Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and a Marie Hordernt. Join us each
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Speaker 2: Bloomberg Terminal and the Bloomberg Business App. Here's a few
Speaker 2: on Wall Street this morning. Julian and Manuel, I've ever
Speaker 2: course saying it's not yet the time to parle in
Speaker 2: right in the following, A pullback is our base case,
Speaker 2: given the parabolic move already and the risks from tariffs
Speaker 2: and policy to the economy. Judy had joined us now
Speaker 2: for more. Julian, good morning, good morning. Aha, we take
Speaker 2: a beat. How's it feel the last quarter? What was
Speaker 2: that like for you?
Speaker 3: Look?
Speaker 4: Incredible in many respects.
Speaker 5: So the market actually did what it was supposed to do. Okay,
Speaker 5: you had this incredible surprise reaction to something where we
Speaker 5: were completely not used to what we were seeing, which
Speaker 5: was a tariff schedule, you know, higher than smooth Holly.
Speaker 5: And then you got what you actually didn't get at
Speaker 5: the bottom in October of twenty twenty two, a volatility event,
Speaker 5: an actual capitulation that really presented the buying opportunity very
Speaker 5: very clearly. And from our point of view, the surprise
Speaker 5: is the unrelenting speed with which the market continues the advance.
Speaker 2: Massive move twenty percent plus off the lows on the
Speaker 2: S and P thirty percent something like that in the
Speaker 2: last nine one hundred. I sait here, and I wonder
Speaker 2: looking out twelve months now, can you say with confidence
Speaker 2: the outlook for runnings is getting better or worse?
Speaker 5: At this point it's it's definitely getting better, okay, because
Speaker 5: basically what has happened is you've had this adjustment from tariffs,
Speaker 5: and now that there is this presumption that you are
Speaker 5: going to get and we can talk about the effect
Speaker 5: on interest rates later or what have you, that you're
Speaker 5: going to get some form of stimulus that is going
Speaker 5: to be more favorable to the twenty twenty six picture. Obviously,
Speaker 5: the twenty twenty five picture remains in flux, and we're
Speaker 5: going to find that out in a couple of weeks
Speaker 5: when the earning seasons start. But in general, the whole
Speaker 5: narrative of the economy having avoided a recession is a
Speaker 5: reasonably positive backdrop.
Speaker 6: Let's put the one big beautiful bill on the side
Speaker 6: for one second and just go to the tariffs, which
Speaker 6: you mentioned are still at the highest going back to
Speaker 6: the nineteen thirties and haven't fully been priced in yet.
Speaker 6: When it comes to whether it's consumer prices, whether it's
Speaker 6: companies absorbing it in the profit margins, what makes you
Speaker 6: think this isn't going to show up in earnings and
Speaker 6: a material hit to profit margins for a significant number
Speaker 6: of companies.
Speaker 5: Well, so, the work that we've done was the expectation
Speaker 5: that roughly it be a fifty to fifty split. You know,
Speaker 5: larger companies will will shoulder less, smaller companies will will
Speaker 5: shoulder more of.
Speaker 4: The tariff hit.
Speaker 5: And yes, it definitely will fall into earnings. But again
Speaker 5: there is this presumption that it is the one time
Speaker 5: hit and that there will be this transition period, which
Speaker 5: obviously for the market began in the spring, but we're
Speaker 5: already sort of pricing through that. And again, what it
Speaker 5: points to is the resilience of corporate America, the ability
Speaker 5: to adapt, the ability to move supply chains, and the
Speaker 5: ability to figure out what a correct pricing strategy is.
Speaker 6: We're putting an economic narrative to a market story, to
Speaker 6: something that really is big tech names that continue to
Speaker 6: innovate in a technological boom that is trickling out into
Speaker 6: other companies at the same time that there are these
Speaker 6: independent factors that are very real that are affecting other
Speaker 6: asset classes. And we talked about the dollar that might
Speaker 6: be some of the vigilantes are going, or this question
Speaker 6: of where the marginal buyer is going to be, how
Speaker 6: the market responds to negative news in the economy. How
Speaker 6: much are we making an economic argument for something that
Speaker 6: is now increasingly divorced from the economy.
Speaker 5: Well, again stepping back the story of this year, and
Speaker 5: in large part from our point of view, the reason
Speaker 5: that the advance off the April bottom has been as
Speaker 5: unrelenting as it's been is because we are now finding
Speaker 5: that corporate America is understanding how to use AI constructively
Speaker 5: across all industries, not just for cost saves, but for
Speaker 5: revenue enhancement well as well. And this is something that
Speaker 5: we think is going to continue to proliferate, and when
Speaker 5: you think about it, is part of the reason. Look,
Speaker 5: we're uncomfortable with where multiples are, which is why we
Speaker 5: think that you're likely.
Speaker 4: To have a pullback.
Speaker 5: But on balance, it is something that supports higher multiples
Speaker 5: x ANTI than what we've seen.
Speaker 7: I'll pull back when though, because you talk about a
Speaker 7: FOMO driven melt up.
