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 Amrie Hordert. 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 south it stops looking to build momentum heading into a blockbuster day for Wall Street. Dan Sazuki vi Capital writing a robust Macro backdrop should fuel a second straight quarter of twenty percent plus earning strowth. With tell One's failing in the second half, this may be what peak growth looks like. Dan joins us now from more Dank and Mornic. Good morning, Welcome back, Buddy, and congratulations on the new CA. It's good to see you. 00:00:57 Speaker 3: Yeah, great to view with you. 00:00:58 Speaker 4: Guys, love this show. 00:00:59 Speaker 2: Let's stry this thing between peak growth and peak markets. 00:01:02 Speaker 3: How wide is that distinction? 00:01:03 Speaker 4: This morning it's clearly not very very distinct, right. I think, like in normal markets, it's really more about peak earnings than it is about peak growth. But I think when expectations get really high and the bar set so high, peak growth is all it takes to sort of get expectations to be too high to me, And that's kind of what you're seeing today in the AI trade. 00:01:24 Speaker 2: Lisa talked about how high the bar is for the chips name the likes of Intel, the likes of Skehihex, the likes of Samsung. How high is the bar for the Hyperscalus, a couple of names that have been beaten up quite a lot. 00:01:34 Speaker 4: I mean, I think what you're seeing, you know, this earning season, is that the bar is set too high for any stock associated with the AI trade, right. And it's not to say that the underlying fundamental story is not good, but the bar is just being set too high, so you can't see any stocks that are up on their earnings results. And I think the way to think about now is the bar is set so high. You know, the new beat is, you know, called a ten percent beat on earnings and a lower capex guidance. I think that's the thing that's going to get sucks to rally. 00:02:04 Speaker 1: So this is an area that's controversial. 00:02:06 Speaker 5: You think that if they underperformer at least they lowball the capex plans and they come in lighter than expected, that would be a case for rally more than anything else. 00:02:15 Speaker 1: Is that correct. 00:02:16 Speaker 4: I think that's part of the story. I think you want to see underlying strong fundamental trends, but also an eye toward monetization of all this investment spending that's happening. And this is something we've been talking about I Capital for a while and we call it the AI Capex vigilantes. And you're seeing the vigilantes are winning these days, right, and you're saying, everybody's waking up to this story, whether it's the hyperscalers, the semis now is the sort of second derivative of that, And I think that's really what's coming to play. So what the market wants to see, what the vigilantes wanted to see, is signs that there's an eye toward the monization of that investment. 00:02:50 Speaker 5: Do you want to get on the vigilante train and overweight some of the fixed income instruments that have leveraged right now? And not necessarily go to the equity side of the equation. 00:02:58 Speaker 3: No, I think both sides. 00:03:00 Speaker 4: You know, the reality of what's happening right now in markets is that the markets are waking up to the risks associated with the AI trade across the supply chain, right. And it's not to say that the underlying fundamental story is broken, but you know, there's a lot of good things happening, but there are obviously a lot of risks. Modes are weak, pricing power is week, capex is very high, and when you get sort of price wars and price pressures and competitive environments in a hugely capital intensive industry that typically you know, causes a lot of shakeout and volatility in some of the names. And I think that's what you're seeing now. 00:03:31 Speaker 6: Do you see any evidence that some of the AI trade is starting to move to other industries that are starting to use and adapt AI quicker? 00:03:38 Speaker 4: Yes, yes, absolutely. It's hard to find. I was just talking about this the other day. It's hard to find an area of the market that's not an AI trade, right. It used to be emerging markets. That's as far as you can go. Now emerging markets is an AI trade. You know, utilities are an AI trade. Real estate is an AI trade. I mean, where do you go that's not an AI trade? And that's like, that's what you're seeing that's up right now right. You know you talked about since sort of the May highs. You know, all this stuff is down, but look at all this stuff that's updouble digit. That's sort of the other side of the cesaw, the anti AI trade. 00:04:09 Speaker 2: If you will, one of the banks, how would you describe that running You're staying in the financial yea, that's. 00:04:14 Speaker 3: Part of the story. 00:04:15 Speaker 4: The underlying fundamentals for the banks are strong. But at the same time, this is kind of the rotation that Lisa was talking about, Like there's other stuff putting up good growth and accelerating growth at a time when there's people are starting to think about the risk associated with AI. And I think financials are part of that. Small caps are part of that. Values are part of that. And I think people are just understanding that there's more to the world and to the market. 