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Speaker 1: Bloomberg Audio Studios. Podcasts.

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Speaker 2: Radio. News.

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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. 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 6 to 9 a.m. 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 with stock stalling following their best day in more than six weeks. Geoff Few of BNY joins us now for more. Geoff, good morning.

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Speaker 3: Morning.

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Speaker 1: We've got two different dimensions to this equity market story. We've got the AI trade one. We've got the energy piece of the story two. Can we start with the latter? We'll turn to the former later. energy. How much two-way risk is there going into the diplomatic effort this week?

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Speaker 2: So, I think the mood music is, let's just say, positive risk heading to the downside. If there can be some conversations on the sidelines, I think markets welcome that. You mentioned earlier there's some discipline emerging amongst central banks and hopefully governments. I think that's the missing piece. And then let's not forget fiscal impulse and the contribution to demand.

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Speaker 3: As well.

00:01:17
Speaker 2: So, if we can, especially for Europe, if we can have, let's say, Brent at about 100, that will do the ECB a lot of good. So, I think there are more than two parties involved here. And often, Wanda, you bring in China into the equation here. Can you imagine if China was growing very strongly right now with the high energy demand, where would global oil prices be? So, I think that's one area where soft Chinese demand is sort of helping the global economy in this respect, but even domestic prices moving up as well. So, I think we need a conversation there too.

00:01:43
Speaker 1: It could have been a whole lot worse without the Chinese on the growth side, but also on the purchasing side for oil as well. That's been a major feature. Absent up until recently, crude prices could have been way, way higher than they were a few months ago. Absolutely.

00:01:57
Speaker 4: It was just softer buying in terms of the imports that China was willing to go to the global market for. And that's really put a lid on some of these prices. You mentioned the ECB. How difficult is the rest of the year going to be for them? Because Philip Laines is saying that the geopolitical outlook is making it incredibly tougher for them to fight inflation.

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Speaker 2: It really is tough, but I think the market is all over Europe, not just the ECB. I'm looking at pricing in Sweden, for example, where they're deciding this week as well. It's just so aggressive in terms of rates, whereas inflation expectations are... are much more manageable. But Lagarde said rates are not set basically based on energy prices. Markets are moving in that direction right now. So, if energy prices come down, then maybe rate pricing has to come down as well. So, you can't have it both ways. But I do think there is some scope for some positive surprises.

00:02:44
Speaker 1: Well, Geoff, let's get into the scope for positive surprises. Let's take the yield curve right now, Tuesday out to 30s. The two-year at 472 is still comfortably above the policy rate at the moment, Jeff. Do you see some scope for disappointment here?

00:02:56
Speaker 2: So, I think overall, when it comes to policy expectations, you need to anchor inflation expectations. At the end of the day, yes, the Fed has a dual mandate, whereas the ECB is a bit more dogmatic in terms of sticking to inflation. But as you said earlier, that discipline, I think when markets realize there is discipline coming through from central banks, then where the central banks lead is The rest will follow, especially when you get unanimous decisions, as we've been seeing on both sides of the Atlantic right now. I think that's really, really essential. And then you communicate accordingly. Everyone, I think, is going on a meeting-by-meeting basis. And markets need to get into that discipline right now. So, that's why I said earlier. don't price in, let's say, three hikes, four hikes over the next six months or so. That is far too aggressive. Get the next meeting right first. If that discipline comes through, then I think we can create a, yes, high-risk premium, but a better risk appetite and then let equities do their own thing.

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Speaker 1: Before we get to the equity story, tactically, is there a compelling argument to go out the curve in treasuries?

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Speaker 2: So, in treasuries right now, if I look at our flow data, there's still a big divergence between what Local clients are doing, U.S. clients are doing versus international clients are doing. The latter group may be still worried slightly about, you know, where the dollar is or just adding to their hedges because the dollar hedges have actually been quite light.

00:04:11
Speaker 3: U.S.

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Speaker 2: Exceptionalism, dollar exceptionalism, that still has been strong. But in the U.S., as long as break-evens are where they are, real rates are very firm, I think that's happy days, you know, for the pension funds and the LDI managers.

