00:00:02 Speaker 1: Bloomberg Audio Studios. Podcasts Radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. 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 6 to 9 a.m. 00:00:27 Speaker 1: Eastern. 00:00:28 Speaker 2: 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 inching higher, bonds stabilizing with yields sitting near multi-decade highs. Matt Miskin of John Hancock writing, we are in a high-yield bond world and no one wants anything to do with it. Matt joins us now for more. Matt, welcome. Let's just start with the long end. The long end, we got some disappointing data and still people didn't want to buy on 30s. What gives? 00:00:57 Speaker 3: Yeah, yesterday was tough, John. 00:00:58 Speaker 4: Consumer confidence weaker, jolts missed, and yet yields higher. 00:01:02 Speaker 3: And oil prices were lower. 00:01:04 Speaker 4: So what we're seeing, though, more broadly is just still a love for risk assets. Equity is just doing amazing this year. And every stock on the planet is loved. Every bond on the planet is disliked. It's a sentiment issue. We've got to get through the PCE report today. We're getting some revisions, so that's good news. But underlying, I think we're waiting to see this before bond investors step back into this market. 00:01:29 Speaker 2: Let's just bring up the yield curve, Matt, and look at twos, tens, and thirties, and we can sit on the front end. We've done this repeatedly over the last month or so. Twos have got a really comfortable spread right now between where the two-year is and where the Fed policy rate is. Just think about the risk-reward here, how compelling things might be just to sit at the front end of the curve. Where's the hawkish surprise going to come from, given what's already priced? 00:01:51 Speaker 3: Yeah. 00:01:51 Speaker 4: So, I mean, we backed off the October hike as of this morning. 00:01:55 Speaker 3: So that's nice. 00:01:56 Speaker 4: But December is still looking like a hike. And so, you know, right now I think we've gone from about three hikes priced into two. That's a nice little reduction for the markets. But I think it is a lot built in. And look, right now you can getting about a six percent yield in the intermediate part of the curve. 00:02:13 Speaker 3: That's really attractive. 00:02:15 Speaker 4: We're at 20-year high yields and no one wants them. So there's a ton of value in the bond market. 00:02:20 Speaker 3: Right now, the equities have. 00:02:21 Speaker 4: The momentum going for them. They don't have valuation going for them. We're off probably peak growth. We're probably decelerating in growth here. And I think that's what the bond market is missing. I think that's a story for 2027. This looks a lot like 2018 to us. where you had fiscal policy come in, help the economy, juice it into kind of the back half. We've got a new Fed chair trying to communicate. It's missing some of the time. But nonetheless, bond investors have better yield they've had in 20 years. Try to keep it simple. If you can lock in these yields, I think that's going to be pretty attractive. 00:02:55 Speaker 2: Don't knock it, Matt. The communication improved just a quarter, grew a little bit older. Let's give him that. Matt, let's talk about the argument in the equity market at the moment. At the moment, I hear a lot of people come on this program talking about rotating within equities, going back to the hardware trade, the tech trade. Are you making the argument to rotate out of equities to take advantage of these bond moves? 00:03:15 Speaker 4: So we're using quality value. And John, look, we've still got tech. That's one thing we have had over the years. 00:03:20 Speaker 3: It's just great quality businesses. 00:03:23 Speaker 4: The earnings growth is massive, but we keep trying to find what is the best thing around that. And that's really where we spend our time looking for. Healthcare has been great for us, this sector. We've been adding to that. Industrials, though, took a breather. It was tough because the AI trade didn't really show much breadth. It was like semis, and then everything else just got left behind. I think part of that is that interest rate story. We're going to look back on this quarter as the rate shock quarter. Utilities got crushed. We're picking through some of that stuff and saying, look, if rates do kind of back up to a certain point here and level out, Where are things that have added or have some more value? We think defensive value actually cheapened up a bit this quarter. But quality value has been our mantra. We've been doing pretty well here. You know, over the course of the quarter. Other than that, we're just trying to find other things than tech. But to your point, we've got Micron after the close here in terms of earnings. Wouldn't be surprised if it's another great quarter. We're watching South Korea exports of semiconductors. I mean, it was off the charts the last couple of weeks in terms of at least the first couple of weeks of September. So overall in the quarter, I mean, GDP for Q3 is booming. A lot of that's investment in data centers. 00:04:38 Speaker 3: So that's no-no. That's the thing. It's like, we already know that. 00:04:42 Speaker 4: What can we find that's undercover, things that are trying to still add some value to portfolios and healthcare to us as that biggest sector? 