Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: of the week in financial markets, Ross coasterriokat Black Rock
Speaker 2: joins us now for more RUSS A big change, and
Speaker 2: you turn from the President of the United States. Is
Speaker 2: it making more bullish on equities or on bonds?
Speaker 3: I say it right now, it makes us cautious. Good morning, Johnathan.
Speaker 3: We've been pulling in risk for a while. Clearly yesterday
Speaker 3: was the relief. Market took it as such. But you know,
Speaker 3: as I just looking at a fourth this morning, you're
Speaker 3: often get these big rallies during periods of turbulence. Our
Speaker 3: view is that you're still in an environment where policy
Speaker 3: uncertainty is heightened. You're also an environment that whatever you
Speaker 3: came into twenty twenty five, whatever your economic assumptions were,
Speaker 3: they've got to be lower today. So if we've got
Speaker 3: a world of higher uncertainty, probably higher volatility, slower growth,
Speaker 3: you've got to adjust the portfolio accordingly Russ.
Speaker 1: In the past, that would mean going to bonds. This
Speaker 1: time around, is that still true, Well.
Speaker 3: We have been raising our allocation to bonds. We were underweight,
Speaker 3: as you might remember. You know, over the last few
Speaker 3: years have been talking about it generally modestly underweight bonds,
Speaker 3: particularly on the long end of the curve. We've been
Speaker 3: bringing that back closer to benchmark. And I'd say that
Speaker 3: is more of a reflection of the economic environment than
Speaker 3: trying to make a bet on policy. And now, if
Speaker 3: you do have an environment where growth is going to
Speaker 3: be slower, it's not crazy that your bond allocation is
Speaker 3: going to be closed their home. But by the way,
Speaker 3: we've done a similar thing in equities. We brought our
Speaker 3: equity allocation down closer to benchmark. So what's happened generally
Speaker 3: lowering the risk of the portfolio in this type of environment.
Speaker 3: Rather than a strong bed on you want to be
Speaker 3: in bonds and equities you want to bring risks down.
Speaker 1: Maybe the larger question is US assets versus XUS assets.
Speaker 1: At a time where the source of volatility is the
Speaker 1: United States, and this has to do with bonds, but
Speaker 1: more broadly with dollar denominated assets, does it make you
Speaker 1: rethink some of what you have in your portfolio based
Speaker 1: on where the source of volatility has been coming from.
Speaker 3: This is a great question. I think this is actually
Speaker 3: a harder question to answer. But what I would say
Speaker 3: is I don't think you have a Kneiser reaction to
Speaker 3: move away from dollar assets. A couple points. First of all,
Speaker 3: we might remember twenty eleven during the debt sealing crisis,
Speaker 3: the US gets downgrade and the epicenter of the crisis,
Speaker 3: what happens, Treasury bonds go up. The dollar is still
Speaker 3: the reserve currency. We can debate what's going to happen
Speaker 3: in five or ten years. It is still a safe
Speaker 3: haven asset, and I do think that you've got to
Speaker 3: be skeptical about calling the end of dollar dominance. The
Speaker 3: other point, in the equity side, you know we are
Speaker 3: still modestly overweight the US. Now, why would you do
Speaker 3: that with all the turbulence. Going on simple answer, we
Speaker 3: still find better companies in the US. We think about
Speaker 3: what do we want in this environment. We want profitability,
Speaker 3: We want companies that can generate consistent earnings. Still find
Speaker 3: more of those companies in the US rather than Europe
Speaker 3: or Japan. So to my mind, even with the turbulence,
Speaker 3: from a bottom up perspective, still in an argument to
Speaker 3: be modestly overweight the US.
Speaker 4: Given all the uncertainty, even whether or not Trump decides
Speaker 4: to blank walk off the cliff, give these reprieves.
Speaker 5: Do you still like gold?
Speaker 2: We do like gold.
Speaker 3: You know again, they have to trade around it. It's
Speaker 3: been a huge move. We like gold back six months ago.
Speaker 3: We definitely like it today. A couple of reasons. First
Speaker 3: of all, you know m range, as you suggest, still
Speaker 3: a asset that works during times of turbulence. You look
Speaker 3: at the performance of gold when volatilities rising again. I
Speaker 3: think it's safe to say we'll probably in a more
Speaker 3: vol environment, generally does very well of over stocks. The
Speaker 3: other argument is the long term fiscal picture. One of
Speaker 3: the reasons we like gold is you can't print more
Speaker 3: of it. It is a store of value. It's still
Speaker 3: not obvious that there's going to be a significant improvement
Speaker 3: in the fiscal picture. If we are an environment of
Speaker 3: these two trillion dollars structural deficits, They're not necessarily going
Speaker 3: away having something that can't you can't increase the supply.
Speaker 3: It is a store of value of the portfolio. We
Speaker 3: think that makes sense over the longer term.
Speaker 2: Russ just wanted to jump in with some news now
Speaker 2: to the European Union. The headline just crossing the Bloomberg
Speaker 2: terminal that the EU is considering pausing counter tariffs against
Speaker 2: the United States for ninety days, in line with that
Speaker 2: ninety day pause that the President announced just yesterday. Just
Speaker 2: taking the temperature down just a bit more this morning.
Speaker 4: And I also think the European Union is looking around
Speaker 4: the room and saying, look what's going on with Japan,
Speaker 4: Look what's going on in South Korea. They are pushing
Speaker 4: out all of branches. They are saying they want to
Speaker 4: do deals with this president. He's come out and said,
Speaker 4: you're going to get a ninety day reprieve, So why
Speaker 4: should we escalate at this moment? Maybe we should send
Speaker 4: a team over and try to de escalate and come
Speaker 4: to a trade agreement.
