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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordert. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app. We begin this south

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Speaker 2: it stops looking to build momentum heading into a blockbuster

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Speaker 2: day for Wall Street. Dan Sazuki vi Capital writing a

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Speaker 2: robust Macro backdrop should fuel a second straight quarter of

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Speaker 2: twenty percent plus earning strowth. With tell One's failing in

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Speaker 2: the second half, this may be what peak growth looks like.

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Speaker 2: Dan joins us now from more Dank and Mornic. Good morning,

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Speaker 2: Welcome back, Buddy, and congratulations on the new CA. It's

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Speaker 2: good to see you.

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Speaker 3: Yeah, great to view with you.

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Speaker 4: Guys, love this show.

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Speaker 2: Let's stry this thing between peak growth and peak markets.

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Speaker 3: How wide is that distinction?

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Speaker 4: This morning it's clearly not very very distinct, right. I think,

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Speaker 4: like in normal markets, it's really more about peak earnings

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Speaker 4: than it is about peak growth. But I think when

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Speaker 4: expectations get really high and the bar set so high,

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Speaker 4: peak growth is all it takes to sort of get

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Speaker 4: expectations to be too high to me, And that's kind

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Speaker 4: of what you're seeing today in the AI trade.

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Speaker 2: Lisa talked about how high the bar is for the

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Speaker 2: chips name the likes of Intel, the likes of Skehihex,

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Speaker 2: the likes of Samsung. How high is the bar for

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Speaker 2: the Hyperscalus, a couple of names that have been beaten

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Speaker 2: up quite a lot.

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Speaker 4: I mean, I think what you're seeing, you know, this

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Speaker 4: earning season, is that the bar is set too high

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Speaker 4: for any stock associated with the AI trade, right. And

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Speaker 4: it's not to say that the underlying fundamental story is

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Speaker 4: not good, but the bar is just being set too high,

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Speaker 4: so you can't see any stocks that are up on

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Speaker 4: their earnings results. And I think the way to think

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Speaker 4: about now is the bar is set so high. You know,

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Speaker 4: the new beat is, you know, called a ten percent

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Speaker 4: beat on earnings and a lower capex guidance. I think

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Speaker 4: that's the thing that's going to get sucks to rally.

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Speaker 1: So this is an area that's controversial.

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Speaker 5: You think that if they underperformer at least they lowball

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Speaker 5: the capex plans and they come in lighter than expected,

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Speaker 5: that would be a case for rally more than anything else.

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Speaker 1: Is that correct.

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Speaker 4: I think that's part of the story. I think you

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Speaker 4: want to see underlying strong fundamental trends, but also an

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Speaker 4: eye toward monetization of all this investment spending that's happening.

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Speaker 4: And this is something we've been talking about I Capital

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Speaker 4: for a while and we call it the AI Capex vigilantes.

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Speaker 4: And you're seeing the vigilantes are winning these days, right,

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Speaker 4: and you're saying, everybody's waking up to this story, whether

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Speaker 4: it's the hyperscalers, the semis now is the sort of

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Speaker 4: second derivative of that, And I think that's really what's

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Speaker 4: coming to play. So what the market wants to see,

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Speaker 4: what the vigilantes wanted to see, is signs that there's

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Speaker 4: an eye toward the monization of that investment.

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Speaker 5: Do you want to get on the vigilante train and

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Speaker 5: overweight some of the fixed income instruments that have leveraged

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Speaker 5: right now? And not necessarily go to the equity side

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Speaker 5: of the equation.

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Speaker 3: No, I think both sides.

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Speaker 4: You know, the reality of what's happening right now in

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Speaker 4: markets is that the markets are waking up to the

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Speaker 4: risks associated with the AI trade across the supply chain, right.

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Speaker 4: And it's not to say that the underlying fundamental story

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Speaker 4: is broken, but you know, there's a lot of good

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Speaker 4: things happening, but there are obviously a lot of risks.