00:04:38 Speaker 2: And that doesn't screen growth scare and these set are rolling shocks. We've been talking about through energy, through interest rates, through the bond market, but it hasn't materialized with a growth scare is on the horizon. 00:04:47 Speaker 3: How avoidable do you think it is? Growth scare? 00:04:50 Speaker 4: I mean, you'll have to help me define that, John, because I think one of the two other things that we highlight as risks for the second half of the year are sort of fading tailwinds to the consumer and then also higher for longer instrates. Both of those things are actually happening, and so I think that our base cases that growth does slow in the second half of the year. The real question is how much. And there are a lot of tailwinds that are mounting, and liquidity will probably past peak liquidity for the year. You know, this is not a great environment for accelerating. 00:05:19 Speaker 2: Just sit on that point, attention, just for one further beat. You can see a situation where the consumer tail went slow but rates remain elevated. 00:05:27 Speaker 3: Can you explain that? 00:05:28 Speaker 4: Yeah, I mean, I think if you just look at the sheer amount of tailwinds that have been boosting the consumer, whether you know it's tax cuts or just the reopening of liquidity, you know there's been a lot that's gone into boosting the overall economy in the first half of the year. Just to look at any measure for the second half of the year, right, we've ori paid out the record, you know, tax refunds, that's sort of in the rear view. They're still in their pockets, so they can still spend that World Cup is now behind us. Unfortunately, liquidity is tightening up, so as you look at the second half of the years, it's more like not that growth is going to slow, but you know, inflation to me right now comes down to what's happening. I ran right, and so whether or not the Fed hikes or whether or not inflation accelerates, to me, that's an oil story right now. Even though they say they're going to look through that. When you have tariffs and oil two shocks, I think that makes the story a bit more. 00:06:17 Speaker 1: Difficult for them. 00:06:18 Speaker 5: Putting oil aside for a second, if you do think that there's going to be a slowdown in growth heading into your end, are you expecting rates to go lower at least the Fed funds rate and potentially not glean a whole lot right now, but more by that going forward about Kevin. 00:06:32 Speaker 4: Orsh this is why we you know, like we had the base case that you know we're going to have the straight of horm moves is going to open up. Growth was going to slightly soften, and that was going to keep the FED on hold for the rest of the year. And that's still our base case. But I think oil is the wild card and that's going to really drive what. 00:06:47 Speaker 3: Happens with injuries. 00:06:48 Speaker 4: If if you take out what's happening in hor moves, I think insurates do fall into the end of the year. But if you reintroduce this story, you know, I think you're seeing increasing risk that at the September meeting and beyond you are a hiking cycle. I think that's what the FED is telling you. There's like, if you look at the FED minutes, it was basically a scenario analysis of what they plan to do based on what happens with inflation, which is very much driven by oil. 00:07:11 Speaker 1: Why wouldn't they look through it. 00:07:12 Speaker 5: I mean, we've been talking to one analyst after another about have I always looked through oil? And actually that the inflation coming from other areas seems to be more prevalent, including capital markets, which seemed to be slowing down at least you view what we're seeing in the wake of earnings. 00:07:24 Speaker 4: It's just going on for too long a right and inflation's too sticky for too long. He keeps hearkening back to the mistakes that were met made during after the twenty two oil price spike and the inflation that we saw. Then you know, we're looking at Just listen to what the Fed, you know, speakers are saying. They're saying, you know, if this keeps going, I'm going to start hiking rates. I want to start hiking rates. And that's what they're telling us. That's what the minutes hold this and so yes and all those equal. They're going to look through terraces, they're going to look through energy. But the more that this goes on, the more that bleeds into inflation and expectations. 00:07:55 Speaker 3: And by the way, you know core PCE, you know what. 00:07:58 Speaker 4: Did that like bottom like two years years ago, and that's been rising. I mean, these are not good trends for the Fed to sit on. 00:08:04 Speaker 3: Stay with us. 00:08:05 Speaker 2: More Bloomberg surveillance coming up after this. So here's the latest this morning. Wall Street expecting fend share Kevin Walsh to deliver a hawkish hold later on today. Some traders still preparing for the possibility of a surprise high. Claudia sam of New Century Advisors writing, Wash has managed to make the FED an even bigger focus of attention by saying less and certainty around economic policy was already high. The last thing we need is the FED adding to it. Claudia joins us now for more. Claudia, welcome to the program. Do you think that Chairwash is contributing to the kind of volatility that might be harmful? 