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: Terminal and the Bloomberg Business App. Let's turn to tariffs.
Speaker 2: Ocean First Financial CEO Chris Mars saying, while the direct
Speaker 2: impact on businesses isn't concerning at present, the volatility and
Speaker 2: uncertainty is clearly evident. The longer the period of uncertainty,
Speaker 2: the more likely the perceptions translate into reality. Chris joins
Speaker 2: us now for more. Chris can morning, Marian, John, been
Speaker 2: so long, It's going to see you again, sir. Let's
Speaker 2: start with the reality, your reality and your business at
Speaker 2: the moment. What do you see there?
Speaker 3: It is interesting because we'll read about taris, tarist tariffs.
Speaker 3: Our clients are not particularly concerned about them. And I
Speaker 3: think you have to look from their perspective. They've been
Speaker 3: through the first Trump administration and they have been through COVID.
Speaker 3: So I like to say, our folks got a PhD
Speaker 3: In supply chains during COVID. They figured out I have
Speaker 3: remarkably small businesses at bank with US. We cover clients
Speaker 3: between Boston and Washington. I have a pet foods business.
Speaker 3: This guy can explain to you the supply chains in China, Cambodia, Vietnam.
Speaker 3: He understands the tariffs, he knows where he's going to
Speaker 3: get his stuff, and it is not looming large in
Speaker 3: their minds. So it's more the perception than the reality.
Speaker 2: It's her sentiment, we say in the survey. At a
Speaker 2: consumer level, we're having this debate about whether it's hurting activity.
Speaker 2: So these companies that came into the new year with
Speaker 2: investment plans, with hiring plans, are they on hold or
Speaker 2: they go on forward with them?
Speaker 4: They're on hold.
Speaker 3: They're a little bit cautious and concerned. They want to
Speaker 3: make sure they see how things going to pan out.
Speaker 3: You talked about the continuation of the tax cuts earlier.
Speaker 3: Right for those customers, these are higher income house that
Speaker 3: own these businesses. They're trying to figure out the whole puzzle.
Speaker 3: So it'll be okay for a little while. You know,
Speaker 3: we have we have days, we probably have weeks, but
Speaker 3: I don't think we have months before that confidence starts
Speaker 3: to impact the economy.
Speaker 1: I want just to elaborate a little bit further on
Speaker 1: the point that John was making. There was an estimate
Speaker 1: of some of the small business confidence, a survey that
Speaker 1: showed just nineteen percent of small business owners in February.
Speaker 1: We're planning the capital outlies in the sixth next six months,
Speaker 1: which matches the lowest level since April twenty twenty. How
Speaker 1: do you match that with what you're telling us that
Speaker 1: actually they're okay, they're taking it in stride. Is there
Speaker 1: a sense that they really are going to re engage
Speaker 1: with all of those capital outlays immediately within the next
Speaker 1: six months, as soon as there is some.
Speaker 5: Clarity, Well, you know, we so.
Speaker 3: I think that these small business owners, right the company
Speaker 3: and their own personal financials are really closely tied, so
Speaker 3: they tend to be more cautious. They've built up liquidity
Speaker 3: since the since kind of COVID happened, understood the uncertainty,
Speaker 3: they have plans. We're talking about loan pipelines are improving
Speaker 3: and increasing, but there is a range of hesitancy around
Speaker 3: some kind of the edge con like a residential construction
Speaker 3: is an area where people are kind of holding back.
Speaker 3: They want to make sure that we don't kind of
Speaker 3: head into a recession. There isn't a demand issue down
Speaker 3: the road.
Speaker 1: So are they concerned about the competitive advantage that they
Speaker 1: have versus large companies given their a negotiating position with
Speaker 1: potential contractors, with potential supply chains dealers. We hear about
Speaker 1: Walmart going to China and saying, guys, lower your prices,
Speaker 1: and they can do it because they are an eight
Speaker 1: hundred pound grilla and even they are getting pushed back.
Speaker 1: I mean, how much does that really issue for your clients?
