Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each
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Speaker 2: Bloomberg Terminal and the Bloomberg Business App. I want to
Speaker 2: bring in Muhammad Aloud of Queen's College, Cambridge. Mhammad joins us. Now, Muammed,
Speaker 2: you've had a few minutes to go over these numbers,
Speaker 2: your initial reaction, and then we can get to the much,
Speaker 2: much bigger picture going forward from here.
Speaker 1: So well, I agree generally that this is not as
Speaker 1: relevant as it normally is as an employment report. I
Speaker 1: do focus on zero point three percent monthly earnings growth.
Speaker 1: When people rush to predict lots of FED cuts, they
Speaker 1: forget the difference between what is necessary and what is
Speaker 1: necessary and sufficient weakness pronounced weakness in the economy is
Speaker 1: necessary for the sorts of cuts that are being priced in,
Speaker 1: but they're not sufficient. The FED needs some sort of
Speaker 1: air cover on inflation. And most forecasts of inflation, as
Speaker 1: Jeff said, are now going to the three to three
Speaker 1: and a half percent at the PCE core level, So
Speaker 1: this is quite a move. The point three monthly earning
Speaker 1: growth that we saw in today's report is not consistent
Speaker 1: with air cover on inflation. So this is a report
Speaker 1: that suggested the Fed wait and see. And my hope
Speaker 1: is that Jeff Powell this later this morning will do
Speaker 1: two things. He will walk back the notion that the
Speaker 1: terriff impact on inflation will be transitory and let's eliminate
Speaker 1: that word again from its vocabulary. And the second thing
Speaker 1: I hope he walks back is the ease with which
Speaker 1: he dismissed the soft data, because, as Stephanie said, expect
Speaker 1: the hard data to weaken in the months ahead.
Speaker 3: Mohammed, are we dismissing the strength of this labor market
Speaker 3: report at our own peril? The idea that corporate America
Speaker 3: has thrived despite what the US government has occasionally done,
Speaker 3: and that there is quite a bit of robustness and
Speaker 3: people who are employed and able to absorb a greater
Speaker 3: amount of price increases that might get passed along to them.
Speaker 1: I think, Lisa, what this reminds you is that the
Speaker 1: structure of the economy is fine. And this is important
Speaker 1: because while there is general agreement on a very bumpy
Speaker 1: few months, the significant disagreement on where this would lead to.
Speaker 1: Now those who think that the pain is worth the
Speaker 1: gain that's coming forward. It's just a matter of time,
Speaker 1: and the structure of the economy is strong enough to
Speaker 1: take us through it is very bumpy journey, and there
Speaker 1: are others that were we that the structure of the
Speaker 1: economy is not as strong as we think it is.
Speaker 1: This number here gives you some confidence that the economy
Speaker 1: is fine if we can just avoid repeated self inflicted wounds.
Speaker 2: If you are just joining us, welcome to the program.
Speaker 2: Moments ago, a big upside surprise on a payrolls report
Speaker 2: to twenty eight the estimate one forty. And we look
Speaker 2: at the charts in the immediate aftermath of that job's number,
Speaker 2: This market hardly blinked. You're just stilled down fifteen basis
Speaker 2: points at the front end of the curve three fifty two,
Speaker 2: and in the equity market at the moment, equally, futures
Speaker 2: are lowered by two point eight percent. Mohammad was looking
Speaker 2: forward to chairman power at eleven twenty five and Stephanie
Speaker 2: Rothy talked about that word transitory, the t word, just
Speaker 2: like I can today.
Speaker 4: I would imagine he won't use it again.
Speaker 5: I guess, of course, we'll see, but I think we'll
Speaker 5: have to be a little bit more cautious about this.
Speaker 5: And I think it's also important to think out the
Speaker 5: fact that transitory one does doesn't mean the same for
Speaker 5: every person, which is the problem.
Speaker 4: And the extent of the tariffs are so big that.
Speaker 5: It might take a really long time for this inflation
Speaker 5: shock to work its way through the economy.
Speaker 2: So they get hiding word, as you know, speaks to
Speaker 2: the same mistake we all remember, which was waiting too long.
Speaker 2: That's the problem with the tea word at the moment,
Speaker 2: waiting too long to do something about inflation this time around.