Speaker 1: What if you missed that?
Speaker 5: So, look, it could be going on right now, but
Speaker 5: from our point of view, there's enough policy uncertainty out
Speaker 5: there that I would equate this more to the sort
Speaker 5: of FOMO that we had in and around the election.
Speaker 5: Remember a lot of froth there, you know, led by
Speaker 5: crypto names, led by names that were tied into the
Speaker 5: Trump administration. And I think we're seeing a lot of
Speaker 5: the same thing now. But again, the actual activity supporting
Speaker 5: a more prolonged period of FOMO hasn't materialized yet. We
Speaker 5: do think you need to get less policy uncertainty to
Speaker 5: get to that period.
Speaker 7: What uncertainty unnerves you the most? Lisa mentioned tariffs. Right now,
Speaker 7: we have this debate on the one big beautiful bill,
Speaker 7: but no one thinks it's not going to pass. It
Speaker 7: just might be an absolute slog and it's probably not
Speaker 7: going to come on July fourth. What's the uncertainty that
Speaker 7: makes you nervous to really want to add more to
Speaker 7: your exposure?
Speaker 5: So I think it's a what the response is going
Speaker 5: to be in and around July to ninth. That's the
Speaker 5: you know, the tariff story. But again this other idea
Speaker 5: that you know, we're seeing the resilience on the corporate
Speaker 5: earnings front. But if you go back to last Friday,
Speaker 5: it was really the first indication with the inflation numbers
Speaker 5: higher than expected and the income and spending numbers weaker
Speaker 5: than expected. GDP revised down that yes, in fact, this
Speaker 5: theorized pass through.
Speaker 4: From tariffs might actually in fact be dding. What's the
Speaker 4: best outcome for July ninth?
Speaker 2: Ask this question? Yes, and I, as an extended pretend
Speaker 2: keep the Guschett and go ten percent and move on.
Speaker 2: What's the best outcome for you?
Speaker 5: I think it's I think, well, you'd like certainty. I mean,
Speaker 5: if you just went to ten and said that's it,
Speaker 5: that would be fine.
Speaker 4: The market would embrace that.
Speaker 5: But something leads me to believe that it isn't quite
Speaker 5: going to be that simple.
Speaker 2: In negotiation, You're not alone, by the way, And I
Speaker 2: think this is interesting that the market is just sort
Speaker 2: of happy, and I think it was happy several months
Speaker 2: ago with the idea of a ten percent universal tariff.
Speaker 2: Move on to other things.
Speaker 6: Then companies can actually price it in, they can re
Speaker 6: raise your supply chains, and like Julian said, the adapt
Speaker 6: adjusts wi you see in so many different companies is
Speaker 6: what we've already seen with respect to half being absorbed
Speaker 6: by them, a little being absorbed by them, and maybe
Speaker 6: just a small marginal one time price increase.
Speaker 7: And to your point, Jonathan, the market was happy.
Speaker 8: I was there. It was rallying when.
Speaker 7: The President got up in the rose garden said here's
Speaker 7: a ten percent across the board tariff. It only started
Speaker 7: to crater when they came out with the massive billboard
Speaker 7: of the reciprocal tariff rates that were extortioned for some
Speaker 7: countries an kittsult to the extreme.
Speaker 2: And now we're happy with ten percent, and apparently even
Speaker 2: the EU is now happy with a ten percent universal tariff.
Speaker 6: With carvauts in sure, whatever, that's not what we're going
Speaker 6: to get because we also have sectoral tariffs and you've
Speaker 6: got countries that are waiting for the two through twos.
Speaker 2: These countries aren't arguing about the ten percent universal tariff.
Speaker 2: They're not even debating it with the US at all,
Speaker 2: which goes the.
Speaker 6: Question of if you anchored the extreme, is that the
Speaker 6: way to get people to all accept something that would
Speaker 6: have been extreme?
Speaker 7: It's a massive You turn to when I was in
Speaker 7: the Netherlands last week and they said they would not
Speaker 7: accept a ten percent across the board tariff. Now a
Speaker 7: week later, okay, fine, walk ccept ten percent. We need
Speaker 7: some help on stealing autos.
Speaker 2: What's the relationship between your outlook for the equity market
Speaker 2: and what's been happening in fixed income?
Speaker 5: No, it is definitely a mystery, There's no question about it.
Speaker 5: And it almost makes you wonder as if there might
Speaker 5: be a time where, let's say this bill passes and
Speaker 5: then we wake up and yields start moving higher by
Speaker 5: a reasonably significant amount. But at the end of the day,
Speaker 5: if you look at it, the yields have been going
Speaker 5: sideways for two years. Okay, literally somewhere between four and
Speaker 5: four and a half for two whole years, And frankly,
Speaker 5: that's perfectly fine for the equity market, because again that
Speaker 5: removes part of the uncertainty.
Speaker 6: Well, okay, they say the same, but the backdrop has
Speaker 6: been very different.
Speaker 8: Economically.
