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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: with the promise of fiscal stimulus out of China, equities
Speaker 2: running worldwide ahead of jobless claims in the US, and
Speaker 2: comments from Chairman pell Evan Brown of UBS saying recession
Speaker 2: risk needs to be further priced out. Investors poured money
Speaker 2: into defensive trades over the last couple of months, but
Speaker 2: resilient US economic data and a proactive FED have meaningfully
Speaker 2: reduced the left tail. We look for treasury yields to
Speaker 2: continue bouncing from here and cyclical sectors to help perform defensives.
Speaker 2: Evans with us and more. Evan, good morning, Good morning.
Speaker 2: Before we get to the market. Coch let's start with
Speaker 2: the Cole on the economy. How'm encouraged on you by
Speaker 2: what you saw from the Fed last week and what
Speaker 2: you're saying from China this week.
Speaker 3: Very encouraged. I mean, look, when you have a meaningful
Speaker 3: change in messaging from to the most important economic actors
Speaker 3: in the world, which would be J Powell and I
Speaker 3: guess President she and the broader Paul Bureau, it pays
Speaker 3: to listen. And what we saw from Powell was a
Speaker 3: message of labor markets fine, we're going to keep it there.
Speaker 3: We are going to keep it there, and so I
Speaker 3: think the bar is very low for them to keep
Speaker 3: doing fifties. You know, ultimately inflation has come down quite
Speaker 3: a bit and that enables them to act more aggressively.
Speaker 2: This is something Deutsche Bank said as well. You suggested
Speaker 2: the next hundred basis points one hundred and fifty basis
Speaker 2: points of acing is actually an easy decision.
Speaker 3: I don't know if it's an easy decision. I just
Speaker 3: think that the the next well, yeah, look, I think
Speaker 3: the next one hundred and one hundred and twenty five
Speaker 3: we're going to get. The more aggressive that they are
Speaker 3: right now, the less I think they have to do later. Ultimately,
Speaker 3: you're as you're saying, we're bringing down recession risks because
Speaker 3: they're acting sooner or more aggressively at this point.
Speaker 4: At a certain point, you have to wonder how much
Speaker 4: does this leave inflation as a bigger concern, even if
Speaker 4: recession is less of a concern. We were talking about that.
Speaker 4: With longer term yields picking up just a touch, you
Speaker 4: have to imagine, are we truly seeing just a return
Speaker 4: to the past normal or is this going to be
Speaker 4: a new inflationary environment where officials aren't willing to allow
Speaker 4: the economy to collapse enough to create that disinflation.
Speaker 3: Yeah, I think we're a long way from inflation becoming
Speaker 3: a meaningful concern again. I think, you know, we were
Speaker 3: just talking about oil and what's happening there, and oil
Speaker 3: is that's a major disinflationary force, not just on a
Speaker 3: headline level, but ripples through into core inflation. The labor
Speaker 3: market is still cooling. You would need to see like
Speaker 3: a re tightening of the labor market, I think to
Speaker 3: get like domestically generated inflation getting going again. So I
Speaker 3: kind of think this is the best of all worlds
Speaker 3: where they're supporting growth maybe inflation becomes more of an
Speaker 3: issue if we get Trump tariffs and the like down
Speaker 3: the road. But I think that's kind of tomorrow's story
Speaker 3: as opposed to today.
Speaker 4: The story that you're painting makes me think the US
Speaker 4: is less exceptional, and frankly everything else that's a little
Speaker 4: more exceptional, especially on the valuations that they're currently trading at.
Speaker 4: Is that how you're looking at it.
Speaker 3: I think the US is still exceptional in one clear way,
Speaker 3: which is that we have a great productivity story here.
Speaker 3: We have seen productivity pick up in the US. Yes,
Speaker 3: employment has been coming down, but GDP growth has been
Speaker 3: really really strong, and that's allowed US also to get
Speaker 3: unit labor costs inflation lower. You're not seeing that in Europe.
Speaker 3: You're still seeing ongoing supply chain issues, corporate margin issues
Speaker 3: and the like. You're not seeing that in the UK.
Speaker 3: And so the US is still quite exceptional on that front.
Speaker 3: When we talked about the equity markets, though, of course
Speaker 3: a lot of that good news, more of it is
Speaker 3: priced in the US and the rest of the world,
Speaker 3: as is almost always the case.
