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 Amerie Hordernt. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Terminal and the Bloomberg Business app. Fello Orlando, the chief
Speaker 2: equity markets trying to just a federated global investment right
Speaker 2: in the following. We expect the FED to cut interest
Speaker 2: rates by a quarter point at both his September and
Speaker 2: December meetings this year. We should boost stocks towards our
Speaker 2: seven five hundred target next year for the S and
Speaker 2: P five hundred.
Speaker 3: Phil joins us now for more, Philke and.
Speaker 4: Monic John, thank you very much for having me back.
Speaker 3: Thank you for being here, sir.
Speaker 2: Let's talk about the month ahead payrolls this week, in
Speaker 2: flight next week and then the big feder Reserve meeting.
Speaker 2: How do a thing's shapen up for you in a team.
Speaker 4: So we've had this massive thirty five percent rally off
Speaker 4: the Liberation Day bottom going into I guess the week
Speaker 4: before Jackson Hole, and then the market traded off about
Speaker 4: four percent or so because the market didn't really understand
Speaker 4: or appreciate what sort of a tone would Powell take
Speaker 4: at the meeting. Now, the rally we've seen over the
Speaker 4: course of the last week or so has been that
Speaker 4: Powell took the right tone that the Fed is thinking
Speaker 4: about easing. But as we get back to the day
Speaker 4: after Labor Day, everyone's back from vacation. Now the cold
Speaker 4: dose of reality sets in. All Right, what's the next
Speaker 4: set of inflation data going to look like? What is
Speaker 4: the labor market data this week? And then you've got
Speaker 4: all the noise surrounding the Fed and tariffs and does
Speaker 4: meron does he get seated this week? So at this
Speaker 4: point that dose of reality, we think, given the fact
Speaker 4: that we've turned the calendar to September, there could be
Speaker 4: some chop here looking out going into the September seventeenth met.
Speaker 3: Well, let's touch on a potential source of tension.
Speaker 2: Let's say the move we saw in the last month
Speaker 2: to see cyclical was outperformed, to see the airlines up
Speaker 2: double ditgit's the home builders up, double ditchits to see
Speaker 2: the rustle to small caps of my seven percent at
Speaker 2: a time where the chairman is increasingly word about a
Speaker 2: cyclical downstad does that one stack out for you?
Speaker 4: So we love small caps, just full disclosure here, and
Speaker 4: the key reason for that is we believe lower interest rates.
Speaker 4: Not only do we think we've got two quarter point
Speaker 4: cuts this year, we think we've got another four quarter
Speaker 4: point cuts over the course of next year. The funds
Speaker 4: rate by the end of calendar twenty six, we think
Speaker 4: the upper band is going to be a three percent.
Speaker 4: If we're right, that suggests that you've got an excellent
Speaker 4: backdrop for small cap stocks as well as those consumer
Speaker 4: cyclical areas. So that's our longer term view. But there's
Speaker 4: a lot of noise and nonsense that we're going to
Speaker 4: have to parse through over the course of the next
Speaker 4: several weeks.
Speaker 1: Given the fact that this would be the deepest rate
Speaker 1: cutting cycle outside of our session ever going back to
Speaker 1: the nineteen eighties, I mean, this is something that a
Speaker 1: lot of people have pointed to. So do you see
Speaker 1: these cuts coming irrespective of whatever economic data that we get.
Speaker 1: In other words, you can question the politics of the moment,
Speaker 1: but what this market seems to be pricing in is
Speaker 1: rate cuts for the sake of ray cuts that juice growth,
Speaker 1: impossibly inflation regardless of the economic data.
Speaker 4: Great point, Lisa. We're looking at that dual mandate, We're
Speaker 4: looking at the data, and so while there is some
Speaker 4: concern about inflation, we're focused on the labor market.
Speaker 5: Here.
Speaker 4: What's happened in the labor market over the last three
Speaker 4: three months. The average non farm payrolls thirty five thousand.