00:04:50 Speaker 5: Besides healthcare and industrials, is there anything else you like? Because it seems like that has been a trade that everyone has been pretty long this. 00:04:58 Speaker 1: Entire year, Matt. 00:04:59 Speaker 4: Yeah, and the rotation even in comm services, like some of the stuff in communication services was so left behind in the quality space. And these companies have great ROE, great profit margins. So it is some of that quality growth part of the market. We still have it. It is about as broad as we've been in terms of sectors we like. So I know it doesn't sound like a lot, but that is a lot for us. 00:05:21 Speaker 3: We used to be much more concentrated. But it is. It's getting harder. 00:05:26 Speaker 4: I mean, every stock on the planet is basically up 10, 20 percent this year. 00:05:31 Speaker 3: Emerging markets are up 24. Small caps up 14. 00:05:35 Speaker 1: The value is just not there. 00:05:36 Speaker 3: And it's all about earnings growth. And it's like we know it. 00:05:39 Speaker 4: But the earnings growth picture for Q3 is probably going to be strong. We're looking at nearly 28% earnings growth for the S & P 500 as of now for Q3. 00:05:48 Speaker 3: It's so weird because it's like the end of the quarter. 00:05:49 Speaker 4: We're still getting Q2 data, but it's around the quarter we get Q3 earnings here. We think it's going to be a bit broader than the market thinks. 00:05:58 Speaker 1: Matt, any point do. 00:05:59 Speaker 5: You see higher rates, higher oil prices impacting these earnings? I mean, you look at the conference board data yesterday, clearly constant references about higher prices, higher energy prices are hitting consumers. 00:06:09 Speaker 1: Do they start to hit some corporates? 00:06:11 Speaker 4: Yeah, it's been one of the biggest dislocations I've seen in my career from basically the consumer saying things are tough and corporate profits and corporate management saying things are amazing. The data center build out is a once in a generation type thing. And I think that's really been the epicenter of it. Talking to analysts on our team, it's really, you know, either you're in the data centers and you're building those out or you're not. 00:06:35 Speaker 3: And it's two different worlds, basically. 00:06:37 Speaker 4: But nonetheless, we think that basically into 2027, what we're going to see is the base effects. So this last quarter, we had 20 percentage points of the 50 percent earnings growth was actually private investment, rewriting those valuations of these upcoming tech companies that are going to IPO. So that's going to be hard next quarter to say, all right, well, we had even more private investments that came out of nowhere in A.I., And we're going to add to that. So I look at 2027 earnings as it's going to be a high bar to hit. The base effects are going to be tough. Higher cost of capital, higher energy input costs. You add it all up, it's going to be tougher. And I think that's why bond yields right now are reflecting, booming everything. Next year, I think it's going to be tougher. I think growth is going to be weaker, softer. We're not going to get the fiscal stimulus we got this year. Next year, you add it all up. I think yields are lower into next year. I think these yields are attractive. I think equities have got to be mindful of the valuation, mindful we might be passing peak growth. 00:07:35 Speaker 1: But there are still certainly opportunities there. 00:07:38 Speaker 2: Stay with us. More Bloomberg Surveillance coming up after this. The Financial Times reporting the Trump administration is holding crisis talks on the proposed diesel export ban as prices hold near all-time highs. Francisco Blanch of Bank of America writing, the outlook for diesel remains bullish with a balance of 26, with elevated prices likely required to prevent inventories from falling to critically low prices. Francisco joins us now for more. 00:08:10 Speaker 3: Francisco, welcome. 00:08:11 Speaker 2: You've seen the proposals. You've heard the debate over in Washington, D.C. I imagine you've done some scenario analysis. What do you imagine a potential ban might look like and what would it mean for prices in the near and medium term? 00:08:22 Speaker 3: Hey, John. Great to be on your program again. We've looked at different things. One of the issues with the ban is that you might end up creating shortages in parts of the U.S. that are importing diesel. So if you were to do this ban, you would need to do it in conjunction with. 00:08:46 Speaker 3: Frankly, ample shipping capacity within the U.S. And as Anne-Marie just pointed out, shipping is complicated. We have record shipping costs right now. You need to move vessels to the U.S. to get those U.S. Gulf Coast refineries to transport the diesel to the parts of the U.S. that have been historically dependent on foreign fuels. So that's number one. Number two, you have to be careful about the impact on gasoline markets. because you could trigger a reduction in crude runs in the U.S., which right now are the highest in the world, I may add. The U.S. has been, of course, making a lot of money by exporting energy, and it's had a massive increase in market share across all major thermal fuel products. But, of course, under a ban, you have less of an incentive to run those refineries. You would likely see some of them going into maintenance. And that might also creep up the price of gasoline. So there's a few considerations. And then there's the impact on allies, right? And if the Europeans would agree to release their strategic reserve of diesel right at this moment in front of winter to help mitigate those negative effects. So those are the three considerations I think right now. in order to make a decision going forward on diesel. 00:10:04 Speaker 1: Well, let's sit on the U.S. customers for a second. That's Europe. That's Latin America. 