Speaker 1: People went from a.
Speaker 6: Very high benchmark industry understanding of the world that was
Speaker 6: high inflation to one that now if you put all
Speaker 6: of the other potential tariffs and other disruptions out of
Speaker 6: the picture, we would be looking at pretty much close
Speaker 6: to two percent inflation rate. We're looking at basically mission accomplished.
Speaker 6: So is this highlighting a new premium that will ultimately
Speaker 6: challenge US valuations and risk markets in a way that
Speaker 6: has not fully been appreciated.
Speaker 5: Well, there's certainly an element to that. However, the countervail
Speaker 5: to that is that we are likely to get a
Speaker 5: new FED chairman sometime next year that is going to
Speaker 5: be let's say a little bit more accommodating in terms
Speaker 5: of ringing infrastrates down.
Speaker 6: Let's say that they are accommodating and taking sharpie messages
Speaker 6: of the world's interest rates and saying, okay, we'll cut
Speaker 6: three percentage points in this meeting, regardless of what happens.
Speaker 8: What happens the long end, that's true, you.
Speaker 5: Will get a yield curve steepening the likes of which
Speaker 5: most investors do not remember that twenty years ago and
Speaker 5: so on, twos tens was more in the neighborhood of
Speaker 5: one hundred and fifty over rather than fifty over. A
Speaker 5: very rapid steepening. And frankly, when we think about what
Speaker 5: the risks to the equity market are, ten year yields
Speaker 5: going through five percent far and away at this point
Speaker 5: are the most significant risk.
Speaker 8: What can that happen?
Speaker 4: Again?
Speaker 5: It just the psychology right now is telling you it
Speaker 5: doesn't seem likely, you know, because as John pointed out,
Speaker 5: you know, counter to expectations, and really the same way
Speaker 5: the dollar. This is counter to the expectations of people
Speaker 5: that thought.
Speaker 4: Tariffs would be bullish to the dollar.
Speaker 5: It really just takes a turnaround in psychology that we
Speaker 5: don't see. But I would suggest that if the inflation
Speaker 5: data continues to firm, at the same time we get
Speaker 5: more sort of pushback on the direction of tariffs, that's
Speaker 5: the mix that.
Speaker 2: The dollar move. I think Julian speaks to exactly the
Speaker 2: risks you describe. Just go through the scenario. You face
Speaker 2: a situation where you do get a fed chair, let's
Speaker 2: say it's more willing to drop interest rates regardless of
Speaker 2: what's happening gaswag, you get the curve stinkning you describe,
Speaker 2: you get all the debt issued at the front end
Speaker 2: with a Federal Reserve cutting interest rates, then it's precisely
Speaker 2: one of the reasons you're seeing the dollar strength has
Speaker 2: been developingly so over the last several months.
Speaker 6: What is the fear that this is going to be
Speaker 6: a FED that's going to try to monetize the debt
Speaker 6: that's going to try to essentially print money to offset
Speaker 6: this by having rates at a very low level and
Speaker 6: then just printing money at that level. And how much
Speaker 6: does it take at this point to create dollar strength,
Speaker 6: given that that fear has been embedded in the overall
Speaker 6: investor base.
Speaker 2: It's in the President actually arguing for that right now
Speaker 2: over the last several months, almost explicitly saying that he
Speaker 2: wants the Federal Reserve to drop interest rights so they
Speaker 2: can issue that at the front end and get lower
Speaker 2: interest rates.
Speaker 6: He's saying there is a direct connection between the FED
Speaker 6: rate policy and what the US pays and interest payments.
Speaker 6: And then Scott bess And came out and said, yeah,
Speaker 6: we're not going to turn out the debt, We're going
Speaker 6: to focus on the front end because right now the
Speaker 6: term premium is just too great. So you put those together,
Speaker 6: and that is to your point explicit explicitly calling for
Speaker 6: the FED to help the country lower its interest payments.
Speaker 7: In the sharpie black and white, you have cost the
Speaker 7: USA a fortune and continue to do so. He's talking
Speaker 7: about the net interest we are paying on our debt,
Speaker 7: which has basically toppled the entire US budget higher than Defenseman.
Speaker 2: Quick found of word dollar witness how much for a
Speaker 2: tail whend does that for the S and P five hundred.
Speaker 5: It's definitely been significant, and it has definitely contributed, among
Speaker 5: other reasons for the large cap our performance over small
Speaker 5: cap In general, it tends to be a positive, but
Speaker 5: again there's always sort of until it isn't. And I
Speaker 5: would suggest, and it's not our base case, that there
Speaker 5: are going to be issues around getting this bill passed.
Speaker 5: But if we start getting towards August and again not
Speaker 5: our base case, chill, that is where you run into problems.
Speaker 2: So many reasons for dollar weakness, which I think makes
Speaker 2: the pain. Try to Q three dollar strength, that's going
Speaker 2: to be the pain. Try to Q three dollars strength.
Speaker 2: Who's position for.
