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

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business App. Joining us now, we

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Speaker 2: won't be patient at all. Zach griff is a credit

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Speaker 2: size alongside Rebeala Farruki of High Frequency Economics Rabela A

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Speaker 2: question that I had last week many others as well.

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Speaker 2: The data last week, never mind opening the door to September.

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Speaker 2: Does it open the door for a real conversation, a

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Speaker 2: live meeting in July about cunning interest rates?

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Speaker 1: Oh? Good morning. You know we think that data relatively,

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Speaker 1: you know, if you look at the growth side of things,

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Speaker 1: if you look at spending, if you look at inflation,

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Speaker 1: and then you know, on top of that, what you're

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Speaker 1: seeing in the labor force, what you're seeing, is there's

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Speaker 1: better balance between inflation and the labor market, and we

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Speaker 1: do think that, you know, there's enough evidence in the

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Speaker 1: data to at least start the conversation. We don't think

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Speaker 1: there's enough for them to move in the July meeting.

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Speaker 1: You know, they get more information between July and September.

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Speaker 1: That's going to be important, So I don't think they

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Speaker 1: need to rush the decision. And also, you know, this

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Speaker 1: set is very careful about not surprising the markets. But

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Speaker 1: I think the discussion definitely can start, especially if our outlook,

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Speaker 1: you know, if things do turn out the way we

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Speaker 1: expect them to, which is an ongoing slowing in what

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Speaker 1: we're seeing on the growth side, and also in terms

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Speaker 1: of what we're seeing on the labor market.

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Speaker 3: That is very key.

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Speaker 1: You know, that rise in the unemployment rate for three

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Speaker 1: straight months. The unemployment rate is still very low, but

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Speaker 1: perceptions about the labor market from households they have deteriorated,

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Speaker 1: and that is going to be a very key input

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Speaker 1: into how household approach the outlook for the economy and

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Speaker 1: what that means for the growth path.

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Speaker 2: Zach To, You believe that we've made enough progress on

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Speaker 2: inflation to put more weight on the other side of

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Speaker 2: the Joe mandate and focus on protecting the labor market.

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Speaker 3: I think we have.

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Speaker 4: John, and I think that's what you're seeing in the

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Speaker 4: minutes last week going through just what fed participants we're

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Speaker 4: talking about. The emphasis seems to be on shifting toward

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Speaker 4: the labor market. That's not to say that they're not

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Speaker 4: going to remain acutely focused on inflation, but I think

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Speaker 4: the labor market gets a bigger waiting going forward, and

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Speaker 4: we are looking for more normalization there and to us

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Speaker 4: with a slow and growth story driven by the consumer

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Speaker 4: in the second half of this year.

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Speaker 3: We don't think they're going to.

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Speaker 4: Go in July, but we agree that the conversation should

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Speaker 4: begin and we're expecting the first cut in September.

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Speaker 5: Zach, when you talk about some of the split screen

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Speaker 5: that we're seeing right now in the economy, where you

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Speaker 5: have certain segments that are doing very well and inflation

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Speaker 5: is still a concern in those segments, and thinking of

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Speaker 5: hotel rooms and some particular routes on airlines, I am.

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Speaker 5: On the other hand, you have a lot of places

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Speaker 5: that are struggling, and you see that with the Russell

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Speaker 5: two thousand in the companies that you cover, how much

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Speaker 5: are you seeing real distress are going to pick up

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Speaker 5: in certain companies even as the overall picture looks stable, We're.

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Speaker 4: Not seeing a ton of distress, I'd say right now

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Speaker 4: at Lisa, what we're seeing is signs that the consumer

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Speaker 4: is slowing down, and we're starting to see a reaction

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Speaker 4: by some of these consumer goods and retail companies not

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Speaker 4: necessarily taking prices down, but doing more promotional pricing. And

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Speaker 4: I think there's going to be a mismatch and timing

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Speaker 4: of when that shows up in the inflation data and

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Speaker 4: when it's actually taking place in the real economy, and

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Speaker 4: how these companies are responding to a slowing consumer. And

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Speaker 4: so when we think about how that changes the balance

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Speaker 4: of risks, we think that fundamentals are going to become

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Speaker 4: a bigger part of the picture in terms of credit

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Speaker 4: spreads in the second half of this year and first

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Speaker 4: half of twenty twenty five. And that's why we have

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Speaker 4: a little bit more of a widening bias versus our

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Speaker 4: more bullishview that we've held for really the past eighteen

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Speaker 4: months or so.