Speaker 2: The lyceis headline from the team here at Bloomberg that
Speaker 2: the European Union is considering pausing counter tariff against the
Speaker 2: United States on metals for ninety days. Russ. Just to
Speaker 2: bring it back into the conversation as we take the
Speaker 2: temperature down worldwide, how close did we come to an
Speaker 2: accident in this bond market? What did you see developing
Speaker 2: in the previous few days coming into the announcement from
Speaker 2: the President just yesterday afternoon. Well, I think the.
Speaker 3: Bond market move was definitely something we're paying attention, and
Speaker 3: it was not just the treasure market. You'll remember that
Speaker 3: during the initial phases of the selloff, credit markets were
Speaker 3: remarkably well behaved. That all started to change on Friday.
Speaker 3: We saw spreads back up dramatically. I think that gave
Speaker 3: a lot of people pause because now it's not just
Speaker 3: a matter of growth, it's a matter of liquidity. It's
Speaker 3: a matter of what's happening with the availability of credit,
Speaker 3: and that was something that definitely unnerved investors. If you
Speaker 3: see the bond market calming down, it's definitely development that's
Speaker 3: going to give a little bit more comfort to the
Speaker 3: equity side of the market.
Speaker 2: Things setting down in the bond market this morning. Ross
Speaker 2: appreciate your time. Rouss Costrict of Bland Troup, rita's center
Speaker 2: of Energy Aspects, writing, Trump needs higher supplies to lower
Speaker 2: oil prices in a manner that can provide a tailwind
Speaker 2: for global growth as an offset to his tariff policies. Instead,
Speaker 2: tariff will lead to lower oil prices by hurting demand growth.
Speaker 2: And Rita joined us now for more and Rita, welcome
Speaker 2: to the program. You made some headlines in the past
Speaker 2: few days on some very very low numbers in the
Speaker 2: crude markets. So what do you expecting now.
Speaker 6: Well, I think the prices, the general trajectory is still lower.
Speaker 6: I know there's been a ninety day pause. We saw
Speaker 6: a little bit of a bounce, but ultimately, if you
Speaker 6: look at the trade weighted tariffs reciprocal tariffs globally on
Speaker 6: the second of April, it was actually nineteen point one percent.
Speaker 6: Yesterday it was twenty six point two percent despite the pause,
Speaker 6: because of just how much the China bit has escalated.
Speaker 6: It just tells you that that is ultimately the one
Speaker 6: that matters the most when it comes to kind of
Speaker 6: global growth. Of course, it's better news for some of
Speaker 6: the countries some of those tariffs have been paused, but
Speaker 6: like you guys were saying just now as well, there
Speaker 6: is there is definitely no certainty that they will remain off.
Speaker 6: We are hearing more and more from our clients that
Speaker 6: consumer and a particularly business sentiment has completely come to
Speaker 6: a stall. Nobody's investing, there's no capex investment, and we're
Speaker 6: going to see a pretty big demand hit. We've just
Speaker 6: reduced our oil demand number for the second half of
Speaker 6: the year by four hundred and fifty thousand barrels per day,
Speaker 6: the same for twenty twenty six. So I just don't
Speaker 6: see how oil prices are going to start moving higher
Speaker 6: anytime soon until we see the supply response.
Speaker 4: How loo are we talking, Amerta, Do you think oil
Speaker 4: prices can go?
Speaker 3: So?
Speaker 6: Look, the difference now versus in the past cycles is
Speaker 6: that the shale breake events are higher. And when I
Speaker 6: was there just last week as well, I would say
Speaker 6: my biggest takeaway was that outside of the Permian, all
Speaker 6: the other basins you're talking about like in the sixties,
Speaker 6: well into the high sixties in some basins which are
Speaker 6: now their break events. At the Permian it's in the fifties,
Speaker 6: but that is effectively the flaw. The difference is it's
Speaker 6: the timing of it.
Speaker 2: Right.
Speaker 6: We need to be here for one whole quarter before
Speaker 6: supply response, and the response will be significant this time around.
Speaker 6: You are going to lose a few hundred thousand barrels
Speaker 6: per day pretty quickly. But it is just that timing
Speaker 6: like in that within that timeframe, prices can continue to
Speaker 6: go lower. I remember there's positioning driven. A lot of
Speaker 6: this is positioning driven, and people are just liquidating positions.
Speaker 6: So then it just becomes a number. But ultimately the
Speaker 6: floor should be around where we are now, maybe a
Speaker 6: couple of dollars lower. But I don't necessarily see sustained
Speaker 6: prices in the forties or the fifties, but we can
Speaker 6: absolutely test the four handle in the short term.
Speaker 4: I know that opek plus in Saudi Arabia says they
Speaker 4: do not target price, but given this environment you're describing,
Speaker 4: why did they go further and add even more barrels
Speaker 4: to the market.
Speaker 6: Yeah, I mean, look, the timing of it is obviously
Speaker 6: left to plenty of rumors about like, you know, were
Speaker 6: they doing this on the back of tariffs or to
Speaker 6: a peace. President Trump ahead of his visit to the Kingdom.
Speaker 6: In reality, OPEK just has its own timelines for doing things.
Speaker 6: The Saudi OSB always comes out around the fifth of
Speaker 6: the month, so they had to take the decision before that.
Speaker 6: So it was an unfortunate timing. But the decision was
Speaker 6: entirely to do with internal OPEC dynamics. As we've been saying,
Speaker 6: you know, we have seen laggards, a couple of you know,
Speaker 6: ops in Middle Eastern countries itself, but it's mainly Kazakhstan.