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Speaker 4: Modes are weak, pricing power is week, capex is very high,

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Speaker 4: and when you get sort of price wars and price

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Speaker 4: pressures and competitive environments in a hugely capital intensive industry

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Speaker 4: that typically you know, causes a lot of shakeout and

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Speaker 4: volatility in some of the names. And I think that's

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Speaker 4: what you're seeing now.

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Speaker 6: Do you see any evidence that some of the AI

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Speaker 6: trade is starting to move to other industries that are

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Speaker 6: starting to use and adapt AI quicker?

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Speaker 4: Yes, yes, absolutely. It's hard to find. I was just

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Speaker 4: talking about this the other day. It's hard to find

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Speaker 4: an area of the market that's not an AI trade, right.

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Speaker 4: It used to be emerging markets. That's as far as

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Speaker 4: you can go. Now emerging markets is an AI trade.

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Speaker 4: You know, utilities are an AI trade. Real estate is

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Speaker 4: an AI trade. I mean, where do you go that's

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Speaker 4: not an AI trade? And that's like, that's what you're

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Speaker 4: seeing that's up right now right. You know you talked

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Speaker 4: about since sort of the May highs. You know, all

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Speaker 4: this stuff is down, but look at all this stuff

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Speaker 4: that's updouble digit. That's sort of the other side of

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Speaker 4: the cesaw, the anti AI trade.

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Speaker 2: If you will, one of the banks, how would you

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Speaker 2: describe that running You're staying in the financial yea, that's.

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Speaker 3: Part of the story.

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Speaker 4: The underlying fundamentals for the banks are strong. But at

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Speaker 4: the same time, this is kind of the rotation that

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Speaker 4: Lisa was talking about, Like there's other stuff putting up

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Speaker 4: good growth and accelerating growth at a time when there's

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Speaker 4: people are starting to think about the risk associated with AI.

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Speaker 4: And I think financials are part of that. Small caps

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Speaker 4: are part of that. Values are part of that. And

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Speaker 4: I think people are just understanding that there's more to

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Speaker 4: the world and to the market.

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Speaker 2: And that doesn't screen growth scare and these set are

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Speaker 2: rolling shocks. We've been talking about through energy, through interest rates,

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Speaker 2: through the bond market, but it hasn't materialized with a

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Speaker 2: growth scare is on the horizon.

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Speaker 3: How avoidable do you think it is? Growth scare?

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Speaker 4: I mean, you'll have to help me define that, John,

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Speaker 4: because I think one of the two other things that

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Speaker 4: we highlight as risks for the second half of the

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Speaker 4: year are sort of fading tailwinds to the consumer and

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Speaker 4: then also higher for longer instrates. Both of those things

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Speaker 4: are actually happening, and so I think that our base

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Speaker 4: cases that growth does slow in the second half of

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Speaker 4: the year. The real question is how much. And there

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Speaker 4: are a lot of tailwinds that are mounting, and liquidity

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Speaker 4: will probably past peak liquidity for the year. You know,

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Speaker 4: this is not a great environment for accelerating.

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Speaker 2: Just sit on that point, attention, just for one further beat.

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Speaker 2: You can see a situation where the consumer tail went

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Speaker 2: slow but rates remain elevated.

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Speaker 3: Can you explain that?

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Speaker 4: Yeah, I mean, I think if you just look at

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Speaker 4: the sheer amount of tailwinds that have been boosting the consumer,

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Speaker 4: whether you know it's tax cuts or just the reopening

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Speaker 4: of liquidity, you know there's been a lot that's gone

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Speaker 4: into boosting the overall economy in the first half of

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Speaker 4: the year. Just to look at any measure for the

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Speaker 4: second half of the year, right, we've ori paid out

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Speaker 4: the record, you know, tax refunds, that's sort of in

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Speaker 4: the rear view. They're still in their pockets, so they

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Speaker 4: can still spend that World Cup is now behind us. Unfortunately,

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Speaker 4: liquidity is tightening up, so as you look at the

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Speaker 4: second half of the years, it's more like not that

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Speaker 4: growth is going to slow, but you know, inflation to

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Speaker 4: me right now comes down to what's happening. I ran right,

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Speaker 4: and so whether or not the Fed hikes or whether

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Speaker 4: or not inflation accelerates, to me, that's an oil story

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Speaker 4: right now. Even though they say they're going to look

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Speaker 4: through that. When you have tariffs and oil two shocks,

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Speaker 4: I think that makes the story a bit more.