Speaker 4: The first four months of this year, that number was
Speaker 4: up around one hundred and twenty five thousand. All of
Speaker 4: last year that number was one hundred and sixty eight thousand.
Speaker 4: So the labor market is materially slowing. This coming Friday,
Speaker 4: we're going to get the August non farm pay report.
Speaker 4: The August report historically is the wonkiest report of the year.
Speaker 4: There's going to be a lot of noise. You know,
Speaker 4: you've got summer vacations in and out, company's menufacturing facilities,
Speaker 4: take downtime in terms of furloughing temporarily workers and whatever.
Speaker 4: And then next week I think it's next Tuesday, we're
Speaker 4: going to get the annual payroll revisions. Last year that
Speaker 4: revision was down eight hundred thousand jobs. We think the
Speaker 4: revision this year could be down another five or six
Speaker 4: hundred thousand. So we'd be focused more on the labor
Speaker 4: market and the deterioration there as opposed to what's going
Speaker 4: on with inflation.
Speaker 1: If inflation is higher though, and you do see that
Speaker 1: sort of crimping in the labor market, the sort of
Speaker 1: loosening or in the labor diver I should say, this
Speaker 1: issue of people not being able to get jobs, Then
Speaker 1: why would small caps rally, which are typically hinged to
Speaker 1: growth when that's a stagflationary backdrop.
Speaker 4: So we think that growth ultimately over the course of
Speaker 4: next year is going to improve. Let me throw this
Speaker 4: data point out our Macro Policy Committee at Federated Our
Speaker 4: GDP forecast for next year is two point eight percent.
Speaker 4: The blue chip consensus is one point four percent. Within
Speaker 4: the blue chip consensus, the highest estimate on the street
Speaker 4: is two percent. So why are we at two eight
Speaker 4: One of the things we're focused on is the fact
Speaker 4: that we are looking for a significant improvement in economic
Speaker 4: activity coming in corporate cap X. One of the key
Speaker 4: provisions in the One Big Beautiful build was one hundred
Speaker 4: percent expensing. So you look at productivity growth in the
Speaker 4: first quarter of this year and it was negative by
Speaker 4: two percent. It's never negative. What we think was happening
Speaker 4: is a lot of companies were holding back their cap
Speaker 4: X plan, saying we're going to wait to see what's
Speaker 4: in this piece of legislation.
Speaker 1: Okay, but that was also continent on some clarity around tariffs.
Speaker 1: Don't some of those plans get withdrawn now that there's
Speaker 1: a real question mark around how much the tariff's go
Speaker 1: into place.
Speaker 4: Well, the tariff question is an open question at this point,
Speaker 4: and so I think legislatively we've got that, but I
Speaker 4: think this is ultimately going to be decided by the courts,
Speaker 4: particularly the Supreme Court, in terms of the legality of
Speaker 4: the terriffs.
Speaker 2: Despite that, you're clearly looking for a reacceleration and growth
Speaker 2: through the next year, and parkably the market's picking up
Speaker 2: on that in the last month. Do you think what's
Speaker 2: happening at the long end of the Yeld curve is
Speaker 2: a reflection of a better growth profile in our future
Speaker 2: or do you think it could become a constraint for
Speaker 2: risk assets.
Speaker 4: So the way we're looking at the yield curve is
Speaker 4: you're probably going to see a further steepening lower interest
Speaker 4: rates at the low end, higher interest rates at the
Speaker 4: high end. But as we look out over the course
Speaker 4: of the next eighteen months or so, we think the
Speaker 4: benchmark ten year treasury you'ld could be working down towards
Speaker 4: the four percent level, which is supportive when we think
Speaker 4: of consumer cyclicals and smaller cap stock.
Speaker 2: Stay with us more Bloomberg surveillance coming up after this.