00:04:21
Speaker 1: Is that holding them back from engaging with equities? Yes.

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Speaker 2: I don't think so. It's not a binary situation right now. I think in equities, of course, there's always that concentration risk we talk about. They want to see earnings deliver. They want to see where AI is headed and the like. And also, you need to see broadening out of growth within the economy as well. So, I think the burden of proof is different in between government bonds in general and equities. I think the missing link right now, when we go back to that word discipline, where's fiscal discipline going to come in?

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Speaker 1: The fiscal discipline is not coming any time soon. I don't see it in Washington. Do you see it in Europe? Well, this is where Mr.

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Speaker 2: Burnham, who is meeting the president today, he's and Mr. Healy, of course, a few headlines I'm coming through as well. But it's interesting. A lot of clients actually say you may question the UK's plan, but the UK has had a plan. increased fiscal headroom and the government has been sticking to that right so it's about having a plan first and then sticking to it and then we judge execution on its merits and the UK is executing right now at least you know that is the narrative are.

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Speaker 1: They doing it in a growth positive way or a growth destructive way.

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Speaker 2: So the push is so that's where execution in a growth positive way I think that's the idea but It's always a chicken and egg story right now. I think where people are looking for in terms of the budget is, yes, if tax is going to rise to increase headroom again, what will be the offset in terms of growth positive stories? Is it going to be planning reform? Is it going to be non-fiscal aspects? I think that's where governments need to be a bit more imaginative. I know it's a lot to ask.

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Speaker 1: Can we cross the channel? Because the big headline that crossed the Bloomberg terminal the last week or so was the spread, France over Germany, blowing out to 100 basis points. Speaking of discipline, we've talked about a lack of discipline in the French government for a long, long time when it comes to the deficit. Are they finally starting to pay the price for the lack of discipline?

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Speaker 2: Well, again, if you look at the flows, 2024, when we had that short-term merry-go-round of prime ministers... I think that was the point where just looking at positioning, French debt OATs, they repriced, and there's never been a recovery since. So I think that spread now, for the time being, at least until the presidential election, is going to stay in place. So that structural imbalance in terms of where revenue versus spending, that will be in place as well. But also, if you look at what's happened to bunds over the last 24, 48 hours or so, Politics doesn't seem to be playing too much of an impact as well. So that's where if the numbers make sense, irrespective of what's going on in government, then markets will.

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Speaker 4: Reward you as well.

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Speaker 2: So again, it's about autopiloting, I guess.

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Speaker 4: Is it possible, though, for any economy in Europe, any of these countries to actually have fiscal discipline when they're dealing with this energy crisis?

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Speaker 2: You need fiscal rules, I think. So, Sweden, I think, is always a good example. You know, they set fiscal rules a long time ago. They've been sticking to that. Switzerland is a different case, of course. But if you go to some smaller countries and, of course, being the Eurozone is part of the issue, right, where you lose your monetary policy offsets, But if there is going to be spending rules with spending offsets, then, you know, again, that's why people are saying the UK, again, you might not like the budget in terms of the split. But if they stick to the plan and repeated chance there's have been sticking to the plan, then at least that's something to cling on to, but only cling on to.

00:07:36
Speaker 1: Stay with us. More Bloomberg surveillance coming up after this. So here's the latest this morning.

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Speaker 2: U.S.

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Speaker 1: And Chinese officials aiming for balance in trade talks between President Trump and Xi Jinping this coming Thursday. The former senior White House trade advisor, Kellyanne Shaw, writing the upcoming Trump-Xi summit is all about maintaining communication and stability. The stakes are increasingly high. Kellyanne joins us now for more. Kellyanne, good morning. Good to see you.

00:08:08
Speaker 5: Good morning.

00:08:08
Speaker 1: Thanks for dropping by in the studio. We went through the schedule for the president today. You've helped prep the president. Can you just bring up that graphic again of all the events for the president taking place later today? How difficult is it to brief the sitting president with events like this lined up?

