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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this out with stocks adding to losses following an underwhelming start to tech earnings. Jim Caron of Morgan Stanley Investment Management joined us now for more. Jim, welcome the numbers from Alphabet, the numbers from Tesla. Do we have a capex problem, a spending issue, or a positioning and price problem in this market?

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Speaker 3: I think it's a readjustment in prices, honestly. I mean, you know, look, there's been a lot of expectations for many of these companies.

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Speaker 4: The earning have been decent.

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Speaker 3: It's just that they're not beating expectations in the way that maybe you know, people want.

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Speaker 4: Them to going forward.

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Speaker 3: And look, the earnings run so far for the first half of this year have been very strong. Of course, the markets are forward looking. They're looking into the next six months, into the next twelve months, and what they're saying is that the pace of earnings is just not going to be what it was because effectively this run rate of very you know, accelerated earnings is really unsustainable.

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Speaker 4: But that's okay because these companies.

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Speaker 3: In this sector has actually been performing, you know, not so well this year. It's actually, you know, the value sector is the broadening of the market that's done better this year so far. So I think markets are being very efficient in terms of taking down some of these you know, more technology company prices in the growth sector prices in anticipation of slowing earnings going forward. So this isn't to me an alarm bell, It's just the natural progression of the of the earning cycle.

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Speaker 2: So Jim, just to build on that peak earnings growth is a sufficient enough reason aligned to stay away from these names.

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Speaker 3: I wouldn't say that because it's a question of it's a question of the valuation. I think that yes, you know, second quarter earnings will probably mark the peak. I mean, it's going to be hard to beat that going forward, But that doesn't mean that the cash flow and that the run rate of cash going forward is going to all of a sudden dry up. Look, what we're hearing from the broader economy is that they have a lot of demand for technology, for compute and for all of these things that that many of these you know, hyperscalers provide. So the demand I think is going to be there and it's only going to grow. It's just that the earnings growth rate may not be as fast as it was, you know, like in the first half of this year, just going forward. And I think that's why these you know, many of these companies are adjusting in price, and that's actually a very good healthy sign. And meanwhile, File John, you know, as all of this is happening, the equity markets are holding up, and they're holding up because the market's broadened out.

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Speaker 4: So to me, this is you know, you know, this is okay.

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Speaker 1: How unusual is it, Jim to see the stock market holding up and the broadening out continue with yields continuing to climb.

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Speaker 3: If we were having this conversation six months ago, nine months ago, we would have said that if many of these hyperscaler stocks go down and bond yields go up, that would absolutely spell spell a disaster for you know, for equity prices broadly. But that's not happening right now, and I think that's a really important signal for us to take away.

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Speaker 4: So is it unusual, Yes, it's unusual? Is it? Is it? Is it a shock right now? No?

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Speaker 3: Because what we're seeing is is the other sectors of the markets, the other broadening. If you look at the healthcare sector, if you look at the consumer, if you look at financials, if you look at industrials, if you look at materials, all of these other sectors are holding up, and they're making up for some of the losses that we're seeing in the technology sector.

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Speaker 4: That people were quite frankly, we're worried about.

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Speaker 1: Let's say next week, Kevin worsh comes out and announces that the FED had just hiked rates by twenty five basis points, is prepared to take further action to limit inflation, and frankly gives what the market already has priced in. Would that affect things in a negative way or in a positive way?

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Speaker 3: Yeah, that's a really good question, I'm going to say that it's actually going to impact things in a negative way. And the reason I'm going to say that is, you know, number one, I don't think that the FED is going to hike rates you know, this year. But the other issue here is that this is a supply side shock. The Fed's tools monetary policy is there when the economy is overheating because of demand side issues you know that are taking place, you know, higher wages, you know, rampant hiring, a lot of spending, things like that.

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Speaker 4: When you have a supply shock.

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Speaker 3: When you have an oil or an energy you know shock that's coming through. A rate hike is basically just saying we're going to hike into something that's going to slow the market in the future. Higher oil prices is a headwind to the market. Why would you hike into a headwind into the market. It doesn't to me, that doesn't make a lot of sense. So that's why I think the markets would take it negatively when it.

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Speaker 5: Comes to what they should do. Though, higher oil prices potentially can become entrenched in this economy, especially when you're dealing with an economy that is farmed to road to table. When it comes to things like groceries. At some point, is the FED going to have to move given the fact that last year they said the cuts were insurance cuts.