Speaker 5: You also like China, especially versus Europe. But how much
Speaker 5: is the European story dependent on what happens next in China,
Speaker 5: and if what's happening with fiscal and monetary stimulus actually works.
Speaker 3: Yeah, I think, look what happens in China, there's going
Speaker 3: to be some positively through into Europe, especially with some
Speaker 3: of the big luxury names. If you can shore up
Speaker 3: consumer confidence in China, then that helps on that front.
Speaker 3: I still think Europe faces a number of domestic challenges.
Speaker 3: You know, you still have stubborn wages, you still have
Speaker 3: a German manufacturing sector that is in pretty bad shape.
Speaker 3: And we had from Mario Draghi last week, maybe the
Speaker 3: week before him, talking about how do we get Europe
Speaker 3: more competitive? And it's almost a sad read because you
Speaker 3: see such great work, such interesting work of things that
Speaker 3: can and should be done, but so little confidence that
Speaker 3: the institutional framework is going to allow politically these reforms
Speaker 3: to happen.
Speaker 2: Let me jump in as an investor looking at Europe.
Speaker 2: How do he react when the German finance ministry sounds
Speaker 2: almost unsets with my stock coming gown? Yeah, I mean
Speaker 2: that's what it's not telling you about the situation in Europe,
Speaker 2: because that's ultimately what's happened in the last two weeks.
Speaker 3: Look I think that's that's, you know, the underlying Yeah,
Speaker 3: there's an underlying institutional issues that are going to hold
Speaker 3: Europe back. Now, I don't think I'm saying anything that's
Speaker 3: not already reflected in European equities. They're very cheap, and
Speaker 3: then they can receive some bounce from this China improvement
Speaker 3: and maybe the ECB gets a little more aggressive and
Speaker 3: so that that helps. But structurally, it's hard to make
Speaker 3: this long term investment case for Europe relative to the.
Speaker 2: US VMH Right now, you mentioned luxury, a VMHIF in
Speaker 2: Europe one of the six percent of the my mom.
Speaker 2: So we're seeing that running and luxuries you might expect
Speaker 2: on the menu a number of asset classes. Let's pick three,
Speaker 2: so equities, commodities, for in exchange. Out of those three,
Speaker 2: to price out recession, what does that mean to price
Speaker 2: in what now and where? Yeah?
Speaker 3: So I think what we'll see more most in most
Speaker 3: clear is what's happening in the excuse me, in equities
Speaker 3: regionally and intra sector. And you know, like I said,
Speaker 3: a lot of people pour money into defensive sectors here
Speaker 3: in the US. I think we've got to price a
Speaker 3: lot of that out. I think recession risk that left
Speaker 3: tail has been sectial utilities.
Speaker 2: What does it leave you, given that that run up
Speaker 2: is actually just off the back of AI as well
Speaker 2: as the defensive nature of the particular three pistolsis well,
Speaker 2: what do you do with utilities?
Speaker 6: Utilities is the is.
Speaker 3: The trickiest one because of that AI. I mean, in itself,
Speaker 3: utilities look extremely overbought. We've seen tons of ETF flows
Speaker 3: into utilities. Is all telling us, especially given the macro
Speaker 3: dynamics in our view that yields can bounce from here,
Speaker 3: that utilities should be vulnerable. But then you get these
Speaker 3: these big AI power demand announcements and and that's uh,
Speaker 3: that's so. I think among the defensives, utilities look a
Speaker 3: little bit better. I think in you know, staples, real estate,
Speaker 3: and healthcare probably underperform utilities. At least you have that
Speaker 3: AI story there on utilities.
Speaker 4: Just listening to you, it seems like overweight small caps,
Speaker 4: equal weight, overweight Chinese equities maybe preferly European securities, underweight
Speaker 4: bonds and have a high holiday. Is that basically your view? Yeah?
Speaker 3: I think so. I mean it's kind of like refle
Speaker 3: It's it's like a reflation with without the refle without
Speaker 3: the inflation. It's kind of how I'm thinking about it,
Speaker 3: and that like this pricing out of recession, right, but
Speaker 3: now you have oil coming down for supply reasons, and
Speaker 3: hopefully that you know, the Middle East doesn't doesn't escalate
Speaker 3: much further from here. But if oil's coming down for
Speaker 3: supply reasons, you know, that's another very stimulative thing for
Speaker 3: the private sector and consumers. So I think we have
Speaker 3: this this kind of uh, you know, stimulus from China,
Speaker 3: stimulus from the Fed, simulus just more globally, and we're
Speaker 3: setting up for just this better economic picture than people
Speaker 3: thought going into your end and next year.
