WEBVTT - Torsten Slok Talks Jerome Powell and The Fed

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. I'm thrilled to say

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<v Speaker 1>we have tourists and Slock, he is Apollo's chief economist,

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<v Speaker 1>joining us on set.

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<v Speaker 2>It's great to see you, Torson. Thanks for having me.

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<v Speaker 1>So let's talk about your own pal, because he's made

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<v Speaker 1>very clear that he would like to cut rates. The

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<v Speaker 1>data so far hasn't been quite cooperating with that impulse,

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<v Speaker 1>but maybe a little bit of weakness in the last

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<v Speaker 1>couple prints. Where do you think he stands right now?

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<v Speaker 3>What I think for him today it is that we

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<v Speaker 3>still have three inflation prints before the eighteenth of September

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<v Speaker 3>FMC meeting, so that means that he doesn't need to

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<v Speaker 3>come out with a strong.

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<v Speaker 2>View in either direction.

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<v Speaker 3>It's pretty clear that they will not cut in July,

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<v Speaker 3>and it is quite fascinating how the market always is, Oh,

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<v Speaker 3>it's not this meeting, but the next meeting is when

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<v Speaker 3>they cut will come.

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<v Speaker 2>So I still think we have some time here for at.

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<v Speaker 3>Least two or three more inflation prints before we find

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<v Speaker 3>out if the FED has enough confidence in inflation actually

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<v Speaker 3>moving down towards two percent.

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<v Speaker 2>Why do you think no cut in July?

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<v Speaker 4>Peter Cheer of Academy Securities was on earlier and he

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<v Speaker 4>said he thinks it'll be a July.

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<v Speaker 2>It's the last day of July, right.

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<v Speaker 4>Because the Fed doesn't want to cut too close to

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<v Speaker 4>the election.

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<v Speaker 3>Well, I think there's a number of challenges with that.

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<v Speaker 2>You name it.

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<v Speaker 3>First of all, if you look at the weekly writbook,

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<v Speaker 3>retail sales data is still very strong. If you look

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<v Speaker 3>at auto sales, monthly data also very strong.

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<v Speaker 2>If you look at some of the.

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<v Speaker 3>Numbers that have been coming in across the board on

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<v Speaker 3>KPEC spending, on AI, spending on AI earnings. When it

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<v Speaker 3>comes to the value of starts going up, the tailwind

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<v Speaker 3>to the economy from easy financial conditions is also very strong.

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<v Speaker 2>So I take that.

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<v Speaker 3>For the Fed, the issue is they need to get

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<v Speaker 3>inflation to come down towards two percent, and we'll see

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<v Speaker 3>on Thursday what we get on CPI. But the question

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<v Speaker 3>is whether they will have that confidence at the end

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<v Speaker 3>of July.

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<v Speaker 2>And I still think this questionable.

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<v Speaker 3>If this is the case, they definitely need to change

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<v Speaker 3>their communication sooner rather than later.

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<v Speaker 4>If I type ECSU on the Bloomberg terminal, I see

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<v Speaker 4>economic surprises and they're all to the downside, and I

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<v Speaker 4>read your notes every day. You've mentioned commercial real estate

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<v Speaker 4>recently and the fact that they can see rates continue

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<v Speaker 4>to remain high. I was talking about this with Lori Calvacina,

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<v Speaker 4>and there's a maturity wall coming to you know. Isn't

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<v Speaker 4>the FED worried about tripping us into a recession?

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<v Speaker 3>I think they are, But from their chairs, they will

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<v Speaker 3>probably say, well, we need to race interest rates to

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<v Speaker 3>make it more difficult to get financing for consumers and

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<v Speaker 3>for firms and in commercial really state, And if you

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<v Speaker 3>look at the progress of this process of the FIT

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<v Speaker 3>having race rates in March of twenty twenty two, we're

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<v Speaker 3>just still not quite there yet. If you look at

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<v Speaker 3>the employment report last Friday, for the last three months,

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<v Speaker 3>employment growth has been two hundred thousand, for the last

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<v Speaker 3>six months, two hundred thousand, for the last.

