00:00:00 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this hour with stocks adding to the record breaking rally at leash to the vnfbny Wath recently raising her year end target for the SMP to eight K. Earnings took over from macro and driving markets. The capex cycle continues to support the economy and industrial sectors as hyper scatter spending as power and earnings of twenty percent of the SMP Alisa joins us now from more Aisia. Good morning, Good morning, what a massive run we've sin in just a few days on tech's phenomenal What are your turn in class? 00:01:01 Speaker 1: It's phenomenal. 00:01:02 Speaker 3: Look. 00:01:02 Speaker 4: We think the market ends higher at the end of the year, we're in prints at eight thousand. I think it's probably moving higher. The forward earnings growth rate right here of the S ANDP is actually thirty percent. 00:01:13 Speaker 5: So the multiples come down even now. 00:01:17 Speaker 4: It's you know, the market sort of tread water around that, you know, seventy five hundred range since mid May kind of stuck there as the market rotated, and we've, as you talked about, we've had these clearing events. There are major questions hanging over this market. The first of which is the war restarted. Oil prices are higher, yields are higher. Can the market rally if the ten years over four point five percent, which was really the bogie in this entire cycle. The answer is yes, it can. The second thing was is there ROI on hyper scale or spending? Are they just spending into oblivion funding the balance sheets of every other company but not themselves as they go freach pretty cashful negative turns out, actually there's a business case for it, and their cycle reaccelerated through the growth rate. So that was answered as well. And so you've gotten two major questions out of the way. And then the third is this an earnings bubble? And the answer is. No, it is not, because you've got accelerated growth rates for the spenders and that once you've answered that question, it's pretty much clear out there. 00:02:24 Speaker 2: If there is a clearing event and you've identified several it seems to be benefiting everybody at the moment, and we're trying to figure out when do we start to discriminate again, because much of this year you saw chips do well but software bring out poorly. You saw an inverse correlation between the hyperscalis and the chip players at times as well. That's what ultimately blew up the likes of Situational Awareness, who were very long cantwhere and very short software and things flipped pretty quickly in the last month or so. Where do you see things going from here? What does the leadership come from? Surely you don't believe that everything can take just keeps on rallying the way it has been. 00:02:55 Speaker 4: No, there's definitely going to be there's going to be more selection here. I mean, this was sort of clearing chars, like you went through fifty to two hundred days in the last two weeks, which you really needed to do to clear the charts of the deteriorating software company so we cleared it. I think for the most part it's likely to be from the hyperscalers and less on the chips, in part because the chips have come so far, and there is that lingering question. You know what you quoted here which I said, which is they're funding the balance sheets and the p and ls of twenty percent of the S and P very clearly. And we know that Marcus trade on the rate of change. At some point there's going to be a question, can you grow earnings one thousand percent? Are you growing earnings twenty percent instead, which is still excellent, but it's not growing one thousand percent. And there's a reason some of these chip companies are trading in the single digits because the street just doesn't see this going forever. And I think that's where you're going to start to see the differentiation. 00:03:58 Speaker 5: You still haven't cleared the parabolas. That's an issue. 00:04:01 Speaker 4: So I think you're probably getting it to the unloved companies. Since November one of last year, that whole panoply of large cab tech has been terrible underperformed the S and P. It's underperformed the rustle, it's underperformed international, it's underperformed emerging markets, and I think that gets a little that gets reverted to here. I think the chips while benefiting and the investment cycle can go for a long time, eighteen months, more, three years maybe, who knows. Actually eventually the growth rate is going to slow on the earnings for those companies. 00:04:34 Speaker 6: How much is the success on return on investment and the likes of hyperscalers and software going to come at the expense of open AI and anthropic And I say this because it could be a volatility inducing event when they try to IPO, if they try to IPO, given some of the noise about exactly what this model looks like and how much of a moat they have over something that's increasingly open model. 