00:10:08 Speaker 5: This Financial Times report says that officials have briefed foreign allies, including the United Kingdom, about. 00:10:13 Speaker 1: The possible disruption to their supplies. 00:10:15 Speaker 5: Do you see, then, the European Union actually tapping immediately the supplies they have built up, their reserves, when it comes to product? 00:10:25 Speaker 3: It is possible. It will be effectively an emergency, right? I mean, if the U.S. bans diesel exports, the Russians have banned diesel into the end of October and gasoline into next year. So it would be definitely, I think, it would definitely qualify as an emergency situation. The question is whether it can be done before the U.S. triggers that export ban. We've heard Fatih Birol from the International Energy Agency saying that there was no consideration for further releases. At the same time, the SPR has announced a further 40 million barrel release. So, you know, I think there's all kinds of debates going on across governments. But the reality of the matter is fuels are coming back, as you just pointed out. We are seeing a pretty high number of crossings. Question mark is how long will that last? And is it related to the ongoing U.S.-Iran negotiations, or maybe the U.S. has finally been able to wrestle control away of the Strait from Iran, in which case I think we could expect flows to continue at a higher rate. But those are some of the more important considerations. What is really behind the uplift in vessels in the Strait of Hormuz? Again, is it just the U.S. or is maybe Iran is also kind of pulsing while they know she? 00:11:49 Speaker 1: Well, what do you see in terms of the data? 00:11:51 Speaker 5: We heard from Goldman, JP Morgan talking about the fact that they are seeing an uptick of Persian Gulf supplies, but really not an uptick at all going down when it comes to Iranian exports. 00:12:02 Speaker 1: Francisco, do you think the blockade is working? 00:12:06 Speaker 3: Well, the blockade, the numbers clearly show the blockade is working. The question is whether it can continue to work. And the other point you made, I mean, not only you have to face shipping costs of $ 20- plus a barrel, we're also looking at two aircraft carrier groups from the U.S. having to maintain the system here, which, frankly, is also a very expensive process. very expensive process. And I think the question is whether a different arrangement might just be a lot more convenient. I mean, if we were spending $ 40 a barrel to try to get oil moving in the Strait of Hormuz, could we find consensus around some other arrangement that brings down those costs dramatically, maybe not to zero like it was before, but maybe just to a few dollars. 00:12:56 Speaker 5: For Saudi Arabia, then, do you think they're going to rely more on the East-West pipeline going forward in the future regardless and going through Yanbu? 00:13:05 Speaker 3: Well, I think that's definitely an option that Saudi Arabia has had on the table for a long time. The challenge there is that we've seen the Houthis, as you know, taking control of important outposts in the Strait of Bab al-Mandeb. So it makes it hard for Saudi Arabia to use that route for Asia. And if you have to go around the Mediterranean and. 00:13:31 Speaker 3: Cape in South Africa, you're adding 20 days to your trip. So ideally, you also want to have some arrangement with the Houthis where essentially Saudi vessels can move over to Asia relatively freely. So look, I mean, there's U.S. midterm elections coming up in a month. There is a There's a lot of pressure on all sides to come to an agreement. China's inventories are falling, which is one of the reasons why Beijing may this time be more interested in trying to find a solution for oil to get out of the strait. We've seen, if you look at the onshore inventory data, we've seen several weeks where inventories have been falling at two to three million barrels a day in China. And they have a lot of stocks, but they're losing them very quickly. And I think that may have also urged Beijing to try to find some solution here as well. 00:14:27 Speaker 1: Stay with us. 00:14:28 Speaker 2: More Bloomberg surveillance coming up after this. We've got Stephanie Roth, a Wolf researcher with us around the table. Steph, good morning. 00:14:45 Speaker 1: Good morning. 00:14:45 Speaker 2: First reaction to that. 00:14:46 Speaker 1: Is that news or noise? 00:14:48 Speaker 6: I mean, I think it was news, but we were all waiting for, you know, we knew that was going to happen, but now it actually finally printed such where you got the big revisions to some of the categories that Mike mentioned. The big ones are computer software and portfolio management. And now we're seeing an environment where now we're fighting 3% inflation on core PCE. And realistically, when you move through the next couple of months, the tariffs roll through the data, we're going to see that we're really fighting 2.5% inflation. So it's a much different backdrop than the headline numbers as they printed, say, last month. 00:15:16 Speaker 2: Does that fight require a hike in October and a hike at. 00:15:18 Speaker 1: The end of the year? 00:15:19 Speaker 6: I don't know if it requires it, but I think the Fed probably wants to do it, although maybe there are some questions now after William's speeches yesterday. But I think they're going to hike at least one more time, maybe twice. 