00:00:00 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this hour, which stocks a little change, turning into this morning's day to an atala bank earnings. Chris fher owners bad stratigas right in the following, with ninety nine percent of banks about the two hundred day average. The group kicks off the two Q earning season on solid technical footing. Chris joins us now for more. Chris, good morning, Good to see John. Is that where your focus is on this morning, because we've got CPI, we've got fed share wash. Is it earnings front and center? 00:00:58 Speaker 3: Yeah? 00:00:58 Speaker 1: I think this is going to strut take some of the attention away both from the Central Bank. 00:01:02 Speaker 3: And from Ran here. 00:01:04 Speaker 1: And you know, our kind of main point here is when you look at kind of the setup of the bank stocks into earning season, they are on very sound footing. Are they overbought in the near term, Yeah, they probably are. I don't particularly care because the underlying trends are so firm. 00:01:17 Speaker 3: These are still the relative leaders. After frankly, what. 00:01:19 Speaker 1: Was a pretty funky, you know, March April period, the banks have really since about mid may come back and reclaim the bar of leadership. 00:01:28 Speaker 3: And you see it not just domestically. 00:01:29 Speaker 1: It's true in Europe, it's true in Japan, even with JGB eals up. 00:01:32 Speaker 3: It's true in. 00:01:33 Speaker 1: Japan that these global banks continue to act really, really well. So I think it's difficult to get kind of two worked up about financial conditions here when financial stocks are still in pretty good sha. 00:01:43 Speaker 2: Well, let's talk about the US banks and it kind of exposure you want right now. So let's say on the fast side you've got a pure plan capital markets, and on this side is a pure play on main Street. The closer you are to this side as a general rule is some So far this year, the best you've done in terms of more can Stanley golment sacks, those stocks have been flung who it's the sweet spot now. 00:02:01 Speaker 1: So that's now generally been true for about two years. You look at like when Morgan Stanley and Goldman broke out, it was probably back in late twenty four early twenty five, So they've really have carried the flag of leadership to the entire time, I think, which maybe a little unappreciated though, particularly when you go down the cap scale. There are so many regional and small banks that are acting great here, that are in good long term up trends that I've just finally broken out to new multi year highs. 00:02:22 Speaker 3: So it's more than. 00:02:25 Speaker 1: Just the capital market stocks, which clearly there's been a story there with the IPO boom, but it's when you start to migrate down the cap scale you do get some exposure and some very good charts in these small and MidCap banks. 00:02:35 Speaker 4: Just to build on what John's talking about, it's almost main sweet versus Wall Street. You've got Wellsburg one side of the extreme, the Goldman, Sachs and Morgan Stanley on this side of the extreme. And it seems like we've seen the fees that potentially are coming from some of these IPOs some of these issuances. Is it going to broaden out where we start to see true robust borrowing and lending from consumers and the broader economy to the. 00:02:57 Speaker 3: Degree to it extends to consumers. I'm on shore. 00:02:59 Speaker 1: I would say this when you look at the credit landscape and put aside the private credit names for a minute. We can talk about that, but public credit conditions. 00:03:05 Speaker 3: Are still extremely benign here. 00:03:07 Speaker 1: I mean double B spreads yesterday made new cycle types. That's true here, It's true in Europe as well. So I think again, with bank stocks generally still went up, trends across the world, credit conditions pretty benign. I think it's premature to get two worked up or two barsure. 00:03:23 Speaker 3: Listen, I recognize where we are. 00:03:24 Speaker 1: Seasonally, you can get a correction here for any reason into August into September. 00:03:28 Speaker 3: We've seen that historically. 00:03:30 Speaker 1: But I think the underpinnings of this market are still in decent condition. 00:03:34 Speaker 4: One big anxiety right now markets is how long can this last? This incredible issue ince boom, this incredible financing condition for anything related to AI. And we've gotten the sense that maybe in the margins are starting to come back a little bit do you expect to get a sense of that the sort of forward pipeline, or just whether it's starting to close. 00:03:52 Speaker 1: So, Lisa, our kind of big view this year is that there is some interest rate out there where bonds simply become more competitive to stocks. And I just don't think we have found that interest rate yet. So to answer your question, when does kind. 00:04:06 Speaker 3: Of the. 00:04:07 Speaker 1: Capital markets boom end, I think it's when we find a bond yield that is meaningfully higher than where yields are today. We learned a couple weeks ago, I think the highs were four sixty seven on tens. 00:04:17 Speaker 3: That's not the level, it's some level meaningfully higher. 