00:04:55 Speaker 4: Look, it's really it's very unclear. I mean, there are many people who think the models are converging. So the latest for one LLM over another, they're starting to look very similar. And I think that is the question for those those business models, right, Like, you know, if you can't differentiate, then you know what's the value. On the other hand, I know everybody uses all of them, and so they seem to be terrific. Also, if you just look at the revenue growth rate. I mean, the revenue is compounding for both those companies at an extraordinary We're talking close to one hundred billion dollars for each coming off of zero two three years ago. So the revenues are sounding compounding at a sounding rate. So I think I think they'll be successful. 00:05:39 Speaker 6: Do you think that the doors are still as wide open for IPOs for raising money in the equity and debt markets now as they were two months ago at a time when there still is a huge bill coming for all of the. 00:05:52 Speaker 5: Build out here. 00:05:53 Speaker 4: I think that we're going to have to see some of the lockups on some of the marquee IPOs to kind of clear the deck a little bit. You know, in the end, you want the IPOs to be successful and that break price. And if you break price within a week or two, that's an issue. And I think that's why you've seen it slow down in the calendar right and then you have a lot of SpaceX because you have to you have to get through the lockup. You have to get through the lockups here. I don't think there's too much capital coming to the market. The S and P is sixty trillion dollars. I don't think the IPOs are too big. I think there's a massive wall of capital coming to this, not just in the US, but globally. You know, we're hearing from our Iflow team there's a massive, massive buying of US equities globally because where else are you going to go with that wall of money? 00:06:38 Speaker 5: Other markets are simply not big enough. 00:06:40 Speaker 4: So I'm not worried about the dollar amount, but there is that marketing thing right where you want it to be successful, and I think the markets have to calm down a little bit. 00:06:49 Speaker 2: On the previous parted too alphabet again and ahead of some of this, the additional supply to your point on SpaceX, anthropic on the horizon, open ai, just the reporting we've seen around open ai potentially pushing things out twenty seven maybe beyond, I don't know, Yeah. 00:07:02 Speaker 6: And potentially because of some of the concerns around the capital rais with respect to their model, competitive pressure, et cetera. At the same time, it seems like a lot of people are pretty ambitious some of their voice. 00:07:12 Speaker 4: It looks like both are winning. Like it looks like everybody's winning. You know, it doesn't look like once, but they're. 00:07:16 Speaker 5: All being a prize and you get a prize. 00:07:19 Speaker 7: It's one of the last four days it's felt like in the stock market. 00:07:21 Speaker 5: I'll take it, you know, it's finish, good change. 00:07:23 Speaker 7: At least just going to see you. Thanks, one of the best. Appreciate it at lea should have been there of bn y wealth. 00:07:29 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. It's the latest this morning, the president out in the US economy as midterm primary results roll in In the crucial swing state of Michigan, the Senate Democratic primary between progressive Abdul al Said and Representative Hattie Stephens still too close to cool. 00:07:55 Speaker 7: Aaron A. 00:07:56 Speaker 2: Sabbataur of More Than Stanley, writing, we think Democrats hold a slight edge, but the Senate map remains a major structural headwind. Arianna joins us now for more and good morning, it's going to see you. How is the state set for this economy into November and what does it mean for voters at the moment. 00:08:10 Speaker 1: Yeah, a lot of things to unpack there. Obviously, the economic picture is one of an aggregate of different indicators, right, so if you look at things like inflation, we're expecting more disinflation throughout the remainder of this year. If we look at things like consumption, the overall sentiment is not great, where we're a little bit higher off of the low lows, but we don't think that really translates to spending intentions. We still see relatively robust consumption this year around two percent. We just revised that up from one point seven percent. You know, the labor market still relatively sideways. So all of that paints sort of a decent picture for the ECON. We call it a benign macro backdrop. That's not the only thing that matters to voters. Obviously, affordability a top concern, but aside from that, we see prediction markets, we see polling, we see the presidential approval rating, all signaling a more favorable environment for Democrats come November. 00:08:56 Speaker 2: I remember thinking that bind it would get battered in the midterms into that and event a few years ago, and it didn't happen. The white people thought it would. What's the lesson from them? And how might it apply to this situation? 