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Speaker 5: Well, Billa, what do you make of that, especially given

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Speaker 5: that it's so bifurcated, right, I mean you could have

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Speaker 5: for example, we're going to be getting the one year

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Speaker 5: inflation expectations from the New York feed day at eleven,

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Speaker 5: we get NFIB small business optimism tomorrow. These are sort

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Speaker 5: of peripheral measures that have been a little bit out

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Speaker 5: of sync with the rest of everything that's going on.

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Speaker 5: How much do you pay attention to that at a

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Speaker 5: time where you see such dominance of particularly high income

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Speaker 5: companies and individuals fueling specific sectors of the economy.

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Speaker 1: No, I mean it's a very important point, right, I

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Speaker 1: mean you are seeing a biplication. There is you know,

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Speaker 1: a slit. You know if you look at what high

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Speaker 1: end consumers are doing versus what you know, people at

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Speaker 1: the bottom end of the income scale. But you know,

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Speaker 1: if you look cumulatively, the sign is still the same.

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Speaker 1: The consumer side of the economy is decelerating. We're not

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Speaker 1: seeing a weakening, we're not seeing a contraction. But this

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Speaker 1: is what drives the economy, and we are seeing a deceleration.

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Speaker 1: You know, what's really important is that the services side

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Speaker 1: of the economy, right that is now moderating. That is

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Speaker 1: something that we have been looking for for a while.

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Speaker 1: And notwithstanding you know what we're seeing with airline travel

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Speaker 1: and you know, things like that, but there is a deceleration.

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Speaker 1: Even if we don't, you know, our base case remains

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Speaker 1: that the combined message is that the economy is slowing,

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Speaker 1: the inflation is on a decelerating path, the labor market

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Speaker 1: is loosening, and those things are going to be what

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Speaker 1: drives the policy path forward. And to us, that means

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Speaker 1: that the FED has to make the policy stands less

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Speaker 1: restrictive sooner rather than later. Managing the risk between the

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Speaker 1: labor market loosening versus the labor market weakening. That is

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Speaker 1: a very tricky thing and I think the FED is

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Speaker 1: very sensitive to that. You know, there are a lot

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Speaker 1: of uncertainties You've been discussing this, you know, in terms

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Speaker 1: of the political arena, in terms of the policy arena.

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Speaker 1: Right now, the FED has to focus on what we're

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Speaker 1: seeing in the economy, and you know, we think that

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Speaker 1: means that the FED has to consider changing the policy

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Speaker 1: stamps rabil.

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Speaker 6: I want to ask your question John brought up earlier.

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Speaker 6: Is this a welcome cooling you just outlined or an

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Speaker 6: unwelcome deterioration.

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Speaker 1: I think it is a welcome cooling. But like I said,

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Speaker 1: managing the risk between a welcome cooling and a weakening

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Speaker 1: and a contraction in payrolls and a surge in the

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Speaker 1: unemployment rate, that's very difficult. Trip Paul has talked about this.

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Speaker 1: You know, what they're talking about is an unexpected weakening

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Speaker 1: in the labor market. So they do expect the labor

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Speaker 1: market to moderate to you know, rebalance more completely. It's

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Speaker 1: just that that unexpected weakening is what they're going to

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Speaker 1: be ready to respond to. We're not really seeing an

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Speaker 1: unexpected weakening. We are seeing a cooling, but it's still

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Speaker 1: in our view, justifies making that policy rate less restrictive.

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Speaker 7: Zach.

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Speaker 2: That's the stance the Federal Reserve is taken. When you

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Speaker 2: speak to people about the unemployment rate, particularly in the market.