00:04:19 Speaker 1: People forget now, go back to nineteen ninety nine when you're in that Nasdaq melt up. You know, bond yields that year went from four to seven in the US. So it typically takes a yield so much higher than the consensus believes to truly be competitive. So I think we're in this environment where money is just sloshing it around from group to group to group, but it's very reluctant to leave the asset class of that quation it's going for seven percent, No, I'm just saying that it takes a yield much higher than what the consensus believes is right in front of them. I don't think four sixty one this morning is that yield that ends this kind of seventeen yearble market that we've been in. 00:04:56 Speaker 5: Is July twenty ninth the first rate hike, I think not. 00:05:01 Speaker 1: I don't think we get a rate hike in the calendar. You're twenty twenty six. I'll give you three things to think about. Number one, I think is the one we all know. Look at forward inflation expectations, they're relatively anchored by any metric, whether. 00:05:15 Speaker 3: Five year, five year forward or even just five year forwards. 00:05:17 Speaker 2: Is that because the monk is price for hikes. 00:05:21 Speaker 3: Well played? Listen. 00:05:25 Speaker 1: I think the shift and narrative this year has been so dramatic we got to get back to center here a little bit. 00:05:33 Speaker 3: Let's think about some of the data. 00:05:35 Speaker 1: Number one PMI right now is fifty three and a half. 00:05:38 Speaker 3: FED. 00:05:38 Speaker 1: Doesn't hike from there. Just look historically, that's not where your majority. 00:05:42 Speaker 3: Of hikes come from. 00:05:43 Speaker 1: The three month average on payrolls right now is about one hundred and twenty five K. 00:05:47 Speaker 3: If you look at a distribution of FED action. 00:05:49 Speaker 1: When the three month average of payrolls is in that one hundred and one hundred and fifty range, the likelihood of a hike any point over the next six months is less than twenty percent. So, whether it's the payroll data, whether the PMI data, I think the likelihood that we get this FED in particular moving to hikes in twenty six is low. Reserve the right to change the opinions, so the facts on the ground change as always, but that's kind of the job of what we do. 00:06:16 Speaker 3: I'd be betting no hike. 00:06:17 Speaker 5: Here, even though Governor Waller yesterday made it very clear he's very concerned about inflation and also talked about he doesn't want to repeat the mistakes of the past. 00:06:26 Speaker 1: Walach not the chair, and I think we all need to come to this realization. The chair is the chair. Let's get back to that mentality. The chair is the chair. I think, as we've seen with these task courses, we're going to get less and less communication from regional FED presidents Fed governors. So I'm more inclined to kind of discount what Waller said yesterday. I think that at the end of the day, the likelihood this fit goes in twenty six is still low. That's how we're positioned, That's how we're thinking about that. 00:06:54 Speaker 2: It's interesting you don't think the censor of power of the feder hisself has shifted somewhat, because I've witnessed the committee vote down if a chat before, and in that case it was the Bank of being the governor of a Q eight coming down of the financial crisis. 00:07:05 Speaker 3: He wanted more. 00:07:05 Speaker 2: The committee vouded against him a couple of times. I believe if my memory says me, well, the situation of the FED, you don't think it's shifted, Just give us the why. 00:07:13 Speaker 1: I figure I had a minimum these task forces over the next six months due buy the new worst FED time to kind of you get an understanding of the new lay of the land. I also think the data is just not there at the end of the day. If this is a data sensitive FED, the data's not there, whether it's payrolls, whether it's manufacturing. I also think when you look at you know, ten year yields, are they escape velocity here? 00:07:37 Speaker 3: I would hardly say that. I mean twos. You can make a. 00:07:40 Speaker 1: Case, hey twos, are you know four to twenty five this morning? There are fifty BIPs above FED funds. That's probably the one signal that I would say maybe pushes back in my view here a little bit. I wouldn't say it's as extreme as what we saw on late twenty one or early twenty two. I think by the time the Fed got around to hiking in early twenty two, the to year yield was something like two hundred BIPs above where FED funds were, So we're not yet a category, but wash the two year yield here, that would probably be the one thing that would struct to share my mind. 00:08:04 Speaker 3: Stay with us. 00:08:05 Speaker 2: More Bloomberg surveillance coming up after this under Savannahs this morning, the case for hiking rates. 00:08:20 Speaker 6: Can we get another hot reading on core inflation this week, then the FMC will need to consider tightening monetary policy in the near term. As always, we need to avoid making the mistake of fighting the last war and reacting too soon to tighten inflation. 00:08:38 Speaker 2: So here's the latest this morning, traders boosting beds. The Federal Reserve will raise rates later this month. Investors are waiting fresh inflation data and FED check. Kevin WASH's testimony on Capitol Hill a little bit later this morning. The former New York FED President Bill Dudley joined us Now for more. Bill, what was your reaction to that Welcome to the show, buddy, What was the reaction to that speech yesterday? And what is the likelihood that this month is indeed life? 00:09:02 Speaker 7: Well? 00:09:02 Speaker 8: I think it is live because inflation has been above the Fed's target for over five years, and the core inflation has stayed quite sticky over the last few months. While are basically is providing the guidance to the market about how the FED is likely to react if the inflation news as bad that Kevin Warsh has been unwilling to provide. This is one of the problems that Kevin Watsh I think has If he continues to be as silent as he has been about how the FED is likely to react, his voice is just going to be replaced by other people that are going to provide more insight into terms of how the Fed is likely to react. I think there's a strong case for tightening Mantray policy. I don't see much evidence that Mantray policy is actually restrictive. 