Speaker 6: If you look at Kazakhstan's production, four hundred thousand barrels
Speaker 6: bit higher than where they are meant to be, and
Speaker 6: they are just not showing any signs of coming off.
Speaker 6: And I think that is where I worry even for
Speaker 6: next month, regardless of price, because if this is about
Speaker 6: getting cohesion and getting the message across that everybody needs
Speaker 6: to do their bit, then it will not matter until
Speaker 6: Anonilyst Prince Abdilacy sees that compliance number.
Speaker 5: Pick up, let's put.
Speaker 1: That into English. Basically, this is all designed to punish
Speaker 1: Kazakhstan with lower oil prices for a margin grab unless
Speaker 1: they're into compliance and then there can be some sort
Speaker 1: of agreement.
Speaker 6: Yes, I think long story short, that's it, and not
Speaker 6: just Kassakhs and the few of the laggods. But yes,
Speaker 6: it's to say that cuts need to be equitable. It
Speaker 6: can't just be Saudi Arabia that carries the cuts for.
Speaker 5: Everybody at a certain point.
Speaker 1: There's also a knock und effect that this potentially could
Speaker 1: become punitive at that kind of level for US jail producers,
Speaker 1: for the US oil ex board system. That has been
Speaker 1: one of the drivers of a lot of growth that
Speaker 1: we've seen in the United States and the GDP here for.
Speaker 2: The past decade.
Speaker 1: I'm just wondering at what point that factors in as well.
Speaker 2: Well.
Speaker 6: That's what I was saying just now. Right, the shale
Speaker 6: break events are significantly higher narn, which is why I
Speaker 6: was saying that I don't see prices sustainably going below
Speaker 6: fifty five to sixty or even sixty five. But in
Speaker 6: the short term it could be because even at these
Speaker 6: price levels, we are hearing from our shale producer clients
Speaker 6: that they have just stopped drilling, or they're planning to
Speaker 6: stop drilling. They could even drop rigs. You're going to
Speaker 6: see a very significant turned down in shale production very quickly,
Speaker 6: and like you said that, and we forget this. We
Speaker 6: tend to talk about the US as a consumer nation.
Speaker 6: Production and given how much US production is, production is
Speaker 6: a huge part of US GDP.
Speaker 2: Right now, I'm Rachel just quickly. We've seen commodities drop
Speaker 2: across the board over the past week or so. See
Speaker 2: some evidence that particularly with copper, Chinese buyers might be
Speaker 2: stepping back in I had of stimulus, so you're seeing
Speaker 2: anything like that. With crude, we've.
Speaker 6: Seen a little bit here and there, but I do
Speaker 6: think right now there's just a bit more panic because
Speaker 6: it's still a moving target. They have come out with
Speaker 6: an SBR program as well, saying that we need to
Speaker 6: stalk pile, but that's really from July onwards. The biggest
Speaker 6: hit is actually going to be on lpg F in
Speaker 6: in particular, and propine foods still okay, but the physical
Speaker 6: market is actually still very strong, even in the East.
Speaker 6: It's you know, stocks are still drawing. But it is
Speaker 6: really about the fear of the future.
Speaker 2: Got it, and Racha appreciate the update. Thank you and
Speaker 2: Rach to send there of energy aspect Erica and a
Speaker 2: Jeron of UBS writing management teams are between a rock
Speaker 2: and a hard place, as any outlook seen as quite
Speaker 2: bearish could also punish the sector. Erica joins a snapper
Speaker 2: more Erica always good to see you get to see.
Speaker 2: What do they tell us the Morrow monic? What can
Speaker 2: they tell us?
Speaker 7: What can they tell us that will matter? A lot
Speaker 7: of investors are thinking that whatever they'll say, which is
Speaker 7: actually not so bad, is going to be seen as
Speaker 7: backward looking. Now, I think there are really two things
Speaker 7: that investors are looking for. Number One, are activity levels
Speaker 7: now just permanently impaired from both the corporate side and
Speaker 7: the consumer side. So clearly we had this animal spirits
Speaker 7: economy that we really wanted to come through.
Speaker 5: And if you're a corporation, how do you make decisions
Speaker 5: in this environment?
Speaker 2: Right?
Speaker 7: And so as you think about investment, banking and loan
Speaker 7: growth and commercial you would think that has to be
Speaker 7: at least delayed.
Speaker 5: Although I wonder.
Speaker 7: If the equity market continues to rally obviously not today,
Speaker 7: but I wonder if there's some deals that it's going
Speaker 7: to get pushed through the pipeline over the short term.
Speaker 7: On the consumer, you know, American Express is not normally
Speaker 7: seen as a bell weather report, but given that ten
Speaker 7: percent of Americans account for or high end Americans that
Speaker 7: make two fifty account for fifty percent of the spend.
Speaker 7: All of a sudden, there a bell the report because
Speaker 7: if they're slowing down, that's not good for consumer activity
Speaker 7: for the rest of the year.
Speaker 2: So the banks are the best data points we have
Speaker 2: at the moment. It's the best real time data. We'll
Speaker 2: get a lot of people look at payrolls and just
Speaker 2: set that old news. When you were in touch with
Speaker 2: the management teams over the past few days, you put
Speaker 2: together a picture of where things are act currently. What
Speaker 2: are they telling you about activity at the moment? If
Speaker 2: things slowed down.
Speaker 5: Things are slow.
Speaker 7: If you look at the regulatory data and you catch
Speaker 7: up with the banks and commercial activity, it's slow, it's
Speaker 7: quite flat. And if you look at the geologic data,
Speaker 7: I mean it's depressing. The whole capital markets renaissance is
Speaker 7: just not quite happening. But trading, you know, as you
Speaker 7: can imagine, given all this volatility.
