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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 am Marie Hordern. Join us each

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

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

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

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

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

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Speaker 2: Bloomberg Terminal and the Bloomberg Business app. Ed Mills joined

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Speaker 2: us a Frammer James ed, good morning to you, sir.

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Speaker 2: It's going to see you once again. Let's get back

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Speaker 2: to those tariffs. Twenty five percent tariff on auto's, chips

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Speaker 2: and pharmaceuticals, maybe as soon as early April. And are

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Speaker 2: you taking the president seriously and literally?

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Speaker 3: Yeah?

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Speaker 4: I mean I think what we'd say here is it's

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Speaker 4: unlikely to be twenty five percent off the bat. What

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Speaker 4: we've seen with Canon to Mexico and China that whatever

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Speaker 4: the market is focused on that's probably is not what's

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Speaker 4: going to be implemented.

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Speaker 5: Is there something? Is it a ten percent.

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Speaker 4: On semiconductors, nothing that goes on pharmaceuticals in a study

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Speaker 4: on autos, that would be probably my base case here, John.

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Speaker 4: He likes to throw out really large numbers, something that

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Speaker 4: forces trading partners to react and ultimately resets the bar.

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Speaker 4: So if he comes in lower on any one of

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Speaker 4: those threes, or exclude any one of those threes, the

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Speaker 4: market will take it as a win and he'll get

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Speaker 4: the victory as well.

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Speaker 6: We also have the European Union's top trade official in

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Speaker 6: Washington this week. Trump once again said there seems to

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Speaker 6: be a deal on the table when it comes to Europe,

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Speaker 6: and they're auto tariffs. Do you see this going for

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Speaker 6: like for like tariff for tariff between Brussels and Washington.

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Speaker 4: So I would expand kind of the European auto conversation

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Speaker 4: beyond just tariffs. I think when I have had conversations

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Speaker 4: with the experts in DC related to Europe, say, one

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Speaker 4: of the big things about Europe is choosing a side.

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Speaker 4: Is it going to be partnerships with the United States

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Speaker 4: or partnerships with China? And so with the auto space,

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Speaker 4: more joint ventures with US car makers rather than joint

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Speaker 4: ventures with Chinese car makers. Donald Trump sees the German

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Speaker 4: carmakers having deals with the Chinese car makers as a

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Speaker 4: national security concern of epic proportions. So part of that deal,

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Speaker 4: in my mind, would be a recentering towards partnerships with the.

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Speaker 5: United States investment in the United States.

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Speaker 4: That's what gets him to back off the car tariffs

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Speaker 4: on European counterparts.

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Speaker 6: It felt like when Trump was speaking yesterday it was

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Speaker 6: a bit lucy goosey in the neighborhood of twenty five

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Speaker 6: percent probably April second. So I have a list March fourth,

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Speaker 6: the pause on Canada and Mexico, that deadline is up

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Speaker 6: March twelve, the imports of aluminium steel getting twenty five

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Speaker 6: percent hit, and then April second, these auto tariffs. How

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Speaker 6: much does Trump need to potentially punt so he can

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Speaker 6: align the tars with the tax cuts that he's hoping

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Speaker 6: his Congress can get in place.

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Speaker 4: Yeah, amriy, what I hear there is We're going to

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Speaker 4: have weekly, if not daily at times, announcements on tariffs.

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Speaker 4: He's going to keep us guessing, keep us informed. And

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Speaker 4: part of this is a two pronged attacked as well.

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Speaker 4: Number one move the goalpost force policy changes that he wants,

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Speaker 4: and once he gets those achievements, he will celebrate that

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Speaker 4: prong number two by moving these dollar amounts in the

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Speaker 4: percentage is so high. If we don't get twenty five percent,

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Speaker 4: say we're at five or ten percent, that is the

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Speaker 4: foundation for a universal tariff that he actually wants. And

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Speaker 4: he will say he's using that money to give Republicans

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Speaker 4: the opportunity to pass tax cuts, do additional spending.

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Speaker 5: On key priorities.

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Speaker 4: And so he is doing a both and strategy as

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Speaker 4: relates to what he's doing here, because he's moving the goalpost,

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Speaker 4: resetting expectations, and going to get some policy wins out

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Speaker 4: of it, and he will celebrate it in each step

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Speaker 4: of the way.

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Speaker 6: So it sounds like he's in full on negotiating mode.

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Speaker 6: Then what will act as the revenue raisers?

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Speaker 4: Well, I think the ultimate revenue raiser is going to

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Speaker 4: be that smaller than expected, but more permanent tariff that

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Speaker 4: goes into effect. When we look back to the Canada

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Speaker 4: Mexico China experiment, we were all focused on that twenty

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Speaker 4: five percent, but what was actually implemented was ten percent,

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Speaker 4: which looked like a better deal visa VI everyone else,

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Speaker 4: But that being set as a baseline for everything that's

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Speaker 4: coming from China. I think is the base case as

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Speaker 4: we set a baseline for the rest of the world.

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Speaker 5: If he just said that outright, we'd all be freaked out.

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Speaker 4: But if we start at twenty five percent, he says

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Speaker 4: he's going to go higher, but only settles at ten percent,

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Speaker 4: and Marie, or maybe even less, if he settles for

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Speaker 4: five percent, that is the political cover for additional spending

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Speaker 4: on Capitol Hill.