Speaker 3: It is an issue, we said in a very different way,
Speaker 3: so we have I used the home building example, so
Speaker 3: we work with some of the largest home builders in
Speaker 3: the country. They can stock warehouses full of appliances, so
Speaker 3: they just kind of immune to where the appliance has
Speaker 3: come from. But in a different way, the small builders
Speaker 3: just move where they're buying stuff from. So, you know,
Speaker 3: ge appliances has a pretty strong US domestic manufacturing base,
Speaker 3: so they're going to buy Ge instead of some other brands.
Speaker 3: Some of the other brands have a bigger base in
Speaker 3: say Canada, So the small businesses are more nimble. The
Speaker 3: big businesses are able to do kind of more bold
Speaker 3: supply chain things, stocking up inventories and kind of planning ahead.
Speaker 6: Our materials going up. Are they already seeing this price effects?
Speaker 3: Sure, avery they've gone up. Lumber's gone up three different
Speaker 3: price hikes in the last couple of months, so lumber's
Speaker 3: certainly up. You're seeing anything with steel or aluminum. Although
Speaker 3: I'd make the comment that we tend to talk about
Speaker 3: steel for our clients, there's like fifty different kinds of steel.
Speaker 3: Some steel is going to be an issue, other kinds
Speaker 3: of steel are not. And although we're talking with many
Speaker 3: international parties, your steel can be sourced from South Korea,
Speaker 3: can be stores from Latin America. So there's very interesting
Speaker 3: kind of subset as you get under the covers and
Speaker 3: look for one company, steel may matter, for another company,
Speaker 3: it doesn't.
Speaker 1: I was speaking to the head of a toy manufacturer
Speaker 1: and he was saying, well, it's not that big of
Speaker 1: a deeal because we can kick up prices and if
Speaker 1: people are buying a doll they can pay an extra
Speaker 1: two dollars and they don't really care. Do your business
Speaker 1: clients feel the same way that they can really pass
Speaker 1: it mostly along to clients?
Speaker 3: Generally, no, they're very concerned about passing it along, although
Speaker 3: we're starting to see contracts now have a language in
Speaker 3: the contract that would say, you know, we're going to
Speaker 3: pass along the price increases. So generally know, there are
Speaker 3: some cases that we have a special metal manufacturer. Their
Speaker 3: products going to jet engine turbines. We need them, so yes,
Speaker 3: the price is going to go up. It'll be a
Speaker 3: small increase to a bigger part of a larger engine.
Speaker 3: So they're just going to have to raise prices.
Speaker 6: So this is where the rubber meets the road. They
Speaker 6: increase prices. Are you hearing direct feedback that consumers are
Speaker 6: unwilling to absorb those higher prices.
Speaker 3: I think in consumer products you're seeing substitution, so people
Speaker 3: are choosing one thing versus another thing. We have a
Speaker 3: seafood supplier. They get snow crabs, right, so they get
Speaker 3: them from Canada. They have already told us if the
Speaker 3: tariffs go in, they're not going to sell snow crabs.
Speaker 3: You'll be eating something else, so you won't notice that
Speaker 3: your menu has changed. The snow crabs won't be on
Speaker 3: it because they're just going to go up to a
Speaker 3: price that restaurant tours we're not going to want to buy.
Speaker 2: Hey, Chris, this was an important conversation. Let's do it
Speaker 2: again soon. Richard Chris ma ev Ocean First Bank shift
Speaker 2: the focus bank to commodities. Oil edging high following an
Speaker 2: industry report which signaled a large decline in US crewed stockpiles.
Speaker 2: Traders also weighed the prospect of a Russian Ukraine ceasefire
Speaker 2: in the Black Sea, and readercent of Energy Aspects joined
Speaker 2: us Now for more and Resa, welcome to the program.
Speaker 2: Let's get to that potential ceasefire that we could see
Speaker 2: between Ukraine and Russia on a much larger scale. What
Speaker 2: would that do to energy prices? What would that do
Speaker 2: to the flow of energy?
Speaker 7: Firstly, I don't think we're going to get a seas
Speaker 7: far anytime soon in the true sense of the world,
Speaker 7: like you guys were discussing. I think there'll be a
Speaker 7: lot of noise, and I think we have to remember
Speaker 7: that both sides, Russia and Ukraine are going to tread
Speaker 7: this kind of line where they are all appear very
Speaker 7: positive and you know that all the outcomes are very positive,
Speaker 7: but if you actually look at it, nothing has moved.