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Speaker 2: I'm talking about strategists and investors specifically, they're focused on

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Speaker 2: whether we trigger the pund rule. I want to know

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Speaker 2: from your perspective, Zach, and we touched on this earlier

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Speaker 2: in the program. If next month we go to say

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Speaker 2: four point two percent on the unemployment rate or even higher,

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Speaker 2: and that rule gets triggered, do you think that that

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Speaker 2: would trigger a broad set off in this market?

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Speaker 4: I think we'd have to see at least somewhat of

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Speaker 4: a repricing of risk, and that's really what we're looking for, John,

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Speaker 4: is this.

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Speaker 3: Repricing of credit risk.

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Speaker 4: We have spreads that are really tight, equities that are

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Speaker 4: really high, and when we think about the balance of

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Speaker 4: risk going forward, we're almost more concerned with that unwelcome

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Speaker 4: deterioration outcome with the FED having held policy quite restrictive

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Speaker 4: in our view, and I think there's a lot of

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Speaker 4: uncertainty there, but we do think it's at a restrictive point.

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Speaker 4: And if they don't start to respond to what we're

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Speaker 4: seeing in the consumer in the economy broadly, then we

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Speaker 4: have a higher risk of that hard landing scenario that

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Speaker 4: everyone was so fearful of in twenty twenty three emerging

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Speaker 4: perhaps in the second half this year, first half of

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Speaker 4: twenty twenty five. So we are expecting that if we

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Speaker 4: do see more deterioration, perhaps at a faster pace than

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Speaker 4: what we've seen so far, you're going to see that

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Speaker 4: reflected in asset prices.

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Speaker 2: Hey, Zach, good here from you, Zach Griffiths Stair of

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Speaker 2: Credit Sites and Rabila Ferruki of the High Frequency Economics

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Speaker 2: HEDD astres of Vader partner's writing this, and let's Biden

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Speaker 2: improves in the polls, the screams to drop out are

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Speaker 2: going to grow deafening. Team Biden is putting up a

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Speaker 2: valiant effort right now to stay in the race. But

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Speaker 2: it is our expectation that staying in the race is

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Speaker 2: untenable and the President will choose to step aside. Hendra

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Speaker 2: joins us now for more, Hendry. It's wonderful to have

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Speaker 2: you with us on the program.

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Speaker 3: Will it be the.

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Speaker 2: Polls, the donors, officials within the party that get the

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Speaker 2: president to take that decision.

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Speaker 8: Yeah, it's interesting they're getting all three right now. The

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Speaker 8: donors are leaving the polls. The best poll that the

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Speaker 8: president had in the last week was that the Bloomberg

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Speaker 8: consult Pool that y'all conducted, which showed him down in

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Speaker 8: every state.

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Speaker 7: Except for Michigan and Wisconsin.

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Speaker 8: He's underwater in Pennsylvania by seven points, I believe in

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Speaker 8: the Bloomberg Morning consult Pool. So all three of those points,

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Speaker 8: including the members, are coming out against Joe Biden right now,

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Speaker 8: which is why we have seventy percent odds that he

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Speaker 8: will ultimately decide to step aside and open this up to,

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Speaker 8: as I would phrase it, the chaos of what will

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Speaker 8: either be passing it towards to Vice President Kamala Harris

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Speaker 8: or opening it up to sort of a contested mini

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Speaker 8: convention as they're calling it on the Democratic side.

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Speaker 1: Now.

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Speaker 6: Range of seventy percent odds is a big call. Henrietta,

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Speaker 6: what's the timeline? You can see this unfolding, great question.

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Speaker 8: You know, these things happen very slowly and then suddenly

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Speaker 8: all at once.

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Speaker 7: To paraphrase right now, there are a lot of different

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Speaker 7: big ticket items.

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Speaker 8: Y'all have been mentioning the NATO events this week and Thursday,

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Speaker 8: and those are all integral. But let's step back and

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Speaker 8: sort of consider this from the perspective of the average voter.

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Speaker 7: No one's watching that.

