Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
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
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: top story, stop sending out a fourth day of gains,
Speaker 2: Tracey McMillan of Wells Fargo writing this, we remain more
Speaker 2: cautious at current levels in both fixed income and equities
Speaker 2: until valuations improve and better opportunities present themselves. We expect
Speaker 2: to see broader opportunities inequities over the next six to
Speaker 2: twelve months. I'm please to say that joining us now
Speaker 2: is Tracy. Tracy. Let's talk about this more course, on
Speaker 2: both stocks and on fixed income as well. How does
Speaker 2: a view a one asset class inform the other? Currently?
Speaker 3: Good morning, John, So we are cautious on both equities
Speaker 3: and on fixed income, and we're really waiting for better
Speaker 3: opportunities to.
Speaker 4: Add to both of those asset classes. Right now, what.
Speaker 3: We see is that at the short end of the
Speaker 3: fixed income curve, the yield is over five percent, and
Speaker 3: so you have to compare that to the opportunity and equities,
Speaker 3: and our large cap forecast for the end of twenty
Speaker 3: twenty four is fifty two hundred at the midpoint. So
Speaker 3: there's not a lot of upside potential that we see
Speaker 3: in equities going out to the end.
Speaker 1: Of twenty twenty four.
Speaker 3: Now twenty twenty five we think could be a better year,
Speaker 3: so we continue to favor large cap equities. But right
Speaker 3: now the balance between the risk reward between fixed income
Speaker 3: and equities does have a more cautious inequities going up
Speaker 3: in quality going up and quality and fixed income and
Speaker 3: staying towards the short end of that fixed income curve.
Speaker 2: Could you clarify something for me, how do you think
Speaker 2: bonds would behave in a drawdown in equitcies? Would they
Speaker 2: still perform?
Speaker 5: Well?
Speaker 3: Yeah, so that's a really interesting question because over the
Speaker 3: past couple of years, what we've seen is higher correlations
Speaker 3: between both equities and fixed income, and that's because of
Speaker 3: the driver of the downturn in both of those markets,
Speaker 3: or conversely, the upturn in both of those markets, and
Speaker 3: that's been the expectations for interest rates based on inflation.
Speaker 3: And so as inflation expectations have changed, we've typically seen
Speaker 3: bond yields rise, We've seen equities come down, so both
Speaker 3: of those negative at the same time. And then conversely,
Speaker 3: what we are telling investors is that going forward that
Speaker 3: should start to normalize as an inflation that comes under
Speaker 3: better control, and diversify, diversify into assets that do not
Speaker 3: have that strong positive correlation right now, like commodities and alternatives.
Speaker 5: I'm wondering you talk a lot about the consumer and
Speaker 5: a weakening and the consumer. How much can we get
Speaker 5: a rid of that from the recent earnings which have
Speaker 5: been pretty strong on an earnings per share basis, But
Speaker 5: you've seen revenue come in light at a number of places,
Speaker 5: including an uber. They're talking about bookings coming in lighter
Speaker 5: than expected, expecting.
Speaker 4: That to continue.
Speaker 5: They talk about Latin America bookings having to do with this.
Speaker 5: They talk about early holidays. Do you think this is
Speaker 5: evidence of just tighter competition of price pressure by the
Speaker 5: consumer or all of the above.
Speaker 3: It's probably all of the above, Lisa. What we're seeing
Speaker 3: in terms of the consumer is that you mentioned this
Speaker 3: a little bit earlier. Consumer confidence does appear to be waning,
Speaker 3: and there is a bifurcation, as you also mentioned, in
Speaker 3: the upper income quintile the bottom four income quintiles, which
Speaker 3: which have exhausted all of their pandemic savings, so really
Speaker 3: relying on just that upper end consumer now to carry
Speaker 3: the market. We'll see retail sales next week and that
Speaker 3: will give us a further indication of whether or not
Speaker 3: consumers are continuing to spend. But some of the underlying
Speaker 3: information that we're getting out of recent data and recent
Speaker 3: reports is that consumers are pushing back on some of
Speaker 3: the price increases and that companies are feeling less confident
Speaker 3: about their ability to raise prices.
Speaker 4: So all in all, that.
Speaker 3: Could be good for inflation, but we do see the
Speaker 3: consumers starting to pull back in aggregate.
Speaker 5: I think a lot of people would agree with you, Tracy,
Speaker 5: the issues just the speed and exactly where this is
Speaker 5: going to go. In terms of the weakening. You have
Speaker 5: some people come on and say we're going to see
Speaker 5: a protracted weakening and we're going to get that true downturn.