Speaker 5: Trading could be lights out for this quarter. Okay, hold
Speaker 5: on a second.
Speaker 1: I remember when we used to get volatility and it
Speaker 1: was good volatility, and then it was bad volatility. And
Speaker 1: volatility isn't always a good thing. So is this good
Speaker 1: volatility or bad volatility in terms of bank profits?
Speaker 7: So so far again, you know, speaking about backward looking.
Speaker 7: If you think about the month of March and think
Speaker 7: about the equity market volatility, sell side desks are typically
Speaker 7: long volatility, so that could.
Speaker 5: Be good for them.
Speaker 7: Now it makes me nervous, is what's been happening to
Speaker 7: the treasury market in terms of dealer capacity. So the
Speaker 7: key question for the month of April is, you know,
Speaker 7: is there something going to happen? Is there bad volatility
Speaker 7: now happening in the fixed income markets? That is not
Speaker 7: going to be good news for the second quarter.
Speaker 1: So going forward, what do you think is going to
Speaker 1: potentially be the bigger driver? Is it going to be
Speaker 1: the trading side of things, or is it going to
Speaker 1: be the m and a wave that doesn't come to pass,
Speaker 1: or is it going to be deregulation which we've seen
Speaker 1: some of but not necessarily the full package.
Speaker 7: So investors just never really value trading earnings.
Speaker 5: Much, right, it's super volatile. It's like throwing a dart
Speaker 5: on the board. Who knows in any given quarter, right, I.
Speaker 7: Think what they're really looking for is, you know, honestly,
Speaker 7: any signs of credit at this point, because the reaction
Speaker 7: of banks up until yesterday really told me that investors
Speaker 7: were starting to worry about recession rather than just to
Speaker 7: slow down in activity levels. And so how they frame
Speaker 7: that in terms of preparedness having the earnings power to
Speaker 7: protect their capital.
Speaker 5: Let's say, if credit.
Speaker 7: Costs go up in anticipation of a tougher economy, I
Speaker 7: think that's what the market sort of needs to hear
Speaker 7: for now. On the deregulatory point, what's gotten lost in
Speaker 7: all of this is I feel like the deregulatory momentum
Speaker 7: and Trump two point zero is actually much stronger than
Speaker 7: Trump one point.
Speaker 8: Oh.
Speaker 5: I mean we went to that lunch.
Speaker 7: I mean he started off Secretary Besson started off with
Speaker 7: bank deregulation at this lunch with the Economic Club in
Speaker 7: New York, and everybody just wanted to talk about tariffs,
Speaker 7: and he started off with bank deg But for now,
Speaker 7: until we understand you know that they range of outcomes
Speaker 7: for the economy, the macro volatility uncertainty will trump the
Speaker 7: deregulatory positive catalyst.
Speaker 4: But do you even believe these CEOs when they come
Speaker 4: out and potentially say we're not gonna have a recession
Speaker 4: or we Goldman Sachs pulled their call yesterday after Trump
Speaker 4: came out and.
Speaker 5: Blanked again Rock in a hard place. Right.
Speaker 7: So, you know, if you think about how banks set
Speaker 7: credit costs, they think about the future, they think about
Speaker 7: the outlook, and they're saying to themselves, well, I have
Speaker 7: no you know, I don't.
Speaker 5: Know what the outlook is.
Speaker 7: So perhaps they're going to build reserves a little bit,
Speaker 7: but you don't have an inventory of losses that are
Speaker 7: coming down.
Speaker 5: The pipeline.
Speaker 7: Card delinquencies are actually flat to down, and commercial delinquents
Speaker 7: or non performing loans are pretty flat and improving.
Speaker 5: And so it's tough.
Speaker 7: But they have to talk defensively or else investors will
Speaker 7: think they're baring their head in the sand.
Speaker 4: It's an important point you brought up about Scott Besson
Speaker 4: at the Economic cub of New York where we saw
Speaker 4: each other last because he wanted to talk about deregulation
Speaker 4: and tax cuts, but the entire room wants to talk
Speaker 4: about tariffs. At the moment, there was all this unsurgerty
Speaker 4: what they were going to.
Speaker 5: Do with trade.
Speaker 4: When you take the entire policies of the Trump administration, deregulation,
Speaker 4: tax cuts, and tariffs. How much more constructive is that
Speaker 4: for banks towards your end?
Speaker 7: So deregulation is super super constructive, right, particularly as we
Speaker 7: start thinking about changes in the stress test, which I
Speaker 7: think could be a twenty twenty six catalyst. I know
Speaker 7: it's not five minutes from now, as we like, So deregulation.
Speaker 5: I think is a big catalyst.
Speaker 7: You know, tax cuts obviously, the continuation of you know,
Speaker 7: the tax cuts and jobs that would be you know,
Speaker 7: beneficial for corporate activity, But that's something that's already embedded, right,
Speaker 7: It's already baked in the base case. So just extending
Speaker 7: that isn't necessarily going to pump up activity, which goes
Speaker 7: back to trade. Right, it's like the big overhang that
Speaker 7: is overshadowing everything else that's good.
Speaker 5: So did the big.
Speaker 1: Banks benefit the most from deregulation and an uncertain regime
Speaker 1: where they consolidate a lot of trading volumes?
Speaker 7: So I think that in a deregulatory environment you get
Speaker 7: to unlock a lot of excess capital, and I think
Speaker 7: that's great. But if there's not a lot of demand
Speaker 7: for that capital other than trade, what good is it
Speaker 7: to unlock excess capital?