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<v Speaker 2>Twelve months, two hundred thousand.

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<v Speaker 3>Yes, the unemployment rate is going up, but a very

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<v Speaker 3>important reason why the unemployer rate is going up.

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<v Speaker 2>It's not because people are getting fired.

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<v Speaker 3>It's because more people are showing up at the labor force,

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<v Speaker 3>most likely immigrants and others that are basically saying, well,

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<v Speaker 3>we would like to have a job. That's a good

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<v Speaker 3>sign of the economy actually doing recently well. So I

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<v Speaker 3>still think that overall, yes, that process of destroying demand

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<v Speaker 3>as a result of rates going up is playing out

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<v Speaker 3>in certain parts of the economy, including commercial estate. But

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<v Speaker 3>when you look at the aggregate impact, with two hundred

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<v Speaker 3>and six thousand jobs created in the month of June,

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<v Speaker 3>that's still an economy that's doing quite well.

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<v Speaker 2>Torson.

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<v Speaker 5>Even though you have a FED chair who will meet

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<v Speaker 5>Congress who maybe wants rate cuts sooner rather than later,

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<v Speaker 5>you still have a situation where the monetary seems to

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<v Speaker 5>be fighting the fiscal How much concern is there that

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<v Speaker 5>if they were to cut rates and the government keeps

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<v Speaker 5>spending as it is, then the problem compounds into twenty

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<v Speaker 5>twenty five.

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<v Speaker 3>Well, when interest rates go up, of course, interest expenses

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<v Speaker 3>for the government will go up. It will take a

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<v Speaker 3>little bit of time, but it will eventually happen. But

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<v Speaker 3>when insust rates go up, you also have that people

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<v Speaker 3>who live on fixed income and people who own fixed income,

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<v Speaker 3>including people who own public credit private credit, will get

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<v Speaker 3>cash flows that are higher than they basically have been

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<v Speaker 3>in decades. Combining that with the stock market going up

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<v Speaker 3>every day, with home prices going up, the wealth of

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<v Speaker 3>a significant part of consumers.

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<v Speaker 2>The wealth effect is just really still quite strong.

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<v Speaker 3>So yes, interest rates going up is biting certainly harder

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<v Speaker 3>on highly leveled companies, on highly leveled consumers, and also

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<v Speaker 3>on some parts of commerciary state to Matt's point, but

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<v Speaker 3>I still think that the net effect still tells you

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<v Speaker 3>that job growth is still strong. And yes, again the

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<v Speaker 3>unemplying rate is going up, but the rise in jobless

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<v Speaker 3>claims has also been more seasonal, so we don't see

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<v Speaker 3>this as any sign that the economy really is slowing

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<v Speaker 3>down to the same degree that the narrative at the

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<v Speaker 3>moment is in markets.

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<v Speaker 5>I'd really be curious about your view on the demand

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<v Speaker 5>for tea bills, as issuance has been really flooding the market.

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<v Speaker 5>When does demand evaporate and why?

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<v Speaker 3>Yeah, this is really important because there has been a

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<v Speaker 3>very deliberate decision, of course to issue more T pills

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<v Speaker 3>over the last several quarters, and ultimately dead levels are

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<v Speaker 3>growing so significantly that we will need to see more

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<v Speaker 3>issuance of coupons, being bonds and notes. So the more

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<v Speaker 3>issuance of rises, of course, it begins to create the

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<v Speaker 3>question who is going to buy all these tipiles that

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<v Speaker 3>are coming to the market, and that begins to raise

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<v Speaker 3>some issues and fears about what happened in September twenty

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<v Speaker 3>nineteen where funding markets started to be impacted because there

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<v Speaker 3>was a significant amount of supply coming to the market

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<v Speaker 3>at the time.

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<v Speaker 2>There was also a lot of issues well with supply was.