00:09:06 Speaker 1: So twenty two to two is actually really similar to this midterm election if you think about it. We had an energy shock in February of that year, right, and then the structural the map the Senate was really what was important in that election. There were some anomalies. Remember we had the Roe v. Wade decision leaked, which energized turnout among specifically women and college educated voters. I think that is what allowed the Democrats to maintain the edge. But back to the structural sort of dynamics here, the map is really important, and with this progressive win we saw in Michigan last night, that makes it really challenging as a general election seat for Democrats to flip right, And that's going to be kind of the key point between Michigan, North Carolina, Georgia races for November one. 00:09:47 Speaker 5: Are the main issues and I'm thinking. 00:09:48 Speaker 6: Specifically of the hyperscalar build out and some of the energy plants, and this concern about the cost of living that could potentially be tied to artificial intelligence. How much is that present in some of the discussions with constituents. 00:10:00 Speaker 1: Extremely present, And this is probably the biggest wedge issue heading into the midterm elections. Right, we know AI is unpopular. We know specifically among younger voters so eighteen to twenty nine, something like sixty percent are worried about job displacement. When we look at the data center build out specifically, the concerns are really threefold. So first is quality of life, right, so no one likes to see large scale construction in their neighborhoods. Second is around water usage, which we find to be a little bit less well founded than some of the other concerns. And then of course electricity inflation and what you're paying for your utility bill. That is more a phenomenon on a regional level rather than national, but it is certainly part of the discussion and part of the reason we're seeing this real political constraint in building out these data centers. 00:10:41 Speaker 6: Well, so, how much of a political constraint will this be, because so far the White House has been behind a lot of these efforts and saying we have to maintain a dominant edge. How much will it constrain some of those policies that have enabled to build out so far. 00:10:54 Speaker 1: So, look, we think there are ways to mitigate it. We think there are certain concessions that hyperscalers and other companies can offer these communities, whether that's bonuses to local community engagement or whether it's some sort of a large load tariff or commitments to grid modernization. We think there's enough they can sort of promise and provide to facilitate the build out. But that's importantly why we think it's conditional. We don't think this is going to be a uniform kind of one size fits all approach across the country. And what that leads to is basically a bifurcation between regions that allow data center development and regions that do not. 00:11:27 Speaker 2: It's the left tripping up on the national stage. Are you seeing sort of the highly progressive members and I've noted a few. I've seen a few in the last twenty four hours struggle to articulate that view and being sucked into major issues that have nothing to do with local ground issues. 00:11:40 Speaker 7: If you notice the. 00:11:40 Speaker 1: Same thing, I think what you're seeing is an amalgamation of concerns among the voter base. And right now, if you look at the Democrat Party, there's no clear front runner for leadership, right so we don't have a clear person that's ahead of the other candidates when it comes to even the twenty twenty eight election. So I think Democrats are right now going through a really important phase of sort of self discovery, right so figuring out which policy paths are the ones that are going to resonate with voters. And remember this is an election that's the pretext to twenty twenty eight, so this is the important time to sort of have those debates and those discussions. I think it's experimentation and we'll probably see it on the Republican side as well once Trump steps back. 00:12:14 Speaker 7: Aarana, it's good to see you. 00:12:15 Speaker 2: Thanks for Thank you, Ariana Sabato there of Morkan Stanley stay with us mult Bloomberg surveillance coming up after this. Andrew holmholsts the City, writing this this morning. We do not see risks that the labor market is retiming and becoming a source of upward pressure on wages and prices. Andrew joined us Now for more. Andrew and Morning Morning sending the ADP number we'd found to take that view. 00:12:46 Speaker 3: Yeah, a little bit weaker on the ADP. 00:12:47 Speaker 8: It's a pretty volatile number, but I would say in the context of labor market data that's just in general been very volatile. So we had much stronger payrolls readings at the beginning of the year, had a weaker report in the month of June. We think we're store for some weaker reports upcoming. 