Speaker 5: Right? And by way.
Speaker 7: Remember, buybacks tend to be very pro cyclical, like if
Speaker 7: we're staring down the barrel of what we stared at
Speaker 7: last week. You know, I don't feel like bank management
Speaker 7: teams are gonna be like, I'm gonna buy.
Speaker 5: Back a ton of stock now, right.
Speaker 7: They tend to be like, well, we're gonna keep the capital.
Speaker 5: You know, tight and excessive for a rainy day.
Speaker 7: So you know, we have this regulatory or deregulatory momentum
Speaker 7: to unlock the access capital, but we need somewhere to
Speaker 7: put it. And I'm not sure it's going to be
Speaker 7: like shoe factories in Binghamton, Right.
Speaker 2: Do you think there's some pressure on them to cut costs?
Speaker 7: Now? Pressure to cut costs? I think it's too early.
Speaker 7: I mean, trading is great. No one is giving up
Speaker 7: on the outlook yet for investment banking. And you know,
Speaker 7: a lot, especially a lot of regional banks have PTSD
Speaker 7: from cutting too much in twenty twenty three, and now
Speaker 7: like they're you know, lost some A players and now
Speaker 7: they're scrambling to hire even like a B plus player, right,
Speaker 7: So I'm saying, so there might be.
Speaker 5: Some durability in costs. It's too late to use that
Speaker 5: as a lever, so sorry so early.
Speaker 2: Rather looking across the companies that you cover at the moment,
Speaker 2: just identify a couple that you do like in a
Speaker 2: moment like this one. Because this sounds tremendously parish at
Speaker 2: the moment, but I'm sure there's sometimes you like do
Speaker 2: you like at the moment?
Speaker 7: Counter to everything that I said, I am obsessed with
Speaker 7: Capital One. I think that like so here here's the tagline.
Speaker 7: Cycles are temporary, but networks are forever and buried under
Speaker 7: all of the Liberation Day chaos. And Thursday was the
Speaker 7: New York Times headline that the DOJ is okay with
Speaker 7: the deal, right, and this is a once in a
Speaker 7: lifetime deal for Capital One to own a debit network
Speaker 7: and a credit network. So in an environment like this,
Speaker 7: I have no idea what the macrost or else, I
Speaker 7: wouldn't be sitting here, I'd be on the beach, right.
Speaker 7: But in that case, what investors want will support and
Speaker 7: like our stories where they can self start, like you know,
Speaker 7: they can you know, grow earnings power in a different
Speaker 7: way that's completely exclusive of the macro. And that's what happened,
Speaker 7: That's what's happening with this discovery deal.
Speaker 2: We all want to come to the beach with you. Eric,
Speaker 2: is good to see it, Nanks for dropping by, Thanks
Speaker 2: for your time, Eric, and the Jerry in the VPS
Speaker 2: looking ahead. So those pancanics they dropped tomorrow morning. Susan's
Speaker 2: slock of Apollo joints is surround the table, Sustin. Good morning, sir,
Speaker 2: It's good to see you morning. Can I ignore all that?
Speaker 9: Well, this is a golden lug starting point for the FED,
Speaker 9: at least, I mean the dual mandate it says inflation
Speaker 9: should be too. We moved a little bit more in
Speaker 9: that direction, better than expected, and on jobless claims, we
Speaker 9: also had a label market that still is reasonably strong.
Speaker 9: So from that perspective, this is absolutely good news for
Speaker 9: the FED that we did not get yet any inflation
Speaker 9: surprise to the offside. But obviously we still have terriffs
Speaker 9: in the pipeline, and what's left on the tariff front
Speaker 9: could still add as much as one percentage point to
Speaker 9: tariffs over the next I'm sorry to inflation over the
Speaker 9: next twelve months. So in that sense, this is backward looking.
Speaker 9: As Mike is saying. The risks are of course that
Speaker 9: there's now more upside coming to inflation.
Speaker 2: So this is the issue, and it's a sequencing gissue
Speaker 2: and I'd love to get your thoughts on it. So
Speaker 2: sentiments collapsed basically created over the past few months. What
Speaker 2: we started to see with CPI, it's just a bit
Speaker 2: of softness that's encouraging. How long before we see the
Speaker 2: weakness in the output data before we then see the
Speaker 2: higher prices in months to come? What comes before the other.
Speaker 9: Well, let's think about how companies might respond to this.
Speaker 9: So now you know tariffs are coming. For example, if
Speaker 9: you think about Amazon, of this sellers on Amazon seventy
Speaker 9: one percent they source their goods in China. So one
Speaker 9: very important aspect is that it will be visible for everyone.
Speaker 9: The prices are going up on things that are imported,
Speaker 9: of course from China. So the conclusion to your question
Speaker 9: is how do you respond to that? Do you take
Speaker 9: your existing inventory and sell that at the old prices?
Speaker 9: Do you take your existing inventory and raise the price immediately?
Speaker 9: That profile will probably be individual for different companies, depending
Speaker 9: on the competitive situation which sets are there in how
Speaker 9: sensitive they are to tariffs. So we just don't know
Speaker 9: yet what the impact will be and how quickly this
Speaker 9: will feed through. But we do know that higher prices
Speaker 9: are coming as a result of goods coming from China
Speaker 9: becoming significantly more expensive. So even if companies decide to
Speaker 9: sell the existing inventory at the old price, we will
Speaker 9: over time see some outware pressure on goods inflation coming
Speaker 9: from this source.