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Speaker 1: As from your conversations with people in Washington, DC who

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Speaker 1: cover trade, is there any consistent methodology to how these

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Speaker 1: tariffs are being threatened or discussed or is it basically

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Speaker 1: just a flood the zone approach?

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Speaker 5: Oh, Lisa, it is a flood the zone approach.

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Speaker 4: I've had very senior conversations with folks in the administration

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Speaker 4: and they've said a lot of this is do something

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Speaker 4: so big and so bold that forces a policy response.

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Speaker 4: And so last week when we got the reaction on

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Speaker 4: reciprocal terroriffs, the fact that we're including the value add attacks,

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Speaker 4: currency man manipulation, any regulation or anything that they want

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Speaker 4: to include here shows me just how much they're going

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Speaker 4: to use the force of the United States government, the military,

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Speaker 4: of the United States, the economy of the United States,

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Speaker 4: to threaten something so large that other countries have no

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Speaker 4: choice but to respond in a way that Donald Trump

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Speaker 4: wants you to respond, but then also having the ability

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Speaker 4: to come in after that and has laid down a

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Speaker 4: universal tariff.

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Speaker 5: It is kind of very.

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Speaker 4: Interesting to watch, and I think it is kind of

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Speaker 4: very transparent of exactly what they're trying to do here, Lisa.

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Speaker 7: That's on an international level.

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Speaker 1: On a domestic level, is there any methodology that you

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Speaker 1: can glean from some of the cuts that are making

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Speaker 1: being made more broadly across the government, stemming from the

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Speaker 1: Doze efforts that have been heralded by a lot of people.

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Speaker 5: Yeah, so on Doze.

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Speaker 4: Kind of the greater the cuts are, the more fanfear

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Speaker 4: that those come. That's also providing political cover on the

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Speaker 4: Budget Reconciliation bill, because.

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Speaker 5: The more if you are going to spend four point.

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Speaker 4: Five trillion dollars plus on extending out the twenty seventeen

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Speaker 4: tax cuts, if you want to spend an additional three

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Speaker 4: hundred billion dollars on the military, on immigration, on energy,

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Speaker 4: which is exactly what the Republicans want to do, they

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Speaker 4: need something really big out there, like doge like tariffs

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Speaker 4: to give them the political cover to say it is

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Speaker 4: okay for us to do this because we are getting

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Speaker 4: savings elsewhere. Again, resetting the bar, resetting the conversation. So

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Speaker 4: what ultimately gets done seems like a compromise, where in

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Speaker 4: normal DC terms, that would be the main fight.

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Speaker 3: That appreciate the frame and thank you, sir at most

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Speaker 3: of Raymond.

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Speaker 2: James Sabati chapter of soct GEN writing, the administration's focus

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Speaker 2: on the ten yure yield and lowering borrowing costs should

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Speaker 2: cap the rise in yields. They can reduce deficits, which

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Speaker 2: they seem committed to doing. Through doubts Sabatra Joints is

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Speaker 2: now for more Sapatra, good morning, good morning.

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Speaker 3: Is this just vibes or is this the real deal?

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Speaker 8: We'll find out over time, because so far, what we've

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Speaker 8: heard from Bessin is that they've had in Elon Musk

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Speaker 8: and his team have found fifty billion in deficits savings,

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Speaker 8: you know from all of the work that they've been

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Speaker 8: that they've put into it. But that's far from the

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Speaker 8: two trillion that's that they're targeting in cutting spending from

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Speaker 8: the federal So they have a long way to go

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Speaker 8: to get to that target. So it'll be really interesting

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Speaker 8: to see what they do, how they approach the savings

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Speaker 8: on cuts and spending, as well as you know, ways

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Speaker 8: to you know, change the way they issue so that

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Speaker 8: you know, they have control over what yields are, so

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Speaker 8: that borrowing costs in general remain quite low for the.

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Speaker 3: For the investors.

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Speaker 1: There's an idea that's embedded in what you're saying, which

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Speaker 1: is that the idea of the deficit in the United

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Speaker 1: States has been driving the backup in yields we saw

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Speaker 1: at the end of last year and that we've seen

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Speaker 1: with the rally this year is an acceptance that maybe

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Speaker 1: that deficit won't be as steep as people previous believe,

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Speaker 1: previously believed.

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Speaker 5: Is that true?

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Speaker 1: Is that sort of the base case of what's kind

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Speaker 1: of being baked into this treasure market.

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Speaker 8: So I'd say the ten treasure yields have kind of

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Speaker 8: stuck between a rock and a hard place. On the

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Speaker 8: one hand, you have, you know, inflationary data that's pushed

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Speaker 8: yields higher. You have a global environment where deficits not

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Speaker 8: just in the US but globally are expected to rise.

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Speaker 8: I mean, Germany and all the other countries in Europe

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Speaker 8: have to spend a lot more on defense. That's going

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Speaker 8: to push their yels higher, so global bond yields should

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Speaker 8: be moving higher. But on the other hand, you have

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Speaker 8: this commitment almost from a Treasury Secretary Besson as well

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Speaker 8: as from President Trump that they're going to try to

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Speaker 8: keep a lid on tenure treasury yields specifically, so that

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Speaker 8: kind of keeps sendy yields around that four and a

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Speaker 8: half percent level. So it's kind of this very interesting

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Speaker 8: back and forth that you see in the bomb market

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Speaker 8: where you see rise towards four seventy five.

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Speaker 7: How are they going to cap those yields.