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Speaker 3: Yeah, So if it does become a pervasive, you know, higher level of inflation that's seeping into the core, you know, and it's becoming very, very permanent, then you know, absolutely the FED would have to hike interest rates. I don't think that we're there yet, though. I don't think that we're seeing really you know, the material signs of that that would be running through their large scale macroeconomic models, what they call the FRBUS models. So I still think, you know, look, there might be a descent, I mean, you know, and I think that Warsh needs to explain that. But I think that you know, a lot of what Warsh is really looking at is task worse and trying to decipher the data and have new data points come in that can help them, you know, disseminate this information. But I you know, and it's a great question, but I just don't think that we're at the point where we're seeing widespread inflation to the point where the FED would feel the need to hike interest rates, at least not at this moment.

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Speaker 2: Gym. This is new territory, and given the average age on a trading floor right now, it might be territory that they've never experienced before. We're going into a meeting next week and we don't really know what's going to happen, and that might be a feature, not a bug of new leadership. You've written about this gem. Do you think they are strategically reintroducing volatility into the front end of the curve? Can we just start there?

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Speaker 6: Yeah?

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Speaker 4: I do, John.

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Speaker 3: I mean, look, so the way that I think that Warsh is approaching this is that he wants to have more contemporaneous, more real time policy reaction, meaning you know, fed interest sights hikes and cuts, and you know, depending on the cycle. Think of the front end of the market as a shock absorber to inflation and inflation expectations. If you get the shock absorber right, you get a smooth ride for the back end of the curve. And the back end of the curve could get more normal, stabilized interest rates. And that's where most people borrow, that's where corporates borrow, that's where people borrow for mortgages, for cars, autos and everything else. So I think the uncharted territory that we're moving into here is that is that Warsh will likely be more volatile in terms of his short term views on inflation and interest rate policy. But that's there to smooth out the long in and I think this is a very very different FED right now that's going to introduce more supply side indicators, not just rely solely on demand side indicators, to help, you know, make their policy decisions going forward.

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Speaker 2: Stay with us. Molblomberg, Savannan's coming up after this under Savannahs this morning, doubling down on the wall.

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Speaker 6: We don't need the hormone street, but we do it because we have to do it, because we cannot let Iran have a nuclear weapon. They're getting hit so hard and they want to make a deal. But I say they're not ready to make a deal because every time they make a deal they want to change it and everything. They're not ready. They'll be ready very soon.

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Speaker 4: So here's the laces.

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Speaker 2: This morning, how Speaker Mike Johnson delivering a win for President Donald Trump's effort to fund the panic on the House narrowly passing a record one point five trillion dollar defense bills, setting up billions more and spending for the war with a run.

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Speaker 5: So when it comes to this, the President really wanted Congress to act. The House did. The issue is we're probably not going to see the Senate take this up very quickly. This is part of reconciliation. They proved ninety five billion. Part of that, as you mentioned, seventy three billion in funding for the Iran war, twelve billion in farm aid, and ten billion aimed at incentivizing states to adopt elements of the Save America Act. So all these are the President's priorities. The issue is only the House was able to push it forward, and it potentially it might be a very hard vote ahead of the midterm elections for some individuals to take that vote. And I don't see Senate Majority Leader Foon acting on this very quickly.

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Speaker 4: Well, let's talk about the view from the House.

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Speaker 2: The Republican Congressman French Hill voting to pass the budget, saying that bill, this bill enshures our military has what it needs to deter our adversaries and defend American interests around the globe. Congressman Hill joined us now for more Congressmen, welcome back to the program. It's been too long, my friend, let's get into some of these issues. You understand why the asymmetric nature of this conflict we have at the moment, the American workforce, the American military is spending an absolute fortune, an absolute fortune right now to fight and defend American interests and global interests for that matter. In that strait, the Iranians are able to use very cheap one way attack throuns. Do we really want to get drawn in to an enduring billion dollar skeet shooting over in Iran for as long as the I can see?

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Speaker 7: Well, First, thanks for having me back. It's always good to be with the team Blueberg early in the morning. The spending bill for budget reconciliation was important to make sure we.

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Speaker 4: Keep our stocks high.

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Speaker 7: And I think it's important for the American people understand that after decades of trying to pay the Iranians offer the Iranians diplomatic capability the long standing Obama negotiation, the risks to Iran having a nuclear weapon were rising, and Iran's provocative nature threatening its Gulf neighbors, using terror with the Hoho Thi's to close the Red Sea, to attack Gaza, to continue to disrupt in Syria and Lebanon. I think the President just took the decision we have got to prevent them from having a nuclear weapon, which she initiated this spring. So I agree that Iran should and have a nuclear weapon, and we also need global open seas in the Persian Gulf. I would hope that we would have more support from around the world for those international waters, and I think that's something that I've been a little disappointed in. Our strategy is not the maintenance of those sea lanes.