Speaker 2: I wander conditioned by their previous experience, do they wait
Speaker 2: too long to do something about growth and downside risk
Speaker 2: to growth, because that's the major risk for this market.
Speaker 5: Yeah, I think that's potentially the case, and they're going
Speaker 5: to have to wait and see. And by the way,
Speaker 5: they're going to be watching inflation expectations they've anchored, especially
Speaker 5: the last time in twenty eighteen, they said inflation expectations
Speaker 5: were the main anchor to determine whether they can look
Speaker 5: through it or whether they have to act more hawkishly
Speaker 5: as a result. And if inflation expectations start to pick up,
Speaker 5: they're going to be in a tough situation for a
Speaker 5: little while. They're gonna have to wait until things get
Speaker 5: really bad before they can act. And by the way,
Speaker 5: inflation expectations long term ones are largely driven by your
Speaker 5: most recent experience with inflation. Well, in twenty eighteen, we
Speaker 5: had no inflation in the past prior years.
Speaker 4: This time it's very different, and inflation.
Speaker 5: Expectations are likely to pick up a lot more given
Speaker 5: experience with inflation and the fact that these terrafs are
Speaker 5: just so.
Speaker 3: Large, which raises a question, Jeff and I would love
Speaker 3: your thoughts on this. How the bond market responds to
Speaker 3: either a duvish message from Fedschair j Powell or.
Speaker 4: A hawkish message.
Speaker 3: If he does put transitory back in the bottle, does
Speaker 3: that give you more confidence frankly to go into long
Speaker 3: term bonds because eventually they might have to cut rates
Speaker 3: a whole lot more.
Speaker 6: Yeah, you know, it's really interesting if you look at
Speaker 6: the last two days in what has transpired in terms
Speaker 6: of the bond market. So yesterday you saw a big
Speaker 6: rally in rates, but it was mostly led by the
Speaker 6: intermediate and short end. If you look at the thirty
Speaker 6: year portion of the curve, it lagged for a brief
Speaker 6: moment in time.
Speaker 7: It barely budged at all. Contrast that to today, and
Speaker 7: today what you're seeing is a very different picture from
Speaker 7: the bond market, and probably the most striking is that
Speaker 7: you're seeing not only longer term inflation expectations fall, but
Speaker 7: even some of the shorter term inflation measures. And so
Speaker 7: the steventy was.
Speaker 8: Just talking about it.
Speaker 7: It'll be challenging for the Fed because it depends on
Speaker 7: how you're measuring inflation expectations. So everybody's seeing the Michigan survey.
Speaker 7: The survey measures will likely be going higher in an
Speaker 7: environment where people are seeing higher prices due to terrace.
Speaker 7: You know, potentially that gets a little bit offset by
Speaker 7: what we're seeing in oil, but the impact in terms
Speaker 7: of survey responses maybe to higher inflations. Meanwhile, in the
Speaker 7: bond market, they're really looking at the financial conditions tightening
Speaker 7: that's going on, seeing the implications for consumption. Seventy percent
Speaker 7: of the economy is driven by that side, and that's
Speaker 7: quite negative and starting to price in today much more
Speaker 7: of a deflationary environment. So you're seeing the back end
Speaker 7: of the curve fall, you're seeing break Eban's fall, and
Speaker 7: you're even seeing short end inflation measures, which have really
Speaker 7: been this story about stagflation. When you measure the stagflation,
Speaker 7: it's short measures. Inflation in the near term is expected
Speaker 7: to go up. Now some of that stuff is starting
Speaker 7: to get rolled over. So it's possible here the bond
Speaker 7: market may try to lead the Fed to this message
Speaker 7: of transitory by basically cutting the interest rates, both in
Speaker 7: real and nominal terms.
Speaker 2: I can tell you this market moves not leading the
Speaker 2: President to change in his mind, just posting on through
Speaker 2: social right now saying that my policies will never change.
Speaker 2: If you're looking for someone to blink this morning, it's
Speaker 2: not the President at the moment.
Speaker 3: He says, to the many investors coming into the United
Speaker 3: States and investing massive amounts of money, my policies will
Speaker 3: never change.
Speaker 4: This is a great time to get.