Speaker 6: That I couldn't agree more. I was thinking, people say
Speaker 6: that there's going to be a stimulative effect. No memory
Speaker 6: would agree argue with this from the one big beautiful bill,
Speaker 6: Let's say that plays in with better than expected earnings
Speaker 6: and economic data.
Speaker 1: What does a dollar do?
Speaker 2: Jitdy, and it's gott to say you s thanks for
Speaker 2: dropping by, thank you doning in to mind We that
Speaker 2: of evicle as we kick off the second half of
Speaker 2: twenty twenty five. Up next the former NEC Deputy director
Speaker 2: Evera Eisenstadt as the EU comes to the table for
Speaker 2: trade talks plus Your Moves with Danny Berger the latest
Speaker 2: on Tesla.
Speaker 8: In case you missed it on the opening trade, I.
Speaker 9: Think we could go to say one forty, that's that's right,
Speaker 9: one one four zero absolutely, that's.
Speaker 8: Where at one fourteen right now?
Speaker 9: Well one fourteen yeah, yes, yeah, yeah. This is the
Speaker 9: scale of moves over what time for it? This could
Speaker 9: be within one or two years, that's the that's first.
Speaker 9: That's fast. Absolutely, yeah, yeah, yeah. I mean if you
Speaker 9: look at how fast the dollar fell from two thousand
Speaker 9: and two to two thousand and four, it was similarly
Speaker 9: large as this. To me, it's not out of the
Speaker 9: realm's possibility.
Speaker 8: So I'm just sitting.
Speaker 10: I can't quite Yeah, So take us to the US economy.
Speaker 10: I mean, does the underlying state of the US economy
Speaker 10: matter in that trade? It seems as if interest rate
Speaker 10: differentials in the state of the US economy may be
Speaker 10: pushed to the sideline by this border big picture narratives.
Speaker 1: That you describe.
Speaker 9: Absolutely. Yeah, the normal cyclical dynamics much less important with
Speaker 9: this type of structural change.
Speaker 8: Miss the Opening Trade every weekday in case you missed
Speaker 8: it on the Pulse.
Speaker 11: I think the idea of wait and see and pause.
Speaker 11: As Bill Yesterday's news, our best advice to CEOs right
Speaker 11: now is that if you're not operating differently than you
Speaker 11: were a year ago, you may be falling behind. Yes,
Speaker 11: we need to build resilient, but we need to also
Speaker 11: build growth despite the environment, and that requires a different
Speaker 11: strategy than.
Speaker 8: Just a year ago.
Speaker 7: Don't miss the Pulse live every weekday.
Speaker 2: Welcome to the second half LI from New York City
Speaker 2: this morning. Good morning, Your scores look like their secretary
Speaker 2: feature is negative by two tenths of one percent on
Speaker 2: the SMP, following back to back all time highs on
Speaker 2: a benchmark in the United States. We're coming into Q
Speaker 2: three on a three day winning streak. Come then, that's
Speaker 2: that one hundred after a major rally off the lows
Speaker 2: of April, we're down just zero zero point three percent
Speaker 2: with threeans until the opening bout. Let's get you some morning.
Speaker 9: Movers, henri to trace us at the papers.
Speaker 4: Of the House.
Speaker 2: We'll roll over and accept the Senate's more material deficit increases.
Speaker 2: Henrietta joins us. Now for more, henri to welcome back
Speaker 2: to the program. Just describe what's taking place in the
Speaker 2: Senate right now and whether you believe we're pretty close
Speaker 2: to getting this done.
Speaker 12: Yeah, it looks like we're enforce it mode. We've got
Speaker 12: jd Vance going up to the Senate clearly indicating with
Speaker 12: some muscle that he's there to break a vote if
Speaker 12: he needs to and be the holdout. But I want
Speaker 12: to just emphasize one thing here. Him having to vote
Speaker 12: for the bill now means that over the last seventy
Speaker 12: two hours, the trajectory of this bill has actually lost
Speaker 12: a Senator along the way. So his vote was not
Speaker 12: needed for the motion to proceed on Saturday night, and
Speaker 12: now it is, and that's not necessarily that's how not
Speaker 12: a good sign. And I think a big part of
Speaker 12: that could be the distributional tables that were released by
Speaker 12: the JCT at about two o'clock this morning, which show
Speaker 12: the top bracket is going to see twelve five hundred
Speaker 12: dollars when this bill has passed, and the lowest bracket
Speaker 12: is going to see one hundred and fifty bucks. So
Speaker 12: that's really the fallout here, that's what's got Alaska flipped out.
Speaker 12: We've got some problems.
Speaker 8: Still, Henritta.
Speaker 7: Is it when it comes to the Senator of Alaska
Speaker 7: Lisa Murkowski? Is she the one that Majority Leader Johnson
Speaker 7: has to flip?
Speaker 12: She's essential to the package. What we always watch, and
Speaker 12: you know it's been decades now is the combination of
Speaker 12: Collins and Murkowski. And let's not forget that Dan Sullivan
Speaker 12: is one of the Alaska Senators that's actually up next cycle.