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Speaker 5: Well, it certainly requires a lot of caffeine. It's hard to keep up with him and his schedule. I mean, look, the president is like the Energizer bunny when it comes to some of these international meetings, these multilateral forums. He likes to get as much bang for his buck as he can in terms of meeting with various leaders, attending different meetings. You really just have to grab him right before, give him the top level two or three points, and send him off.

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Speaker 4: So the big meeting is going to be this week between Xi Jinping and the president. How would you have prepped him for that? What would be your main talking points that you would want to leave with him before he goes into that?

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Speaker 5: Well, look, I think the stakes are very high for this meeting, but they're also simultaneously low, meaning this is really the second act of the Beijing meeting. So the big deliverable here is that $ 30 for $ 30, $ 30 billion in tariff cuts each way, checking in on compliance with some of these agricultural purchases and other purchasing commitments, and then seeing how the Busan deal, which is really the trade deal, is tracking. So what you want to tell the president going into that meeting is like, sir, here's where we're at on all of these things. Here's where maybe a conversation with Xi Jinping would help get us over the line. And here are some things that you may want to discuss with him on a more theoretical level, like AI, for example, the direction of travel for both countries.

00:09:36
Speaker 4: When it comes to the actual trade deal, it ends November 10th. How do you see them doing? of communicating, socializing the timeline of this? Because China and the United States have a very wide gap in terms of how long they want to extend that deal.

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Speaker 3: Yeah.

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Speaker 5: And my sense here is both the United States and the Chinese ultimately want to see an extension of Busan. There is common ground that this is the new detente. This is the new normal. It's about is it in the U.S. interest or the Chinese interest to have a six-month extension or a three-year extension. And so I think this is going to come down to the wire. Again, both sides want this, but both sides think the other side wants it more. So this will be a last minute decision. My base case is we won't see that announcement until November.

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Speaker 4: Knowing this president and knowing what the relationship is right now, do you see a world in which he allows Chinese EVs into the United States?

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Speaker 5: I think it's going to be really hard. Look, I think the president is very attracted to foreign countries investing in the United States, creating US jobs, irrespective of the sector. But there are a number of national security concerns. We have these ICTS rules. We have CFIUS and other types of investment screening. And you've got the politics around this where you've got senators and House members who are really going to push back on any efforts to allow Chinese vehicles into the United States. So while he may be open to the idea of investment more broadly, I don't really see us going down this path in terms of EVs.

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Speaker 1: Why do you think he hasn't shut it down?

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Speaker 5: I think the president leaves everything on the table, right? You're not going to get certainty and stability from this president. It's not his style. But again, he talks directionally as well.

00:11:09
Speaker 1: The USMCA negotiations are coming up too. Is China going to be at the epicenter of that as well?

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Speaker 5: China already is. The one thing that the U.S. wants out of these negotiations is stricter rules of origin to prevent Chinese subcomponents, Chinese content, from getting the benefit of the bargain we struck with Canada and Mexico. So I think that's ultimately what this is about. Now, we may see some sort of deal with Mexico in the next few weeks or by the end of the year. I think Canada is going to take a much longer time to resolve. But that's what this USMCA renegotiation is really all about.

00:11:41
Speaker 1: It's about China.

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Speaker 4: That's the sense we got yesterday from Ambassador Greer. He was way more animated and almost seemed frustrated when Jonathan asked him about Canada than we were talking about China. Why?

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Speaker 5: Well, some of this might be emotional baggage from being a U.S. negotiator for the last decade. But I will say some of our best friends, like the Europeans and the Canadians, are the most challenging partners to negotiate with. And part of the issue with Canada is we've been at this for so long that all the easy issues have been traded away. So we're really only left with the hardest sticking points. Now, that said, there's a lot of he said, she said about what went wrong with the collapse in these negotiations from the other week. In the U.S. perspective, what I hear from the administration is they don't understand what the Canadians are doing. They don't understand why Carney walked away. And the reasons that the Canadians are saying publicly don't make sense based on what was in the room. So that might be why you got some frustration from the ambassador.