00:09:41 Speaker 7: Right now. 00:09:42 Speaker 8: Financial conditions are extremely accommodative, and that's providing quite a strong impulse to the economy. And then you have the AI investment spending boom, which is likely to continue for a while longer. Both those things, to me argue for the FED to raise race. The FED isn't there yet. I don't think Kevin warsh thereat if you look at what he said in his public remarks, pretty optimistic about AI, you know, helping you on proctivity holding down inflation. But Waller, you know, is put a marker down. And I think there's a lot of other people in the fifth that feel the same way. 00:10:16 Speaker 2: Well, do you think that's where we can find some common ground? There are some people that do think we are slightly restrictive. Many on the FMC do not share that view. But can we find consensus around the following idea that we are sufficiently restrictive to get inflation back to talk? Is that where we can find some consensus on the committee. 00:10:35 Speaker 8: I don't think there's much evidence as that we've been in this sposedly restricted setup for several years now, and inflation hasn't come down in the economy and the unemployment rate hasn't gone up. So it seems to me that the evidence that matre policy is exerting restraint is really quite weak in the current venue, but. 00:10:50 Speaker 4: We've been just getting on bank earnings, and frankly, it seems like all cylinders are firing as quickly as they possibly can. Record after record after rector in capital markets as well as means street activity that seems to be reaccelerating by not hiking interest rates, do you think that this FED is allowing some sort of capital markets bubble effor vessels, whatever you want to call it, to build. 00:11:13 Speaker 7: Well way much? 00:11:14 Speaker 8: Assie Martin used to say that the Fed's jobs that take away the punch bowl when the party just starts getting good. 00:11:19 Speaker 7: And I would say, the party is getting really good right now. 00:11:22 Speaker 8: So this is, you know, the flip side of financial conditions being very accommodative, and so I think that argues for the FED raising rate raising rates a little bit. You know, the CPI will get a good headline CPI this month, but that's not going to have as much weight now that the war in Iran has started back up and energy prices. 00:11:41 Speaker 7: Are having headed back up. 00:11:43 Speaker 8: So it's really what's happening to inflation beyond energy prices that's really going to matter. 00:11:49 Speaker 7: And I think that's what Waller flagged this past week. 00:11:52 Speaker 4: There's a question about the idea of outsourcing some of the commentary to other FED officials on the part of Kevin Warsh with Chris wall are really sucking up the oxygen in the room. Do you think that this is actually a desirable outcome or do you expect Governor Fred, President Fred Chair Worsh to clip the wings say of a Chris Waller. 00:12:14 Speaker 8: I don't think that the FED Chair has a lot of power to limit the ability of people to talk about their outlook for monitary policy. And that's what SET officials do. That's their jobs as a conduct monetary policy. So I think the problem that Kevin Warsh might have is that as people like Kevin, people like Chris Waller speak up and Worsh does not provide similar kind of guidance about what is monetary policy reaction function is, it basically makes him less important. It makes people like Chris Waller more important in terms of guiding markets. 00:12:45 Speaker 5: So, Bill, what does he say today his first testimony as a FED chair before Congress on the heels of not just what Governor Waller said, but also CPI does he just stick to the script of his task force? And I'm not going to provide guidance. 00:12:57 Speaker 7: I think it's going to be more of the same. 00:13:00 Speaker 8: I think he's not going to provide much guidance about where he's going forward. I think where he's done himself a good job, done him some good service, is basically underscoring the fact that he's committed to the independence of the FED. So compared to where he was when he was testifying before the Senate Banking Committee for hist confirmation, he's gotten a lot more distance from President Trump, and I think he's really reinforced the idea that she's not going to change the fedes commitment to price stability bill. 00:13:26 Speaker 5: Picking up your point about financial conditions, they're easy in some sectors, but do you expect Kevin mooreh to double down that they're restrictive when it comes to the housing market. 00:13:35 Speaker 8: Well, I think the housing sector is the weakest part of the economy. But the question is why is housing week Is it weak because interest rates are too high, or is it weak because we're not having any more immigration into the United States and so the growth rate of the household formation has collapsed, and so with that, the demand for housing is much weaker than it was in the past when you're creating two million jobs a year, that created a lot of demand. For how you're not creating much in a way of job creation, that housing demand is going to be a lot weaker. And so I think I don't think the housing sector is weak so much because rates are too high. I think it's weak because we're not seeing a lot of growth in the labor force. 