Speaker 7: I think the positive spin we are seeing out of
Speaker 7: DC on very very minimal gains has been impressive, no doubt,
Speaker 7: But if you actually read through the details, there has
Speaker 7: been no shift from either side on their red lines.
Speaker 7: And I think that's the critical thing. Remember, the headlines
Speaker 7: will have to put a positive spin so that neither
Speaker 7: side angers the current president. I think we need to
Speaker 7: look at the whole thing through that lens. In terms
Speaker 7: of sanctions lifting, Remember we haven't lost any Russian oil
Speaker 7: because of sanctions. India and China continue to buy that oil.
Speaker 7: Any Russian oil we've lost is because of OPEC plus policy.
Speaker 7: That's not changing. OPEK is going to continue to bring
Speaker 7: back barrels over the summer months. Russia gets a part
Speaker 7: of that. That's fine. Beyond that, nothing one last thing.
Speaker 7: US sanctions on Russia, if they were to be remove
Speaker 7: without europe going ahead, that is actually bullish for oil,
Speaker 7: not bearish, because the original European sanctions were designed so
Speaker 7: that Russian oil couldn't flow at all through Western shipping sanctions.
Speaker 7: The price cap was designed to allow that to flow.
Speaker 7: If you take away the price cap, the European sanctions
Speaker 7: kick in without this caveat, and therefore really no Russian
Speaker 7: oil will be able to move other than in the
Speaker 7: dark fleet. People forget that, Amrita.
Speaker 6: Are they even enforcing the price cap right now though?
Speaker 5: No?
Speaker 7: But the whole point is the price cap gives you
Speaker 7: the ability. You can claim whatever the price it is,
Speaker 7: but you can say, oh, because of the price cap,
Speaker 7: we are able to move it. If you take the
Speaker 7: price cap away, the European sanctions say they cannot use
Speaker 7: any any Western shipping or insurance services. That's the critical thing,
Speaker 7: because at least the price cap gives you a way
Speaker 7: to get away from it.
Speaker 6: When it comes to other potential energy flows, we can
Speaker 6: see if they were to get closer to a ceasefire agreement.
Speaker 6: Certain rav talking to task News Russian state media yesterday
Speaker 6: said that nord Stream there is talk of nord Stream
Speaker 6: coming back online and Rita, what do you make of that?
Speaker 7: I think again there's going to be a lot of noise,
Speaker 7: a lot of headlines in terms of again gas, I
Speaker 7: think it is going to be more important for gas
Speaker 7: than it is for oil, just given the volumes loss. Right,
Speaker 7: Like I said, oil we haven't lost, but we keep forgetting.
Speaker 7: This is Russia also trying to create a wedge between
Speaker 7: Europe and the US, and that's why certain statements like
Speaker 7: that that of course you know, we're going to bring
Speaker 7: north stream and by the way, Europe, you need our gas.
Speaker 7: Europe has a big say in this, and the European
Speaker 7: sanctions are actually the main sanctions on Russia, much more
Speaker 7: than the US. Once it's the opposite for Iran.
Speaker 6: But how much will European gas actually be helpful to Europe?
Speaker 6: I mean, although Europe has a lot of tough rhetoric
Speaker 6: when it comes to Russia, they're still importing Russian gas.
Speaker 7: Oh yeah, And look, I think this is the biggest
Speaker 7: question mark that I don't think anybody will have a
Speaker 7: like true answer to in the sense that we are
Speaker 7: losing so much industrial demand and we have lost I
Speaker 7: would say fifteen percent of gas demand we believe is
Speaker 7: never going to come back in Europe because of the
Speaker 7: high gas prices and the relocation of industry to places
Speaker 7: like the US. So the question then becomes, yes, Europe
Speaker 7: is talking about more renewables and kind of tripling down
Speaker 7: on it. But if it's again not our basis. But
Speaker 7: if you suddenly start to get a ceasefire and sanctions
Speaker 7: get removed, does Europe actually change that. We do think
Speaker 7: some European countries will go back to Russian gas, but
Speaker 7: we're not going to get the volumes back anywhere close
Speaker 7: to where we used to be pre war.
Speaker 1: Are you saying, I'm rita that if there is an
Speaker 1: end to the war between Ukraine and Russia, then it
Speaker 1: will have an immaterial effect on the price of oil.