Speaker 3: Rich richer an ever before, which raises this question of
Speaker 3: how much the bond market and the stock market matter
Speaker 3: to him at a time where there is real concern
Speaker 3: on Wall Street that isn't being reflected.
Speaker 2: In his commentary, Jeff mentioned crude crude is down by
Speaker 2: seven and a half percent on w Cipron is down
Speaker 2: by close to seven four percentage points, Muhammad, Quite clearly,
Speaker 2: this is a shock to the cycle. Quite clearly, we're
Speaker 2: repricing growth lower. From your perspective, how much of a
Speaker 2: shock to the system is it and how long does
Speaker 2: it take to internalize major regime changes like the one
Speaker 2: we might see.
Speaker 1: So John, we are repricing growth outlook in a significant manner.
Speaker 8: Interestingly, the beta for the rest of the.
Speaker 1: World is catching up. It started out being a US phenomenon.
Speaker 1: Now it's spreading. People are realizing that if the US
Speaker 1: growth rate falls by x, it may form then by
Speaker 1: more than x outside the US, and I think that
Speaker 1: is correct. Debta is greater than one outside the US.
Speaker 1: So it's a major, major revisiting of the growth outlook.
Speaker 1: How long it depends on what other countries decide. Right now,
Speaker 1: the president's message will encourage other countries to retaliate.
Speaker 8: You see, there's a choice out there between retaliate, the escalate,
Speaker 8: or just wait. And we all want.
Speaker 1: The escalation, but the escalation requires both sides to play
Speaker 1: along and for there to be an amount of trust
Speaker 1: that this is not a multi round where you're going
Speaker 1: to have to renegotiate every time. If you de escalate,
Speaker 1: now it will hold. That isn't there right now, So
Speaker 1: I suspect you will see more countries move towards what
Speaker 1: China did, which is a response that involves both tariffs
Speaker 1: and non tariffs. And where that comes in for the
Speaker 1: bond market is we're not going to start talking not
Speaker 1: just about interest rate risk, but credit risk in the
Speaker 1: bond market. Credit risk has been on until very recently,
Speaker 1: really well protected, but now we're starting to see it
Speaker 1: come under pressure, and credit investors no longer have the
Speaker 1: shield of all in the yield because.
Speaker 8: Both components now are in play.
Speaker 1: So the next thing to look in the bond market,
Speaker 1: John is going to be not just a government bonds,
Speaker 1: but look at credit and in particular high yield, because
Speaker 1: that is significantly vulnerable right now.
Speaker 3: Yeah, we saw yesterday the biggest spread widening going back
Speaker 3: to the heart of the pandemic in some of those
Speaker 3: riskier instruments. We caught up with you earlier this week, Muhammad,
Speaker 3: and you said that it's about a fifty to fifty
Speaker 3: chance in your estimation that we either have some sort
Speaker 3: of Reagan and Thatcher esque reordering of the global trade system,
Speaker 3: or you go back to the seventies, you go back
Speaker 3: to Carter on steroids. Do you still think it's fifty
Speaker 3: to fifty?
Speaker 8: I do. What has changed?
Speaker 1: If you remember I said my own perception is fifty
Speaker 1: to fifty. The market is at eighty twenty. The market
Speaker 1: is absolutely convinced this is a wagon Thatcher moment. I
Speaker 1: think that eighty has come down in the last couple
Speaker 1: of days and for good reasons. So yes, I'm still
Speaker 1: out of fifty to fifty because there is the upside
Speaker 1: of significant innovations in tech that are there that are
Speaker 1: multi year beneficial to productivity.
Speaker 8: So yes, I'm still fifty to fifty.
Speaker 1: The market is replicing now closer to fifty to fifty,
Speaker 1: which is I think that that's the correct thing for
Speaker 1: the markets to do.
Speaker 2: We can answer that, I think there's a lot of
Speaker 2: faith at a moment. Based on the conversations we've had
Speaker 2: so far this morning, Lisa, that many people still don't
Speaker 2: believe these tariffs even go on, and if they do,
Speaker 2: it won't last long. We've got these two key dates now.
Speaker 2: April fifth is tomorrow, so that's the baseline ten percent tariff.