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Speaker 1: Difficult for them.

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Speaker 5: Putting oil aside for a second, if you do think

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Speaker 5: that there's going to be a slowdown in growth heading

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Speaker 5: into your end, are you expecting rates to go lower

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Speaker 5: at least the Fed funds rate and potentially not glean

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Speaker 5: a whole lot right now, but more by that going

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Speaker 5: forward about Kevin.

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Speaker 4: Orsh this is why we you know, like we had

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Speaker 4: the base case that you know we're going to have

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Speaker 4: the straight of horm moves is going to open up.

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Speaker 4: Growth was going to slightly soften, and that was going

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Speaker 4: to keep the FED on hold for the rest of

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Speaker 4: the year. And that's still our base case. But I

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Speaker 4: think oil is the wild card and that's going to

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Speaker 4: really drive what.

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Speaker 3: Happens with injuries.

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Speaker 4: If if you take out what's happening in hor moves,

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Speaker 4: I think insurates do fall into the end of the year.

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Speaker 4: But if you reintroduce this story, you know, I think

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Speaker 4: you're seeing increasing risk that at the September meeting and

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Speaker 4: beyond you are a hiking cycle. I think that's what

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Speaker 4: the FED is telling you. There's like, if you look

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Speaker 4: at the FED minutes, it was basically a scenario analysis

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Speaker 4: of what they plan to do based on what happens

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Speaker 4: with inflation, which is very much driven by oil.

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Speaker 1: Why wouldn't they look through it.

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Speaker 5: I mean, we've been talking to one analyst after another

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Speaker 5: about have I always looked through oil? And actually that

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Speaker 5: the inflation coming from other areas seems to be more prevalent,

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Speaker 5: including capital markets, which seemed to be slowing down at

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Speaker 5: least you view what we're seeing in the wake of earnings.

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Speaker 4: It's just going on for too long a right and

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Speaker 4: inflation's too sticky for too long. He keeps hearkening back

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Speaker 4: to the mistakes that were met made during after the

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Speaker 4: twenty two oil price spike and the inflation that we saw.

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Speaker 4: Then you know, we're looking at Just listen to what

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Speaker 4: the Fed, you know, speakers are saying. They're saying, you know,

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Speaker 4: if this keeps going, I'm going to start hiking rates.

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Speaker 4: I want to start hiking rates. And that's what they're

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Speaker 4: telling us. That's what the minutes hold this and so

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Speaker 4: yes and all those equal. They're going to look through terraces,

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Speaker 4: they're going to look through energy. But the more that

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Speaker 4: this goes on, the more that bleeds into inflation and expectations.

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Speaker 3: And by the way, you know core PCE, you know what.

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Speaker 4: Did that like bottom like two years years ago, and

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Speaker 4: that's been rising. I mean, these are not good trends

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Speaker 4: for the Fed to sit on.

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Speaker 3: Stay with us.

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Speaker 2: More Bloomberg surveillance coming up after this. So here's the

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Speaker 2: latest this morning. Wall Street expecting fend share Kevin Walsh

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Speaker 2: to deliver a hawkish hold later on today. Some traders

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Speaker 2: still preparing for the possibility of a surprise high. Claudia

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Speaker 2: sam of New Century Advisors writing, Wash has managed to

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Speaker 2: make the FED an even bigger focus of attention by

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Speaker 2: saying less and certainty around economic policy was already high.

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Speaker 2: The last thing we need is the FED adding to it.

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Speaker 2: Claudia joins us now for more. Claudia, welcome to the program.