00:13:01 Speaker 2: Good services, energy and labor. The sources of inflation LABE, it's not really been a source of inflation over the last twelve months, not a major one anyway. The inflation is coming from other places. Where'd you get confidence that that disinflation repath will continue and what does it come from? 00:13:17 Speaker 8: You know, I'm a lot more confident now than I was even a few weeks ago after we had the Gune inflation report. You look at these various underlying measures of inflation, and there's always an issue when we say which measure are you looking at right? This is part of what came up in the press conference with Chair of Warsh last week. But when you look at the various measures that we have of underlying inflation, most of them are telling us that inflation is slowing and it's not that far off of target. I know that's very different than a lot of people's perceptions of what's going on. But if you look at the actual data, you can look at a trend, mean, you can look at a median, you can look at core CPI. Core CPI inflation is not an esoteric measure of inflation. This is one of the typical measures that anybody would look at to try to assess what's going on with inflationary pressure. Two point six percent core CPI year on year, that's not far off of what would historically normally be historically normally be two point three percent, And we think we're going to see that two point three percent number in the next couple months. 00:14:13 Speaker 5: Why do you think it's going to continue going down? 00:14:15 Speaker 3: Right? 00:14:15 Speaker 6: This goes to the question of sufficiently restrictive and the faith of the path of some of the inflation reads. 00:14:21 Speaker 5: Why isn't it just a one off tied to. 00:14:24 Speaker 6: Energy prices and a couple of other just comparative reasons for the disinflation. 00:14:29 Speaker 8: Yeah, what's happening with headline inflation? That is a function of energy prices. They came up that boosted headline, they've come back down. That's going to drag on headline. If you look at the core measure that we've got a very weak reading for core CPI and core PCE in the month of June. That extreme weakness might not repeat, But what we saw in those readings if you looked at the underlying data was broad based lack of inflationary pressure. You see it across all categories of inflation is significant slowing in the month of June in particular shelter prices, and I think go out and look at house prices, look at rents. 00:15:02 Speaker 3: These enter official measures of inflation with a. 00:15:05 Speaker 8: Lag of about a year, maybe a year and a half, and they've been very slow. 00:15:09 Speaker 3: So those shelter pressures should stay slow. That's a key reason that we're going to have slower inflation going forward. 00:15:15 Speaker 6: How do you then understand the move that we've seen down at the front end in terms of yields are essentially pinned and the rise. 00:15:21 Speaker 5: And long end of the yields. 00:15:22 Speaker 6: It seems like the market is saying something very different to what you're saying. 00:15:27 Speaker 5: How do you interpret that? 00:15:28 Speaker 8: So if you look at the market, and this is another thing that again maybe very different than how some people are talking about this. The market is not worried about inflation in the US if I look at the market that assesses that most carefully, which is the market for inflation link security. So if you look at inflation break evens, if you look at inflation swaps, we are pricing inflation to be around two percent for the next two years. We're pricing inflation to be around two percent for the next ten years. So this idea that higher longer term yields have something to do with a lack of heed credibility and an expectation that inflation is going to run persistently higher. It's just not the case when you look at markets. The movement that we've had higher in long term yields is in real yields. It's not in the inflation component. It's in the real yield component. And why are they higher. It's what you've been talking about all morning and apparently with your children at bed time, which is and the deficit in this country. 00:16:16 Speaker 2: Our inflation expectations anchored because people still believe this Fed will hike. If they believed your story, I wonder whether it'd be. 00:16:24 Speaker 8: We have a probability of a hike that's priced in right. The FED came into July, there was a thirty percent probability that they were going to hike coming into July. At some point there was a fifty percent probability that they were going to hike in July. The Fed declined to hike in July. We got a very small movement higher in inflation break events, but. 00:16:41 Speaker 3: Staying really at low levels. 