Speaker 12: So when you get thirty five percent of the Medicaid
Speaker 12: recipients in Alaska that are under risk of seeing their
Speaker 12: cuts or their healthcare lost, that's a material problem for
Speaker 12: the state. But then we still have the IRA issues
Speaker 12: that are critical to Maine and a whole host of
Speaker 12: other states as well. So I think we actually have
Speaker 12: a little bit longer to go before this is all
Speaker 12: nailed down.
Speaker 7: In your note, you think that in the end the
Speaker 7: final passage will get Moretowski and Senator of Collins vote.
Speaker 7: But Senator Collins had an amendment earlier this morning when
Speaker 7: it would give more money to rural hospitals in lieu
Speaker 7: of raising the tax rate on those making twenty five
Speaker 7: million dollars more, and that was struck down. So is
Speaker 7: she a no now given her amendment went down in flames?
Speaker 12: You know, in my experience, that's more of a messaging document.
Speaker 12: You're not going to get Republicans to vote for tax
Speaker 12: increases for any individual brackets. Even President Trump tried to
Speaker 12: do that earlier on in the year and the party
Speaker 12: killed it pretty quickly. So I see that more of
Speaker 12: as a message and you know, pretty serious signals to
Speaker 12: Senator Collins, who was also upper reelection next cycle, that
Speaker 12: she has another workaround. But the fact again that Vance
Speaker 12: is there means she might be a no vote. And
Speaker 12: she made it really clear during the motion to proceed
Speaker 12: on Saturday night that she was only voting to proceed
Speaker 12: she did not have support for the underlying bill. So
Speaker 12: Vance being there suggests that they have lost the senator
Speaker 12: from the process.
Speaker 8: Alone, Henrietta.
Speaker 7: Then this goes to the House and you think the
Speaker 7: House just accepts it, although we're already seeing some housemen
Speaker 7: come out the Salt Caucus. I don't like what they
Speaker 7: did to tweak what happened with the salt cap. You
Speaker 7: have the House Freedom Caucus saying, actually, this raises the deficit.
Speaker 7: We're going to be increasing spending. Why are you so short?
Speaker 7: The House is just going to take this on the chin.
Speaker 4: Yeah, and I'm.
Speaker 12: Sorry, it's been a long night, but I got to
Speaker 12: say the Salt caucaus has to sit down. I mean,
Speaker 12: they've gotten enough of their carve out. They got a
Speaker 12: forty k cap, They've got it up to five hundred
Speaker 12: thousand dollars for an income bracket. So they've gotten what
Speaker 12: they're going to get. That's why the distributional tables are
Speaker 12: so bad. I would really expect that the Murkowski Earnst
Speaker 12: Grassley bill on the IRA or the amendment has to
Speaker 12: pass in order to satiate the House IRA supporters, of
Speaker 12: which there are anywhere between eighteen and thirty members. To me,
Speaker 12: that's a bigger caucus than the Salt Conference, who's already
Speaker 12: gotten as much as they can ask for, much more
Speaker 12: than I anticipated, indeed, so I think that they need
Speaker 12: to sit down and we need to move into the
Speaker 12: IRA place. We haven't even gotten an amendment vote on
Speaker 12: that bill yet, so we need to see that happen.
Speaker 2: We're getting closer. Hanretta, Thank you. Hanretta tries the Aida Pomas.
Speaker 2: Let's turn to the bond market and the federal serve.
Speaker 2: Colin Martin of the Swap Center for Financial Research righting
Speaker 2: expectations for the number of federright cuts this year continues
Speaker 2: to increase despite the relatively stable labor market. Colin joins
Speaker 2: us now for more. Colin, good morning, good morning. Can
Speaker 2: you explain that then, why's not happening?
Speaker 13: Well?
Speaker 3: I think it has to do with the idea that
Speaker 3: inflation actually continues to move lower despite the fact that
Speaker 3: tariffs are in place.
Speaker 1: If we take away.
Speaker 3: The tariffs, which we can't do, of course, but absent
Speaker 3: the tariffs, the Fed probably would have cut already. And
Speaker 3: if we look at what's going on in the inflation
Speaker 3: data right now, we're still seeing that dichotomy between services
Speaker 3: and goods, and we are seeing a slight pick up
Speaker 3: in the goods inflation, specifically things coming in from China,
Speaker 3: but we're seeing a lot of disinflation, maybe even deflation
Speaker 3: on the services side. So the inflation data said just
Speaker 3: that they could be cutting absent those tariffs, but the
Speaker 3: labor market's still holding up.
Speaker 1: I mean, maybe that starts to change soon.
Speaker 3: But what I think is really remarkable is if you
Speaker 3: look at that unemployment rate four percent to four point
Speaker 3: two percent, that very narrow range, for thirteen straight months.
Speaker 1: It's expected to increase a.
Speaker 3: Little bit when we get the report on Thursday, but
Speaker 3: if it doesn't, if it's four to two, that's fourteen
Speaker 3: straight months.