00:15:31 Speaker 2: How much weight should we put on John Williams? We've had a hawkish chorus over the last few weeks. Very, very difficult to find any daylight between them. And then you've got the New York Fed president talking at one and maybe at the back end of the year. How useful was that commentary from the New York Fed president? Is he an outlier or is that the emerging core? 00:15:49 Speaker 6: I mean, I think he tends to be on the more dovish side of the core. So I don't know if that necessarily represents the rest of the governors. I think what we'll see is they're going to be swayed to some extent on the data. So it's going to depend on payrolls. It's going to depend on CPI. And then they'll ultimately make their decision. And realistically, I think that will be swayed depending on also where markets take them and where oil prices land. 00:16:13 Speaker 5: When it comes to Williams, though, he used this phrase, there's no need for urgency. When you see this data today, does that spark to you urgency? 00:16:21 Speaker 6: No, I don't think there was a need for urgency in the first place. I think the market wanted the Fed to be hiking partially because oil prices spiked. And in thinking about in the survey of clients that we did yesterday, that seems to be the primary reason as to why rates have backed up most recently. Certainly taking rates notably above 5%, a combination of technical factors and oil rates. So it's not really economic in nature, nor do Fed hikes really solve that, but the market wanted them to hike, and therefore they went ahead and did it. 00:16:49 Speaker 5: We also heard from Williams yesterday saying, while monetary policy cannot move ships or reopen pipelines and refineries, it can diminish the risk that these supply shocks spill over into broader and more persistent inflation. How much are you seeing it spill over? 00:17:02 Speaker 6: The spillover isn't that large realistically. I mean, it's been concentrated in a couple of categories. 00:17:07 Speaker 1: On the good side, for sure. 00:17:08 Speaker 6: And there are increasing concerns that as the war in Iran continues, you'll see more supply shocks impacting the good side of the economy. So far, it's been mostly on the tariff side. It's been the Iran war boosting airfares. 00:17:19 Speaker 1: And then. 00:17:21 Speaker 6: To some extent on the chip side. And now, you know, after today's data, you got some significant downward revisions to your computer software categories, largely because of the way that NIPA went ahead and changed the construction of that measure. 00:17:34 Speaker 2: Torsen's lock is making the argument that today's diesel prices are tomorrow's core inflation. Do you see it the same way? 00:17:41 Speaker 6: I mean, I think at the margin it will put upward pressure on goods. I don't think it will be so substantial. Similar to the way that everybody was so worried about tariffs causing massive inflation. 00:17:48 Speaker 1: Tariffs did contribute to inflation, no question. 00:17:51 Speaker 6: I don't think that the diesel price effect will be nearly as large as the tariff effect. But it fed through very slowly into inflation at a time where tariffs are going to be moving the year-over-year figures the other way. Realistically, we're not going to get another rise in oil prices the same way that we got. So airfares will maybe continue to trend higher, but not so much. And we'll be in an environment where inflation is trending into the twos. 00:18:14 Speaker 2: Steph, October 14th, CPI. Does that hold the keys to what happens here at the end of this month? Or is it more than just about one data point? 00:18:20 Speaker 1: I think it's more than one data point. 00:18:22 Speaker 6: And, you know, today's data, while it came in lower than expectations, it barely rounded down to 0.2. 00:18:26 Speaker 1: It was 0.247, right? We still plan that game. We are still playing that game. The extra decimal. 00:18:31 Speaker 6: To some extent, yes, just because that drives the headlines to some extent. We got some significant downward revisions on the year-over-year, about 40 basis points, but we knew that was coming, and mostly driven by portfolio management, which is largely because they changed the calculation so it's not entirely driven by stock returns. And therefore, we're probably in an environment where it's going to be a combination of oil... what happens on Friday, to your point earlier, wages are going to be important to watch out for. Because so far, wages have been quite sluggish. There's been no argument that the labor market is contributing to inflation. But if that starts to change, that could easily tip the scale in favor of. 00:19:06 Speaker 1: Going in October. And then oil prices. 00:19:08 Speaker 6: And Trump has alluded to not wanting to have a deal before the midterm election. So if we end up with oil prices where we are higher, the market's going to probably push them to end up hiking. 00:19:19 Speaker 2: Are you expecting that wage number to change? What are your base case expectations for Friday morning? 00:19:24 Speaker 1: Base case for Friday. I think it'll be a slightly softer report. 00:19:27 Speaker 6: We have, you know, 70,000 versus consensus, which is a little bit higher than us. The unemployment rate ticking up a little bit to 4.2. Wages coming in at 0.3. So I think it will be a somewhat boring report realistically. But the combination of some of the other factors will be what ends up deciding whether the Fed ends up going on. 00:19:45 Speaker 2: Given the month we just had in this bond market, I think we'll take boring on Friday morning, won't we? I think so. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6 a.m. to 9 a.m. 00:20:01 Speaker 4: Eastern. 00:20:01 Speaker 2: Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App.