Speaker 2: Always enjoy your work. Just fantastic catchup. It's been too
Speaker 2: long as well. Come back soon, Evan Brown, if you best.
Speaker 2: That's not with equities Equiti jump across the board still
Speaker 2: that most sticks. I could examp on the S and
Speaker 2: p up by eight ten. So on the nassnak up
Speaker 2: by one point five. Let's flip up the board. Switch
Speaker 2: on the board, turn the page. You get to the
Speaker 2: bond market story. The two year yield was lower, the
Speaker 2: ten yere yield was lower. Now the two years just
Speaker 2: a little bit higher. So that's the change off the
Speaker 2: bank of this in the last ninety seconds. Push that
Speaker 2: through foreign exchange dollar a little bit stronger. You're a
Speaker 2: dollar banking off session highs one eleven forty eight. Just
Speaker 2: remember payrolls a week tomorrow. The estimates one forty I
Speaker 2: think the survey week was last week. So this is
Speaker 2: what we're looking at for next month payrolls. Is it
Speaker 2: really going to slow down anytime soon? Given what we've
Speaker 2: seen coming out of the jobless claims numbers over the
Speaker 2: last month or so.
Speaker 4: If jobless claims are the best high frequency indicator, the
Speaker 4: answer would be no. At the same time, people have
Speaker 4: pointed to the fact that you're not seeing jobs getting created.
Speaker 4: It's not just maybe people getting fired, but that people
Speaker 4: aren't actually getting the opportunities, and you are seeing that
Speaker 4: some of the sentiment surveys. However, there is a discrepancy
Speaker 4: between the bearishness and the fears versus what we're seeing
Speaker 4: in the claims numbers, and I think that that's what
Speaker 4: you're feeling in terms of the lift in yields on
Speaker 4: the margins in the bond market today.
Speaker 2: Jay Bryson and wels Fago with this now to discuss Jay.
Speaker 2: I just love your thoughts on jobless claims at two eighteen.
Speaker 2: It just screams, there's nothing to see here. Everything it's okay,
Speaker 2: it's everything okay. Well, you know, so.
Speaker 6: You talk about payrolls coming out right, and so payrolls
Speaker 6: is a net number, it's you know, it's two gross
Speaker 6: numbers or what we're getting today. An initial job was
Speaker 6: claims is people who are losing jobs. What Lisa was
Speaker 6: just talking about is creating jobs. And so when you
Speaker 6: look at the economy, we're not creating a lot of jobs.
Speaker 6: We're not losing a lot of jobs either, and so
Speaker 6: when you get that net number out next week, you know,
Speaker 6: we're one thirty five. So there has been a slow
Speaker 6: down in job creation, and what that means is you're
Speaker 6: just not going to have as much income growth going
Speaker 6: forward as well.
Speaker 2: Is it inevitable that lay offs the next I.
Speaker 6: Don't think it's necessarily inevitable because if you look at
Speaker 6: the financial health of most businesses today, that's actually pretty good.
Speaker 6: You know, their balance sheets are pretty strong, the debt
Speaker 6: service ratios for most companies are very very strong as well,
Speaker 6: and so they don't necessarily need to lay people off
Speaker 6: at this point. But you know, if monetary policy remains
Speaker 6: restrictive here, that's going to continue to put headwinds on growth,
Speaker 6: and that eventually puts actually could lead to those jobless
Speaker 6: claims going up.
Speaker 4: Do you get the sense that this market is too
Speaker 4: complacent about the sort of soft landing nirvana as we've
Speaker 4: named it, or is this mora an economy that's at
Speaker 4: risk of a reacceleration that people maybe are a little
Speaker 4: bit overly complacent about the inflation side of the equation.