Speaker 2: April ninth is when you hear the twenty on the EU,
Speaker 2: twenty four on Japan, thirty four on China, and the
Speaker 2: big numbers on everybody else. Everybody thinks that we can
Speaker 2: negotiate something in between. I think they're scared of the
Speaker 2: moment that we won't. But if you go through all
Speaker 2: the research on Wall Street right now, the base case
Speaker 2: is this won't happen, and I wonder where that fight
Speaker 2: comes from.
Speaker 3: At a certain point, there was this belief heading into
Speaker 3: this year that the Fed put was there and that
Speaker 3: the Trump put was there. To imagine that an administration
Speaker 3: would allow an economy to tank or a market to
Speaker 3: tank seems infeasible, and I think that's what a lot
Speaker 3: of people are looking at. If you put on top
Speaker 3: of that this question of where is the off ramp
Speaker 3: for the tit for tat retaliation? How do we start
Speaker 3: to estimate the damage from that, it becomes a fool's
Speaker 3: errand try to model out. And I think a lot
Speaker 3: of people are just saying, look, we're just going to
Speaker 3: assume that's not going to happen.
Speaker 2: Jeff, where does that fith come from in the market
Speaker 2: right now? That is so bad it just won't happen.
Speaker 6: I think as you're pointing out that fail or as
Speaker 6: Muhammad was pointing out, I think that faith is being
Speaker 6: is being challenged day by day, and I think that's
Speaker 6: why you're seeing the market reactions. Yeah, so you know,
Speaker 6: I think the only path forward is to observe what
Speaker 6: this administration and the policies that it chooses to implement are.
Speaker 6: It's very possible to forecast, but the eighty twenty to
Speaker 6: fifty to fifty I think is right, and you see it,
Speaker 6: you know, in these in these market reactions.
Speaker 4: Sephany, how do you model this?
Speaker 5: So we've definitely tried to model this a number of
Speaker 5: different ways base cases, We've taken the we've done the
Speaker 5: fools that are an approach, and tried to model from
Speaker 5: a global perspective, what happens if we play all of
Speaker 5: the tariffs, what happens if everybody else retaliates in kind,
Speaker 5: and then you get some offsetting factors.
Speaker 4: That looks the numbers are kind of comically bad.
Speaker 5: You're looking at something like a two to three percentage
Speaker 5: point headwind on GDP if this all really plays out again.
Speaker 5: We don't think it will play out to that extent.
Speaker 5: We think it will be pretty severe, which is why
Speaker 5: we took a growth growth estimates down for this year
Speaker 5: two point five.
Speaker 4: Percent and recession jobs.
Speaker 5: Up to forty percent, because this is these policies are
Speaker 5: bad and it's hard for the administration to walk away
Speaker 5: away from it unless something forces them to do so,
Speaker 5: and we're not there yet.
Speaker 2: Stephanie Raltha will three such a special thanks alongside Jeff
Speaker 2: Rosen of Blank Rog Muhammad, I just wanted to give
Speaker 2: you the final word before we go. What you'll be
Speaker 2: looking for going into the weekend and as we reset
Speaker 2: coming into next week. What's the number one thing at
Speaker 2: the top of your list.
Speaker 8: Number one is listening to the administration.
Speaker 1: I think there is a belief that you may have
Speaker 1: to break some things to remake the global order, but
Speaker 1: remaking the global order is the objective. And you have
Speaker 1: the very specific example of X where you had to
Speaker 1: break things to remake it at the back of people's mind.
Speaker 1: But also listen to business, and I've been on the
Speaker 1: phone NonStop with business leaders.
Speaker 8: And they are not waiting John.
Speaker 1: They see hit on the cost side, They're worried about
Speaker 1: demand destruction on the revenue side, and they're starting to
Speaker 1: make difficult decisions about the balance between profit margin, compression,
Speaker 1: higher prices and cutting costs.
Speaker 8: And these discussions, believe me, are really active.
Speaker 1: Business is not gonna wake because they're going to try
Speaker 1: to rebuild resilience because whatever people disagree on, I think
Speaker 1: most of us agree on this being a very uncertain environment.
Speaker 2: Mohammed, I appreciate your time, sir as always, Mohammed, are
Speaker 2: in there of Queen's College, Cambridge with this around the table,
Speaker 2: micro Jesus of Morgan standing Michael komorning, good morning. This
Speaker 2: is tough for a lot of people. It's so bad
Speaker 2: it just won't happen. Is that your position on things?