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Speaker 2: Do you think that Chairwash is contributing to the kind

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Speaker 2: of volatility that might be harmful?

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Speaker 7: So we are seeing the Chairwash is contributing to volatility.

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Speaker 7: Now where it's most clear is in the Federal Fund's

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Speaker 7: futures market. So coming in yesterday there was still about

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Speaker 7: a thirty percent chance of a Reid hike.

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Speaker 3: Today.

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Speaker 7: That may not sound like much, but that is very

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Speaker 7: high for that close to a meeting. The only time

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Speaker 7: we have seen uncertainty like that in the past several

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Speaker 7: years had been big moments like lift off in twenty

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Speaker 7: fifteen or the first rate cut in twenty twenty four.

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Speaker 7: There was a lot of economics going on and lots

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Speaker 7: of disagreement on the committee. This time, the uncertainty that

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Speaker 7: comes from a chair who has gone really low information

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Speaker 7: on how he's thinking about.

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Speaker 2: Policy, low information on a range of things. In Claudia,

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Speaker 2: you pointed out the difference. It's okay to stop providing

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Speaker 2: forward guidance, but he's also failed to articulate his reaction function.

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Speaker 2: What kind of questions do you have for this news conference?

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Speaker 7: I think one is just to ask Kevin Warsh about

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Speaker 7: his own past words. When he worked on the Bank

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Speaker 7: of England's communication review in twenty fourteen, he recommended that

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Speaker 7: they give timely feedback on what the decision was, the

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Speaker 7: rational for the decision, and he even talked about the

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Speaker 7: importance of a reaction function. So what's changed That's been

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Speaker 7: over a decade ago and his thinking could have changed.

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Speaker 7: But like, I agree with that Kevin Worsh about how

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Speaker 7: he thinks about communication, and I'm having a hard time

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Speaker 7: with it in this moment, though, I will say we

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Speaker 7: got all of that information by the time we got

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Speaker 7: to the June FMC minutes, So it may just be

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Speaker 7: Kevin Worsh wants to change the format we get the information,

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Speaker 7: not necessarily that we get less information. I think it'd

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Speaker 7: be a really good idea to at least get it

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Speaker 7: into the statement today if he doesn't want to say

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Speaker 7: it in the press conference.

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Speaker 5: Claudia, what are you expecting in terms of the breakdown

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Speaker 5: of descents versus the majority opinion.

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Speaker 3: I expect that.

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Speaker 7: We probably will see some descents today in favor of

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Speaker 7: a hike. Lorie Logan and Beth Hammock laid out very

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Speaker 7: clear explanations for why they thought, if not right away,

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Speaker 7: maybe sometime soon it would be wise for the Fed

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Speaker 7: to raise raids to bring inflation down. That doesn't mean

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Speaker 7: that they're going to dissent, but I think they really

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Speaker 7: set themselves up to have that, you know, kind of

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Speaker 7: way in in that way, because descents need to be meaningful.

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Speaker 7: People do that when they really feel at odds with

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Speaker 7: where the Committee is standing at the moment, you know,

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Speaker 7: another wildcard to keep. We have seen the sense in

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Speaker 7: recent past on how the statement itself was worded, like

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Speaker 7: what kind of information is conveyed? This idea of do

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Speaker 7: you get a reaction function, get any forward guidance? So

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Speaker 7: I think the statement could be pretty interesting this afternoon

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Speaker 7: in terms of learning where the Committee as a whole is.

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Speaker 5: Do you think that right now inflation is a pre

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Speaker 5: eminent concern or excesses in volatility in tech sectors? And

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Speaker 5: I'm wondering this because ultimately the wealth effect has been

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Speaker 5: one of the biggest drivers of a lot of the

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Speaker 5: sustainability in spending, So you can't disentangle these two, and

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Speaker 5: you can hear it in some of the rhetoric from

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Speaker 5: FED officials over the past couple of weeks.