Speaker 7: What's going to happen is that Russian differentials, which now
Speaker 7: trade at a discount, will go up because Russia no
Speaker 7: needs no longer needs to discount its oil, right because
Speaker 7: right now it's having to discount to clear but on
Speaker 7: a volume metric basis, No, because Russia is already producing
Speaker 7: as much as it can within the the OPEC last
Speaker 7: framework is just sending it to China and India.
Speaker 1: Before I let you go, I did want to get
Speaker 1: your take on copper and what we heard overnight from
Speaker 1: President Trump and the likelihood of pretty aggressive tariffs on copper.
Speaker 1: This goal to bring manufacturing back to the United States.
Speaker 1: Shift building is a big piece of that. It's also
Speaker 1: a part of the steel and aluminum tariffs. How much
Speaker 1: does that shift the cost of copper in the United States.
Speaker 1: We've seen a real departure of what's traded in the
Speaker 1: US and what's traded on the London's Metals Exchange.
Speaker 7: Yeah, and I think this is I mean, it's not
Speaker 7: just copper, like you mentioned steel and aluminum. Look, I'm
Speaker 7: in the Midwest myself. I've been meeting with a lot
Speaker 7: of the producers, including some who were in the meeting
Speaker 7: in the White House just last week, and I think
Speaker 7: the shift in metals prices is becoming a real talking
Speaker 7: point for both upstream and downstream, and ship building is
Speaker 7: I'm including them in the downstream just in terms of
Speaker 7: like certain producers are telling me their costs of got
Speaker 7: raw material costs of have gone up anywhere between fifteen
Speaker 7: and twenty percent. And I think that's why you are
Speaker 7: going to get prize discrepancy between US metals markets and
Speaker 7: the rest of the world, simply to kind of basically
Speaker 7: price that in. And I think metals markets are going
Speaker 7: to go through this huge period of volatility until we
Speaker 7: have more clarity on the second of April.
Speaker 2: I'm Rita. I appreciate your view. Thank you. I'm Rita.
Speaker 2: Send their energy aspects. Jeanette Lodge Tatiga is a bad company,
Speaker 2: writing when we added up what has already been announced
Speaker 2: in terms of tariffs, we found that it would be
Speaker 2: a two hundred and thirty five billion dollar impact over
Speaker 2: twelve months, or zero point seven percent of GDP, which
Speaker 2: is more than many investors we're expecting. Jeanette joined us
Speaker 2: now for more. Janet, welcome to the program. Certainly surprising
Speaker 2: how hard and fast they've moved since they walked into
Speaker 2: the White House. Are you seeing any signs over the
Speaker 2: last couple of days that maybe they're just softening their tone,
Speaker 2: just maybe back in a way of touch.
Speaker 1: Yeah.
Speaker 8: Absolutely, I think they are trying to start to walk
Speaker 8: back a little bit. I think it there hadn't been
Speaker 8: a lot of numbers put out there of what the
Speaker 8: actual impact was, and so we really try to take
Speaker 8: what has actually been levied already on China and Canada
Speaker 8: and Mexico when it's steel and aluminum, and then add
Speaker 8: in reciprocal tariffs and then sectoral tariffs, and I think
Speaker 8: that that number started to surprise some folks, and if
Speaker 8: you see all of that coming in at once, that can.
Speaker 5: Actually be negative for the administration.
Speaker 8: Now, obviously we're still getting mixed signals, so we don't
Speaker 8: necessarily know will some sectoral tariffs and maybe auto still
Speaker 8: be announced. That is kind of up and play. And
Speaker 8: you also have we have reciprocal tariffs that it's just
Speaker 8: focused on higher rates that other countries charge. But then
Speaker 8: the administration also wants to include what those countries charge
Speaker 8: in that taxes and put that into the equation and
Speaker 8: some other non teriff farriers, and that I think is
Speaker 8: the question. So they need to kind of figure out
Speaker 8: what pieces do they actually want to include and then
Speaker 8: how that actually can be structured, because it could be
Speaker 8: quite a shock if we come on April second, depending
Speaker 8: on what is announced. They don't pair some of this back.