Speaker 9: Well, I think there's probably plenty of room for negotiation.
Speaker 9: We just don't know what the parameters are, right, So
Speaker 9: when we'd expect that lower terrariffs, potentially asset purchases, potentially
Speaker 9: more military spending in some of these situations might help,
Speaker 9: but really we're in this discovery process right now of
Speaker 9: what the sufficient conditions are. Unfortunately, and they don't think
Speaker 9: this will clarify anything for anyone. They're probably different conditions
Speaker 9: for different countries. So we shouldn't go into this, at
Speaker 9: least from my perspective, thinking that any of these negotiations
Speaker 9: will go quickly or any of this terraff relief will
Speaker 9: come about quickly, and so we do need to price
Speaker 9: in at least most of the negative consequences of these choices.
Speaker 3: What is the significance of the formula that this Trump
Speaker 3: administration use to come up with the teriff rights on
Speaker 3: each country?
Speaker 9: Yeah, I mean, I only know what they've told us,
Speaker 9: which is effectively that it's supposed to be a representation
Speaker 9: of the trade deficit and that in a theoretical world
Speaker 9: where if tariffs are equalized, that there would be no
Speaker 9: good trade deficit. That said, you know, I don't know
Speaker 9: if the information we're supposed to take from that is
Speaker 9: that their end goal is to just get good trade
Speaker 9: deficits down to zero, or if just that they apply
Speaker 9: the methodology and they're willing to talk about it again.
Speaker 9: I think we're in that discovery process over the next week.
Speaker 9: But either way, it doesn't seem like we're going to
Speaker 9: get relief quickly from any of this.
Speaker 3: I was speaking with an investment manager yesterday and I said,
Speaker 3: you know, what is your methodology of taking all of
Speaker 3: the data that we're getting it and ranking it, etc.
Speaker 3: And they said, I run a lot. I run frequently.
Speaker 3: What are on earth that you're telling your clients? Yeah.
Speaker 9: I think what we said coming into the year is
Speaker 9: that we did think that higher tariffs were going to
Speaker 9: be a fixture of the US policy posture. We thought
Speaker 9: it was going to be mostly aligned with China and
Speaker 9: kind of rest of world would be a lighter touch.
Speaker 9: That's still generally true, but the China tariffs happened faster
Speaker 9: than we thought. We did think they'd get to sixty percent,
Speaker 9: but we thought that was kind of an early twenty
Speaker 9: twenty six event, and rest of world would sort of
Speaker 9: be product by product in a lighter touch.
Speaker 4: So the new thing we have to bake.
Speaker 9: In here is rest of world tariffs are higher. There's
Speaker 9: at least that ten percent minimum, and then there's higher
Speaker 9: levels on top of that, maybe some of that and
Speaker 9: it gets negotiated back. But that means there is a
Speaker 9: weaker growth outlook than we would have anticipated. So now
Speaker 9: we have to price in weaker growth, higher recession probability,
Speaker 9: and unfortunately, we think most risk markets just aren't priced
Speaker 9: for that reality.
Speaker 8: Yet.
Speaker 9: Some of the stuff becomes positive catalysts once you've price
Speaker 9: that in, but we're not quite there yet.
Speaker 2: Do you entertain the theory that this was about getting
Speaker 2: the band stuff out the way, getting rights down, getting
Speaker 2: bond yachts below four percent down towards three before they
Speaker 2: come out with a massive tax plan.
Speaker 4: Do you entertain any of that?
Speaker 2: You know?
Speaker 9: I tend to look at this more as it was
Speaker 9: a sequencing of what was available to them politically and
Speaker 9: sort of legislatively going into this. Right So, because you
Speaker 9: could sort of make a theory that, hey, why don't
Speaker 9: we just do the tax cuts first and create space
Speaker 9: to operate and incur some of the pain around tariffs
Speaker 9: and the effort of kind of this grand remaking it,
Speaker 9: that's what people hopedful, right, But I think practically speaking,
Speaker 9: the ability to actually extend tax cuts and or do
Speaker 9: more wasn't going to be on offer early because you
Speaker 9: had to work through the budget reconciliation process really slim majority,
Speaker 9: So you work with the things that are executive controlled,
Speaker 9: which is terroriffts, because that's that's open to you, and
Speaker 9: the legislative stuff was just always going to take longer.
