Speaker 1: The FED minutes showing a few officials saw a case
Speaker 1: for hiking interest rates at their June meeting, pointing to
Speaker 1: inflation concerns, the minutes saying quote, many participants noted that
Speaker 1: ongoing strong demand for AI infrastructure would likely sustain upward
Speaker 1: pressure on prices for technology products and electricity. Let's get
Speaker 1: more with Michael McKee, Bloomberg's International Economics and Policy correspondents.
Speaker 1: Don't apult just one piece of the minutes out, Michael,
Speaker 1: and make it all about that. Essentially, as Michael Feroli said,
Speaker 1: these were pretty milk toast minutes, right. It could be
Speaker 1: up next, or it could be down next in terms.
Speaker 2: Of rates exactly, not really down, but on hold for
Speaker 2: quite some time. The minutes kind of are like groundhog
Speaker 2: Day because it was June seventeenth that the President signed
Speaker 2: the Memory Understanding with Iran, and so the FED was
Speaker 2: confronted with the fact that maybe the war would end
Speaker 2: in inflation would go down, and if that were the case,
Speaker 2: they looked at a scenario where they might stay on hold,
Speaker 2: but if inflation continued to rise and the jobless rates
Speaker 2: stayed down, they might raise rates. And they added, as
Speaker 2: you pointed out, AI as an inflation worry to tariffs
Speaker 2: and war, so the balance of risks tilted toward prices.
Speaker 2: There's also a bit of a worsh effect in it all,
Speaker 2: and that the minutes were about a thousand words shorter,
Speaker 2: maybe fifteen to seventeen percent shorter. Participants views were notably
Speaker 2: more concise according to our chat GPT analysis of the
Speaker 2: minutes and policies discussions and the staff reviews of the
Speaker 2: economy and markets were also condensed, So you didn't get
Speaker 2: a real firm view from the minutes or from the
Speaker 2: truncated minutes on what the Fed is going to do.
Speaker 2: But that's because the Fed didn't know. And now we're
Speaker 2: back at war and oil prices are going up, gasoline
Speaker 2: prices will probably follow, and we don't know what is
Speaker 2: going to happen, so stay tuned. We do have next
Speaker 2: Tuesday CPI in the morning and then that warsh is
Speaker 2: testifying to the House Financial Services Committee, so that'll be
Speaker 2: a big day to try to make more progress for
Speaker 2: the markets on what they think is going to happen.
Speaker 3: Well, see if we get any of that, we'll certainly
Speaker 3: get again his testimony, but if he gives us any
Speaker 3: hints Michael, thank you so much for joining us. Bloomberg's
Speaker 3: Michael McKee and let's continue the conversation with Dan Sezuki,
Speaker 3: global investment strategists at I Capital. Dan, great to see you,
Speaker 3: and I know on your outlook you and the team
Speaker 3: you think cuts are more likely than hikes, But your
Speaker 3: base case is essentially no move. That's not necessarily what
Speaker 3: the market is pricing. It's pricing in that hikes are
Speaker 3: more likely. So what are we missing?
Speaker 4: Yeah, well, I don't think you're missing anything, Dan, but
Speaker 4: I do think that the market's missing something. I mean,
Speaker 4: I think the market is basically living in like the
Speaker 4: world of two months ago, as was the Fed minutes,
Speaker 4: which is like living in a different world if you
Speaker 4: think about, you know, the Fed minutes that basically came
Speaker 4: out that meeting happened hours before the MoU As signed,
Speaker 4: so the war was still effectively going on. Gasoline prices
Speaker 4: were above four dollars, and job growth was running about
Speaker 4: one hundred and seven eight thousand jobs per month. If
Speaker 4: you fast forward today, you know, yes, there's fits and starts,
Speaker 4: but I think more likely, you know, the piece deal
Speaker 4: will hold. You'll continue to see more passage go through
Speaker 4: the straight u horm moves, gasoline prices have come down,
Speaker 4: and job growth is closer to fifty thousand.
Speaker 1: So it's just a.
Speaker 4: Different world that we're living. And if you take this
Speaker 4: world that we live in today and you look at
Speaker 4: what the Minutes said about what the scenarios that they're
Speaker 4: talking about, I think you're more likely to see, you know,
Speaker 4: cuts than your hikes because they said if inflation comes
Speaker 4: down because their ran pressure goes away, and then and
Speaker 4: you start to see inflation come toward the two percent target,
Speaker 4: then you're more likely to see a scenario where you're
Speaker 4: on hold or you're more or going to cut. And
Speaker 4: that's kind of what we laid out in the report.
Speaker 1: So when does the market see this done? Because right
Speaker 1: now we've yields going higher. I mean right now the
Speaker 1: thirty yer yield is still at five oh seven.
Speaker 2: Yeah.
Speaker 4: I think the markets will come around to this when
Speaker 4: inflation comes around. The problem for the markets is inflation's
Speaker 4: lagging indicate. So if you focus on if you focus
Speaker 4: on the past, and gasoline prices are coming down, albeit
Speaker 4: sort of the move on the news overnight, you know,
Speaker 4: gasoline prices will probably be trending lower overall energy prices
Speaker 4: will be trending lower. They noted in the Minutes actually
Speaker 4: that housing pressures will continue to be a drag on inflation.