Speaker 5: Francis Donald than you live talking about that yesterday, and
Speaker 5: then you have other people saying, actually, it's just the
Speaker 5: appropriate softening to us small caps to rally.
Speaker 4: Which camp do you fit into? So we do think
Speaker 4: that we're going to see more of a soft patch.
Speaker 3: We think that the data last week is supporting that
Speaker 3: view that we'll probably see that soft patch growth slowdown,
Speaker 3: labor market slow down starting to occur in the second
Speaker 3: half of this year, so, you know, more of a
Speaker 3: soft patch.
Speaker 4: We think there's less risk of a recession.
Speaker 3: Than there was in twenty twenty three, but that doesn't
Speaker 3: necessarily give us the refresh, the reset that we would need,
Speaker 3: the clearing of markets that we would need for small
Speaker 3: caps to reassert themselves. Small caps for really for decades now,
Speaker 3: have seen the ranks of non earners increasing, and that
Speaker 3: gives us some longer term concern about small caps. But
Speaker 3: there's certainly a place in the cycle to invest in them.
Speaker 3: We just don't think that the time is quite right yet.
Speaker 6: Tracy. All morning, we've been talking about the developments in
Speaker 6: the Middle East, and in your note you talk about
Speaker 6: how this could still be a risk to oil prices,
Speaker 6: which we've seen pulled back quite significantly. What kind of
Speaker 6: upside do you think we can see in the oil
Speaker 6: market now?
Speaker 3: We have a price target on oil between eighty and
Speaker 3: ninety dollars a barrow through the end of this year.
Speaker 3: But we could see towards the upper end of that
Speaker 3: target range if we were to see oil trade restricted
Speaker 3: more in the Middle East. We did get good inventory
Speaker 3: numbers here in the US, and certainly US mint producers
Speaker 3: could ramp up production, but that will that will probably
Speaker 3: take a little bit of time, and in the interim
Speaker 3: we could see some supply constraints that would push prices higher.
Speaker 3: And don't forget about you know, Opak being able to
Speaker 3: bring on more supply as well. So we don't see
Speaker 3: oil price is necessarily skyrocketing, but we could see certainly
Speaker 3: the upper end of that range, and we think that
Speaker 3: would again put pressure on markets because it could imply
Speaker 3: inflation if.
Speaker 6: That were to be the case, a ninety dollars a barrel.
Speaker 6: Where would you potentially want to shift in your portfolio?
Speaker 3: Yeah, so we have already shifted towards commodities with an
Speaker 3: overweight there again, you know that the non correlation. We
Speaker 3: like that about commodities. We've certainly seen precious metals performing well,
Speaker 3: gold in particular, and we think that oil does have
Speaker 3: some upside from here. So you know, a commodities position,
Speaker 3: we think is probably a smart thing to do at
Speaker 3: this point.
Speaker 2: Crude a little bit lower on a session this morning, Tricy.
Speaker 2: He always wonderful to hear from you, a triceman than
Speaker 2: in that of whilst FAGA. Minneapolis FED President Neil Kashigawari,
Speaker 2: urging core, adding the FED will like to keep rates
Speaker 2: on hold for a quote extended period. More Fed speak
Speaker 2: on TAT with Jefferson, Collins, and Cook all speaking today
Speaker 2: Janet Henry and the team at HSBC expecting the Fed's
Speaker 2: first cut in September and expecting the ECB and BOW
Speaker 2: to move in June. Janet joins us Now for more, Janet,
Speaker 2: some people might say September has become the new June.
Speaker 2: What is the risk that December becomes the new September
Speaker 2: and pretty soon?
Speaker 1: Yeah, there's always risks where markets that are concerned. As
Speaker 1: you well know, it's not so long ago that markets
Speaker 1: were pretty convinced that the first rate cup was going
Speaker 1: to be in March, and then it briefly went right
Speaker 1: to the end of the year, and you're September for
Speaker 1: us is the new June. But you'll also know that
Speaker 1: back in December we were saying June. So it really
Speaker 1: will depend on the data. But as Powell keeps telling us,
Speaker 1: it's the totality of the data. Yes, they need to
Speaker 1: see further improvement on inflation, but they don't need to
Speaker 1: wait until they get back to two percent. The urgency
Speaker 1: with which they will feel the need for act will
Speaker 1: depend on all of the data, including the labor market.
Speaker 4: So it may be that, you know.
Speaker 1: The progress on inflation is relatively modest, but if they
Speaker 1: see more that scares them in the labor market data,
Speaker 1: that could cause them to act. But if in December
Speaker 1: we're still an unemployment less than four percent, still getting
Speaker 1: payroll prints of two hundred thousand, and inflation core PCU
Speaker 1: is still above two and a half percent, then what's
Speaker 1: the urgency.