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Speaker 1: Is it going to be simply with the deficit or

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Speaker 1: is it going to be not selling ten your treasuries?

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Speaker 1: What sort of the mechanism other than we care about

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Speaker 1: that don't let those yields go higher.

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Speaker 8: So it's going to have to be a combination of things. One,

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Speaker 8: they're going to have to try to rain in deficits,

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Speaker 8: don't have to rain and spending. So maybe that that's

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Speaker 8: something that puts a lid on on higher on on

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Speaker 8: tenner trasure yields. Because a lot of the rizin in

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Speaker 8: treasure yields has been because of higher term premires, so

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Speaker 8: there's less treasury debt issuance, and then that should cap

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Speaker 8: the the rise in in treasure yields. But there are

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Speaker 8: also other mechanisms that in which they can kind of

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Speaker 8: cap the.

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Speaker 3: Rise in yields.

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Speaker 8: One is is they're committed to, you know, producing more energy.

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Speaker 8: Maybe that reduces headline inflation, so inflation expectations could come

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Speaker 8: under pressure. That's another way that they're they're that they're

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Speaker 8: thinking about putting a lid on on how high yields

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Speaker 8: are are going to move.

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Speaker 7: Do they edit the issuance? You know, that's very interesting.

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Speaker 8: We'll have to see how that actually works out, because

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Speaker 8: you know, as you guys were discussing it, you know,

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Speaker 8: the best in before he became the traagy secretary was

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Speaker 8: actually you know, calling Yellen's invest in issuance as sort

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Speaker 8: of activist treasury issuance. So the question is whether they

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Speaker 8: stick to the same type of plan where they show

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Speaker 8: a lot more in treasury built and not so much

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Speaker 8: in coup nishurance. At least, the initial indication seems to

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Speaker 8: be that that's really where they're headed, and that's what

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Speaker 8: the market is really focused on in the last refunding meeting.

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Speaker 7: Is that change.

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Speaker 8: No change, I should say in the forward guidance, which

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Speaker 8: leads us to believe that they might keep coup onn

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Speaker 8: insurance sizes in the long and unchanged for the remainder.

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Speaker 3: Of the year.

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Speaker 2: Rabini and Miron put out that paper at the end

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Speaker 2: of last year. Maren's now in the administration and still

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Speaker 2: no change. Maybe we'll get a change.

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Speaker 3: I don't know.

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Speaker 2: I once understand when you think we start thinking about

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Speaker 2: taxes a little bit more, add a little bit less

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Speaker 2: about tariffs and and doge, when does taxes really start

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Speaker 2: to hit this market.

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Speaker 8: So the tax cuts I think that they're going to

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Speaker 8: try to pass first. I mean, whether it's Wander Reconciliation

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Speaker 8: Bill or two is yet to be seen. That's going

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Speaker 8: to just the extension of the DCJ alone is going

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Speaker 8: to add roughly for trillion increase in deficits. So they're

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Speaker 8: going to have to find ways to offset those increases

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Speaker 8: in debt deficits with spending cuts. And that's really where

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Speaker 8: I think you're going to see a lot of pushback

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Speaker 8: even among the Republicans in Congress. I think you're going

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Speaker 8: to see you know, pushbacks to spending cuts because it's

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Speaker 8: going to hit their own district and they're going to

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Speaker 8: try to have to think hard before they agree.

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Speaker 7: To the tax deal.

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Speaker 2: If you are sexually best at his number one priority

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Speaker 2: for this year, he will say extending TCJA. We've heard

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Speaker 2: that from him for had the whole conversation about the

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Speaker 2: bomb market not talked about the FED and the FED.

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Speaker 2: Minute's worth looking at likes from this afternoon.

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Speaker 1: Absolutely, because they will maybe actually let me dial that back.

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Speaker 1: They might be because people are hoping that perhaps they'll

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Speaker 1: send some light on how the new policies and the

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Speaker 1: policy uncertainty is factoring into FED officials views on inflation,

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Speaker 1: et cetera.

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Speaker 7: I say, maybe not, they're taking it back.

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Speaker 1: Maybe just say anything and they'll just say, you know,

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Speaker 1: we have to wait and see and it won't be

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Speaker 1: more claricy.

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Speaker 3: Should last to reschedule that nap.

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Speaker 8: Yes, she should, because I think that they you could

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Speaker 8: get some nuggets of information on what they're thinking about

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Speaker 8: how long they want to stay on pause, I said,

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Speaker 8: as well as on QT. Yeah, I mean it's any

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Speaker 8: changes to QT.

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Speaker 1: I mean there is a possibility that is also going

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Speaker 1: to be pretty opaque.

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Speaker 7: And I'll say anything.

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Speaker 3: But you know, I'm not going to nap.

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Speaker 7: I'm going to be there. I'm going to be reading it.

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Speaker 2: Special coverage from Bramo. Tune in later on this afternoon

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Speaker 2: on Bloomberg TV. So batter appreciate it. Thanks all, that's

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Speaker 2: good to see it.

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Speaker 3: Thank you. Jap there of so jam.

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Speaker 2: As young Thomas is sofi seeing broader opportunities ahead writing

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Speaker 2: the US is not the only game, and tech is

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Speaker 2: not the only game. Don't miss opportunities because you're stuck

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Speaker 2: staring at the same groups. The pallete your portfolio up

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Speaker 2: until this point, Liz joins us now for more.