Speaker 4: So if you get that dynamic playing out through markets,
Speaker 4: if you look at some sort of real time metrics
Speaker 4: of inflation, they're telling you that there's probably more downside
Speaker 4: to where those numbers are going to go.
Speaker 3: One of the interesting things though about those thirty year
Speaker 3: yields being elevated, is it's not just inflation, because real
Speaker 3: yields are also with the highest since two thousand and eight.
Speaker 3: What do you think is driving that? And why do
Speaker 3: you think risk assets haven't reacted more to this because
Speaker 3: this is usually something that could be troubling for stock markets,
Speaker 3: for example, and they continue to trade within one percent
Speaker 3: of all time high.
Speaker 4: Yeah. I think, you know what, there's the structural case
Speaker 4: for inflation and rates, and then there's sort of what's happening,
Speaker 4: you know, relative geopolitics in the cycle. I think structurally
Speaker 4: we're in a higher for longer inflation environment and a
Speaker 4: struct higher for longer interest rate environment, which is why
Speaker 4: you're sort of seeing that in the tenure. I mean,
Speaker 4: we got we have fiscal issues to take care. We're
Speaker 4: in a deglobalized, deglobalizing world. All that puts upward pressure
Speaker 4: on the longer term inflation and interest rates story, which
Speaker 4: is why I think, you know, the long end is
Speaker 4: going to be a bit more sticky. But that means
Speaker 4: you're probably see some yeal curve steepening through the end.
Speaker 2: Of the year.
Speaker 3: Why don't risk asss care though?
Speaker 4: I think risk asst story moved on this. I mean,
Speaker 4: this is one of the points that we highlight in
Speaker 4: the midyear is that you know, the markets have moved
Speaker 4: on from hormones, right, it almost like doesn't matter, And
Speaker 4: we actually said it was actually a mispriced risk, underpriced risk.
Speaker 4: Like so base case is that Iran is over from
Speaker 4: effectively over from a market perspective, but the markets had
Speaker 4: one hundred percent priced it out and that was a
Speaker 4: little bit extreme in our view.
Speaker 1: So, being the global investment strategist, where are you looking
Speaker 1: to next? I mean, Korea has had a way of
Speaker 1: time literally and you know before that it was pretty
Speaker 1: much Japan.
Speaker 3: Where might be.
Speaker 2: The next hot market?
Speaker 4: I think it depends on sort of what you're trying
Speaker 4: to get at when you look internationally, because your Korea Taiwan.
Speaker 4: They've been phenomenal performers, but you know, they're concentrated Semi
Speaker 4: plays right, obviously tied into the ai story. So you're
Speaker 4: not really getting a ton of diversification, even though geographically
Speaker 4: you are. And so one of the areas we look
Speaker 4: at sort of risk reward, I think Japan is actually
Speaker 4: one of the more interesting areas because fundamentally you're actually
Speaker 4: seeing good earnings momentum. You look at some of their
Speaker 4: economic indicators, they're improving. You know, it's not too expensive,
Speaker 4: and you get a lot of high quality companies. So
Speaker 4: I think that's probably one of the better risk reward
Speaker 4: areas right now.
Speaker 3: While here in the US, I mean, it's been some
Speaker 3: remarkable chopped in Like one day we love Semi the
Speaker 3: next day we hate them. It's a back and forth
Speaker 3: between them and the hyper scalers, from the check writers
Speaker 3: to the check receivers. What is this a rotation taking place?
Speaker 3: Is this a fight for leadership?
Speaker 2: Yeah?
Speaker 4: I mean, obviously you know you're dealing with two dynamics.
Speaker 4: Is the pendulum is swinging, you know, is swung really
Speaker 4: far in the direction of sort of the check receivers.
Speaker 4: I think you said, right, and I think maybe you know,
Speaker 4: what we talked about in our earlier reporter is sort
Speaker 4: of the idea that cap vigilantes, the market's going to say,
Speaker 4: you're spending too much. We don't see line of sights
Speaker 4: actually that turning into business results. And so I think
Speaker 4: the market, the hyperscalars so stomics that have listened and
Speaker 4: they're monetizing that capex, and so now you start to
Speaker 4: see that pandulum short of shift the other way. Ultimately,
Speaker 4: I think there's that dynamic along with the competitive dynamic.
Speaker 4: That's why you're seeing all this moving around. I think
Speaker 4: I think it is sort of a nice case. I
Speaker 4: think to see I think you will start to see
Speaker 4: that pandum continue to swing in favor of the hyperscalers
Speaker 4: to some extent, but there is ongoing competition coming in
Speaker 4: and you're seeing, you know, so the pricing pressure on
Speaker 4: the on the model story. I mean, every day we're
Speaker 4: getting a new story about how they're having to cut
Speaker 4: prices or offer more for less.
Speaker 1: That's not a great sign Kapex vigilantis. One day we'll
Speaker 1: be saying, down Suzuki, who invented the terms, thank you
Speaker 1: for joining That is down Suzuki of I capital