Speaker 1: The labor markets holding in.
Speaker 3: We're seeing you know, the low hiring, low firing, but
Speaker 3: that's okay for the economy to kind of continue to
Speaker 3: chug along right now.
Speaker 1: So that's doing okay.
Speaker 3: I think you're the concerns in the second half of
Speaker 3: the year, now that it is July, is what happens
Speaker 3: next and will we start to see the weakness in
Speaker 3: that labor market. Given that the tariffs have to have
Speaker 3: an impact somewhere. If they're not passed along to the consumer,
Speaker 3: does that impact margins, which therefore might impact the labor market.
Speaker 3: So right now we're kind of stuck between the rock
Speaker 3: and a hard place, But all signs are suggesting we
Speaker 3: get read cuts later this year.
Speaker 6: If we rewind to April. Second was the tariffs will
Speaker 6: cause the inflation rate to surge and deficits will ignite
Speaker 6: bond vigilantes with their pitchforks to never buy us bonds ever. Again,
Speaker 6: are we saying both of those things are not true?
Speaker 3: Well, on the tariffront, that's the confusing part right now.
Speaker 3: If you look at FED expectations, even though there is
Speaker 3: kind of some vocal members who think we can be
Speaker 3: cutting soon, if you look and dive into the FED projections,
Speaker 3: the medium projections suggest inflation should increase. And even if
Speaker 3: you look at that range, the lowest expected inflation core
Speaker 3: inflation rate by the end of the year is still
Speaker 3: two and a half percent. So there's still an expectation
Speaker 3: that it should increase prices.
Speaker 1: We just haven't seen it yet.
Speaker 3: So there's this idea that maybe people imported goods early
Speaker 3: in advance to this they haven't chosen to pass it through.
Speaker 3: We think there has to be some sort of impact
Speaker 3: at some point. Of course, not the full effect of
Speaker 3: the tariffs, but some of it should get passed along,
Speaker 3: especially when you add in the fact that the dollars decline,
Speaker 3: so you have that working against you as well. On
Speaker 3: the bond vigilantes, they don't care right now. We've long
Speaker 3: held that jets and deficits are not a key driver
Speaker 3: of the direction of long term industries. We've always focused
Speaker 3: on monetary policy and growth and inflation expectations. We dialed
Speaker 3: that back a little bit recently just because our debt
Speaker 3: continues to grow and there doesn't appear to be any
Speaker 3: interest in Washington to fix the situation.
Speaker 6: Okay, hold on a second, I'm sorry to jump in here.
Speaker 6: So deficits don't matter. People could just keep on printing
Speaker 6: money until a point and then they do matter. We've
Speaker 6: been talking about this all year.
Speaker 1: When do they matter?
Speaker 6: I mean, this expanding right now and no one seems
Speaker 6: to care. Bond deals are actually lower on the day.
Speaker 3: Yeah, we don't have the number for when it matters
Speaker 3: because there just hasn't been the relationship. So how we've
Speaker 3: been framing it is because we get this concern from
Speaker 3: our clients at Schwab all the time. We hear about it,
Speaker 3: especially with everything going on in Washington. Is this going
Speaker 3: to send long term meals significantly higher? And we say
Speaker 3: they're not. We don't expect the tenure to get to
Speaker 3: six seven eight percent anytime soon. What we have thought,
Speaker 3: and which actually hasn't been the case over the past
Speaker 3: handful of days, is.
Speaker 1: That maybe it keeps them elevated.
Speaker 3: We thought maybe the ten year goes to that five
Speaker 3: percent range, or maybe hovers between four and a half
Speaker 3: to five percent, so instead of falling in line with
Speaker 3: potential rate cuts late later this year, maybe the fact
Speaker 3: that debt needs to continue to rise, we need to
Speaker 3: attract new buyer survivos, maybe that just kind of keeps
Speaker 3: them where they are. But that's been proven wrong over
Speaker 3: the past couple of days as well.
Speaker 7: Would the bond market pushback on a FED chair that
Speaker 7: they don't see as credible, an extension of Trump, extension
Speaker 7: of the White House?
Speaker 1: You know, that's we've been talking about that a lot.
Speaker 3: What happens if we get what the administration has been
Speaker 3: hinting that they could do in terms of, you know,
Speaker 3: shifting their issuance from coupons to tee bills or a
Speaker 3: huge drop.
Speaker 1: In the FED funds rate.
Speaker 3: I mean, we've heard things from two hundred basis points
Speaker 3: to three hundred and fifty basis points. That would pull
Speaker 3: short term rates a lot lower, I would think, But
Speaker 3: I think that could weigh on the long end.
Speaker 1: We might see long term.
Speaker 3: Yields fall initially just based on that supply demand imbalance.
Speaker 7: But I'm not talking about what the new FED chair
Speaker 7: might do next year. I'm talking about the fact is
Speaker 7: this person seen as credible to the institution.
Speaker 1: Yeah, that concerns us.