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Speaker 5: Well, we do have the Senate majority leader though, when it comes to the funding saying earlier this week that he's not going to move on the House budget blueprint until the Senate solves the September thirtieth funding fight. So when do you actually think we're going to be able to get that money that you think is critical to our troops and military actually out the door.

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Speaker 7: Well, I would hope we could get that done before September thirtieth, is the answer to your question. I think Senator Thune recognizes that the House has now passed Also, you didn't mention it, but a continuing resolution fully funding the government until December fourth. That's also a tool that John Thune has that he can bring to the Senate floor because he's fearful that Democrats and once again to try to get an election advantage, if somebody considers it one, we'll try to shut the government down. Chuck Schumer's done that twice over the last during this Congress for the longest shutdown in American history. And what I think John Thune has now in his arsenal of suggestions is one, we have a cr to fund government with no additions through December four so that we don't have a government shut down. And secondly, he could use the Budget Reconcile Reconciliation Act in the Senate potentially to fund government for the rest of the fiscal years. So he's got some choices, and I'm sure he'll work with his new Budget Committee chair, Senator Johnson replacing Lindsey Graham, on what those options are.

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Speaker 5: Was this a hard vote to take? The majority of Americans opposed this war, and now gasoline prices are north of four dollars a gallon across the United States.

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Speaker 7: Well, I don't think anyone wants high gas prices, There's no question about that. And it's unfortunate that the Iranians don't recognize that they have a once in a lifetime opportunity to return their country to an open society that lives in peace with its neighbor, not the largest exporter of terror or threatening Europe and Asia with ballistic missiles and a nuclear weapon. And so I think that balance is pretty clear to me. It's been fifty years fied my entire working career. We faced assault from Iran killing Americans, killing our allies, threatening our interests, trying to assassinate our officials on our own soil here in the United States, And so I think that balance is just something we have to cope with. But no one wants high gas prizes. What we want is the Iranians to come to the negotiating table and stick with a deal. And that's what we need to continue to have our allies, including the Pakistanis and others help forcefully make that case.

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Speaker 1: Congressman, can we afford a protracted fight right now with our yields climbing, with our deficits climbing, with the bill already significantly higher than some people were prepared to pay for.

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Speaker 7: Look, it's not whether we can afford. There are a lot of challenges that we have in the world that we have to be prepared for China infiltrating our telecommunication networks and threatening our infrastructure. Here requires a major investment. Countering that is a significant investment countering terror around the world that threatens our interest and our allies interest, Countering Putin's advances in Europe and his unwillingness to quit his invasion of Ukraine. All these things cost money. In America is in a leading position both in intelligence and in military affairs.

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Speaker 4: Commers, I guess I'm watching the bodial space.

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Speaker 1: Not to surprise you here in my seat, but I'm watching how yields have reached the highest levels going back to earlier of last year. Looking at the fact that a rate hike is almost evenly priced in next week for FED Chair Kevin worsh do you think it's appropriate potentially hike rates a bit to bring down the long end of the yield curve as the US is facing all these bills that are getting more expensive to pay.

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Speaker 7: Well, that's a decision the Federal Reserve will have to make. I think what we have to do in Congress is make sure we meet the needs of the national defense to counter the threats that we have that are threats that we've inherited for decades and coped with for decades. These are not new threats, not new forces that we face, whether it's Ukraine, the Middle East generally the Gulf, or Iran's threatening in the region. So I just think we have to be prepared, preparing for common defense and funding that is one of our most important obligations here in Congress. We of course want the Iranians to come to the table. You've seen the volatility since February in global oil prices based on what's happening there, and the minute they come to the table bring peace and work with their neighbors to reopen the golf. I think you see obviously, gas prices and crude oil prices dropped precipitously as they've we've already witnessed at least twice in the last few months.

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Speaker 2: Stay with us more Bloomberg surveillance coming up after this. Yield's still climbing. Here's the take from Sophia Kearney, Letterman of FAH and Financial writing. We think the FED will be on hold for the remainder of this year and through the first half of next year. That being said, there is more likelihood of a hike than account. Sofia joins us now for more, Sophia, good morning, good to see you, good morning, Thanks for dropping by, Thanks for being here. What's the argument for a hold given this backdrop right now?