Speaker 1: Is there a risk that we ignore this data at
Speaker 1: our own peril? The idea that actually lower energy prices
Speaker 1: are giving more disposable income to consumers to potentially go
Speaker 1: out there and buy, and that, oh yeah, it's also
Speaker 1: an offset for a lot of potential producers in the US.
Speaker 9: Absolutely, low energy prices is very, very helpful for the consumer.
Speaker 9: But the other thing, of course, is that the whole
Speaker 9: surrounding sentiment around what's being going on is that we
Speaker 9: literally went from the last few days from nuclear winter,
Speaker 9: so now back to talking about stackflation and staflation. Has
Speaker 9: these risks of course, that you have hit winds from
Speaker 9: consumer sentiment being weak, corporate sentimenting weak. If you look
Speaker 9: at the fit survey for CAPEX planning, they are really
Speaker 9: beginning to turn south. So companies are beginning to pull
Speaker 9: back more likely because of the unscore cercy. And let's
Speaker 9: not forget we still have a five trillion dollar net
Speaker 9: wealth effect on consumers from the stock market going down.
Speaker 9: So if I add this whole list together of week
Speaker 9: A corporate centiment, week A consumer centiment, tariffs coming, and
Speaker 9: a negative wealth effect, and on top of that also
Speaker 9: retaliation from foreigners who might be doing things to us
Speaker 9: simply because of the trade wall, that brings you a
Speaker 9: fairly long list of downside risk to the outlooker world.
Speaker 1: Which raises this issue of how we even game out
Speaker 1: the idea of inflation.
Speaker 5: Why potentially are we.
Speaker 1: Not talking about deflation or disinflation? And I say this
Speaker 1: given the fact that we see Walmart, for example, saying
Speaker 1: that they are going to invest in price competitiveness, basically
Speaker 1: they're going to absorb all of the costs from tariffs.
Speaker 1: At what point could potentially the lack of demand be
Speaker 1: the main story more than inflation.
Speaker 9: And that's why the key issue here is who is
Speaker 9: going to absorb the increase in tariffs? Who's going to
Speaker 9: absorb the price increase in goods that are coming here,
Speaker 9: in particular from China.
Speaker 2: Is it going to be.
Speaker 9: Consumers that will face higher prices or is it going
Speaker 9: to be taking out of margins will the E in
Speaker 9: the PE ratio go down as a result of this
Speaker 9: as companies such as Walmart, Costco, and of course Amazon
Speaker 9: begins to say, well, maybe we are going to absorb
Speaker 9: some of this, and that remains to be seen exactly.
Speaker 9: Maybe it's going to be split across corporates and across consumers.
Speaker 9: But the bottom line still is that someone has to
Speaker 9: foot the bill when tariffs are going up.
Speaker 4: Wall Street Journal has this morning that the President privately
Speaker 4: acknowledged that his trained policies could potentially lead to a
Speaker 4: trigger recession, but he said he wanted to make sure
Speaker 4: it didn't cause a depression. Where are you now in
Speaker 4: terms of potentially having a recession this year?
Speaker 9: So, of course the last few days, it was pretty
Speaker 9: clear that there would be a certain stop in the
Speaker 9: economy where prices would go up significantly, literally on all
Speaker 9: trading partners and everything coming in. So that was a
Speaker 9: scenario where a recession was very likely, almost at one
Speaker 9: hundred percent where we came from. Today, the recessiont probability
Speaker 9: is probably fifty to fifty percent, meaning we think that
Speaker 9: there is still a likelihood we will have a slow down,
Speaker 9: but the risk is we just don't know what the
Speaker 9: response is going to be from consumers, corporates, how much
Speaker 9: markets go down further, in particular this wealth effect his own,
Speaker 9: think about how we normally talk about when the stock
Speaker 9: market's going down, we go back to the spreadsheets and say,
Speaker 9: what's the mardule protenzeses to consume? How does consumers react
Speaker 9: when the stock market goes down? Here on his own,
Speaker 9: the stock market down now five trillion so far, and
Speaker 9: of course now it's rebounding and then coming a little
Speaker 9: bit back again. That's, on his own, a fairly significant
Speaker 9: hit to consumers and the wealth effect for the consumer outlook.
Speaker 2: And we still don't know what the policy will be
Speaker 2: in a few months time, including the tax code. This
Speaker 2: came from the President just moments ago a social media
Speaker 2: post saying, great news, the big beautiful bill is coming
Speaker 2: along really well. Republicans are working together nicely. The biggest
Speaker 2: tax cuts in US history getting close.
Speaker 4: Well, it's because yesterday they had to pull a vote
Speaker 4: to vote on the budget resolution from the Senate in
Speaker 4: the House because fiscal hawks are saying that Senate bill
Speaker 4: doesn't do enough to for cut. So what's happening this morning?
Speaker 4: Speaker Johnson? Leader soon are having a press conference later
Speaker 4: this hour to outline a plan to get Trump's tax
Speaker 4: cuts through. The President sees this and he says, oh, look,
Speaker 4: they're working together now this morning. They weren't working together
Speaker 4: last night.
Speaker 2: Can they change the conversation We just had CPI TA,
Speaker 2: So let's bring my the key back in for an update?
Speaker 2: Might you find a second love? What stands out well?
Speaker 10: A couple of things, John, We talked about grocery prices
Speaker 10: and meat prices were up one point one percent. Chicken
Speaker 10: prices were up, pork prices were up, so people will
Speaker 10: really be noticing it at the meat counters in their stores.