Speaker 3: We worry about a lack of FED independence, and we
Speaker 3: know that can have bad impacts if the FED share
Speaker 3: and the Committee as a whole are doing things that
Speaker 3: are more based on short term goals that the administration
Speaker 3: wants versus what their dual mandate suggests, price stability and
Speaker 3: maximum employment. We do worry that that can have an
Speaker 3: effect on the treasury market, specifically long term treasuries the
Speaker 3: dollar market. We could see the dollar continue to decline
Speaker 3: if that were to happen. So that is a worry
Speaker 3: of ours, and it could send long term meals a
Speaker 3: little bit high.
Speaker 2: Haven't They totally, unutterly failed to hit the price stability
Speaker 2: side of that Joe mandate For the last several years.
Speaker 1: They have we're moving in the right direction though.
Speaker 2: Directionally yes, But isn't that the ultimate criticism of them
Speaker 2: and this FED chair. I know that he celebrates it
Speaker 2: a lot on Wall Street by economists that work on
Speaker 2: Wall Street, but ultimately he's full and short, or rather
Speaker 2: full and a buff where it should be for a
Speaker 2: long long time now. And if you go back a
Speaker 2: few years ago when he delivered that speech at Jackson
Speaker 2: Hole eight minutes of pain, then there wasn't any pain,
Speaker 2: and everyone celebrates it. I'm not sure why they celebrates it.
Speaker 2: Inflation never went back down to target. It was never
Speaker 2: mission accomplished, was it.
Speaker 3: Yeah, well, technically no, you're right. Definitionally we have not
Speaker 3: gotten two percent, if anything, though, that calls for the
Speaker 3: rate to stay where it is, or arguably higher, and
Speaker 3: that's I think where you get the lack of confidence
Speaker 3: in the market, because you're right, we're not at that
Speaker 3: two percent goal. Yet they're projecting it to continue to
Speaker 3: move higher at the end of this year if the
Speaker 3: tariff in fact plays a role, and yet there.
Speaker 1: Are these calls for rate cuts.
Speaker 3: So you know, it is tough, and I think if
Speaker 3: we were to get a FED, a newge FED share
Speaker 3: or just the committee as a whole, and they start
Speaker 3: cutting rates and we're still above target.
Speaker 1: I think that's a risk.
Speaker 2: That's the ultimate issue, which is why the criticism, to
Speaker 2: your point, is kind of misplaced at this feder Reserve
Speaker 2: that cut rates one hundred basis points. Last year, rates
Speaker 2: went up in the long end, so did mortgage rates.
Speaker 2: That's the thing you need to get your teeth into,
Speaker 2: Bob Michael JP Morgan is talking about the same thing
Speaker 2: earlier this morning.
Speaker 6: And it might be the consequence of cutting certainly as
Speaker 6: much as President Trump would life. It really goes to
Speaker 6: this question of how you trust data, because remember last year,
Speaker 6: the sum rule was triggered and it was a headfake,
Speaker 6: and the Fed took that on its face and it
Speaker 6: cut rates significantly, and maybe in retrospect, Veder doesn't think
Speaker 6: it was a mistake, but it raises a question, what
Speaker 6: data do you follow to understand that dual mandate when
Speaker 6: you're looking at inflation at a fuzzy moment and when
Speaker 6: you're looking at the labor market at a fuzzy moment.
Speaker 2: The chairman of the Federal Reserve about thirty five minutes away,
Speaker 2: alongside some of its peers, including the ECB President Christine
Speaker 2: Thegard and the Bojvovna away to look out for that.
Speaker 2: A little bit later, Colin mont and a Charles Swat.
Speaker 2: Thank you, sir, I'm going to see you. Colin, appreciate it.
Speaker 8: Thank you.
Speaker 2: Joining us now to talk about it right now is
Speaker 2: Blarina Ricci of t RO Price. Blarina, let's talk about it.
Speaker 2: The low cha dynamic that Lisa just gave a nod to.
Speaker 2: How much longer can we stick in that kind of situation,
Speaker 2: that kind of dynamic.
Speaker 13: It's a very interesting dynamic the US economy right now.
Speaker 13: When you look at the flow of data up to date,
Speaker 13: you really see the labor market has loosened a lot,
Speaker 13: and that's come at the back of slowing demand for workers.
Speaker 13: I am not too concerned We're not seeing a big
Speaker 13: pickup in the unemployment rate, but it does tell you
Speaker 13: that if the Fed were to base monetar policy purely
Speaker 13: on the progress made on inflation so far and the
Speaker 13: cooling in the labor market, I think they would be
Speaker 13: much more comfortable signaling cutting interest rates later this year.