Speaker 2: Lets extend some of this with Leland Miller, the CEO
Speaker 2: of China Baseburg. Leland joins us now for more Leland,
Speaker 2: welcome to the program. Is China and President She from
Speaker 2: an economic standpoint, operating from a position of strength, can.
Speaker 5: Call it a position of strength, but it's getting stronger
Speaker 5: considering that a lot of countries are backing away from
Speaker 5: their close relationships to the United States. If you look
Speaker 5: what's happening with India right now, India doesn't want to
Speaker 5: be looking around the room and see China on the
Speaker 5: left and Pakistan on the right and Belarus across the room.
Speaker 5: I mean, it would rather be in a group of
Speaker 5: countries in the United States and others and strengthening trade
Speaker 5: relations there. But it will push back if it thinks
Speaker 5: it's being pushed into a quarter. And so we're seeing
Speaker 5: a situation where China is getting is becoming an attractive
Speaker 5: option because it's not the United States.
Speaker 1: Right now, it seems like Russia and China have a
Speaker 1: very clear relationship. China is almost the owner or Russia
Speaker 1: is the vassal state of China because it is so
Speaker 1: dependent on its revenues. The relationship between India and China
Speaker 1: is much more complicated. How do you see that evolving?
Speaker 1: How close can that get given how incredibly contentious the
Speaker 1: relationship has been for decades.
Speaker 5: Yeah. Look, you know, India considers itself a non aligned country,
Speaker 5: and a lot of countries do in Southeast Asia too
Speaker 5: that that have that have you know, said they're not
Speaker 5: going to be a US ally directly or a Chinese ally.
Speaker 5: They're gonna they're going to manage relations with both. I mean,
Speaker 5: you've got Indonesia, You've got Vietnam, You've got a lot
Speaker 5: of other countries. But within that non alignment uh label,
Speaker 5: there have been tightening relationships for years and years in
Speaker 5: the United States. It's been geopolitical, it's been economic, it's
Speaker 5: been trade. These things have been very advantageous to US
Speaker 5: policy goals, trade and foreign policy and even military in
Speaker 5: the Pacific region. And if if all of our policy
Speaker 5: ends up backtracking to become one big question about so
Speaker 5: fair trade, but it doesn't have any uh, you know,
Speaker 5: look at the geopolitical side instead, it's on how are
Speaker 5: these things balancing out? Then then we're going to be
Speaker 5: We're going to wake up five years from now, We're
Speaker 5: going to realize that we've just undid twenty years of diplomacy,
Speaker 5: uh that have sort of pushed back against the China
Speaker 5: led world.
Speaker 3: It's a problem how.
Speaker 1: Much you already seeing some of these new alliances in
Speaker 1: the trade data. I mean we've seen, for example, Chinese
Speaker 1: exports that have decres substantially to the United States, but
Speaker 1: that have increased substantially to the rest of the world.
Speaker 1: Do you see that along alliances or is it just
Speaker 1: transshipments the idea of finding the weakest know that they
Speaker 1: can get products in they can eventually get to the
Speaker 1: United States.
Speaker 5: Yeah, it's not alliance, but it's not all transhipment either.
Speaker 5: It's essentially China shoving its exports down other countries throats,
Speaker 5: and you know, the United States says, you know, you
Speaker 5: can see it in our China Facebook data, you could
Speaker 5: see it in other trade data. You know, the direct
Speaker 5: shipments in China the United States has been going down,
Speaker 5: but China has been just unloading its exports, in particular
Speaker 5: into Southeast Asia because they can't they can't push back.
Speaker 5: They can't push back geopolitically, you know, they can't compete
Speaker 5: with Chinese lower prices that are sort of dumping their
Speaker 5: overcapacity into into Southeast Asia. So it's not about tightening
Speaker 5: economic block if anything, it's the opposite. But it means
Speaker 5: that in a world in which China is trying to
Speaker 5: find places to dump its exports, you know, it's picking
Speaker 5: on its weaker neighbors, and it's being very successful.