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Speaker 7: I would put what's happening with AI in the tech

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Speaker 7: sector largely into risk that the FED is monitoring. It

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Speaker 7: has had some effect on inflation, so that is something

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Speaker 7: very clear and direct to their mandate. I think I

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Speaker 7: would use what's the uneasiness in some of the tech

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Speaker 7: sector as just another reason why the FED doesn't need

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Speaker 7: to be injecting more uncertainty and volatility into the situation,

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Speaker 7: Like if market pricing of interest rate gets out of

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Speaker 7: hand because we don't talk enough to the world, that

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Speaker 7: could be really unfortunate have effects on other sectors. So

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Speaker 7: I think they're keeping a watchful eye on it. But

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Speaker 7: I would put a lot of that into the kind

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Speaker 7: of the risk bucket as opposed to something the FED

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Speaker 7: is going to directly try to react to.

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Speaker 6: Well, we know they're going to directly how to react

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Speaker 6: to data, but what about oil. What's the timeline on

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Speaker 6: their reaction function to the whip sign we're seeing in crude?

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Speaker 2: Right?

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Speaker 7: So this I think is one where it really would

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Speaker 7: be helpful to get more information from the FED. In

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Speaker 7: the minutes, they lump together a whole set of reasons

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Speaker 7: why inflation is elevated, including the conflict in the Middle East,

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Speaker 7: but also to AI demand and tariffs. The thing is

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Speaker 7: is that historically the FED has been very wise to

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Speaker 7: look through swings and energy prices. There's a lot of volativity.

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Speaker 7: I mean, we have seen that just in recent weeks,

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Speaker 7: if not recent months, and so for the FED to

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Speaker 7: chase oil prices it has proven to be a mistake.

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Speaker 7: But if you watch like the futures pricing for the FED,

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Speaker 7: it's clear that markets are reacting to that. Like that

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Speaker 7: piece of inflation they think is something the FED will

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Speaker 7: be very reactive to, and I'm not so sure it

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Speaker 7: might be this time is different. They're impatient with inflation

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Speaker 7: and they react to that inflation, but that would be

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Speaker 7: a bit off the playbook for them.

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Speaker 3: Stay with us.

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Speaker 2: More Bloomberg surveillance coming up after this and the Savannahs

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Speaker 2: this morning. A hike versus a hold.

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Speaker 1: The market's not ruling out July, and honestly, neither are we.

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Speaker 2: He needs to do something, and we think three rate

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Speaker 2: hikes is the way to start.

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Speaker 1: This really is a live meeting. The risk that we

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Speaker 1: do get a surprise is much much higher.

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Speaker 7: I think you would get at least one percent if

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Speaker 7: Wash keeps rates on hold.

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Speaker 1: I've got to Fed on hold for the rest of

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Speaker 1: the year.

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Speaker 3: But I have to say it's not high in fiction.

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Speaker 3: So here's the laces this morning.

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Speaker 2: The possibility of a surprise hike looming over today's decision.

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Speaker 2: The former Kansas City Fed President Esther George expecting the

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Speaker 2: Fed to stay on hold, writing, although the probabilities of

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Speaker 2: a hike have risen, the outcome of the committee's family

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Speaker 2: fire could well conclude that they call it Gune inflation

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Speaker 2: numbers allow them to wait. As the joins us now

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Speaker 2: for more. Esther warm welcome back to the program for

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Speaker 2: in a whole new world.

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Speaker 3: This is different.

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Speaker 2: Typically post GFC, we're guided into the decision.

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Speaker 3: We already know what the outcome will be.

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Speaker 2: What do you make of that change that we actually

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Speaker 2: have just a little bit of two way risk.

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Speaker 8: So I think it's a good move in the sense

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Speaker 8: of not trying to forecast and lay the groundwork for

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Speaker 8: upcoming moves. I think the market doing this work is

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Speaker 8: probably an important development here, and at the same time,

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Speaker 8: while you're going to stop short of giving forward guidance,

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Speaker 8: I think it's always helpful to be clear about what

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Speaker 8: you are looking for. So today I think will be

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Speaker 8: important to listen to what is the rationale, how is

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Speaker 8: the committee thinking about the current state of the economy?