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Speaker 3: Liz, welcome to the program. We're all looking at Europe.

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Speaker 2: Massive outperformance there, the financials, the banks on a stock

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Speaker 2: six hundred up by close to eighteen percent. Liz, what's

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Speaker 2: your advice this morning for people watching this program that

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Speaker 2: might have missed it?

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Speaker 3: What should they do now?

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Speaker 8: Well?

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Speaker 7: I don't think you've missed it.

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Speaker 9: And in a sense that we've been waiting for Europe

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Speaker 9: to come back for the better part of fifteen years now,

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Speaker 9: and the debate has really been is Europe cheaper than

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Speaker 9: the US?

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Speaker 7: For a reason? And I think the answer to that

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Speaker 7: for a long time was.

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Speaker 6: Yes.

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Speaker 9: The thing that I've actually been focusing on more than

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Speaker 9: Europe is China. And if you look at the opportunities

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Speaker 9: in China and even just some of the larger ETFs

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Speaker 9: out of China, the Internet ETF and the large cap

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Speaker 9: ETF doing much much better than the SMP, and actually

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Speaker 9: the Internet ETF even outperforming the European ETF. So the

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Speaker 9: point here being that we've had this era where everybody

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Speaker 9: has focused so much on the US, and rightfully so.

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Speaker 9: We've had two full years of over twenty percent returns

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Speaker 9: in the SMP, led mostly by technology, communications, discretionary, all

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Speaker 9: the usual suspects that we know about. And now we're

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Speaker 9: getting to a point where we've got central banks moving

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Speaker 9: in some different directions. We've got steady fundamentals in the

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Speaker 9: US economically and on an earnings perspective. But now we

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Speaker 9: have other regions perking up, and China in particular, showing

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Speaker 9: commitment to really stimulating their economy until they get what

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Speaker 9: they want, which is to meet their growth numbers.

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Speaker 2: So let's talk about China a little bit more on

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Speaker 2: the data front. Overnight home prices not as bad as

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Speaker 2: some people might have thought signed a stabilization there. We

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Speaker 2: heard from a minor BHP billetan early this week they

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Speaker 2: talked about green shoots. Heard from a hotel group in

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Speaker 2: the last twenty four hours IHG who talked about maybe

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Speaker 2: China bottoming gout as well. Liz, with all of that

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Speaker 2: in mind, how do you think people should play the

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Speaker 2: China story when maybe they've tried to get in before

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Speaker 2: and been burnt several times?

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Speaker 9: Yeah, I mean, I think that's happened to people in

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Speaker 9: China and in Europe, so I understand the feeling, and

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Speaker 9: it's happened to me in Europe too.

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Speaker 7: I tried to get in a few years ago and

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Speaker 7: got burned.

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Speaker 9: It went nowhere, So I understand the bruises that I

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Speaker 9: think investors have taken. And make no mistake, China still

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Speaker 9: has progress to make. They still have problems over there,

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Speaker 9: and the stimulus that they've announced so far has not

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Speaker 9: been entirely successful stimulating what they need to which is

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Speaker 9: the consumer portion of their economy and to save the

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Speaker 9: real estate portion of their economy. So I still think

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Speaker 9: more needs to be done, but I do think we

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Speaker 9: will hear more from them as we start to get

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Speaker 9: news of perhaps stimulus that targets the consumer directly.

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Speaker 7: Or that targets the real estate sector directly.

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Speaker 9: I think that's where you see things really perk up

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Speaker 9: in a durable fashion. We've already seen some volatility in

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Speaker 9: the Chinese markets after the stimulus that was announced last fall.

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Speaker 9: We saw this big surge in a lot of those stocks,

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Speaker 9: and then kind of a fall off afterwards. I actually

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Speaker 9: believe China bottomed before that, So bottoming, as we know,

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Speaker 9: is a process. It's not just a moment in time,

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Speaker 9: and China had been going through what I believe to

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Speaker 9: be a bottoming process before that first round of stimulus

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Speaker 9: was announced. Now that first round of stimulus again was

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Speaker 9: not entirely effective. They had to announce some more, and

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Speaker 9: I still believe they'll have more to come. But I

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Speaker 9: think we're on the way to finding out that things

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Speaker 9: are getting a little better there, and if not, they

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Speaker 9: will get the support that they need from the government.

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Speaker 1: One of the reasons why a lot of people have

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Speaker 1: said that China is uninvestable is because the policy structure

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Speaker 1: is less clear there in terms of how much they

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Speaker 1: champion their businesses. And you add on top of that

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Speaker 1: a very deliberate effort by the United States to isolate

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Speaker 1: China and interrupt some of the supply chains. How do

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Speaker 1: you discount those types of just structural arguments against investing

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Speaker 1: in China right now.

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Speaker 9: Yeah, So, when we issued our twenty twenty five outlook,

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Speaker 9: this was in mid December, we had China listed as

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Speaker 9: a contrarian play for obvious reasons.

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Speaker 7: We knew that the new.

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Speaker 9: Administration would go after China and perhaps increase the tariffs

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Speaker 9: that were already in place.

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Speaker 7: So I want to be very clear.

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Speaker 9: This is not something where I'm saying we're investing in

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Speaker 9: China and we're bullish on China for a ten to

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Speaker 9: fifteen year period. This is something where if you're looking

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Speaker 9: at your investment portfolio and you are, much like many investors,

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Speaker 9: overweight US technology, overweight all of the stuff that got

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Speaker 9: us to this point, it's time to start.