Speaker 3: Right now, then can we just DOOWND that point? China
Speaker 3: is the capacity.
Speaker 2: We had a guest on the program forty minutes ago,
Speaker 2: making the income of that China was going to address that.
Speaker 2: Do you see any sign of that whatsoever?
Speaker 5: You know, it's one of these things that people. People
Speaker 5: read the they you know, they read what the government's
Speaker 5: plans are and I say, oh, well, the government must
Speaker 5: be willing to address this there, you know, there, it's
Speaker 5: it's you know, they're going to spur you know, have
Speaker 5: more consumption, they're going to have more stimulus, they're going
Speaker 5: to have you know, they're going to combat over capacity. Finally,
Speaker 5: the model doesn't allow them for them for them to
Speaker 5: do this very easily. So look, if it was a
Speaker 5: priority and the short term, yes, I think that they're
Speaker 5: doing little things is anti evolution campaign. They're they're trying
Speaker 5: to weed out some of this price competition that comes
Speaker 5: from you know, every provincial government in China subsidizing the
Speaker 5: same stuff, leading to oversupply, leading to exported you know,
Speaker 5: exported oversupply in this overcapacity problem. So yes, in the
Speaker 5: short term they're going to deal with it on a
Speaker 5: micro level. But the economic model that China has, which
Speaker 5: is stimulus to the supply side and not to the
Speaker 5: demand side, you know, it does not allow for them
Speaker 5: to shift things away. They're going to have more over
Speaker 5: capacity and there's going to have to find places to
Speaker 5: bury it until someone forced or someone or some block
Speaker 5: forces them to do otherwise.
Speaker 2: Leilan, just why are they married to that particular model.
Speaker 2: What would it take to make them change their mind.
Speaker 5: Well, for I think it's what Sheijenping and Chinese communist
Speaker 5: leaders have have fought for a long time. What they
Speaker 5: want to do is they want to produce more. They
Speaker 5: want to build up their industrial base, and that's fine,
Speaker 5: and that's laudable from their perspective. But what it has
Speaker 5: happened is it's all the all the stimulus. The entire
Speaker 5: model is based on spurring more production and more exports,
Speaker 5: and they've been very explicit about that in the last
Speaker 5: couple of years in particular. So as long as you're
Speaker 5: trying to produce more, produce more, produce more, but you
Speaker 5: have very weak domestic demand and you're doing absolutely nothing
Speaker 5: structurally in order to empower consumers or households or the
Speaker 5: private sector to become more consumers back home. What you're
Speaker 5: doing is you're having a model that's completely reliant on production.
Speaker 5: And that's what the model is right now. It's why
Speaker 5: China is very vulnerable but also not a very good
Speaker 5: trade partner for for others who want them to do a.
Speaker 2: Board ward stay with US mult Bloomberg Surveillance coming up
Speaker 2: after this. Ken Hexter, the Bank for America Security senior
Speaker 2: analyst of air frame and surface transportation joined just now
Speaker 2: for more kenk morning, good morning. Let's extend some of
Speaker 2: that conversation, and thanks for being here. Let's take the
Speaker 2: deminimus exemption. Can you just walk us through it, give
Speaker 2: us a feel for how much of the overall volume
Speaker 2: between say, trade between the US and China that actually
Speaker 2: accounted for through ranks alone.
Speaker 6: Yeah, and happy post labor day and welcome back to
Speaker 6: work everybody. So you know, it's a great question in
Speaker 6: terms of you know, Brendan was mentioning the one point
Speaker 6: four to one point five billion packages a year, about
Speaker 6: four million a day, so you've got a lot of frequency.