Speaker 13: But the key here was what Mike McKee was alluding
Speaker 13: to earlier, that the outlook has changed so much, and
Speaker 13: most of the risks point to upside to inflation, and
Speaker 13: so the FED has come so far. I think they're
Speaker 13: very reluctant to undo all the progress we've made and
Speaker 13: cut prematurely. And again, what matters for the economy and
Speaker 13: for the long end of the curve is if montrepolicy
Speaker 13: is appropriately set or not. And we saw that in
Speaker 13: last September when the FED cut interest rates by fifty
Speaker 13: bass points, but the long end went higher, and that
Speaker 13: was basically telling the FED that, wait a minute, the
Speaker 13: economy is resilient, why are we cutting interest rates. I
Speaker 13: think this is not setting us up for success for
Speaker 13: the risks going ahead, and I think the FED wants
Speaker 13: to avoid that situation.
Speaker 6: This year, there's been a tone shift, though, and John
Speaker 6: alluded to it when he started talking about the Goldman
Speaker 6: Sachs note that came out Yon Hansis and the team
Speaker 6: that brought forward rate cuts and see a greater number
Speaker 6: of them this year. FED members themselves are saying it
Speaker 6: looks as though the inflation impact from the tariffs will
Speaker 6: be a more of a one time shock than they
Speaker 6: will some sort of protracted inflationary impulse. And you aren't
Speaker 6: seeing any kind of inflationary read through from the labor
Speaker 6: market that is cooling, if not maybe even showing signs
Speaker 6: of cracks. Are you also coming around that kind of
Speaker 6: conclusion where it seems to make sense for the cut
Speaker 6: for the FED to cut more and sooner.
Speaker 13: So my baseline for the FED this year is two cuts,
Speaker 13: two twenty five basis point cuts starting in September. I
Speaker 13: think the market has fluctuated between one and a half
Speaker 13: to three cuts at different points of the year. The
Speaker 13: question is, can the Fed bring forward interest rate cuts
Speaker 13: to the July meeting. I think that's something that the
Speaker 13: market is not really prepared for. I don't think we
Speaker 13: have enough time to see a deterioration in the data
Speaker 13: that would push the Fed in that direction. So then
Speaker 13: what would make the Fed and the market price let's
Speaker 13: say three or four cuts for this year. I think
Speaker 13: we would need to see a pretty big increase in
Speaker 13: the unemployment rate. Otherwise, even though the labor market is
Speaker 13: not a source of inflation right now, if you have
Speaker 13: a one or two timeshock two inflation, even though it's
Speaker 13: not supposed to be persistent, it candy anchor inflation expectations.
Speaker 13: So I'm looking at the unemployment rate here, because that's
Speaker 13: the only way that you get the labor market to
Speaker 13: push the FED of the fence. And when I'm thinking
Speaker 13: about the unemployment rate, there are two components that matter.
Speaker 13: One is labor demand and hiring and firing. I think
Speaker 13: labor demand has cooled significantly, but we're not seeing mass
Speaker 13: firing yet. And then I also think the break even
Speaker 13: rate of employment has come down a lot. The break
Speaker 13: even rate of employment is that which keeps the unemployment
Speaker 13: rates steady. It doesn't go up, it doesn't go lower.
Speaker 13: It's come down a lot because net migrant flows have
Speaker 13: decelerated in the last twelve months or so, and so
Speaker 13: with quaker labor supply, is much harder to get the
Speaker 13: unemployment rate to increase a lot unless you have mass firing.
Speaker 13: So I think we're here at an uneasy equilibrium, and
Speaker 13: so for me, it makes a lot of sense for
Speaker 13: the FED to tread carefully. So I feel comfortable with
Speaker 13: keeping two interest rate cuts in my outlook for this year.
Speaker 6: What's the potential for upside surprises later in the year,
Speaker 6: particularly once the One Big Beautiful Bill has passed and
Speaker 6: once people have more certainty around what the tariff outlook
Speaker 6: looks like.
Speaker 13: So in terms of inflation upside surprises, I see two
Speaker 13: pivotal moments in the next two to three CPI reports.
Speaker 13: I'm looking for signs that we're getting significant passed through
Speaker 13: to consumer prices from higher tariffs. What we see so
Speaker 13: far is import prices have not budged, So that's telling
Speaker 13: me that exporters into the US are not adjusting prices.
Speaker 13: So then that leaves domestic firms and consumers as the
Speaker 13: agents that are going to bear the brand of the
Speaker 13: tariff increases. We also have a weeker dollar, so the
Speaker 13: currency is not helping us on the inflation front. So
Speaker 13: I'm looking at the CPI reports for upside risks, and
Speaker 13: that's the one off shock that everybody talking about. But
Speaker 13: then we have the one big, beautiful bill. I think
Speaker 13: there is a real chance that this stimulates demand in
Speaker 13: the near term. So then the next risk that I
Speaker 13: see to inflation is in twenty twenty six from fiscal policy.
Speaker 13: I think we learned our lessons from the supply chain
Speaker 13: disruptions and from the fiscal bill post COVID that they
Speaker 13: can push inflation higher. I don't think the size of
Speaker 13: the shocks right now is as big as it was
Speaker 13: back then, but I do think it's realistic to expect
Speaker 13: some upside to inflation.
Speaker 6: Laurio Ritti of turo Prise, Thank you so much.
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