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Speaker 7: Looking outside of those baskets.

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Speaker 9: And some of that might be still in the US,

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Speaker 9: in other sectors in the US that have not kept pace,

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Speaker 9: things like healthcare, financials, industrials, things that are showing good

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Speaker 9: earnings growth, even some of the communications names that are

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Speaker 9: not so much in the headlines as usual. But then

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Speaker 9: also looking outside the US because another contrarian viewpoint coming

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Speaker 9: into this year was that the US would actually underperform international,

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Speaker 9: So that includes things like China and if you're getting

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Speaker 9: it at a really nice discount, getting it pretty cheap

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Speaker 9: compared to US stocks, and things like Europe also getting

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Speaker 9: pretty cheap compared to US stocks. Valuations are very important

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Speaker 9: in an environment where yields have remained high and are

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Speaker 9: expected to stay high because of the sticky inflation for

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Speaker 9: the foreseeable future.

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Speaker 1: Liz, A lot of people were talking about this last year.

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Speaker 1: At the beginning of last year, the tech would underperform

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Speaker 1: and that everything else would catch up. It seems like

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Speaker 1: people are reviving that concept now because of some similar

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Speaker 1: and some different arguments. Why is it this year that

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Speaker 1: people are going to step away from tech giants that

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Speaker 1: have been hit or miss more generally, but still are

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Speaker 1: at the epicenter of a transition that a lot of

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Speaker 1: people seem to have faith in.

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Speaker 9: Well, first of all, you think about just the timeline

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Speaker 9: of events. Right, I mentioned before, we've had two full

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Speaker 9: years of above.

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Speaker 7: Twenty percent returns in the S and P.

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Speaker 9: If you just look at that over a historical context,

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Speaker 9: usually when you have that strong of performance two years

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Speaker 9: in a row.

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Speaker 7: The third year is still positive on average.

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Speaker 9: But not nearly as positive, so we would expect something

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Speaker 9: more like normal returns this year. Let's call that high

403
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Speaker 9: single digits, low double digits. So that's part of it, right,

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Speaker 9: It can't continue forever. The other part of it is

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Speaker 9: that a lot of what drove tech to this point

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Speaker 9: was the semiconductor play and the theme of AI coming

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Speaker 9: to life. We are still very much in the infancy

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Speaker 9: of that theme, but I think we are transitioning into

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Speaker 9: one of the next phases, and that next phase is

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Speaker 9: going to take us towards other types of companies in

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Speaker 9: the US. If we're looking at just technology in the US,

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Speaker 9: I'm actually more bullish on software and things like cybersecurity

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Speaker 9: than on semiconductors this year, because I do think that

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Speaker 9: we're making that transition. The other part of that transition

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Speaker 9: is that competition rises. So if we're looking at other

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Speaker 9: types of companies, and obviously we know about the news

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Speaker 9: that came out of China a few weeks ago on

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Speaker 9: deep Seek, if we're looking at other types of companies,

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Speaker 9: there's bound to be heightened competition around the globe. Other

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Speaker 9: companies other regions are going to get in on this game,

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Speaker 9: and we're going to have to watch for opportunities outside

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Speaker 9: of the ones that we've been focusing on up until

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Speaker 9: this point.

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Speaker 2: Certainly saying that to stop twenty twenty five, let's appreciate

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Speaker 2: your time, bless you on tell us that of Subfi

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Speaker 2: Monta seti off Delutsche Bank writing. While we continue to

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Speaker 2: think the next move is a cut rather than a hike,

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Speaker 2: recent events have raised the possibility that the Fed needs

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Speaker 2: to hike race in the second half of this year.

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Speaker 3: Matchohin just now for more. It's going to see you,

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Speaker 3: going to see you.

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Speaker 2: It's not your base case, but the chance isn't zero,

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Speaker 2: and the chance went up. So let's talk about why

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Speaker 2: and how high that bar is for that hike.

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Speaker 10: Yeah, I think, to be clear, I think that the

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Speaker 10: bar is high. I think the Fed, you know, the

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Speaker 10: next move is very much likely to be a cut.

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Speaker 10: I think to get there, you know, you needed three

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Speaker 10: things to happen. One, the labor market needs to become

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Speaker 10: a source of inflationary pressures. Again, the latest Batchel data

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Speaker 10: that we had on the labor markets sees the uneplane

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Speaker 10: rate going down, wage growth a little bit higher, payil

443
00:21:36,000 --> 00:21:37,879
Speaker 10: gains picking back up, and so the labor market is

444
00:21:37,880 --> 00:21:39,480
Speaker 10: not as much of a source of downside RISI as

445
00:21:39,480 --> 00:21:41,960
Speaker 10: it once was. You need to see inflationary pressures picking

446
00:21:42,000 --> 00:21:44,520
Speaker 10: up and accelerating. You know, the latest data there was

447
00:21:44,520 --> 00:21:46,320
Speaker 10: a little bit mixed. We saw the CPI report which

448
00:21:46,359 --> 00:21:48,400
Speaker 10: was much higher than anticipated, but that didn't feed throat

449
00:21:48,440 --> 00:21:50,600
Speaker 10: to the PCE data. But at the same time, we

450
00:21:50,680 --> 00:21:52,919
Speaker 10: have tariff threats out there that are more than we

451
00:21:52,920 --> 00:21:56,000
Speaker 10: were anticipating, and so the inflation threat is greater than

452
00:21:56,000 --> 00:21:59,159
Speaker 10: we were anticipating. The third thing is inflation expectations, and

453
00:21:59,240 --> 00:22:02,040
Speaker 10: the FED is always is highly focused on those, and

454
00:22:02,080 --> 00:22:04,359
Speaker 10: there you have seen some upward movement. The latest University

455
00:22:04,359 --> 00:22:06,720
Speaker 10: of Michigan data has moved higher, including at the short

456
00:22:06,800 --> 00:22:10,840
Speaker 10: end inflation expectations. Latest survey professional forecasters has moved.