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<v Speaker 3>So big that that created in particular in the front

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<v Speaker 3>of the.

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<v Speaker 2>Curve issues with supply being high.

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<v Speaker 3>So yes, the change in the structure of that outstanding

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<v Speaker 3>is a very important topic in rates markets at the moment.

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<v Speaker 1>Well, when it comes to T bills and T bills demand.

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<v Speaker 1>You've made the case in your notes that once the

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<v Speaker 1>FED starts cutting rates, that some of that demand is

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<v Speaker 1>going to dry up. And I would just want to

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<v Speaker 1>meditate a little bit longer on why, because you take

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<v Speaker 1>a look at money market funds right now, over six

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<v Speaker 1>trillion dollars in there is a twenty five basis point

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<v Speaker 1>cut and then maybe another really going to really meaningfully

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<v Speaker 1>shrink demand there.

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<v Speaker 3>That's a good point, and I think fair enough, it's

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<v Speaker 3>probably not going to shrink demand dramatically. But given the

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<v Speaker 3>FED is so keen on continuously telling us that the next.

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<v Speaker 2>Move in rates is lower.

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<v Speaker 3>That means that there's a lot of people that are

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<v Speaker 3>then thinking about, Okay, maybe I should be buying some duration,

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<v Speaker 3>but what about the front end. If the next move

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<v Speaker 3>is lower and we'll get a number of more cuts,

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<v Speaker 3>then that could begin to have some duplications for what

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<v Speaker 3>will happen to the amount of money in money market funds.

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<v Speaker 3>And the other thing in that discussion is remo. Also,

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<v Speaker 3>what really is intriguing at the moment is that the

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<v Speaker 3>amount of money in money market funds is going up,

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<v Speaker 3>and at the same time.

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<v Speaker 2>The stock market is going up.

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<v Speaker 3>So we have a very bullish environment where all assets

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<v Speaker 3>both the safest asset they need T pills and also

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<v Speaker 3>the stock market is going up simply because there's still

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<v Speaker 3>a lot of money slushing around buying investments, both in

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<v Speaker 3>risky assets and in safe assets.

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<v Speaker 4>I have a viewer writing into the question I happen

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<v Speaker 4>to know that he's a bond trader.

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<v Speaker 2>He's asking when does the.

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<v Speaker 4>Market price out euphoria over a cut for the realization

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<v Speaker 4>that cuts always signify something breaking in the market.

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<v Speaker 3>Well, a very important part of that discussion is, of course,

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<v Speaker 3>what we've seen in the last few weeks is that

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<v Speaker 3>with the election coming up, there's a lot of debate

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<v Speaker 3>about what would implications be for tariffs, what would implications

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<v Speaker 3>be for restrictions on immigration, what would the implications be

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<v Speaker 3>for the amount of TE pills, And what might even

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<v Speaker 3>be the restrictions.

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<v Speaker 2>Be on in terms of I'm going to get a.

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<v Speaker 3>Bigger fiscal deficit or smaller physcal deficit. So when it

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<v Speaker 3>comes to the outlook for rates, it is partly the

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<v Speaker 3>cyclical discussion, meaning inflation, on employment, jobless claims.

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<v Speaker 2>But there's also this whole.

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<v Speaker 3>New theme emerging of does the fiscal position matter, Does

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<v Speaker 3>it matter that we have more T pills outstanding? And

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<v Speaker 3>what are then the implications for the shape of the curve?

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<v Speaker 3>And the most likely scenario to that question is that

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<v Speaker 3>we'll probably have a steeper curve at the end of

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<v Speaker 3>the day if the fifth does eventually start to cut

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<v Speaker 3>and we still have some fiscal challenges that are very

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<v Speaker 3>difficult to deal with no matter who wins in November.

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<v Speaker 4>All right, Torson, really appreciate you dropping by for our

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<v Speaker 4>inaugural week.

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<v Speaker 2>Torson slock there of Apollo