Speaker 6: So you know, if you say, what's more likely going
Speaker 6: forward slow down, more of a slowdown from here, or
Speaker 6: more of a reacceleration, I'm going to take the more
Speaker 6: of a slowdown sort of story right now. Just again,
Speaker 6: because monetary policyy remains restrictive right here. I just don't
Speaker 6: see a really huge reacceleration right here. And so you know,
Speaker 6: when I think about the risk of recession in the
Speaker 6: next twelve months or so, you know, the underlying run
Speaker 6: rate is like fifteen percent. You know, if you said
Speaker 6: to me, what do you think the rescue recession the
Speaker 6: next twelve months is one in three thirty five percent.
Speaker 6: It's not our base case, but we're not out of
Speaker 6: the woods, right. I mean, you are seeing signs of
Speaker 6: stress in the household sector, seeing delinquencies on credit cards
Speaker 6: going up, you seeing delinquencies on auto loans going up,
Speaker 6: and people's you know, the excess money they had after
Speaker 6: you know, the stimulus programs are all gone at this point,
Speaker 6: and so you could get you could get a move
Speaker 6: to the downside here, although I'm not really expecting that.
Speaker 4: If that's the case, why shouldn't FED go by fifty
Speaker 4: basis points in November.
Speaker 6: I think there's a very good, very good case for that,
Speaker 6: But I think it's going to be I think you
Speaker 6: were saying earlier, it's all you know, we're just very
Speaker 6: very data dependent at this point, and you know it's
Speaker 6: they're trying to balance the risk out there, and you know,
Speaker 6: could you get a reacceleration. Sure, I don't think it's
Speaker 6: the most likely case, but you know there's that's still
Speaker 6: that possibility there. And I don't think they want to
Speaker 6: go fifty to have to have to reaverse that a
Speaker 6: few months from now.
Speaker 5: Well reaverse that because of policy out of Washington in
Speaker 5: twenty twenty five.
Speaker 6: So I don't think you're going to get a huge
Speaker 6: policy shift out of Washington in twenty twenty five. You know,
Speaker 6: I think the biggest thing that Congress has to deal
Speaker 6: with next year is the extension of the t j
Speaker 6: A at the end of the year. We are we
Speaker 6: expecting that right off the bat. Probably not right, that
Speaker 6: doesn't expire until the end of the year, knowing Congress
Speaker 6: is going to take them a long time to do that.
Speaker 5: But I guess what about reacceleration of inflation if it
Speaker 5: came to things like tariffs.
Speaker 6: If it comes to things like tariff that you could
Speaker 6: potentially see that. Now, does that mean the Fed starts
Speaker 6: to raise rates? I think the Fed and that you know,
Speaker 6: if you were to get a reacceleration inflation, I think
Speaker 6: the Fed goes on hold everyone's pricing in two hundred
Speaker 6: basis points of ray cuts. That probably goes away. But
Speaker 6: I think the Fed initially would would say wait on
Speaker 6: hold and see how much it feeds through.
Speaker 2: Let's get to counsel matter of jp MOLK and asset
Speaker 2: management of County Common. It's you, good morning. How vulnerable
Speaker 2: are we to a self print on piros two fridays
Speaker 2: of why.
Speaker 5: Well, there's there's two things to consider.
Speaker 1: One is how vulnerable are we and then you know
Speaker 1: what is most likely to occur. So the initial job
Speaker 1: as claims today suggests that the expansion should continue. The
Speaker 1: labor market is healthy. Now, if you were to ask
Speaker 1: me where the balance of risks is, I would say
Speaker 1: the balance of risks is to the downside. It is
Speaker 1: to the risk that payrolls growth slows more and the
Speaker 1: unemployment rate rises. You know, I know there's this debate.
Speaker 1: If the FED sees payrolls growth below one hundred thousand,
Speaker 1: then that's the green light to do another fifty. I
Speaker 1: think we forget that we already had a payroll's print
Speaker 1: below one hundred thousand two months ago, so payroll's growth
Speaker 1: already is slowing. Now, this is the most new information
Speaker 1: that I feel like I've learned in the past few
Speaker 1: days in terms of FED communication, is that actually, while
Speaker 1: the market is focused on the debate about twenty five
Speaker 1: versus fifty being primarily about the labor market, some participants
Speaker 1: are actually opening up the door to additional fifty basis
Speaker 1: point rate cuts just on inflation alone. And that's why
Speaker 1: I think, you know, you're not going to necessarily see
Speaker 1: materially higher yields just because you know the labor market
Speaker 1: stays around here, there are other reasons yield should remain
Speaker 1: low and should be by a slower because of the
Speaker 1: inflation backdrop alone.