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Speaker 5: Esther, If you are in the family fight right now

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Speaker 5: today and heading into tomorrow, what would you be streaming about?

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Speaker 1: What would you be sort of arguing for?

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Speaker 8: Well, Lisa, I've been concerned for some time about the

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Speaker 8: duration of elevated inflation in the economy. And yes, we've

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Speaker 8: had a number of one offs as we call them,

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Speaker 8: coming hitting the economy, But the truth is, underlying inflation

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Speaker 8: has remained well above the Fed's target, and so my

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Speaker 8: own sense is the cuts last year really eased into

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Speaker 8: something that was still a problem in terms of inflation.

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Speaker 8: So I would continue and am continue to be concerned

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Speaker 8: about elevated inflation.

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Speaker 5: Do you think that it would be appropriate for a

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Speaker 5: number of descents today? Do you think that would be

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Speaker 5: healthy or does that indicate that maybe Kevin worsh is

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Speaker 5: losing clutch over the body.

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Speaker 8: Well, I'm not concerned that there'll be too many descents.

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Speaker 8: You know, the FED chairman is going to make sure

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Speaker 8: I think that his direction, his particular leaning on this

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Speaker 8: is going to carry the day. So yes, I would

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Speaker 8: expect their descents. I wouldn't be concerned about that. We've

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Speaker 8: heard those in some sense already being communicated publicly about

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Speaker 8: how people feel about inflation. So I'm not terribly concerned

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Speaker 8: that he will be outnumbered in terms of a direction today.

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Speaker 6: The characteristics we're seeing in this kind of oil price spike,

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Speaker 6: is this something that the Federal Reserve could look through?

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Speaker 8: Well, they have been looking through it more or less,

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Speaker 8: but we know that the oil price shock is a

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Speaker 8: salient price. It can feed into other things. And so

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Speaker 8: while this has been moving around again, we haven't seen

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Speaker 8: clear direction that we are getting an underlying disinflationary trend. Yes,

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Speaker 8: we had cooler numbers in June, and I think that

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Speaker 8: causes the committee then to really weigh more carefully what

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Speaker 8: might the trend be, what is the direction going to be,

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Speaker 8: and how much of that is influenced by oil.

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Speaker 6: Right now we are seeing some companies come out recommend

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Speaker 6: Kaiser apparently coming on saying because of the move and

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Speaker 6: crude they're going to have to put some of that

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Speaker 6: into their products. Is that the time then where you

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Speaker 6: would see the federal reserves start to really take notice

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Speaker 6: of what's.

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Speaker 1: Going on in the oil market.

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Speaker 8: Well, it is a factor that I think has been

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Speaker 8: present for some time, and that is trying to understand

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Speaker 8: the pricing power that is associated with any one of

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Speaker 8: these particular shocks. And I do think that is always

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Speaker 8: the risk that it broadens out if that has been

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Speaker 8: able to rely on anchored inflation expectations, But that is

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Speaker 8: always a risk. How much time can pass before there

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Speaker 8: begins to be questions about the Fed's commitment, and so

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Speaker 8: that is always the tension here. How much time can

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Speaker 8: you buy and keep inflation expectations well anchored as these

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Speaker 8: various factors are.

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Speaker 2: To instead of throwing bread rolls today, then would you descend.

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Speaker 8: Well, I wouldn't want to prejudge the what information is

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Speaker 8: coming out at that table, because you always learned something

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Speaker 8: up until the time that you are voting on that

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Speaker 8: interest rate.

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Speaker 1: I have been concerned.

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Speaker 8: I probably would put myself in the camp of thinking

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Speaker 8: action is needed, that rates have not been restrictive as

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Speaker 8: described in the past. So my leaning is to say

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Speaker 8: inflation remains a problem. The one instrument the FED has

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Speaker 8: to attack that is Reelly. It's Fed funds rate.

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