00:12:35
Speaker 1: Stay with us. More Bloomberg surveillance coming up after this. Ken Gorowski of Wells Fargo raising his price target on Meta, citing early product momentum, writing, we believe the Muse assistance marks the transition to consumer AI assistance from chatbots. Ken joins us now for more. Ken, this is an important transition, and thanks for making time for us, by the way. Are we starting to get our hands around what the next generation of consumer products will look like from these companies?

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Speaker 3: Yeah, I think the market has been waiting a long time. This has been, AI has been primarily an enterprise-driven application market thus far. I think with the introduction of Muse and there was a privately held company called Instinct that released an app, we are finally on the cusp of a real breakthrough in consumer AI. This is the first time I think beyond chat, which was a very important moment, but I think this is a new dawn for consumer AI.

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Speaker 1: Ken, how cooperative will other internet firms be to make sure that this experience, the consumer experience, is seamless beyond just the meta platforms?

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Speaker 3: Yeah, well, we saw yesterday that Amazon blocked Muse. And so Amazon had done this before with ChatGPT and Google as well with its crawlers and the AI search side. Over time, I think we believe this gets reconciled. We believe that these companies come to an agreement. But for many years, Amazon has fought with Google search, has fought to gain its own traffic directly. And they're not going to give it away right away here. So I think over time, Amazon is more than a third of e-commerce and is a necessary tool and a necessary application for for Muse and other consumer AI assistants to be very useful on the e-commerce side.

00:14:38
Speaker 1: Ken, can we talk about where this product will sit? It will sit on most people's phones. And a lot of people right now watching this, they'll be holding onto an iPhone thinking about the future of this technology. Ken, as we know, Apple and Zuckerberg aren't exactly best friends. How close is Apple to doing the same thing?

00:14:55
Speaker 3: Well, there's two questions in there. First, where does this sit? One, we have the Muse application. I think that will continue to be a key use case. We also think Muse functionality will be dispersed across all of the meta platforms, Instagram, Facebook, WhatsApp. You can already use Muse functionality. through your WhatsApp, I think you'll see Muse functionality across all of their platforms. And that's really the power of meta. As to competition, absolutely, right? We would expect privately held open AI to come out with an AI assistant over time. Google, you know, it's time. We need to see something from Google. And absolutely, to your point, Apple will be in the mix.

00:15:42
Speaker 4: John mentioned Amazon. We were talking a little bit about this earlier this morning. Do you think something like Muse can just be an absolute killer when it comes to advertisements that some of these companies like Amazon gets? Because if you have your agent going out and filling up your cart, then what is Amazon going to target? An agent with advertisements?

00:16:03
Speaker 3: It's a great question, and it's in a debate we've been having with investors over the last 48 hours for sure. Look, we've had advertising move closer to the transaction. If you think back to 2021 when Apple changed its tracking mechanisms, Advertising really moved closer to the transaction. The view was if you could see the transaction, then it is an effective piece of advertising, right? This challenges this. AI search was early in its challenges, but agentic really does challenge this. We think all of these companies will... to varying degrees of success, have to navigate this new paradigm. But absolutely, we do believe that there will be some impact on retail media advertising.

00:16:53
Speaker 1: And Ken, this is interesting because, of course, Meta's revenue stream is advertising. They basically built the modern model of eyeballs and ad revenue. Ken, are they going to have to sacrifice that to achieve what they can achieve with this?

00:17:08
Speaker 3: Yeah, and to your point, we estimate roughly half of Meta's advertising is from the e-commerce vertical. So it's right squarely in what we're talking about. What we think about for Meta in particular, and this will be a challenge for Google because Google's search business is much more akin to this. We think this use case, this is a brand new use case for Meta. The Meta use case for most adults... is a short form entertainment or information. It's connection. This is more about productivity. This lives more in the land of Google and others, maybe Apple as well. But this is a brand new use case for meta. We believe this will be incremental to time spent. We don't believe that you'll spend less time on Instagram than because you're using Muse. In fact, the beauty of Muse is many of those activities happen in the background, these longer running agents. So we actually think that this could be incremental to meta, whereas it may not be so incremental to some of the other players.

00:18:12
Speaker 1: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6am to 9am 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.