00:14:13 Speaker 2: Stay with us multile inpex dividance coming up off to this, Tiffany Wolding and Pimcott Jonas Snappla say not more of that, we'd talk about the data. What's your reaction to CPI droping just mind as a god? 00:14:35 Speaker 9: Yeah, Well, I thought you guys laid out a very key list of questions there that that Chairman Warsh and the FOMC Committee will have to will have to answer over over the coming months and quarters. You know, I think in addition to those questions that you laid out, you know, one of the key ones has been this year, what is really driving inflation? Is it a you know, kind of a sequence of supply shocks and one time price level adjustments or are we genuinely seeing some resilient demand that is lifting inflation? And I lay out that question, because you know, it's really key to how monetary policy makers should react to what we're seeing. If it is indeed just a series of supply shocks, you know, then they can afford to be patient. But if it's not, and it's it's underlying demand, you know, then that's when you really need to offset that with higher interest rates. And I think you know, there's there's certainly evidence that supply related factors are are contributing here, but there's some ambiguousness as well. And I think Waller sort of laid out the case yesterday to basically say, the longer that we get you know, a continued sequence of elevated inflation prints, you know, the more the case builds that this is really demand, that's that's that's keeping inflation elevated as well, you know. So I think this this data today will be a sigh of relief for many f o MC members, as you guys suggested. It won't close the door to interest rate hikes in general, but it basically is now and not in the direction that you know, Yes, we did get some one off teriff adjustments. Certainly energy prices are not back to the war related levels yet, uh And we're getting this sort of AI related UH price increases in tech components and stuff like that. So, you know, I think this print does suggest that, you know, there's there's reason to believe that that cools down in the in the second half of the year, you know, But clearly the onus is on the data. It needs to cool down for them to hold, you know, and they you know, I think Waller again really laid out the case that we could need some modest adjustments higher you know, if inflation continues to rise. 00:16:37 Speaker 2: It gives them the time, if they want it, the much needed time to have a longer conversation through the summer Tyfinanitely, it takes me to this quote from Kevin Walsh the FED Share prepared testimony, and he says this, the members of our committee have no tolerance for persistently anovated inflation, and we share a resolute commitment to restoring price stability. So Tefanie, we have seen persistently above target inflation and they have tolerates it it four or five years. When he says we share a resolute commitments restoring price stability, what's your best guess as to what he means and what they intend to do about it. 00:17:12 Speaker 9: Yeah, well, I mean I think he's clearly you know, saying that. You know, he wants to maintain a Federal Reserve that the markets view as credible, you know, because ultimately, in the longer run, if you have price stability, you know, that's good for the economy. He wants to manage inflation expectations. He wants to make sure that they're anchored, because ultimately that that keeps the that that results in an easier job for the Federal Reserve if inflation expectations are anchored, you know, in order to h to get that price stability, you know. So he is clearly saying the right things here in terms of keeping those inflation expectations anchored. Yeah, but at some point, if inflation does turn out to be more of a demand driven phenomenon above target inflation, if you have you know, several more years of that, know that, again, the risk is that you have inflation expectations that are starting to drift higher and the Fed does have to react, you know, I think they are, and I think Chairman Warsh is basically saying we're prepared to act if we need to, you know, but as of right now, at least with today's print. It does buy them a little bit more time to see a little bit more data and to maybe so clear up some of that ambiguity that we're seeing in terms of demand or supply related factors driving inflation. 00:18:26 Speaker 4: Tiffany, how long can job owning work without action? In other words, how long can they signal that they are willing to act without acting with inflation squarely above that two percent target? 00:18:37 Speaker 8: Yeah? 00:18:38 Speaker 9: Well, I mean I certainly think that you know, at some point, if the data is not and if inflation is not going in their direction, you know, absolutely they will will need to act. But but as of right now, at least you know, if if you have a sequence of inflation prints that are you know, that are are are giving you more evidence than inflation is headed back to target, you know, then I think again that kind of buys you a little bit more time. I mean, we have had just an unfortunate set of you know, sort of events with the increase in energy prices, of course, terror related inflation, you know, inflation that was coming on the back of the pandemic, you know, which was both supply and demand related factors. You know, all of that has just kept inflation above target. We think the Federal Reserve has done a very good job, you know, at certainly at bringing it back down, you know, and of course as we look forward, we expect them to continue to do that and work to moderate inflation. 00:19:36 Speaker 2: This is the Bloomberg Survendments podcast, bringing you the best in markets, economics, an gio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.