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Speaker 8: I mean, let's be honest, Americans there not particularly asking

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Speaker 8: about foreign policy most of the year. I don't expect

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Speaker 8: it to be a major driver in this narrative of

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Speaker 8: the twenty twenty four election. Obviously, Israel, Agaza and Ukraine

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Speaker 8: are important topics, but in the grand scheme of things

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Speaker 8: for the American voter, and that doesn't register. So what

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Speaker 8: I'm looking at is what is former President Trump going

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Speaker 8: to announce his VP. The number one way to supersede

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Speaker 8: that announcement is to move forward with the Democratic announcement

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Speaker 8: about something else that's going to happen at the convention

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Speaker 8: next week or in the days leading up to it.

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Speaker 8: I don't see a lot of rationale for Democrats to

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Speaker 8: step out and say, actually, you know we're going to

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Speaker 8: do We're going to fix all this and open it

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Speaker 8: up to a new situation. Biden's going to step down

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Speaker 8: before the RNC. I would expect it to occur after that.

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Speaker 8: So that's about a week week and a half for

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Speaker 8: investors to continue waiting here.

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Speaker 7: We've been through this a million times with DC.

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Speaker 8: You know, they don't do anything until they absolutely have to,

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Speaker 8: and this is just another example of that. So technically

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Speaker 8: you wouldn't have to get any movement on this until

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Speaker 8: sort of mid August.

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Speaker 7: I think we could see something.

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Speaker 8: We're already seeing a lot of movement underneath the surface,

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Speaker 8: but a real action out of the RNC.

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Speaker 6: But mid August puts this potential individual that might step

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Speaker 6: in to take Biden's place at a disadvantage. You right,

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Speaker 6: right now, no Democratic candidate can beat Trump when it

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Speaker 6: comes to name recognition, National stature to compete with Trump,

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Speaker 6: who would have the best chance.

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Speaker 8: Right, So that's exactly the case right now, except we're

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Speaker 8: already talking about Gretchen Whitmer, Gavin Newsom, Pete Bodajij, Kamala Harris,

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Speaker 8: and name recognition and all the polls that have been

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Speaker 8: conducted of those candidates is increasing rapidly.

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Speaker 7: Due to this concept of the.

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Speaker 8: Invisible primary, where voters have expected either Biden or Trump

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Speaker 8: to drop out of this race all year, people are

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Speaker 8: primed to learn about a new candidate, and so what

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Speaker 8: you're seeing is that name recognition is going through the

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Speaker 8: roof very quickly, and you're seeing improved polling for members

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Speaker 8: like Kamala Harris, even Gretchen Whitmer or Gavin Newsom, which

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Speaker 8: are sort of the second and third tier candidates on

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Speaker 8: that list.

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Speaker 7: Kamala Harris is fired away the front runner.

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Speaker 8: I think what we are focusing on here is that

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Speaker 8: twenty four percent of the electorate, including mostly independents, decide

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Speaker 8: who they're going to vote for after Labor Day. So

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Speaker 8: there's about sixty days sixty days from now that matter

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Speaker 8: most in this election, and we're not there yet. So

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Speaker 8: any of these democratic units, I think have the benefit

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Speaker 8: of what will be an onslaught of media, sort of

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Speaker 8: free or earned media the way that we're most familiar

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Speaker 8: with on the Republican side with Thompsince twenty sixteen, that

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Speaker 8: earned media that you don't have to pay for, that

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Speaker 8: comes from just natural attention and intrigue, and that's now

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Speaker 8: housed within the Democratic Party for the first time since

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Speaker 8: twenty sixteen, Henrietta.

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Speaker 5: I've been confused by some of the polls after the

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Speaker 5: debate and after that interview with Joe Biden on Friday night.

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Speaker 5: Some have shown a widening in the gap, widening the

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Speaker 5: lead for Donald Trump. Others, like the Bloomberg Morning Console

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Speaker 5: poll showing a narrowing of Trump's advantage in the swing states.

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Speaker 5: How do you understand this is basically any press good press.

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Speaker 5: Is it that people already knew about this and this

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Speaker 5: is already factored in? How do you sort of reconcile

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Speaker 5: the different narratives that we see.