Speaker 6: UPS and FedEx export combined about two point eight million
Speaker 6: packages per day, so they're representing and that's not all
Speaker 6: dominimus but a huge portion of this diminusm movement on
Speaker 6: a per day. But international is only about twenty five
Speaker 6: percent of each of UPS and FedEx's revenues, and then
Speaker 6: the export portion is only seventeen percent, so we're still
Speaker 6: talking a small portion, as Branda mentioned, a smaller portion
Speaker 6: of the number of volumes or the high volume but
Speaker 6: low value of the package is moved. But this is
Speaker 6: meaningful this is the highest profitable lane is the US
Speaker 6: China lane. So we've already seen those volumes down about
Speaker 6: seventy five percent year over year once this went into
Speaker 6: effect in May. The new news here is on Friday
Speaker 6: it expanded to the rest of the world. So that's
Speaker 6: about twenty four percent of Dominimus is now encapsulated in
Speaker 6: this new expanded part. How enforceable is this, So it's
Speaker 6: enforced by the US right, so it's something that our
Speaker 6: Customs and Border Protection Division is going to be watching.
Speaker 6: And so now everybody has to comply. The difference of
Speaker 6: what's going on before is ups and FedEx already required
Speaker 6: the information on what's in the package, but now you've
Speaker 6: got to get who made a packet, who made the goods,
Speaker 6: and so the difference is the postal operators. He was
Speaker 6: mentioning thirty different postal service operators suspended because they don't
Speaker 6: have the technology. Before you could just check a box
Speaker 6: that this was a small, low value package. Now you've
Speaker 6: got to give so much more information. So that's guarded
Speaker 6: by the custom a CBP and on imports.
Speaker 1: Now, I was just wondering, you know, if you get
Speaker 1: on a plane, let's say, and you get five hundred
Speaker 1: dollars worth of goods from some country, how do they
Speaker 1: come on the plane and get it? I just wonder
Speaker 1: is this you know, I'm just thinking theoretically, South laughing
Speaker 1: at me.
Speaker 3: I mean, how do they enforce this?
Speaker 1: Has it become difficult given all of the changes and
Speaker 1: the teriff regimes and some of the legal challenges.
Speaker 6: Yeah, what you're carrying on you that's still not going
Speaker 6: to change as far as that eight hundred mint dollars limit.
Speaker 2: Right now, this is looking at class This is the
Speaker 2: mailing reasons.
Speaker 6: This is mailing cross border, right, So this is going
Speaker 6: what's going in packages, what's going on vessels, what's going
Speaker 6: on different methods of transport, even rail cross border? So
Speaker 6: they're managing what what packages are going cross border?
Speaker 2: Of the companies that you follow at the moment, who's
Speaker 2: executing really well? Have you been impressed by.
Speaker 6: Well, I mean they're ex secuting in terms of FedEx
Speaker 6: and ups already moved traffic, right, have the skill sets.
Speaker 6: But this is a question about what's going to happen
Speaker 6: with the increased rates to those packages. So for example
Speaker 6: Temu and Shean, right, these were low value shippers that
Speaker 6: had found a loophole and expanded that loophole. We went
Speaker 6: from one hundred million packages twenty years ago to a
Speaker 6: billion and a half, right, and that's already up to
Speaker 6: nine hundred million packages at run rate by the time
Speaker 6: this went into effect in May. So you're seeing this.
Speaker 6: This is really taking those companies that learned how to
Speaker 6: take advantage. And what you've seen is Shean's volumes are
Speaker 6: down twenty three percent I'm sorry, down twelve percent, but
Speaker 6: revenues are up twenty three percent because they've taken rates
Speaker 6: up to adjust for the tariffs, or they've gone in
Speaker 6: and as you were mentioning gone to different countries.
Speaker 3: Stay with US.
Speaker 2: Multile IMPEG surveyance coming up after this. Aaron McLaughlin, the
Speaker 2: senior economist of the conference for It, joins us now
Speaker 2: for more Aeron, Welcome to the program. I talk about
Speaker 2: your data, the loss of confidence. Are you seeing that
Speaker 2: more pronounced or if we send it bounce back as
Speaker 2: we come into the post Labor Day period.
