Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I'm thrilled to say
Speaker 1: we have tourists and Slock, he is Apollo's chief economist,
Speaker 1: joining us on set.
Speaker 2: It's great to see you, Torson. Thanks for having me.
Speaker 1: So let's talk about your own pal, because he's made
Speaker 1: very clear that he would like to cut rates. The
Speaker 1: data so far hasn't been quite cooperating with that impulse,
Speaker 1: but maybe a little bit of weakness in the last
Speaker 1: couple prints. Where do you think he stands right now?
Speaker 3: What I think for him today it is that we
Speaker 3: still have three inflation prints before the eighteenth of September
Speaker 3: FMC meeting, so that means that he doesn't need to
Speaker 3: come out with a strong.
Speaker 2: View in either direction.
Speaker 3: It's pretty clear that they will not cut in July,
Speaker 3: and it is quite fascinating how the market always is, Oh,
Speaker 3: it's not this meeting, but the next meeting is when
Speaker 3: they cut will come.
Speaker 2: So I still think we have some time here for at.
Speaker 3: Least two or three more inflation prints before we find
Speaker 3: out if the FED has enough confidence in inflation actually
Speaker 3: moving down towards two percent.
Speaker 2: Why do you think no cut in July?
Speaker 4: Peter Cheer of Academy Securities was on earlier and he
Speaker 4: said he thinks it'll be a July.
Speaker 2: It's the last day of July, right.
Speaker 4: Because the Fed doesn't want to cut too close to
Speaker 4: the election.
Speaker 3: Well, I think there's a number of challenges with that.
Speaker 2: You name it.
Speaker 3: First of all, if you look at the weekly writbook,
Speaker 3: retail sales data is still very strong. If you look
Speaker 3: at auto sales, monthly data also very strong.
Speaker 2: If you look at some of the.
Speaker 3: Numbers that have been coming in across the board on
Speaker 3: KPEC spending, on AI, spending on AI earnings. When it
Speaker 3: comes to the value of starts going up, the tailwind
Speaker 3: to the economy from easy financial conditions is also very strong.
Speaker 2: So I take that.
Speaker 3: For the Fed, the issue is they need to get
Speaker 3: inflation to come down towards two percent, and we'll see
Speaker 3: on Thursday what we get on CPI. But the question
Speaker 3: is whether they will have that confidence at the end
Speaker 3: of July.
Speaker 2: And I still think this questionable.
Speaker 3: If this is the case, they definitely need to change
Speaker 3: their communication sooner rather than later.
Speaker 4: If I type ECSU on the Bloomberg terminal, I see
Speaker 4: economic surprises and they're all to the downside, and I
Speaker 4: read your notes every day. You've mentioned commercial real estate
Speaker 4: recently and the fact that they can see rates continue
Speaker 4: to remain high. I was talking about this with Lori Calvacina,
Speaker 4: and there's a maturity wall coming to you know. Isn't
Speaker 4: the FED worried about tripping us into a recession?
Speaker 3: I think they are, But from their chairs, they will
Speaker 3: probably say, well, we need to race interest rates to
Speaker 3: make it more difficult to get financing for consumers and
Speaker 3: for firms and in commercial really state, And if you
Speaker 3: look at the progress of this process of the FIT
Speaker 3: having race rates in March of twenty twenty two, we're
Speaker 3: just still not quite there yet. If you look at
Speaker 3: the employment report last Friday, for the last three months,
Speaker 3: employment growth has been two hundred thousand, for the last
Speaker 3: six months, two hundred thousand, for the last.
Speaker 2: Twelve months, two hundred thousand.
Speaker 3: Yes, the unemployment rate is going up, but a very
Speaker 3: important reason why the unemployer rate is going up.
Speaker 2: It's not because people are getting fired.
Speaker 3: It's because more people are showing up at the labor force,
Speaker 3: most likely immigrants and others that are basically saying, well,
Speaker 3: we would like to have a job. That's a good
Speaker 3: sign of the economy actually doing recently well. So I
Speaker 3: still think that overall, yes, that process of destroying demand
Speaker 3: as a result of rates going up is playing out
Speaker 3: in certain parts of the economy, including commercial estate. But
Speaker 3: when you look at the aggregate impact, with two hundred
Speaker 3: and six thousand jobs created in the month of June,
Speaker 3: that's still an economy that's doing quite well.
Speaker 2: Torson.
Speaker 5: Even though you have a FED chair who will meet
Speaker 5: Congress who maybe wants rate cuts sooner rather than later,
Speaker 5: you still have a situation where the monetary seems to
Speaker 5: be fighting the fiscal How much concern is there that
Speaker 5: if they were to cut rates and the government keeps
Speaker 5: spending as it is, then the problem compounds into twenty
Speaker 5: twenty five.
Speaker 3: Well, when interest rates go up, of course, interest expenses
Speaker 3: for the government will go up. It will take a
Speaker 3: little bit of time, but it will eventually happen. But
Speaker 3: when insust rates go up, you also have that people
Speaker 3: who live on fixed income and people who own fixed income,
Speaker 3: including people who own public credit private credit, will get
Speaker 3: cash flows that are higher than they basically have been
Speaker 3: in decades. Combining that with the stock market going up
Speaker 3: every day, with home prices going up, the wealth of
Speaker 3: a significant part of consumers.