Speaker 2: It's pretty impressive. It's not where we thought we would
Speaker 2: be even three four months ago. Jenna, let's talk about
Speaker 2: September and not the economic data. Can we just talk
Speaker 2: about the politics briefly. You're not alone on September. Other
Speaker 2: people have that monked on the calendar as well, including
Speaker 2: a then Center over Morgan Stanley. I think the natural
Speaker 2: question for us to ask is is the politics relevant
Speaker 2: here going into the election in November. Is September still
Speaker 2: adore an option that's open to this feder reserve.
Speaker 1: I think every meeting is open to the feeder or
Speaker 1: reserve because I think in anyone scenarios, including the most
Speaker 1: likely scenari for any FOMC member, is that the next
Speaker 1: move in rates, and any scenario is still on the table,
Speaker 1: the next move in rates.
Speaker 4: Will be a small one.
Speaker 1: We're talking about a twenty five basis point move in rates.
Speaker 1: Is what's going to happen now. While that is consequential
Speaker 1: because hopefully it will be the beginning of a sequence
Speaker 1: of rates. Even if it's not every quarter or every meeting,
Speaker 1: maybe it is a bit more intermittent, they will take
Speaker 1: the decision when it is appropriate based on the data.
Speaker 1: I don't think it will be oh, we've got to
Speaker 1: wait until after the election and we can't be too political. Yes,
Speaker 1: a lot of them will be having that thought at
Speaker 1: the back of their mind, but it will be about
Speaker 1: what is most likely to settle inflation at least a
Speaker 1: bit more confidently back on track towards the two percent level,
Speaker 1: even if we never really get there without inflicting more
Speaker 1: damage than is necessary in terms of what's happening in
Speaker 1: the labor market.
Speaker 6: But Janet, whether or not they come out and they
Speaker 6: say we don't plan to be political, that's going to
Speaker 6: be the optic. So what's the bar and the data
Speaker 6: they need to see to almost feel comfortable about taking
Speaker 6: that move, knowing that many are going to view it
Speaker 6: through this political lens.
Speaker 4: Well, you know, we get back to the data.
Speaker 1: You've going to remember in the last set of projections
Speaker 1: that we had back in March, what was in the
Speaker 1: FED forecasts for core PCEE for the end of twenty
Speaker 1: twenty four was two point six. You know, we're at
Speaker 1: two point eight. We know this is a bunply ride
Speaker 1: for inflation. But just as everyone got overly excited at
Speaker 1: the end of last year on a few downside surprises
Speaker 1: to the inflation releases, they've got really really hawkish early
Speaker 1: part of the year, when inflation surprised for three months
Speaker 1: via about point one, you know, on a monthly basis
Speaker 1: for that.
Speaker 4: Kind of period, So I think what they do need
Speaker 4: to see now it seems.
Speaker 1: To really pull the trigger is get a core PCEE
Speaker 1: print that probably is more like two point five as
Speaker 1: the headline figure. But they will also need further evidence
Speaker 1: in the data slower growth, employment growth in particular, and
Speaker 1: the wage numbers.
Speaker 4: That's by no means the most important factor.
Speaker 1: But the more point twos we get our monthly inflation
Speaker 1: and the lower the payrolls release, that's probably what we
Speaker 1: do need to see to get that September rate.
Speaker 6: Say September comes and goes and they don't make that cut,
Speaker 6: do you think they push it to December or there
Speaker 6: is a chance that November could be a live meeting.
Speaker 1: I think it would be usual to cut in an
Speaker 1: election month. In fact, when we looked back at this,
Speaker 1: and certainly when I spoke to other previous FOMC members,
Speaker 1: they could only remember one meeting whereby the timing of
Speaker 1: an election, and I think it was a midterm election
Speaker 1: actually influenced the Fed's outcome.
Speaker 4: And actually it was under green Span ahead of our
Speaker 4: midterm elections.
Speaker 1: But the next move straight after the election was a
Speaker 1: seventy five basis point move, so it was really consequential
Speaker 1: when you're delivering a rate a rate rise of that
Speaker 1: kind of magnitude, So I think November will be unlikely
Speaker 1: for me. It really is a case of we either
Speaker 1: go in September or we will wait until December.
Speaker 4: But I wouldn't rule anything out.