Speaker 10: More bad news for the president. He'd been bragging about
Speaker 10: the price of eggs coming down, but they rise by
Speaker 10: five point nine percent of the month, which puts them
Speaker 10: up sixty point four percent for the year. Last month
Speaker 10: it was fifty eight percent. So egg prices are going
Speaker 10: back up now. The China impact perhaps, we saw furniture
Speaker 10: prices rise on the month, and that is something we
Speaker 10: get a lot of from China, up six tenths, bedroom
Speaker 10: furniture up two point seven percent, Apparel up four tenths
Speaker 10: after a six tenths rise the month before.
Speaker 2: Also something we do.
Speaker 10: Get a lot of from China. Toy prices went down,
Speaker 10: though maybe that's because Christmas and Hanukkah are behind us.
Speaker 10: Smartphone prices prizingly go down by one percent, so maybe
Speaker 10: that's an inflation number that is coming but is not
Speaker 10: there yet. The big market, well, let me do housing,
Speaker 10: because everybody follows that owner's equivalent read up four tents.
Speaker 2: That's a rise of a tenth of a percent.
Speaker 10: So I was going to say the big thing that
Speaker 10: people are going to be watching going forward is energy prices,
Speaker 10: which were down six point three percent for gasoline. If
Speaker 10: that continues, it takes some of the edge off the
Speaker 10: food prices and it does help the administration's case.
Speaker 5: A little bit.
Speaker 10: But all in all, this is sort of a mixed report.
Speaker 10: The things that we thought would go down airfares were
Speaker 10: down five point four percent did go down. Some of
Speaker 10: the things we got from China did go up, and
Speaker 10: that's something that could continue with the big tariffs that
Speaker 10: they now have.
Speaker 2: Thank you for the update, Mi mckaytha following inflation dates
Speaker 2: for about ten minutes ago. David Kety, hp Mouk and
Speaker 2: Ascent Management joins us now for more. David welcome to
Speaker 2: the program. How encouraging is that data this morning? I
Speaker 2: don't agree that changes anarrative much.
Speaker 8: I think, you know, Mike m keey was pointing out
Speaker 8: that airfares are down five point four percent. Actually lodging
Speaker 8: hotels and motels and so forth was down four point
Speaker 8: three percent. So I think what we're seeing is a
Speaker 8: lot of softness in the travel industry, which I think
Speaker 8: is going to get worse over the course of this year.
Speaker 8: It is a calm before the inflation storm. We're going
Speaker 8: to get some higher inflation out of the tariffs. I mean,
Speaker 8: remember we left the ten percent universal tariff in place.
Speaker 8: That's a lot higher than anything we've seen really for decades,
Speaker 8: so that's high. And then of course there's enormous tariff
Speaker 8: on China which is going to clog supply chains and
Speaker 8: push up prices too. So I think we will get
Speaker 8: some inflation there.
Speaker 2: But what I actually see.
Speaker 8: In the data looking to get the travel numbers is
Speaker 8: a sort of a deflationary tinge to the economy or
Speaker 8: or or slow down tinge to the economy already. So
Speaker 8: you know, you know, I'm glad that the market rallied
Speaker 8: yesterday and say I'm glad that we've got rid of
Speaker 8: the worst of the reciprocal tariffs apart from on China,
Speaker 8: but I think that we are far from out of
Speaker 8: the woods here. I think that these data do sort
Speaker 8: of still suggest that they're is a slowdown coming in
Speaker 8: the economy.
Speaker 1: So the slowdown is what worries you more than the inflation. David,
Speaker 1: if I'm hearing you correctly, at a time or CPI
Speaker 1: just came in, when you strip out energy and food
Speaker 1: at the lowest level going back to twenty twenty one,
Speaker 1: are you saying that that's really what markets ought to
Speaker 1: be focused on, both bond and stock.
Speaker 8: Yes, because people talk about stagflation all the time, but
Speaker 8: really it's always flation stag You get the inflation first,
Speaker 8: and then you get the stagnation. And the problem is that,
Speaker 8: you know, with labor for the labor supply falling away,
Speaker 8: with these impediments to trade, with cutbacks in government spending,
Speaker 8: government grants and so forth, with a lot of fiscal
Speaker 8: drag this year, I can see a lot of things
Speaker 8: that are going to slow the economy down. You know,
Speaker 8: we'll get a temporary surge and inflation from this, but
Speaker 8: I think we're going to be left with a pretty
Speaker 8: stagnant economy afterwards. And the real question is, you know,
Speaker 8: does that revolt in the House yesterday in terms of
Speaker 8: House members who are fiscal hooks, is that really something
Speaker 8: or not? Are we going to have a bigger deficit
Speaker 8: in fiscal stimulus next year or not. If we have
Speaker 8: fiscal stimulus, then I start working about inflation again. But
Speaker 8: in the absence of major fiscal stimulus, I think that
Speaker 8: people need to worry about recession more than inflation.
Speaker 1: Here, our bond's still the best bet us treasure is.
Speaker 1: In that type of scenario, recession comes very much back
Speaker 1: on the table.
Speaker 8: Well, yes, I mean I think this first of all,
Speaker 8: I think, you know, long term interest rates at four
Speaker 8: point three percent, four point two percent on a ten
Speaker 8: year treasury, I think that's fine, and I think people need,
Speaker 8: you know, i'd be level weight and fixed income. I
Speaker 8: realize that we may have a mild recession here, but
Speaker 8: you know, longer term, whatever recession we have, we'll we'll
Speaker 8: pull out of it again. And these bond deals are
Speaker 8: reasonable for the long run. I don't expect inflation to
Speaker 8: hang around the long run, because you know, we'll get
Speaker 8: these tariffs and then then you know, tarffs just don't work,
Speaker 8: and eventually we'll pull back from them and that'll actually
Speaker 8: have a deflationary impulse in the economy. So long term,
Speaker 8: I'm not that worried about inflation. I am worried that
Speaker 8: there won't be much dynamism about the economy overall.