Speaker 9: So I don't know there's a lot of rhyme or
Speaker 9: reason to it other than the administration's doing what they
Speaker 9: can do with the tools they have available in service
Speaker 9: of their medium term goals, and this just happens to
Speaker 9: be the sequencing of it.
Speaker 2: The challenge at the moment for a lot of us
Speaker 2: is to kind of put markets to one side and
Speaker 2: think about where we'll be twelve months out. Yeah, in
Speaker 2: twelve months time, when you've got your hands around the
Speaker 2: more complete policy platform, not just trying but taxes as well,
Speaker 2: what's the mix going to look like?
Speaker 9: Well, listen, there's two ways to think about this, as like,
Speaker 9: are you better off twelve months from now than you
Speaker 9: would have been if these choices haven't been made. That's
Speaker 9: an open question, And now I think answering that question
Speaker 9: isn't necessarily relevant in the sense of the real question
Speaker 9: is can we price in the kind of negative effects
Speaker 9: of making these policy attempts? And once you've done that,
Speaker 9: can the policy choices you make to kind of ease
Speaker 9: that get it better. So if we were to kind
Speaker 9: of fully price in higher recession probabilities, weaker growth outlook,
Speaker 9: and then some of these negotiations on tariffs workout, and
Speaker 9: then maybe we get a bigger tax cut, then we
Speaker 9: anticipate because right now we think it's going to be
Speaker 9: mostly an extension of the TCJA.
Speaker 4: Those things can.
Speaker 9: Be positives on top of pricing in negative outcomes. So
Speaker 9: I think we to go through the praising and the
Speaker 9: negative outcomes first.
Speaker 3: Yesterday there were a lot of historic kinds of comments,
Speaker 3: a lot of catastrophic rhetoric see changed the loss of
Speaker 3: US exceptionalism. Did you take comfort in the fact that
Speaker 3: treasuries rallied and John mentioned this earlier that even though
Speaker 3: people were talking about boycotting US goods or boycotting the
Speaker 3: US dollar, you did see yields go lower as a
Speaker 3: have in trade.
Speaker 9: I mean, it was obviously incredibly large in liquid market,
Speaker 9: and it makes sense that in times of uncertainty, where
Speaker 9: growth expectations are weaker, that you'd be buying more treasuries.
Speaker 9: I think that to us was sort of never in question.
Speaker 9: I know there are sort of hypothetical longer term concerns.
Speaker 9: But that's why we've had this preference for fixed income
Speaker 9: over equities coming into the year and then throughout all
Speaker 9: of this and think that's still the way to be
Speaker 9: positioned right now.
Speaker 2: That's the silver lining for me, And I wasn't your
Speaker 2: base case, but I'd be extremely worried if we woke
Speaker 2: up one morning and you had all those people that
Speaker 2: were running around saying we're going to see an exodus
Speaker 2: of money from the United States. People are going to
Speaker 2: dump dollar denominated assets. They're dumping equities because that's associated
Speaker 2: with growth. I don't think it's a sign here that
Speaker 2: they're dumping dollar denominated assets because of the policy volatility,
Speaker 2: because that would show up in treasuries too, and that
Speaker 2: is what would really concern me. And that's the silver
Speaker 2: lining I think from the cross asset price section of
Speaker 2: the past twenty four hours or so, then at least.
Speaker 3: The United States is not acting like an emerging market
Speaker 3: in this respect, because that's exactly.
Speaker 4: The dollar weakness.
Speaker 2: But the dollar weakness accompanied with a bond market sell
Speaker 2: off would be getting my attention in a much more
Speaker 2: negative way, and I think it would get the federal
Speaker 2: reserves as well.
Speaker 3: We're a far way away from that, and the United
Speaker 3: States still is the dominant market, which goes to this
Speaker 3: idea of how do you get perspective at a time
Speaker 3: of a lot of superlatives.
Speaker 2: Let's hope we never see that. Let's be very clear
Speaker 2: about that. Michael, thank you. So it's good to see
Speaker 2: Michael sees are there of Morgan Stanley. This is the
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Speaker 7: Mm hmm