00:16:43 Speaker 8: So what I saw there was an indication that the market doesn't need the FED to hike one time or two times, which is essentially was priced in right. One or two hikes from the FED. That's not going to be determinative for inflation. The trend in inflation is not going to be significantly affected by the FED being fifty basis points high or fifty basis points lower. If we have a big inflation problem in this country, if we're accelerating in inflation, you would need rates one hundred basis points higher, one hundred and fifty basis points higher. 00:17:09 Speaker 2: I don't think any of us suggesting we have a big inflation problem with regards to where the index the target is right now, but it's the problem. It's been five years above target, and is that not evidence? So they're not sufficiently restrictive. 00:17:23 Speaker 8: You don't restore the two things on that one. Number one, you don't restore credibility, And I agree credibility has been damaged. Right. This is a FED that said inflation is transitory, and five years later we still have above target inflation. So clearly there's been a hit to credibility. You don't re establish that by hiking just for the point of hiking and showing that you can be tough in the face of even many underlying inflation measures that are slowing. You establish credibility by watching the data and affecting the appropriate policy to bring inflation down. Now, the question is do we have the appropriate policy to bring inflation down? If you step back and you don't just look at the last six months, look at the last year of data, look at the last two years. Inflation is slow, the unemployment rate has come up. If you look at the housing sector, we clearly have restrictive rates for the housing sector. 00:18:12 Speaker 3: So I do think that we still have rates. 00:18:14 Speaker 8: That are modestly restrictive here, and I think a lot of FED officials actually think that also. Their voices are not as loud right now. That has not been the market narrative. But hiking twenty five to fifty basis points, I don't think we'll do anything to restrict. 00:18:25 Speaker 2: Mode is different to sufficient you'd acknowledge that modestly restrictive is different to being sufficiently restrictive to get inflation back to target. 00:18:33 Speaker 7: Do you think with sufficiently restrictive. 00:18:35 Speaker 8: Definitely sufficiently restrictive most measures of underlying inflation are basis points away from target, and in a couple months it's going to look even better than that. 00:18:44 Speaker 5: What's the argument for cutting rates? 00:18:45 Speaker 6: If you don't think that there's going to be much accomplished by hiking rates, what's going to be accomplished by cutting them? 00:18:50 Speaker 8: Yeah, so on the inflation side, that would really be the argument for not raising rates. If we're slowing down towards target inflation, then that's the reason not to raise rates. 00:18:59 Speaker 3: Cutting rates have to have some concern. 00:19:01 Speaker 8: About the labor market or about activity, and there are no concerns right now. Right so we're kind of looking at a FED and a market that's treating this and kind of a single mandate context because we just don't have a concern on the labor market or on activity we think we're going to see in the data because of a residual seasonal pattern that we have in the labor market data, softer labor market data over the next several months. We obviously had a softer reading for the month of June. If the unemployment rate starts moving up again, then it will no longer just be a question of what's the right rate to set for inflation. Then you'll be concerned about the labor market. 00:19:36 Speaker 6: What would it take in the data for you to just say that the Fed's going to be on hold with no more cuts. 00:19:41 Speaker 8: Unemployment rate that just stays where it is, snow one bounces around, you know, four three four four. Then they could be cutting eventually, but this is probably you know, sometime next year, maybe deep next year, because then you know, back to John's point for credibility, you might as well just stand pad and say, look, I want to be indicating that I'm super credible here inflation. 00:20:01 Speaker 3: We have no issue in the labor market. 00:20:02 Speaker 8: So I'm just going to hold things modestly restrictive until I see that we're at two percent inflation. 00:20:07 Speaker 3: And we're not there yet. 00:20:08 Speaker 7: What's your guest for Friday? 00:20:09 Speaker 3: One hundred and. 00:20:10 Speaker 8: Fifteen thousand on the payroll So I think it's a decent reading on the payrolls number. We had a much softer number in the month of June, which came through. The thing to watch for here is actually there are two things. One is, do we get a revision down to the June number? Further revision down that's what we've seen in previous Your lives and the unemployment rate. We have just picking up to four point three percent. Last month, that participation rate fell by three tenths of a percentage point. If that moves back up, unemployment can pop up much higher. 00:20:38 Speaker 2: This is the Bloomberg Sevenans podcast, bringing you the best in markets, economics, ancient politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.