Speaker 2: The wealth effect is just really still quite strong.
Speaker 3: So yes, interest rates going up is biting certainly harder
Speaker 3: on highly leveled companies, on highly leveled consumers, and also
Speaker 3: on some parts of commerciary state to Matt's point, but
Speaker 3: I still think that the net effect still tells you
Speaker 3: that job growth is still strong. And yes, again the
Speaker 3: unemplying rate is going up, but the rise in jobless
Speaker 3: claims has also been more seasonal, so we don't see
Speaker 3: this as any sign that the economy really is slowing
Speaker 3: down to the same degree that the narrative at the
Speaker 3: moment is in markets.
Speaker 5: I'd really be curious about your view on the demand
Speaker 5: for tea bills, as issuance has been really flooding the market.
Speaker 5: When does demand evaporate and why?
Speaker 3: Yeah, this is really important because there has been a
Speaker 3: very deliberate decision, of course to issue more T pills
Speaker 3: over the last several quarters, and ultimately dead levels are
Speaker 3: growing so significantly that we will need to see more
Speaker 3: issuance of coupons, being bonds and notes. So the more
Speaker 3: issuance of rises, of course, it begins to create the
Speaker 3: question who is going to buy all these tipiles that
Speaker 3: are coming to the market, and that begins to raise
Speaker 3: some issues and fears about what happened in September twenty
Speaker 3: nineteen where funding markets started to be impacted because there
Speaker 3: was a significant amount of supply coming to the market
Speaker 3: at the time.
Speaker 2: There was also a lot of issues well with supply was.
Speaker 3: So big that that created in particular in the front
Speaker 3: of the.
Speaker 2: Curve issues with supply being high.
Speaker 3: So yes, the change in the structure of that outstanding
Speaker 3: is a very important topic in rates markets at the moment.
Speaker 1: Well, when it comes to T bills and T bills demand.
Speaker 1: You've made the case in your notes that once the
Speaker 1: FED starts cutting rates, that some of that demand is
Speaker 1: going to dry up. And I would just want to
Speaker 1: meditate a little bit longer on why, because you take
Speaker 1: a look at money market funds right now, over six
Speaker 1: trillion dollars in there is a twenty five basis point
Speaker 1: cut and then maybe another really going to really meaningfully
Speaker 1: shrink demand there.
Speaker 3: That's a good point, and I think fair enough, it's
Speaker 3: probably not going to shrink demand dramatically. But given the
Speaker 3: FED is so keen on continuously telling us that the next.
Speaker 2: Move in rates is lower.
Speaker 3: That means that there's a lot of people that are
Speaker 3: then thinking about, Okay, maybe I should be buying some duration,
Speaker 3: but what about the front end. If the next move
Speaker 3: is lower and we'll get a number of more cuts,
Speaker 3: then that could begin to have some duplications for what
Speaker 3: will happen to the amount of money in money market funds.
Speaker 3: And the other thing in that discussion is remo. Also,
Speaker 3: what really is intriguing at the moment is that the
Speaker 3: amount of money in money market funds is going up,
Speaker 3: and at the same time.
Speaker 2: The stock market is going up.
Speaker 3: So we have a very bullish environment where all assets
Speaker 3: both the safest asset they need T pills and also
Speaker 3: the stock market is going up simply because there's still
Speaker 3: a lot of money slushing around buying investments, both in
Speaker 3: risky assets and in safe assets.
Speaker 4: I have a viewer writing into the question I happen
Speaker 4: to know that he's a bond trader.
Speaker 2: He's asking when does the.
Speaker 4: Market price out euphoria over a cut for the realization
Speaker 4: that cuts always signify something breaking in the market.
Speaker 3: Well, a very important part of that discussion is, of course,
Speaker 3: what we've seen in the last few weeks is that
Speaker 3: with the election coming up, there's a lot of debate
Speaker 3: about what would implications be for tariffs, what would implications
Speaker 3: be for restrictions on immigration, what would the implications be
Speaker 3: for the amount of TE pills, And what might even
Speaker 3: be the restrictions.
Speaker 2: Be on in terms of I'm going to get a.
Speaker 3: Bigger fiscal deficit or smaller physcal deficit. So when it
Speaker 3: comes to the outlook for rates, it is partly the
Speaker 3: cyclical discussion, meaning inflation, on employment, jobless claims.
Speaker 2: But there's also this whole.
Speaker 3: New theme emerging of does the fiscal position matter, Does
Speaker 3: it matter that we have more T pills outstanding? And
Speaker 3: what are then the implications for the shape of the curve?
Speaker 3: And the most likely scenario to that question is that
Speaker 3: we'll probably have a steeper curve at the end of
Speaker 3: the day if the fifth does eventually start to cut
Speaker 3: and we still have some fiscal challenges that are very
Speaker 3: difficult to deal with no matter who wins in November.
Speaker 4: All right, Torson, really appreciate you dropping by for our
Speaker 4: inaugural week.
Speaker 2: Torson slock there of Apollo