457
00:22:10,640 --> 00:22:11,480
Speaker 5: A little bit higher.

458
00:22:11,640 --> 00:22:13,720
Speaker 10: So, just at the margin, I think that we've seen

459
00:22:13,920 --> 00:22:16,320
Speaker 10: the risk of a rate hike increase for the second

460
00:22:16,320 --> 00:22:16,800
Speaker 10: half of the year.

461
00:22:16,920 --> 00:22:19,040
Speaker 1: I wonder if, in the meantime, if we're not talking

462
00:22:19,040 --> 00:22:21,199
Speaker 1: about a hike, are we talking about a Federal Reserve

463
00:22:21,640 --> 00:22:25,520
Speaker 1: that has accepted inflation at about three percent or two

464
00:22:25,600 --> 00:22:28,120
Speaker 1: point eight percent, Given the fact that it's been forty

465
00:22:28,160 --> 00:22:32,159
Speaker 1: six months since inflation has been below that two percent

466
00:22:32,200 --> 00:22:33,280
Speaker 1: target the Fed has.

467
00:22:33,720 --> 00:22:35,760
Speaker 10: It's quite remarkable if you go back to their December

468
00:22:36,359 --> 00:22:38,440
Speaker 10: sep they don't expect inflation to get down to two

469
00:22:38,440 --> 00:22:42,120
Speaker 10: percent until twenty twenty seven. That is an extraordinarily long

470
00:22:42,119 --> 00:22:43,960
Speaker 10: period of time. But I think that they're telling you

471
00:22:44,000 --> 00:22:46,000
Speaker 10: as well, they're not accepting the trade offs between the

472
00:22:46,080 --> 00:22:48,720
Speaker 10: labor marketing and getting inflation down to two percent quicker. Right,

473
00:22:48,760 --> 00:22:50,480
Speaker 10: So they have a two and a half percent core

474
00:22:50,480 --> 00:22:53,119
Speaker 10: pc inflation forecast this year, just like us. We think

475
00:22:53,160 --> 00:22:55,199
Speaker 10: that they will hold steady with their policy rate this

476
00:22:55,280 --> 00:22:57,159
Speaker 10: year in order to help to bring inflation down to

477
00:22:57,240 --> 00:22:59,480
Speaker 10: target over time. But yeah, to a certain extent, they're

478
00:22:59,520 --> 00:23:02,120
Speaker 10: accepting of inflation that's called half of them percent that's

479
00:23:02,119 --> 00:23:05,040
Speaker 10: above their target, because they would not think that they

480
00:23:05,040 --> 00:23:07,280
Speaker 10: need we would want to trigger an unemployment rate that

481
00:23:07,359 --> 00:23:08,920
Speaker 10: rises by a few tents in order to get it

482
00:23:08,960 --> 00:23:09,480
Speaker 10: down quicker.

483
00:23:09,800 --> 00:23:12,399
Speaker 1: Is it enough for them to just remain on hold

484
00:23:12,560 --> 00:23:15,600
Speaker 1: to get inflation on that gradual path back to two

485
00:23:15,680 --> 00:23:17,960
Speaker 1: percent or do they have any control whatsoever over this

486
00:23:18,080 --> 00:23:20,080
Speaker 1: given that a lot of it has to do with

487
00:23:20,200 --> 00:23:23,000
Speaker 1: variables well outside their parameters.

488
00:23:23,080 --> 00:23:25,320
Speaker 10: Yeah, I think if it weren't for all the policy

489
00:23:25,720 --> 00:23:28,600
Speaker 10: risks out there about immigration and fiscal policy and tariffs,

490
00:23:28,960 --> 00:23:30,880
Speaker 10: which is obviously a lot of risks that are really

491
00:23:30,880 --> 00:23:33,399
Speaker 10: important for them, that yes, I think there was a

492
00:23:33,440 --> 00:23:36,560
Speaker 10: disinflationary trend in place. We were seeing rental inflation coming down,

493
00:23:36,920 --> 00:23:38,879
Speaker 10: and I would have confidence that we'd get within a

494
00:23:38,960 --> 00:23:41,920
Speaker 10: quarter percentage point of their target this year. But those

495
00:23:42,040 --> 00:23:45,920
Speaker 10: risks are meaningful that you know, they're certainly lifting inflation

496
00:23:45,960 --> 00:23:49,360
Speaker 10: we think this year, potentially next year, and I think

497
00:23:49,359 --> 00:23:51,760
Speaker 10: that will require them having to remain on hold for

498
00:23:51,760 --> 00:23:54,240
Speaker 10: a period of time here. I think for the minutes today,

499
00:23:54,240 --> 00:23:56,199
Speaker 10: it'll be an interesting question how they talk about how

500
00:23:56,240 --> 00:24:00,240
Speaker 10: restrictive policy is. At the January FMC meeting, chair House

501
00:24:00,240 --> 00:24:02,560
Speaker 10: said that they were meaningfully restrictive. I think you've heard

502
00:24:02,600 --> 00:24:05,119
Speaker 10: a lot of uncertainty from a number of other officials.