Speaker 2: David, appreciate the update. I know you're basically this morning,
Speaker 2: so thanks for making time for a staved Kelly. There
Speaker 2: of JP Morgan Asset Management, if you want to joining
Speaker 2: us downside surprise on CPI market just kind of looks
Speaker 2: through it. I could he still session loads with down
Speaker 2: by two percent on the S and P five hundred.
Speaker 2: There is a bit at the front end of the curve.
Speaker 2: You ce year's falling back by eight basis points at
Speaker 2: three eighty three on a ten year and in the
Speaker 2: effects market that unlocks further dollar weakness. You wrote dollar
Speaker 2: through one eleven rote one eleven fifteen. Torson' slock of
Speaker 2: Apollo is still with us. Torston, David Kelly, come before
Speaker 2: the storm focus on a growth story more than inflation.
Speaker 2: Do you agree with some of that?
Speaker 5: Well, I'm not so sure.
Speaker 9: I mean, in the last few days the FED has
Speaker 9: made very clear that they will also be focusing on inflation.
Speaker 9: So the real big question for them here is do
Speaker 9: they want their legacy to be Arthur parents or do they
Speaker 9: want their legacy to be Paul Volka Because if they
Speaker 9: walk out the door and have allowed inflation to be
Speaker 9: a lot higher and then of course they will have
Speaker 9: a serious risk. So I do think that this becomes
Speaker 9: a very very important debate inside the FIT in terms
Speaker 9: of what weight should they put on the dual mandate
Speaker 9: When one side of the doual mandate says the fair
Speaker 9: should be cutting, namely growth, and the other side of
Speaker 9: the doal mandate inflation says they should be hiking.
Speaker 2: It difficult to read minds, but based on the communication
Speaker 2: of the past week or so, would you get the
Speaker 2: feeling the weight of history is on.
Speaker 9: Their shelters because I do see some final nuances between
Speaker 9: what's being said in particular comparitives or with your power
Speaker 9: lust Friday. Very importantly, can they get away with just saying, oh,
Speaker 9: we're going to cut because long term inflation expectations in
Speaker 9: markets are very well anchored, because survey expectations aren't going
Speaker 9: up quite significantly. Both in the short term and in
Speaker 9: the long term. So it really becomes a matter of
Speaker 9: where do they put their weight when it comes to inflation.
Speaker 9: Is it on actual incoming inflation or is it on
Speaker 9: some measures of inflation expectations which are well anchored.
Speaker 4: But Torsan, you said it earlier. You have tariff still
Speaker 4: in the pipeline. Can they do anything until they actually
Speaker 4: understand the rules.
Speaker 5: Of the road.
Speaker 9: I think they do the same calculations, of course, that
Speaker 9: this read is doing in terms of the impact on
Speaker 9: inflation is between half and a full percentage point higher
Speaker 9: over the next twelve months. Then I do think that
Speaker 9: they come to the conclusion that the forecast is saying
Speaker 9: inflation is going up, and therefore it's going to be
Speaker 9: difficult for them to signal a lot of rate cuts.
Speaker 9: So that's why the market currently pricing three cuts. It
Speaker 9: does make sense that we have a modest amount of cuts,
Speaker 9: but not more than that, even if growth does last
Speaker 9: to slow down more meaningfully.
Speaker 1: Do you have the sense of how close they were
Speaker 1: intervening with the treasury market yesterday.
Speaker 9: I don't know the answers to that, but I do
Speaker 9: know that they bought one hundred billion dollars during COVID
Speaker 9: of course in March of twenty twenty every single day
Speaker 9: in the treasury market, and I do guess that they
Speaker 9: were probably worried that they would have to take out
Speaker 9: some of the same tools if this were allowed to continue. So,
Speaker 9: if both it was the cause by Japanese sellers, if
Speaker 9: the sellof in rates was caused by risk reduction in
Speaker 9: asset managers, and if it also was caused by the
Speaker 9: basis trade on winding, that combination and the fact that
Speaker 9: we don't even know which of these things were most powerful,
Speaker 9: just still created a significant amount of risks to financial
Speaker 9: stability if this were allowed to continue.
Speaker 2: Do you think people are trying to drift away from
Speaker 2: dollar assets? Do you see that building in the past week.
Speaker 9: I don't see that, because the dollar would have gone
Speaker 9: down a lot more in the last few days than
Speaker 9: it actually did. So there are some discussions around maybe
Speaker 9: China others were selling in custody holdings and just kept
Speaker 9: the money in dollars and didn't sell it and took
Speaker 9: it back home. But nevertheless, the fact that the dollar
Speaker 9: index just moved relatively sideways the yen did appreciate, suggesting
Speaker 9: that it's correct that there might have been some Japanese sellers,
Speaker 9: but broadly speaking of that, the xy index onl Bloomberg
Speaker 9: screen was relatively flat for the last few days, suggesting
Speaker 9: that this was not a questioning about US exceptionalism. I
Speaker 9: still think the US is exceptional, still the most dynamic economy,
Speaker 9: is still the biggest financial market. We still have, of course,
Speaker 9: a lot of investors that are looking here to come
Speaker 9: and invest, and that does make sense. We just have
Speaker 9: at the moment some turbulence, of course, that people are
Speaker 9: thinking about that. This is probably mainly viewed as a
Speaker 9: short term equippled in markets.
Speaker 2: I hope you're right, Sustein. We said it's going to
Speaker 2: see you as always, toson slock there as Apollo. This
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