Speaker 7: We have not seen a bounce back yet. It is
Speaker 7: still you know, after our sort of dip after Liberation Day,
Speaker 7: it elevated a little bit in May, and it's still
Speaker 7: very similar. Those numbers looking at sort of a trend
Speaker 7: or a possible emerging trend. It looks like younger consumers,
Speaker 7: consumers under thirty five are feeling more negative than some
Speaker 7: older consumers. And we think in part this might be
Speaker 7: well in general because of cost a living. But one
Speaker 7: thing that we're also closely looking at is the end
Speaker 7: of deminimus in the additional cost for fast fashion and
Speaker 7: other items whole.
Speaker 1: Love a second, Aaron, are you saying that because people
Speaker 1: can't get their she and packages and that that's typically
Speaker 1: the younger individual, they're feeling worse.
Speaker 3: Is that what you're sensing.
Speaker 7: I am sensing that that could be the case. Yes,
Speaker 7: So we've done some analysis these packages that are coming
Speaker 7: that have come directly from China other places from around
Speaker 7: the world that are have really boomed the last few years,
Speaker 7: and in fact, eighty three percent of e commerce packages
Speaker 7: come to Minimus and they came in virtually without any
Speaker 7: ariffs on them because they came direct from China and elsewhere.
Speaker 7: And we think that the additional arariffs could add up
Speaker 7: to two tenths of a percentage point on inflation over
Speaker 7: the next year, and you know, it could be a
Speaker 7: downer for younger consumers.
Speaker 1: Taking a step back. There are two prongs to the
Speaker 1: consumer confidence side of things. On one hand, there's this
Speaker 1: question about inflation, which has been a really dominant theme
Speaker 1: over the past number of years. On the other hand,
Speaker 1: it's employment, and that's kind of what we're looking for
Speaker 1: to understand and what the breaking point will be. Are
Speaker 1: they still confident that they will have jobs? They still
Speaker 1: confident enough to keep spending even if they don't feel
Speaker 1: very good about it, because they haven't always done what
Speaker 1: they've said they've felt when it comes to inflation.
Speaker 7: Right right now, it seems that consumers still feel that
Speaker 7: the labor market is fairly healthy, although they're starting to
Speaker 7: reveal in some of the answering of some of our
Speaker 7: data that they sense that there's less jobs available out there,
Speaker 7: which is kind of interesting. So personally they may feel
Speaker 7: confident still continue to spend, but we do think this
Speaker 7: spending will be on sort of not on discretionary goods
Speaker 7: is where it will weaken. That non discretionary goods is
Speaker 7: where consumers will continue to focus, and that when it
Speaker 7: comes to big purchases like appliances and automobiles. As tariffs
Speaker 7: increasingly have an impact on these we just may see
Speaker 7: that confidence are road in the future months.
Speaker 2: And let's talk about confidence, particularly about the labor marketing.
Speaker 2: There's a lot of confusion right now about whether the
Speaker 2: step down and payrolls for growth is leading towards an
Speaker 2: increase in labor market slack or not. What do the
Speaker 2: attitudes as consumers towards the labor markets sound like now
Speaker 2: relative to where they work only six months ago.
Speaker 7: Well, I think consumers recognize that the labor market is loosening.
Speaker 7: But consumers often act based on their own situation, So
Speaker 7: if they feel confident in their own situation.
Speaker 3: They will continue to spend. Generally, they may.
Speaker 7: Be a little bit more wary. But if they see,
Speaker 7: even though the unemployment rate has remained steady, if they
Speaker 7: sense that there's less jobs out there, i e.
Speaker 3: If they lose their job, it.
Speaker 7: Will be harder to get a new one. That will
Speaker 7: certainly has a potential to impact their confidence.
Speaker 2: This is the Bloomberg Survendments podcast, bringing you the best
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