503
00:24:05,920 --> 00:24:09,000
Speaker 10: Even Vice John Williams was talking about they were only

504
00:24:09,040 --> 00:24:11,879
Speaker 10: modestly restrictive. A number officials think that they're near neutral

505
00:24:11,880 --> 00:24:13,520
Speaker 10: at this point in time, which we agree with. So

506
00:24:13,560 --> 00:24:14,800
Speaker 10: I think that's an area where there's just a lot

507
00:24:14,800 --> 00:24:16,200
Speaker 10: of disagreement on the committee.

508
00:24:15,880 --> 00:24:17,880
Speaker 6: At this point. What would it take to raise rates

509
00:24:17,920 --> 00:24:19,879
Speaker 6: You're talking about this uncertainty that the FED is going

510
00:24:19,880 --> 00:24:23,400
Speaker 6: to price and potentially stick your inflation from tariffs, immigration policy.

511
00:24:23,400 --> 00:24:25,200
Speaker 6: What would it take for the Fed to say, actually,

512
00:24:25,600 --> 00:24:26,520
Speaker 6: now's time for a hike.

513
00:24:26,680 --> 00:24:26,840
Speaker 8: Yeah.

514
00:24:26,880 --> 00:24:29,160
Speaker 10: I think you need two things and then the third wildcard.

515
00:24:29,600 --> 00:24:31,520
Speaker 10: The first thing is that labor market needs to retighten,

516
00:24:31,640 --> 00:24:33,000
Speaker 10: So I think you need the unemployment rate to be

517
00:24:33,000 --> 00:24:36,080
Speaker 10: falling below four percent, the quits rate rising, wage growth

518
00:24:36,080 --> 00:24:38,960
Speaker 10: three accelerating, so the labor market is not just there's

519
00:24:38,960 --> 00:24:40,879
Speaker 10: not downside risk, but it's actually a new source of

520
00:24:40,880 --> 00:24:44,879
Speaker 10: inflationary pressures. Two, inflation itself has to accelerate, so I

521
00:24:44,880 --> 00:24:46,960
Speaker 10: think core PC has to be going to three percent

522
00:24:47,440 --> 00:24:49,840
Speaker 10: or above. They've been pretty clear that if inflation is

523
00:24:49,880 --> 00:24:52,920
Speaker 10: just stalling out, they meet that with keeping policy on hold.

524
00:24:53,400 --> 00:24:55,520
Speaker 10: And then the third thing will a is be inflation expectations.

525
00:24:55,560 --> 00:24:57,360
Speaker 10: If those are rising at lowers the bar and those

526
00:24:57,359 --> 00:24:59,960
Speaker 10: two other things, and they could have to raise rates

527
00:25:00,040 --> 00:25:01,640
Speaker 10: of inflation expectations move higher.

528
00:25:01,680 --> 00:25:04,040
Speaker 2: The BNP Pountabat put out it out yesterday and said

529
00:25:04,040 --> 00:25:07,760
Speaker 2: this Federal Reserve was comfortably numb, comfortable doing nothing, and

530
00:25:07,800 --> 00:25:09,359
Speaker 2: I think you might agree with that. And what I

531
00:25:09,359 --> 00:25:11,320
Speaker 2: want to understand that as they're in this period of

532
00:25:11,359 --> 00:25:14,280
Speaker 2: doing nothing, how balanced out of the risks are they

533
00:25:14,320 --> 00:25:16,320
Speaker 2: balanced that the downside as they out to the upside,

534
00:25:16,400 --> 00:25:17,960
Speaker 2: is there a real risk that things could get worse

535
00:25:17,960 --> 00:25:20,560
Speaker 2: as they sit there and do nothing, waiting to see

536
00:25:20,560 --> 00:25:22,840
Speaker 2: the policy changes that may or may not come from

537
00:25:22,880 --> 00:25:23,520
Speaker 2: Washington d C.

538
00:25:23,920 --> 00:25:25,840
Speaker 10: Look, I think we have an economy that is entering

539
00:25:25,840 --> 00:25:27,119
Speaker 10: this period with a lot of momentum.

540
00:25:27,240 --> 00:25:28,360
Speaker 5: You know, growth last year.

541
00:25:28,400 --> 00:25:31,400
Speaker 10: The consumer growth last year was strong, consumer spending about

542
00:25:31,400 --> 00:25:34,080
Speaker 10: three percent four point two percent in Q four. The

543
00:25:34,200 --> 00:25:36,920
Speaker 10: labor market was accelerating in many ways. We've seen peril

544
00:25:36,920 --> 00:25:39,040
Speaker 10: gains on a three month moving average basis above two

545
00:25:39,080 --> 00:25:43,200
Speaker 10: hundred thousand. Leading indicators were supportive credit conditions, financial conditions,

546
00:25:43,480 --> 00:25:47,919
Speaker 10: optimism from businesses, CEO and other surveys hitting several year highs.