Speaker 6: Well, when you mentioned that, I immediately think of the
Speaker 6: European Union and the Commissioner for Trade yesterday is all
Speaker 6: smile standing alongside Howard Lutnik and Jamison Greer Kevin Hassett
Speaker 6: after their intents and negotiations what he's calling it, and
Speaker 6: he says the EUSE priority is a fair balanced deal
Speaker 6: instead of unjustified terriffs.
Speaker 5: Do you think he's going home to Europe with a deal?
Speaker 8: Yeah? I mean so this is what's interesting because I
Speaker 8: think you know, we did sit here some talk about
Speaker 8: lowering the tariff rate on autos and also trying to
Speaker 8: get the US to lower its tariff rate on pickup trucks.
Speaker 8: That's something that obviously can be done, that has been
Speaker 8: a bonu in contention for a President Trump for some time.
Speaker 8: But I think you also have to really watch this
Speaker 8: that piece because I think overall, if you look at
Speaker 8: just applying higher teriff rates on European goods, it's not
Speaker 8: going to be as much of a significant impact. If
Speaker 8: you start to add in that taxes and that impact,
Speaker 8: that's much higher of an impact on the European Union,
Speaker 8: And it's also more difficult for them to change that.
Speaker 8: They're not going to be able to easily change those
Speaker 8: taxes for the Trump administration, So it's harder to see
Speaker 8: where that negotiation could come into play. And I think
Speaker 8: that's going to be important as we move closer to
Speaker 8: April second and get more details.
Speaker 6: When we get more details in April second, what kind
Speaker 6: of terrorsts do you think we will see immediately, and
Speaker 6: then what other legal measures will they rely on that
Speaker 6: will take weeks or months, say two thirty two or
Speaker 6: three oh one.
Speaker 8: Yeah, I mean I think that they are going to
Speaker 8: try to announce several reciprocal tariffs immediately.
Speaker 5: Now I think the question is is it a.
Speaker 8: Thirty day implementation period, kind of like what we've seen
Speaker 8: for some of the other pieces earlier this year. But
Speaker 8: it might be more on select countries. So they're not
Speaker 8: going to probably go for a universal tariff, which is
Speaker 8: what they were talking about doing earlier this year. We've
Speaker 8: moved much more from that universal tariff to this reciprocal piece.
Speaker 8: If it's reciprocal, it could also be country by country,
Speaker 8: which means maybe you can apply it to a handful
Speaker 8: of countries at one time and then add in other
Speaker 8: countries down the road.
Speaker 5: Allows for more negotiation.
Speaker 8: And that piece Trump has also been talking about, you
Speaker 8: know that he wants to do tariffs on autos, and
Speaker 8: he says that he's going to announce that soon. If
Speaker 8: you add in of that on the EU, that kind
Speaker 8: of also hits the European Union on autos, particularly Germany.
Speaker 8: It would hit Ireland in terms of pharmaceuticals, so that's
Speaker 8: going to be important piece. And I think the other
Speaker 8: thing that's really important too is what happens with Canada
Speaker 8: and Mexico. There are significant tariffs right now, if we're
Speaker 8: talking about whether or not Goods or USA compliant or not,
Speaker 8: and are those changed.
Speaker 5: On April second, engine they go.
Speaker 8: Just to reciprocal tariffs, which is much more manageable, or
Speaker 8: do we have reciprocal on top of what has already
Speaker 8: been announced for Canada and Mexico and that could actually
Speaker 8: be much more burdensome and much more troublesome for the market.
Speaker 1: I feel like we're all trying to put together a
Speaker 1: tariff puzzle and figure out what pieces people are saying
Speaker 1: and then put it in its correct place. And if
Speaker 1: we were creating that kind of puzzle, where would this
Speaker 1: copper tariff piece really get put? Yesterday when President Trump
Speaker 1: announced that he is going to put tariffs on copper
Speaker 1: and has previously discussed something like twenty five percent of
Speaker 1: all incoming copper imports.
Speaker 5: Yeah, I mean, so this is something that they are
Speaker 5: trying to rush, right.
Speaker 8: So usually you have two hundred and seventy days to
Speaker 8: do this kind of investigation, and this is something that
Speaker 8: he did with steel and aluminum, so but they it
Speaker 8: follows at least a little bit more of a process
Speaker 8: with regard to having input from the public and from
Speaker 8: companies that would be impacted.