00:08:45 Speaker 7: So we are seeing the Chairwash is contributing to volatility. Now where it's most clear is in the Federal Fund's futures market. So coming in yesterday there was still about a thirty percent chance of a Reid hike. 00:08:58 Speaker 3: Today. 00:08:58 Speaker 7: That may not sound like much, but that is very high for that close to a meeting. The only time we have seen uncertainty like that in the past several years had been big moments like lift off in twenty fifteen or the first rate cut in twenty twenty four. There was a lot of economics going on and lots of disagreement on the committee. This time, the uncertainty that comes from a chair who has gone really low information on how he's thinking about. 00:09:23 Speaker 2: Policy, low information on a range of things. In Claudia, you pointed out the difference. It's okay to stop providing forward guidance, but he's also failed to articulate his reaction function. What kind of questions do you have for this news conference? 00:09:37 Speaker 7: I think one is just to ask Kevin Warsh about his own past words. When he worked on the Bank of England's communication review in twenty fourteen, he recommended that they give timely feedback on what the decision was, the rational for the decision, and he even talked about the importance of a reaction function. So what's changed That's been over a decade ago and his thinking could have changed. But like, I agree with that Kevin Worsh about how he thinks about communication, and I'm having a hard time with it in this moment, though, I will say we got all of that information by the time we got to the June FMC minutes, So it may just be Kevin Worsh wants to change the format we get the information, not necessarily that we get less information. I think it'd be a really good idea to at least get it into the statement today if he doesn't want to say it in the press conference. 00:10:23 Speaker 5: Claudia, what are you expecting in terms of the breakdown of descents versus the majority opinion. 00:10:29 Speaker 3: I expect that. 00:10:30 Speaker 7: We probably will see some descents today in favor of a hike. Lorie Logan and Beth Hammock laid out very clear explanations for why they thought, if not right away, maybe sometime soon it would be wise for the Fed to raise raids to bring inflation down. That doesn't mean that they're going to dissent, but I think they really set themselves up to have that, you know, kind of way in in that way, because descents need to be meaningful. People do that when they really feel at odds with where the Committee is standing at the moment, you know, another wildcard to keep. We have seen the sense in recent past on how the statement itself was worded, like what kind of information is conveyed? This idea of do you get a reaction function, get any forward guidance? So I think the statement could be pretty interesting this afternoon in terms of learning where the Committee as a whole is. 00:11:15 Speaker 5: Do you think that right now inflation is a pre eminent concern or excesses in volatility in tech sectors? And I'm wondering this because ultimately the wealth effect has been one of the biggest drivers of a lot of the sustainability in spending, So you can't disentangle these two, and you can hear it in some of the rhetoric from FED officials over the past couple of weeks. 00:11:36 Speaker 7: I would put what's happening with AI in the tech sector largely into risk that the FED is monitoring. It has had some effect on inflation, so that is something very clear and direct to their mandate. I think I would use what's the uneasiness in some of the tech sector as just another reason why the FED doesn't need to be injecting more uncertainty and volatility into the situation, Like if market pricing of interest rate gets out of hand because we don't talk enough to the world, that could be really unfortunate have effects on other sectors. So I think they're keeping a watchful eye on it. But I would put a lot of that into the kind of the risk bucket as opposed to something the FED is going to directly try to react to. 00:12:14 Speaker 6: Well, we know they're going to directly how to react to data, but what about oil. What's the timeline on their reaction function to the whip sign we're seeing in crude? 00:12:23 Speaker 2: Right? 00:12:23 Speaker 7: So this I think is one where it really would be helpful to get more information from the FED. In the minutes, they lump together a whole set of reasons why inflation is elevated, including the conflict in the Middle East, but also to AI demand and tariffs. The thing is is that historically the FED has been very wise to look through swings and energy prices. There's a lot of volativity. I mean, we have seen that just in recent weeks, if not recent months, and so for the FED to chase oil prices it has proven to be a mistake. But if you watch like the futures pricing for the FED, it's clear that markets are reacting to that. Like that piece of inflation they think is something the FED will be very reactive to, and I'm not so sure it might be this time is different. They're impatient with inflation and they react to that inflation, but that would be a bit off the playbook for them. 00:13:10 Speaker 3: Stay with us. 00:13:11 Speaker 2: More Bloomberg surveillance coming up after this and the Savannahs this morning. A hike versus a hold. 00:13:27 Speaker 1: The market's not ruling out July, and honestly, neither are we. 00:13:30 Speaker 2: He needs to do something, and we think three rate hikes is the way to start. 