547
00:25:48,280 --> 00:25:51,800
Speaker 10: So the economy had meaningful forward looking momentum that is

548
00:25:51,800 --> 00:25:55,359
Speaker 10: being met with a lot of uncertainty. And I am

549
00:25:55,440 --> 00:25:57,240
Speaker 10: you know, I think that they should be somewhat concerned

550
00:25:57,640 --> 00:26:00,000
Speaker 10: that the kind of constant tariff's threats where we're here

551
00:26:00,160 --> 00:26:03,959
Speaker 10: from a fiscal spending perspective, can turn sentiment relatively quickly.

552
00:26:04,040 --> 00:26:06,760
Speaker 10: If they continue to persist, and if it's not counteracted

553
00:26:06,760 --> 00:26:11,760
Speaker 10: by other positive news on the economy, deregulation, fiscal policy,

554
00:26:12,040 --> 00:26:13,919
Speaker 10: tax cuts, and so I think the administration probably has

555
00:26:13,920 --> 00:26:14,920
Speaker 10: to balance that out a bit more.

556
00:26:14,960 --> 00:26:16,800
Speaker 2: How quickly do you think we could see some of

557
00:26:16,800 --> 00:26:19,440
Speaker 2: the job cuts in Washington show up in the economic data?

558
00:26:19,600 --> 00:26:20,240
Speaker 3: Is it too early?

559
00:26:20,680 --> 00:26:20,760
Speaker 2: No?

560
00:26:20,840 --> 00:26:21,120
Speaker 3: I think.

561
00:26:21,200 --> 00:26:22,920
Speaker 10: I mean, if you look at the weekly jobless claims

562
00:26:22,920 --> 00:26:24,760
Speaker 10: and you look at the DC area, it's already showing up.

563
00:26:24,840 --> 00:26:26,280
Speaker 10: It was showing up in the past two weeks, and

564
00:26:26,320 --> 00:26:30,560
Speaker 10: I've expected that accelerates. Many of these cuts look like

565
00:26:30,560 --> 00:26:32,760
Speaker 10: they might be coming after the survey week for the

566
00:26:32,760 --> 00:26:35,440
Speaker 10: February jobs report, so it might take until the March

567
00:26:35,480 --> 00:26:38,000
Speaker 10: job support to get greater evidence of that. And then

568
00:26:38,000 --> 00:26:40,520
Speaker 10: we have this whole batch that took the buyouts, which

569
00:26:40,560 --> 00:26:43,600
Speaker 10: that probably does not show up until the September October

570
00:26:43,680 --> 00:26:45,800
Speaker 10: data because they are kept on payrolls until that period.

571
00:26:45,880 --> 00:26:47,679
Speaker 6: Do you know what it could potentially average out to?

572
00:26:47,800 --> 00:26:50,840
Speaker 6: Because last year, when you look at federal workers added

573
00:26:50,880 --> 00:26:53,200
Speaker 6: to the NFP, it was about north of thirty five

574
00:26:53,240 --> 00:26:56,000
Speaker 6: thousand individuals a month. What kind of number could we

575
00:26:56,040 --> 00:26:57,480
Speaker 6: see every month going forward?

576
00:26:57,760 --> 00:27:00,680
Speaker 10: Look, they've had a target of about ten percent of

577
00:27:00,720 --> 00:27:02,800
Speaker 10: the workforce. You know, we think about having about two

578
00:27:02,840 --> 00:27:06,679
Speaker 10: point four million federal workers save that's two hundred thousand jobs.

579
00:27:07,480 --> 00:27:10,359
Speaker 10: So that is a meaningful hit to payroll gains if

580
00:27:10,520 --> 00:27:13,240
Speaker 10: and when it happens. The numbers are much smaller than

581
00:27:13,280 --> 00:27:15,240
Speaker 10: that that are being reported so far, and the numbers

582
00:27:15,240 --> 00:27:17,119
Speaker 10: that kind of took the BIOT maybe sixty or seventy

583
00:27:17,160 --> 00:27:20,040
Speaker 10: thousand individuals and that doesn't impact the data until later.

584
00:27:20,520 --> 00:27:23,560
Speaker 10: But look, it's it's a meaningful amount to payroll gains

585
00:27:23,840 --> 00:27:26,000
Speaker 10: when it happens, and if it is as big as

586
00:27:26,320 --> 00:27:28,679
Speaker 10: kind of being that's being focused on. I would just

587
00:27:29,000 --> 00:27:31,879
Speaker 10: also indicate in the near term, those bios could actually

588
00:27:31,880 --> 00:27:34,280
Speaker 10: lift perils a little bit. You know, those individuals could

589
00:27:34,320 --> 00:27:37,240
Speaker 10: get another job as they're currently on government. There's actually

590
00:27:37,240 --> 00:27:39,720
Speaker 10: a seasonality here where people would typically be retiring, but

591
00:27:39,760 --> 00:27:42,000
Speaker 10: they won't because they're kept on perils. So over the

592
00:27:42,080 --> 00:27:44,239
Speaker 10: next six, seven, eight months, you could actually have some

593
00:27:44,280 --> 00:27:46,000
Speaker 10: counteracting forces from a seasonal persons.

594
00:27:46,000 --> 00:27:48,320
Speaker 2: That's a great counterpoint to think about. Appreciate your time.

595
00:27:48,720 --> 00:27:51,879
Speaker 2: Thank you, amount Lestid of Deutsche Bang. This is the

596
00:27:51,920 --> 00:27:56,159
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597
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598
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600
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601
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602
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Speaker 8: Mm hmm