Speaker 5: But I think this is something that he is.
Speaker 8: Trying to target certain areas and he feels like the
Speaker 8: stealing aluminum tariffs. You saw that we now got rid
Speaker 8: of the exemptions with the copper, that could be a
Speaker 8: similar story.
Speaker 5: It also could be potentially somewhat.
Speaker 8: Of a negotiating tool if you can announce it and
Speaker 8: then it kind of hits certain partners and there's an
Speaker 8: opportunity there. But it seems like with the commodity tariffs
Speaker 8: in particular, Trump looks to be looking to focus on
Speaker 8: putting those into place and.
Speaker 5: Not allowing as many exemptions. So that's something we're definitely
Speaker 5: going to be watching and going forward.
Speaker 1: Jet there has been this shift in tone more generally,
Speaker 1: and John started the show talking about it. We've been
Speaker 1: feeling it in terms of market performance, and we're hearing
Speaker 1: it not just from the White House and Tarifa negotiations,
Speaker 1: but also from the House, with House Speaker Mike Johnson
Speaker 1: coming out yesterday saying we have to bring stability to markets,
Speaker 1: saying that negotiators around the budget not necessarily terriffs, need
Speaker 1: to give people certainty so that they can quote make
Speaker 1: decisions about expanding their businesses and jobs. How much are
Speaker 1: we hearing a kind of around the table feeling of
Speaker 1: concern about the uncertainty in Washington, DC. That is a
Speaker 1: material shift than say, even a couple days ago.
Speaker 8: Absolutely, I definitely think that this is definitely a part
Speaker 8: of the conversation for policy makers. And if you think
Speaker 8: back to the first Trump term, you had them passing
Speaker 8: a tax bill first and then going in and putting
Speaker 8: on tariffs, primarily on China. So there are much more
Speaker 8: modest and scope than they are today, and that created
Speaker 8: a cushion for the market. This time we have the opposite.
Speaker 8: We have tariffs coming into place first. We're not obviously
Speaker 8: going to have a tax bill done by April, so
Speaker 8: you're going to have that more difficult piece coming in
Speaker 8: first before you get some.
Speaker 5: Of that fiscal policy to help balance it out.
Speaker 8: I think you do see members of Congress thinking about
Speaker 8: what will be the tariff impact and thinking about do
Speaker 8: we need to include some more pro growth to tax
Speaker 8: policies within that tax bill, So kind of bringing back
Speaker 8: the R and D immediate expensing, having one hundred percent
Speaker 8: bonus appreciation, doing that potential fifteen percent tax rate for
Speaker 8: domestic manufacturers, potentially even other pieces. So I think they're
Speaker 8: going to have to start being thinking about those proposals,
Speaker 8: and I think they are currently and how they get structured,
Speaker 8: and then as we get the TERRORF announcements, that will
Speaker 8: give them more to know what they need to do
Speaker 8: moving forward as that tax bill actually gets built.
Speaker 2: Jennet, appreciate your time as always to not load that
Speaker 2: I should take us a bad company, joining us around
Speaker 2: the type with adventuy shamp for a self jam, jumping
Speaker 2: into the sea, savantrac. Good to see you, Good to
Speaker 2: see you too. I've been asking this question. We all
Speaker 2: have all morning things really that bad based on what
Speaker 2: we sew and consumer confidence numbers in the past twenty
Speaker 2: four US.
Speaker 4: So the hard data has been relatively good, right. You
Speaker 4: have a strong, relatively strong label market. Inflation is easing
Speaker 4: ever so gradually. Even retail sales, even though it's a
Speaker 4: little bit below consensus, was relatively charged to the consumers
Speaker 4: holding up. But if you look at every soft or
Speaker 4: survey based data that you're getting it's all quite you know,
Speaker 4: points to kind of a souring sentiment. So the question
Speaker 4: is what's the lag between that souring sentiment and when
Speaker 4: that actually feeds through to the economy. If you look
Speaker 4: at say the last go around, the experiences is you know,
Speaker 4: after terrorists, it typically takes about three or four months
Speaker 4: for that to actually show up in the hard data.
Speaker 4: But people are starting to incorporate that into their forecast.