Speaker 5: One of the most interesting aspects of your forecast is
Speaker 5: that you now call for twenty five basis points of
Speaker 5: rate clides this year. It was seventy five basis points previously,
Speaker 5: but you keep your forecast for seventy five basis points
Speaker 5: next year. Do you think that we're heading toward a
Speaker 5: higher neutral rate.
Speaker 4: Than you previously expected.
Speaker 1: Well, I've long been contacting over the last few years
Speaker 1: that we are moving towards a higher neutral rate. Obviously,
Speaker 1: the movement on the dot plot and the longer term
Speaker 1: dot from the FOMC has edged up from.
Speaker 4: Two point five to two point six.
Speaker 1: But I really get the impression from various FOMC members
Speaker 1: that they actually think it's more like about about three percent.
Speaker 4: But I guess what we've got in our projections.
Speaker 1: Is the idea that policy will need to stay relatively restrictive.
Speaker 1: I think this is what you might hear from from
Speaker 1: more central banks. You could potentially hear something like that
Speaker 1: from the Bank of England tomorrow. The idea that rates
Speaker 1: can be cut a little bit and still be restrictive.
Speaker 4: If we're still at four percent FED.
Speaker 1: Funds, which we are on our forecast by the end
Speaker 1: of twenty twenty five, arguably that is still restrictive to
Speaker 1: ensure an ongoing disinflationary process.
Speaker 4: We don't have core PCE at two percent by the
Speaker 4: end of twenty.
Speaker 2: Twenty five, Janet Wells said, appreciate the clarity as always,
Speaker 2: Janet Henry the of HSBC breaking down the Federal Reserve. Mandy,
Speaker 2: you call this the persistent kink in the vix futures curve.
Speaker 2: Can you walk us through it.
Speaker 7: Yeah, So we've been observing this since the beginning of
Speaker 7: the year, where the October future of vix Future is
Speaker 7: training at a premium to the September by about two
Speaker 7: to three points. And that's unusual because a we're still
Speaker 7: many minut a month away from the election. If you
Speaker 7: look at this point in the twenty twenty cycle, there
Speaker 7: was only about a one point difference between the September
Speaker 7: and October contract back then, so a lot more volatility
Speaker 7: being embedded this early on in the cycle. And the
Speaker 7: second thing I mentioned before was, you know, the November
Speaker 7: If you look at the November future, it actually doesn't
Speaker 7: show expectations of persistent volatility. People are expecting it to
Speaker 7: be quickly resolved, which I think is you know, interesting
Speaker 7: given the candidates involved.
Speaker 5: You know, just to broad down a little bit this
Speaker 5: concept of volatility, a lot of people have been saying, oh,
Speaker 5: the market is getting more volatile. We look at a
Speaker 5: lot of the overall marred metrics, they're.
Speaker 4: Not really getting all of that more volatile, right, But you.
Speaker 5: Look at specific stocks and their whip sign. We're seeing
Speaker 5: that just this morning.
Speaker 4: How do you put that together?
Speaker 7: Actually, we have a great metric to exactly illustrate that.
Speaker 7: So this has been a key feature of the markets
Speaker 7: of the past I would say eighteen month is that
Speaker 7: while index volatility or macrovolatility has been muted, single stock
Speaker 7: volatility has not. So if you look at the stock
Speaker 7: of exactly your point, there's been some wild swing at
Speaker 7: the stock and the sector level. So, in other words,
Speaker 7: dispersion of stocks has been high in terms of performance,
Speaker 7: while because of the low correlation, index returns have been muted.
Speaker 7: So if you look at vics that's low. If you
Speaker 7: look at our dispersion index DSPX, that's actually near historically
Speaker 7: high levels. And that kind of exactly illustrates that dilemma.
Speaker 6: Many given we know what happened after the twenty twenty election,
Speaker 6: where is this conviction coming from from traders to say, actually,
Speaker 6: there's little fear of a contested election.
Speaker 7: So I think you're going to separate up because even
Speaker 7: in twenty twenty, right, and we saw headlines about you know,
Speaker 7: is there election fraud and obviously one Candida not conceding,
Speaker 7: But even in twenty twenty, volatility came in very rapidly
Speaker 7: in November. So I think in terms of realistic path
Speaker 7: to a contested election, I think the hurdle is actually
Speaker 7: quite high, and I think that's what investors are really
Speaker 7: kind of focusing on. So like you makee noise, you
Speaker 7: make it headlines, but at the end of the day,
Speaker 7: there is a process in place, and investors at this
Speaker 7: point still trust that process and that's why you're not
Speaker 7: seeing that resistant king in the curve.
Speaker 2: You've explored this a little bit as well, How does
Speaker 2: this compare to previous elections, not just twenty twenty, but
Speaker 2: going back even further, is this normal?