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Speaker 8: You know, I think the big thing is one you guys just hit on it. Things are changing very rapidly. Right a week and a half ago after CPIPPI is maybe a different picture than where we are now with WTI crewed at ninety and Brent almost at one hundred. But that being said, you know, the FED is working off the data they have, and we did just get that better than expected June inflation data. So I think that this meeting puts them on a hold. That being said, right, more likelihood of a hike than a cut without a doubt this year. And I think the really big risk is where do we go from here with what we've seen in oil, with what we see in expectations, and from what we have. You know, we know there are several people on the FED Lori Logan, Beth Hammick, Neil Kashgari that dissented only a couple of months ago because they really were worried about inflation. And now there's more upside inflation.

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Speaker 2: Risk see Pippi of the last week.

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Speaker 4: Why is that a source of comfort for you?

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Speaker 8: Well, you know, I wouldn't say it's a source of comfort. I do think we cheer one good data report. Right, we just got the jobless claims number super low.

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Speaker 4: But we also have to remember it's.

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Speaker 8: One month, and it was one month that was so good that in the context of inflation, you have to go that's just one month. I think part of it is a reaction to firms are a lot quicker to change prices right now. Right, we had oil come down, and we saw the immediate reaction not just in energy prices but also in different core inflation.

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Speaker 4: Right, core was the big surprise.

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Speaker 8: We saw that core inflation that was flat, that actually came down to two point six percent. And so the other way you think about it, now it's going the other direction. Our firm's going to be equally as fast to pass along price and increases from fuel Again, so I think we have to put that in the context of its one month. But I do think it sends the FED into the meeting next week on that sort of weight and see more than ready to take action.

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Speaker 1: Do yields at this level start to impede economic activity in the US.

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Speaker 8: You know, I don't think just yet, because again I think we're in this very volatile period. But I think the longer we're here, maybe that being said, you just mentioned it, we have seen a less interest rate sensitive economy. Right, even in the last couple of years, when you know, the FED tightened rapidly, we saw we keep joking this word resilient, this remarkably resilient economy, and we've continued to see that growth. So I think it depends on how long we see yields at these high levels, because the big thing is we've put in a very volatile period. Right If you look at the evolution of the yield curve over just this last six months, we've been high and low, largely high since the war in Iran began. But we're seeing a lot of movement, and I think it becomes we have to see a sustained hold at these highlight levels.

00:19:00
Speaker 1: If it's a more volatile market and it's a more volatile world, does it make sense for FED policy to be more volatile as well, in terms of not just forward guidance to the lack thereof but also for them to be able to kick up rates one month and then take them down another month.

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Speaker 8: Yeah, I think that might be where we're headed, right, with that lack of Ford guidance, lack of commitment to a path forward, they want to be nimble and maybe that's a good thing, right. A lot of people think this is a big shift. We've had J. Powell for a long time, for eight years, who was very clear in his Ford guidance, very communicative, but he really was the one that set that precedent. Right. We haven't always had a FED that is this communicative. Then we've gotten used to and so we might be going back to this. Every meeting is a live meeting, depending on what needs to be done.

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Speaker 5: You think next week is live as well.

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Speaker 8: I think it's live, but I don't expect that they will make a change. I do think there's a not a small chance there could be descents.

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Speaker 2: Right.

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Speaker 8: Again, we have heard some vocal people that are in favor of raising rates, that concern of inflation. Again, I mentioned Beth Hammick Lori Logan, But I don't think that there's necessarily the group yet that's ready to make that change.

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Speaker 2: Do you think that does Wash a favor dissenting next week.

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Speaker 8: Maybe do you think you mean giving him some credibility and.

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Speaker 2: That, Yeah, on the margin, maybe having him anchor inflation expectations without really doing anything, Yeah, I think it could.

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Speaker 8: That's a great point, right, It could sort of set the tone that we are ready to react. And Walsh has been nothing but clear that inflation is the Fed's number one mandate.

00:20:24
Speaker 6: Right that.

00:20:25
Speaker 8: The statement from June was quite short, but it ended very clearly we will get inflation back to two percent. He reiterated that week last week when he was doing his congressional testimony. They are committed to two percent inflation, and so maybe those descents with that would tweak the market. I think to think, ooh, September probably is live that could actually maybe help him.

00:20:47
Speaker 2: This is the Bloomberg's Events podcast, bringing you the best in markets, economics, angiopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.

00:21:09
Speaker 8: MHM