00:13:34 Speaker 1: This really is a live meeting. The risk that we do get a surprise is much much higher. 00:13:38 Speaker 7: I think you would get at least one percent if Wash keeps rates on hold. 00:13:42 Speaker 1: I've got to Fed on hold for the rest of the year. 00:13:44 Speaker 3: But I have to say it's not high in fiction. So here's the laces this morning. 00:13:47 Speaker 2: The possibility of a surprise hike looming over today's decision. The former Kansas City Fed President Esther George expecting the Fed to stay on hold, writing, although the probabilities of a hike have risen, the outcome of the committee's family fire could well conclude that they call it Gune inflation numbers allow them to wait. As the joins us now for more. Esther warm welcome back to the program for in a whole new world. 00:14:08 Speaker 3: This is different. 00:14:09 Speaker 2: Typically post GFC, we're guided into the decision. 00:14:11 Speaker 3: We already know what the outcome will be. 00:14:13 Speaker 2: What do you make of that change that we actually have just a little bit of two way risk. 00:14:18 Speaker 8: So I think it's a good move in the sense of not trying to forecast and lay the groundwork for upcoming moves. I think the market doing this work is probably an important development here, and at the same time, while you're going to stop short of giving forward guidance, I think it's always helpful to be clear about what you are looking for. So today I think will be important to listen to what is the rationale, how is the committee thinking about the current state of the economy? 00:14:51 Speaker 5: Esther, If you are in the family fight right now today and heading into tomorrow, what would you be streaming about? 00:14:57 Speaker 1: What would you be sort of arguing for? 00:15:01 Speaker 8: Well, Lisa, I've been concerned for some time about the duration of elevated inflation in the economy. And yes, we've had a number of one offs as we call them, coming hitting the economy, But the truth is, underlying inflation has remained well above the Fed's target, and so my own sense is the cuts last year really eased into something that was still a problem in terms of inflation. So I would continue and am continue to be concerned about elevated inflation. 00:15:36 Speaker 5: Do you think that it would be appropriate for a number of descents today? Do you think that would be healthy or does that indicate that maybe Kevin worsh is losing clutch over the body. 00:15:49 Speaker 8: Well, I'm not concerned that there'll be too many descents. You know, the FED chairman is going to make sure I think that his direction, his particular leaning on this is going to carry the day. So yes, I would expect their descents. I wouldn't be concerned about that. We've heard those in some sense already being communicated publicly about how people feel about inflation. So I'm not terribly concerned that he will be outnumbered in terms of a direction today. 00:16:21 Speaker 6: The characteristics we're seeing in this kind of oil price spike, is this something that the Federal Reserve could look through? 00:16:29 Speaker 8: Well, they have been looking through it more or less, but we know that the oil price shock is a salient price. It can feed into other things. And so while this has been moving around again, we haven't seen clear direction that we are getting an underlying disinflationary trend. Yes, we had cooler numbers in June, and I think that causes the committee then to really weigh more carefully what might the trend be, what is the direction going to be, and how much of that is influenced by oil. 00:17:03 Speaker 6: Right now we are seeing some companies come out recommend Kaiser apparently coming on saying because of the move and crude they're going to have to put some of that into their products. Is that the time then where you would see the federal reserves start to really take notice of what's. 00:17:17 Speaker 1: Going on in the oil market. 00:17:19 Speaker 8: Well, it is a factor that I think has been present for some time, and that is trying to understand the pricing power that is associated with any one of these particular shocks. And I do think that is always the risk that it broadens out if that has been able to rely on anchored inflation expectations, But that is always a risk. How much time can pass before there begins to be questions about the Fed's commitment, and so that is always the tension here. How much time can you buy and keep inflation expectations well anchored as these various factors are. 00:18:00 Speaker 2: To instead of throwing bread rolls today, then would you descend. 00:18:05 Speaker 8: Well, I wouldn't want to prejudge the what information is coming out at that table, because you always learned something up until the time that you are voting on that interest rate. 00:18:17 Speaker 1: I have been concerned. 00:18:18 Speaker 8: I probably would put myself in the camp of thinking action is needed, that rates have not been restrictive as described in the past. So my leaning is to say inflation remains a problem. The one instrument the FED has to attack that is Reelly. It's Fed funds rate. 00:18:38 Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, anchient 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.