Speaker 7: Is this so what it's been priced in? I would
Speaker 7: say at this point in the cycle is higher than
Speaker 7: what we see at this point in the cycle. But
Speaker 7: if you look at how the vic actually performs in October,
Speaker 7: it's actually underpricing relative to some of the more recent cycles.
Speaker 7: So both twenty sixteen and twenty twenty we saw more
Speaker 7: significant jumps in volatility in the month of October than
Speaker 7: one is actually currently priced in. So I think twenty
Speaker 7: sixteen twenty twenty average about ten point increase in the
Speaker 7: VICX right now two to three. You know, I think
Speaker 7: as we get closer to the election, we'll probably start
Speaker 7: to see that actually increase.
Speaker 2: How does this stack out with what you would advocate for?
Speaker 2: So it's Steve Eisman right, basically tariff Sun China big deal.
Speaker 2: He said this about the Inflation Reduction Act. You might
Speaker 2: get changes that might be talk of repeating get we
Speaker 2: might move on that for a single day, but at
Speaker 2: the end of the day, nothing will happen. Would you
Speaker 2: advocate for the same thing? Is that how you view things?
Speaker 7: So in terms of fiscal policy, I think what is
Speaker 7: important to focus on in the state of government, the
Speaker 7: state of politics nowadays, Really to get fiscal policy through,
Speaker 7: you really need to have a clean sweep, right, and
Speaker 7: that's the kind of what people are focused on. And
Speaker 7: I think part of the reason why this may be
Speaker 7: a little bit less volatility and price and relative to
Speaker 7: how actually performed last cycle, is that there's just more
Speaker 7: of a less chance of potential clean sweep by either
Speaker 7: the Democrats or the Republicans, and that's what you really
Speaker 7: need in order to enact, you know, a significant fiscal
Speaker 7: policy in the market.
Speaker 6: So divide a government means there's going to be gridlocked,
Speaker 6: but at some point they need to contend with the
Speaker 6: Trump error tax cuts they will expire in twenty twenty five.
Speaker 6: Do you expect some of them to be extended at
Speaker 6: the very minimum?
Speaker 7: So I don't have expectation in terms of the fiscal
Speaker 7: policy side, but I will say, you know, that would
Speaker 7: obviously have an impact in terms of you know, the
Speaker 7: rates market, and that's where a lot of people.
Speaker 4: Are focusing on.
Speaker 7: But the big driver you know in the rates market
Speaker 7: obviously is the Fed and monetary policy, and that is
Speaker 7: still front and center for a lot of investors. So
Speaker 7: we'll see as we get closer to the election, obviously
Speaker 7: the outcome of the election, what happens to those you know,
Speaker 7: Trump tax cuts. But so far it's still very much
Speaker 7: focused on inflation and said in potential great cuts.
Speaker 2: So let's put about one things just briefly, the spike
Speaker 2: in volatility and April. You've explored this, was it a
Speaker 2: one off? How do you guide sort of that conversation
Speaker 2: at the moment.
Speaker 7: Yeah, sure so. Insomuch as the April sell off was
Speaker 7: driven by rates, I think it's important to recognize that
Speaker 7: the balance of risus shifted and when we talk about rates, right,
Speaker 7: we've been talking about rates higher for longer, for a
Speaker 7: very long time, but now the focus is really on
Speaker 7: the longer part of that, right, how much longer, which,
Speaker 7: when you think about it, is actually volt dampening because
Speaker 7: it's talking about rates remaining unchanged for longer versus before
Speaker 7: when we were talking about rates for higher for longer,
Speaker 7: the focus was very much on higher, how much higher,
Speaker 7: how much higher inflation can go? The right tail when
Speaker 7: it comes to the rates distribution was much more significant.
Speaker 7: So to me, what stood down in April is that
Speaker 7: even though we did get a sell off in the market,
Speaker 7: volatility was actually really muted. In the rates market. If
Speaker 7: you look at TLT imply volatility for example, it double
Speaker 7: last October during the rates sell off, but this time
Speaker 7: around it actually went up very very modestly and now
Speaker 7: actually currently back down to a one year low. So
Speaker 7: the more conteined reaction that we're seeing in the bond
Speaker 7: market I think has spilled over to the equities. And
Speaker 7: that's why you know vixus again back to thirteen handle.
Speaker 2: Interesting Mandy, you what are the best of this and
Speaker 2: we always enjoy catching up with your Thanks for being
Speaker 2: with us. Thank you, Mandy zoo there of CVO. This
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