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Speaker 8: I think it really changes on for lack of a

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Speaker 8: better phrase, attention to the Democrats, certainly, but the fact

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Speaker 8: that Donald Trump has not grown his base.

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Speaker 7: So it's not that Trump is improving, it's that Biden

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Speaker 7: is deteriorating. Trump is at his ceiling. That has been

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Speaker 7: the case since November.

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Speaker 8: The question is can you beat forty seven forty eight percent,

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Speaker 8: which is where Trump sort of plateaus. The bulk of

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Speaker 8: Biden's supporter sixty three percent are actually just people who

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Speaker 8: don't like Trump. So it creates a scenario where the

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Speaker 8: Democratic voter base and increasingly independence moderates and in particular

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Speaker 8: female voters are primed to migrate to whomever the Democratic

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Speaker 8: Party taps next.

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Speaker 7: It really matters less who that candidate is than the

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Speaker 7: fact that they're not Trump.

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Speaker 8: And that's just the nature of the duality between Trump

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Speaker 8: and the Democratic Party.

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Speaker 3: Right now, let's.

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Speaker 2: Catch up and the next week to us so Hendrat

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Speaker 2: tries that fight apoutent as with the COVID the president,

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Speaker 2: we'll step beside. Yes, Pay, that's quite a headline, the

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Speaker 2: down grade to Nvidia. Just tell me, what are you

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Speaker 2: seeing in the company? Is it what the company is

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Speaker 2: doing or what the stock price is doing? This led

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Speaker 2: to this down right?

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Speaker 3: That's a great question, John.

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Speaker 9: What we've been doing over the last eighteen months following

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Speaker 9: Nvidia and being very early and you know, seeing this

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Speaker 9: AI inflection that we've been comparing what's happening for Nvidia,

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Speaker 9: what expectations are.

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Speaker 3: On Nvidia, with what the supply chain of Nvidia is.

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Speaker 9: Lining in terms of increasing capacity for the for this

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Speaker 9: accelerating AI AI infrastructure deployments. And for eighteen months, we've

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Speaker 9: always seen expectations for Nvidia being below what the supply

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Speaker 9: chain was planning. So every report we said, they're going

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Speaker 9: to be because they're lining up more capacity than what

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Speaker 9: expectations imply today. And as we did that check in

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Speaker 9: the last few weeks, we realized that now when you

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Speaker 9: listen to when you look at expectations for NDIA for

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Speaker 9: twenty twenty five with like data center revenues of like

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Speaker 9: fifty percent, so it actually lines up pretty well with

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Speaker 9: what memory manufacturers are telling us about their capacity plans

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Speaker 9: for HBM. It lines up pretty well with what CSMC

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Speaker 9: is telling us about capacities are lining up for COURS.

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Speaker 9: And so we came to the conclusion that for Nvidia

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Speaker 9: to beat expectations again, we would need to see first

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Speaker 9: a supply chain increasing further their capacity planning, and we

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Speaker 9: felt that was a good time for us to actually

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Speaker 9: signal to investors, to.

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Speaker 3: Our clients, well, you know, you have to be careful.

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Speaker 9: Because this business has grown like ten x over like

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Speaker 9: the last couple of years, like the data center AI

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Speaker 9: business of of Nvidia, and at some point you know

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Speaker 9: it's going to take a breath, it's going to slow,

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Speaker 9: it's going to.

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Speaker 3: To stick where it is.

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Speaker 9: And seeing expectations for Nvidia beating where the supply chain

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Speaker 9: is anticipating felt like a good point in time to.

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Speaker 3: Grow more cautious.

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Speaker 9: About the story, and then valuation is relatively secondized. I

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Speaker 9: think the valuation of Nvidia is still is still reasonable,

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Speaker 9: but it's rich enough to set her if NVDA dis

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Speaker 9: ap points, not by missing expectations, but by not beating them.