Speaker 4: We saw that from the fat They're lowering their growth forecasts,
Speaker 4: they're increasing their the unemployment rate, and they have inflation
Speaker 4: higher for the year. So all of that points to
Speaker 4: kind of a stagnating environment and that's not really great,
Speaker 4: you know for the markets, which is.
Speaker 1: The reason why I think people are struggling to understand
Speaker 1: the role of bonds with all of this. Are they
Speaker 1: an offset or aren't they If you have a slow
Speaker 1: down in growth, usually the knew jerk reaction is to
Speaker 1: go into duration. This time around, is it?
Speaker 2: I think?
Speaker 8: So?
Speaker 4: I think that when you see the equity markets start
Speaker 4: to correct, you are going to see bonds perform.
Speaker 7: Well.
Speaker 4: That negative correlation, I think is very much in play.
Speaker 4: And you saw that You've seen that sort of price
Speaker 4: action over even the last couple of months. I mean,
Speaker 4: equities have sold off quite strongly and you've seen, you know,
Speaker 4: bonds benefit from that. So I think that that's what
Speaker 4: dynamic is here to stay. There's also a lot of
Speaker 4: other reasons why I think I'm somewhat bullish on bonds.
Speaker 4: We actually have teny yells going to three seventy five
Speaker 4: by the end of the year. In an environment where
Speaker 4: the Fed is going to keep policy on hold and
Speaker 4: the front end is going to be pegged, you're going
Speaker 4: to see that rally come in the long and you're
Speaker 4: actually going to see flatter yield curves for the remainder
Speaker 4: of the year. There's also sort of demand dynamics that
Speaker 4: could favor treasures. For instance, if you see a change
Speaker 4: in the regulatory framework and there's changes to the supplementary
Speaker 4: leveragation requirements, I think you're going to see more demand
Speaker 4: from banks and primary dealers for treasure. So in that
Speaker 4: sort of environment, I can see tenyre treasure yelds actually
Speaker 4: heading towards three seventy five by the end of the year.
Speaker 1: So this actually flies in the face of what a
Speaker 1: lot of people come on the show and talk about.
Speaker 1: They say, what's going on in Germany. This fiscal expansion
Speaker 1: increases the amount of develop market debt. Globally, you have
Speaker 1: sticky inflation that is going to remain persistently so and
Speaker 1: then on top of that, you have budget concerns, especially
Speaker 1: given the fact that the deficit is likely to expand
Speaker 1: by three trillion dollars over the next ten years on
Speaker 1: the base case for what right now the GOP is
Speaker 1: proposing in Washington, d C. How do you just shrug
Speaker 1: that all off.
Speaker 4: So there is I would say, for the first time
Speaker 4: in the last decade decoupling. If you were between TENNY
Speaker 4: treasure yields, for instance, in bone yields and JGB eiels,
Speaker 4: I think bone yieos are actually going to go higher
Speaker 4: because of more deficit spending coming from Germany and all
Speaker 4: the other countries in Europe, and in the US it's
Speaker 4: going to be the other way around, where I think
Speaker 4: Treasury Secretary Vestin is going want to issue more bills
Speaker 4: and not as much in coupon issue in sizes. So
Speaker 4: we actually have the ten yure treasury boom spread going
Speaker 4: to forty five basis points by the end of the year.
Speaker 4: So that's a pretty dramatic narrowing of that spread, and
Speaker 4: the decoupling is not just between treasures and booms, but
Speaker 4: it's also between treasurees and jgb's, So that is I
Speaker 4: think is going to be a paradigm shift for this year.
Speaker 6: When do you think he wants to change that issuance
Speaker 6: because so far we haven't seen any changes to what
Speaker 6: Secretary Yellen was doing prior to him walking in the door.
Speaker 4: So I think that they probably keep coupon issuan size
Speaker 4: is stable for the remainder of the year, perhaps even
Speaker 4: to the first quarter of next year, and they probably
Speaker 4: issue a lot more by.
Speaker 5: Way of bills.
Speaker 4: And what's interesting to me from the last fm C
Speaker 4: meeting is the fact that the Fed is basically ended
Speaker 4: its quantitative tightening programs, so they're only reducing their boundariet
Speaker 4: by five billion roughly and mortgages of course every month,
Speaker 4: which means that they're going to be buying more at
Speaker 4: some point. The maturing mortgages probably get reinvested into into
Speaker 4: into treasury bills, so that gives the treasuring more room
Speaker 4: to issue in the very front end as opposed to
Speaker 4: increase in COO bunishment sizes.