Speaker 2: Just to back up, was that Kevina Walla that might
Speaker 2: just not think in that way.
Speaker 1: It was, although to be fair, you know, we've been
Speaker 1: thinking about it this way for a while, which is
Speaker 1: that the Fed has justification to cut probably one hundred
Speaker 1: to one hundred and fifty basis points just on the
Speaker 1: improvement in inflation alone. And then you couple that with
Speaker 1: what we're seeing in terms of inflation expectations, inflation break evens,
Speaker 1: the commodity complex, the global growth backdrop, and I think
Speaker 1: they can feel fairly confident that there is space for
Speaker 1: them to ease. And that's kind of agnostic to does
Speaker 1: the labor market stabilize around here or does it continue
Speaker 1: to move lower.
Speaker 4: One of the most controversial aspects of your whole case
Speaker 4: is that you see this as a reason to buy
Speaker 4: bonds across the entire yield spectrum. When people come on
Speaker 4: the show, they have increasingly said, I'm comfortable with it
Speaker 4: up until about five years, and then after that forget it,
Speaker 4: because I have no idea what's going to happen, and
Speaker 4: potentially we could get even inflation coming back or being
Speaker 4: stickier because of a proactive FED. How do you push
Speaker 4: back against that, because I'm sure you hear that.
Speaker 6: A lot well.
Speaker 1: I mean, when you think about what we are recommending
Speaker 1: that clients do here, what we've found when we look
Speaker 1: at the client base is that despite the fact that
Speaker 1: the FED has finally come in after fourteen months of
Speaker 1: being on hold and cut rates fifty basis points, there
Speaker 1: are still many clients that are under allocated to fixed
Speaker 1: income and over allocated to cash, and so there is
Speaker 1: still a lot of room to move out in terms
Speaker 1: of duration. Now, in terms of how I think the
Speaker 1: term structure of the yield curve is going to evolve,
Speaker 1: I do think that the curve is biased steeper, so
Speaker 1: you are going to see front end yields move lower
Speaker 1: than long end yields as the FED continues to deliver
Speaker 1: those rate cuts. But I do think that when you're
Speaker 1: thinking about building a portfolio that has diversification, you can
Speaker 1: think about a core or core plus fund with a
Speaker 1: five or six year duration, which is what you're going
Speaker 1: to get when you buy one of those full bond funds.
Speaker 1: That invests across the whole maturity spectrum, and that's going
Speaker 1: to give you both the income and also the benefit
Speaker 1: of capital appreciation. If the claims data is not the
Speaker 1: real signal, and in fact the terminal rate for the
Speaker 1: FED is not three but lower, in this.
Speaker 4: Picture, there's a real question about if you're more bought
Speaker 4: biased to the potential for downside risk, why should you
Speaker 4: go into risk your assets.
Speaker 1: So I think there's a couple reasons. First of all,
Speaker 1: all of this in terms of the timing and transmission
Speaker 1: of monetary policy is very uncertain. The lags are very unclear.
Speaker 1: So we do feel like we're getting closer to reaching
Speaker 1: an inflection point, but it's not clear which way the
Speaker 1: economy is going to break. So on one hand, the
Speaker 1: FED cuts fifty basis points, and in twelve months, if
Speaker 1: they succeed in extending the cycle, we could be looking
Speaker 1: at reacceleration. In that case, you know, spread should remain
Speaker 1: very tight. Here.
Speaker 2: On the other hand, if.
Speaker 1: This is like every other time in history, then the
Speaker 1: fifty basis point cut is actually not a proactive move
Speaker 1: that extend the cycle, but a signal that they're already
Speaker 1: too late.
Speaker 5: And to balance those things.
Speaker 2: I think you need both a.
Speaker 1: Combination of duration and high quality, but also some carry
Speaker 1: in your portfolio because the outcomes both tail risks are
Speaker 1: possible at this.
Speaker 2: Moment, Cassie, we've got to leave it that so it's
Speaker 2: going to catch up. Thank you, Cassie Power there of
Speaker 2: j P Bulk and Asset Management. This is the Bloomberg
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Speaker 3: Mm hmm