52.760 If you know, legislative elections would be unsettling to investors. 0:17:52.800 --> 0:17:56.359 I'm guessing that presidential elections, Macron actually resigning, as some 0:17:57.800 --> 0:18:00.320 in the opposition parties want him to do, is not 0:18:00.440 --> 0:18:01.840 something investors would welcome. 0:18:03.960 --> 0:18:05.680 No indeed, I mean that would be a much more 0:18:05.760 --> 0:18:09.080 dramatic shift in France's both fiscal approach and some of 0:18:09.119 --> 0:18:11.560 those big heavy issues like the pension reforms, which is 0:18:11.560 --> 0:18:14.760 the central thing politicians here are fighting over at the moment. 0:18:15.000 --> 0:18:17.600 If that were to be disrupted, that would change the 0:18:17.640 --> 0:18:20.400 fiscal perceptions of France. We've also got some ratings agency 0:18:20.440 --> 0:18:23.400 decisions to look out for, too. A presidential election would 0:18:23.400 --> 0:18:26.560 be very dramatic. A National Assembly election would be less dramatic, 0:18:26.760 --> 0:18:29.560 and getting a new prime minister, while that could produce 0:18:29.600 --> 0:18:30.840 another shrug from markets. 0:18:30.960 --> 0:18:34.600 All right, thank you so much, Stephen Carroll. Fantastic context here. 0:18:34.640 --> 0:18:37.359 Stephen Carroll is host of Bloomberg Daybreak Europe, but he 0:18:37.640 --> 0:18:40.640 is at least my go to authority on all things 0:18:40.680 --> 0:18:43.560 in France, certainly the political crisis that has been brewing 0:18:43.600 --> 0:18:45.520 for over a year now. 0:18:46.160 --> 0:18:50.000 This is the Bloomberg Business Week Daily Podcast. Listen live 0:18:50.080 --> 0:18:53.320 each weekday starting at two pm Eastern on applecar Play 0:18:53.400 --> 0:18:56.240 and Android Auto with the Bloomberg Business App. You can 0:18:56.280 --> 0:18:59.439 also listen live on Amazon Alexa from our flagship New 0:18:59.480 --> 0:19:02.919 York station, Just Say Alexa played Bloomberg eleven thirty. 0:19:04.520 --> 0:19:08.520 Now, so many aideals and so many questions. So to 0:19:08.520 --> 0:19:11.679 answer those questions, let's bring in Mandy Saying, who is 0:19:11.720 --> 0:19:15.119 the global head of technology research for Bloomberg Intelligence. Who 0:19:15.119 --> 0:19:17.760 can tell us all about whether we are in fact 0:19:17.800 --> 0:19:20.720 in an AI bubble. So Mendy, thank you so much 0:19:20.760 --> 0:19:22.639 for joining us today. 0:19:23.200 --> 0:19:24.400 Okay, let's talk about. 0:19:24.160 --> 0:19:27.440 This concept of circular funding to start with why has 0:19:27.440 --> 0:19:30.480 it created such a fus amongst market observers. 0:19:30.359 --> 0:19:31.000 And what is it? 0:19:32.359 --> 0:19:35.560 Well, I guess the easiest way to frame it is 0:19:36.200 --> 0:19:40.280 a company like OpenAI doesn't have the balance sheet of 0:19:41.200 --> 0:19:44.919 Meta or Microsoft or Google in terms of the huge 0:19:45.200 --> 0:19:48.880 AI infrastructure build out that they want to go ahead with. 0:19:48.960 --> 0:19:53.040