Speaker 6: Since we're a week away from tariff day. I wanted
Speaker 6: to get your thoughts and what you thought the FED
Speaker 6: thinking about tariff's being transitory.
Speaker 5: Do you think that's accurate?
Speaker 4: You know, I'm actually starting to hate the tea word
Speaker 4: because it's really really starting. It's really really, you know,
Speaker 4: difficult to know what's going to happen. I mean, yes,
Speaker 4: logically speaking, if you see a one time you know,
Speaker 4: increase in prices, that has to be somewhat you know, transitor,
Speaker 4: and you're seeing that play out in front of inflation
Speaker 4: break evens. You see two year inflation break evens. You're
Speaker 4: seeing a lot of that getting priced into the very front.
Speaker 4: And as supposed to look at say ten yure break evens,
Speaker 4: so five or forward five year break evens, those are
Speaker 4: actually quite low. So the market is also thinking that
Speaker 4: it's going to be sort of a somewhat of a
Speaker 4: one year two year inflation is as opposed to something
Speaker 4: that's more longer term. But I'm not willing to kind
Speaker 4: of bind into that transitory narrative because that transitory narrative
Speaker 4: could be a couple of years.
Speaker 2: Just finally, did you say forty five forty five basis points?
Speaker 4: Yes, it's a little dramatic we're at.
Speaker 2: One fifty five right now. We haven't seen anything like
Speaker 2: that since twenty thirteen. It's been a long long time, yep.
Speaker 4: And that's the that's the dead break rule, right And
Speaker 4: what's also interesting to me is that as sentiments hours
Speaker 4: in the US, sentiment's actually improving in Europe because of
Speaker 4: the fact that you look at the zwzifos, the service
Speaker 4: all point to more optimism in Europe and pessimism in
Speaker 4: the US. So I can see them issuing a lot,
Speaker 4: you know, more debt and then that kind of pushing
Speaker 4: bon yos.
Speaker 2: Just to help us understand this a little bit more.
Speaker 2: So you've got the spread. I use my hands will
Speaker 2: make this work, all right. So we're like this right now.
Speaker 2: Is that Germany coming up to the US, the US
Speaker 2: coming down to Germany? Or is it both? It's both
Speaker 2: and it's equal parts equal measures.
Speaker 4: So we have tenny years going to about three seventy
Speaker 4: five at the end of the year, and bonn Yo's
Speaker 4: going perhaps towards you know.
Speaker 2: Three Germany, and most of the work here we're.
Speaker 4: Just I mean here we're just showing just the treagies
Speaker 4: versus bones. But you're going to see all of Europe
Speaker 4: doing a lot more.
Speaker 2: The periphery comes along for the ride. I guess to
Speaker 2: some extent you think they can handle that. I We'll
Speaker 2: have to see. That's the big question, isn't it whether
Speaker 2: the periphery can actually handle that adjustment in borrowing costs
Speaker 2: they're about to see off the back of the additional
Speaker 2: supply from Germany.
Speaker 1: I'm guessing that this is going to create a lot
Speaker 1: of friction I can imagine among the EU if you
Speaker 1: think about the fact that the periphery has been doing
Speaker 1: the heavy lifting with growth, and now they're going to
Speaker 1: get penalized by the fact that now Germany decides to
Speaker 1: borrow after they've been doing it, and then penalized for borrowing.
Speaker 2: So it creates a.
Speaker 1: Real interesting question mark here. I don't know the answer
Speaker 1: to this, because they can't engage in that kind of
Speaker 1: fiscal behavior as well.
Speaker 2: For Give me for the rapid five because it's a
Speaker 2: phenomenal call. What's the timeline for that call to get
Speaker 2: back to that forty five.
Speaker 4: By the end of the year. A lot of the
Speaker 4: lead pricing is going to happen, especially in bones, probably
Speaker 4: towards the end of the year.
Speaker 2: That's one to watch that's for sure, Sabater a phenomenal call.
Speaker 2: It's going to see you as a thanks for catching
Speaker 2: up with a sabatich Ouf for there of SoC gen.
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