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Speaker 5: Pierre, there's a distinction between a valuation call where maybe

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Speaker 5: it's just gotten over in its skis and needs to

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Speaker 5: pause for a bit, versus the Cisco trajectory of big up,

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Speaker 5: big down. How is the darling in the early two

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Speaker 5: thousands and then it really lost some luster. Do you

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Speaker 5: foresee that type of reaction in video or do you

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Speaker 5: think it might just plateau for a while or even

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Speaker 5: dip before continuing its dominance over the field.

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Speaker 9: Yeah, there is no Really, we don't see any challenges

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Speaker 9: on nvd A'SRKET position.

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Speaker 3: Nvidia is a market leader. Like one of our key.

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Speaker 9: Angles of understanding this market is that it's not a

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Speaker 9: market in which you have to do the best chip.

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Speaker 9: It's a market in which you have to do the

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Speaker 9: cheap that people are going to use the best. And

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Speaker 9: today NVDA is largely dominant in the data center for AI.

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Speaker 9: From that perspective, so we thinks are going to continue

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Speaker 9: to have a very very strong market share. You have

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Speaker 9: more room for challengers like MD of course, and we

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Speaker 9: expect actually in house chiefs to continue to take share,

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Speaker 9: but NVDA will still by farb is the dominant player,

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Speaker 9: will still have the strong margins.

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Speaker 3: And we don't see the.

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Speaker 9: AI bubble, you know, collapsing badly and going away. It's

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Speaker 9: more of the latter that at some point, you know,

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Speaker 9: after like two three years of explosive growth of like

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Speaker 9: resetting the size of the market where we are today,

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Speaker 9: we see a risk that things stabilized and that's where

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Speaker 9: the stock would take a deep and we would be

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Speaker 9: very very constructive on that and see that there's an

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Speaker 9: opportunity to get back on the stock.

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Speaker 2: Of course, pre the stock has sixty five by seven

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Speaker 2: holds just a one sell. I've got to watcher this

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Speaker 2: question almost as a friend. Just the career is associated

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Speaker 2: with not being pullish on the most polish stock on

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Speaker 2: the planet right now, Pierre, how do you think about

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Speaker 2: those things when you're putting these calls together?

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Speaker 9: Thanks for the Thanks for the question. It's a very

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Speaker 9: good one. You know, I am an independent analyst. I

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Speaker 9: don't work for a bank or for like a a broker,

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Speaker 9: and so my professional success is about, you know, how

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Speaker 9: much my clients value my opinion, and I think people

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Speaker 9: who follow us through who support our research, value.

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Speaker 3: That my ability to say.

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Speaker 9: Maybe I'm wrong, but I see things that I was

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Speaker 9: not seeing in the last eighteen months. So things are changing.

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Speaker 9: And I think publishing research like that might upset a

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Speaker 9: couple of people because of stock reacts negative beyond the

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Speaker 9: day or in a couple of days following it. But overall,

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Speaker 9: what really matters is we do the numbers, We do

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Speaker 9: the mass. We look at what Micron and Samsung and

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Speaker 9: high Nichs are saying and we compare that to what

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Speaker 9: expectations are for Nvidia. We'll get what TSMC is saying,

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Speaker 9: and we compare that to expectations for Nvidia. We look

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Speaker 9: at where overall capex are as well, likes the hypher

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Speaker 9: scale capex had increased very significantly, and few things are

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Speaker 9: going to increase again very exactly next year, and so

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Speaker 9: we're worried that there isn't much room for this capex

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Speaker 9: to increase further beyond that.

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Speaker 3: And so I think that work is always valued. So

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Speaker 3: I don't feel like I'm taking a carrig risk.

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Speaker 2: Well, we certainly value your opinion, Pierre, and I don't

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Speaker 2: think it's taking a career risk either. Pierre far to

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Speaker 2: a New Street Research per Thank you. This is the

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Speaker 2: Bloomberg Seventans podcast, bringing you the best in markets, economics,

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Speaker 2: antier politics. You can watch the show live on Bloomberg

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Speaker 2: you listen, and as always, on the Bloombag term nope

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Speaker 2: and look blom Bug business out

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Speaker 8: Yeahm