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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 a Marie Hordern. Join us each

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

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

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

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

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

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Speaker 2: Bloomberg Terminal and the Bloomberg Business App. Alex Oltman of

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Speaker 2: Barclay's writing, ultimately it remains all eyes on that confluence

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Speaker 2: of the f MC, PCEE, NFP megacap earnings window with

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Speaker 2: a sprinkle of tariff threads or relief. Alex joins us

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Speaker 2: now for more. Good morning, Alex, good morning. How we

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Speaker 2: price for all of that?

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Speaker 3: Well, the SMP is pricing in about a one percent

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Speaker 3: move every day over that three day window. But what's

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Speaker 3: really interesting is that we've obviously had a long streak

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Speaker 3: of very little volatility. The market's pricing in a three

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Speaker 3: day window of volatility, and then it's pricing in no

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Speaker 3: volatility again, so I would say there's still a relatively

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Speaker 3: high amount of complacency even over those that three day

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Speaker 3: window of three letter.

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Speaker 2: Acronyms tariff threats or tariff relief. The difference between the two,

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Speaker 2: what is the difference between the two? Is this a

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Speaker 2: market do you feel that's betting against the administration following

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Speaker 2: through or betting on corporate resilience in the face of tariffs.

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Speaker 3: I would say the latter. It's quite clear in the

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Speaker 3: SMP is trading on basically at its cap of what

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Speaker 3: it's been trading from a valuation perspective in a post

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Speaker 3: COVID era, which is about twenty two to twenty two

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Speaker 3: and a half times. And so if we break out

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Speaker 3: of that, we're starting to question if we're getting into

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Speaker 3: a new regime of valuation and of call. Dare I

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Speaker 3: say bubble, which is clearly going to be moving towards

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Speaker 3: tariff relief than tariff fear.

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Speaker 4: Well, but Chris Harvey had an interesting argument about this.

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Speaker 4: You use the word bubble, but he made the argument

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Speaker 4: that we should be getting to hire valuation levels given

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Speaker 4: the fact that this is a much more are tech

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Speaker 4: dominant index that it has been traditionally and we have

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Speaker 4: had this huge industrial revolution underpinning some of the efficiency

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Speaker 4: gains that have allowed companies to absorb some of the

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Speaker 4: tear off costs, etc.

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Speaker 5: With relative grace.

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Speaker 4: What do you make of that that there needs to

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Speaker 4: be just generally a higher valuation, a higher multiple put

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Speaker 4: on US equities as a result.

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Speaker 3: I think that's generally been the path over time. If

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Speaker 3: you look at the path of the equity market multiple POSTGFC,

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Speaker 3: as profit margins have increased, you've generally seen an improvement

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Speaker 3: in invaluations. I would like to pivot slightly in to

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Speaker 3: talk about small caps a little bit, because we're talking

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Speaker 3: to talk about a technological revolution and we need to

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Speaker 3: start thinking outside the box a bit beyond just the

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Speaker 3: hyperscalers and the immediate picks and shovels beneficiaries of AI.

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Speaker 3: Let's talk about the fact that consumers get a huge

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Speaker 3: benefit from AI and basically a subsidized cost as a

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Speaker 3: result of these Hyperscale is investing quite frankly, trillions of

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Speaker 3: dollars into this investment at what is currently a low

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Speaker 3: ROI think about the consumer benefit, about the small business benefits,

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Speaker 3: businesses that now you're democratizing the process of that AI

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Speaker 3: revolution into call it small caps. And that's why I

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Speaker 3: actually think the valuation anomally might actually be in the

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Speaker 3: smaller cap space, which basically has been overlooked for years now.

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Speaker 4: So this is the argument that people were making last

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Speaker 4: year that didn't really come to pass, that we'd see

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Speaker 4: a broadening out away from the hyperscalers and the big

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Speaker 4: tech names to the rest of the index because you

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Speaker 4: are seeing that diffusion of some of the tech prowess.

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Speaker 4: Is that sort of what you're expecting now, Is that

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Speaker 4: kind of where you're leaning in it is?

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Speaker 3: And also, let's sort forget like breadth. This year has

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Speaker 3: been pretty good, so we've already seen a broadening out.

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Speaker 3: Best performing sectors in twenty twenty five have actually been

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Speaker 3: things like industrials. It hasn't been necessarily been just the megacaps.

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Speaker 3: But then we've also got to start thinking about a

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Speaker 3: regime shift, which has already been discussed in this forum here,

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Speaker 3: which is what are the FED going to do if

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Speaker 3: we're going to move away from a higher for longer

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Speaker 3: narrative to a lower interest rate environment. Consider the fact

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Speaker 3: that small caps forty five percent of small caps of

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Speaker 3: variable interest rate debt. They're going to get the direct

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Speaker 3: benefit of interest rate cuts. So we can pontificate about

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Speaker 3: whether mister Powell is going to resign all the rest

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Speaker 3: of it, and we will. However, However, the fact of

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Speaker 3: the matter is is that we will end up with

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Speaker 3: a replaced FED chair at this time next year, and

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Speaker 3: we are pretty convinced that the path is of interest

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Speaker 3: rates is therefore lower. So we need to think about

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Speaker 3: less about the near term and more about if interest

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Speaker 3: rates are lower, who's going to be the direct beneficiary.

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Speaker 3: So it's not just the AI angle. You've got lower

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Speaker 3: interest rates, and you've also got the positioning, which has

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Speaker 3: been our guiding light since the beginning of beginning of June.

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Speaker 3: From a positioning perspective, look at CFTC data on small cabs.

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Speaker 3: It's currently the most short since last summer, right before

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Speaker 3: we had that big squeeze.

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Speaker 1: As well, even.

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Speaker 6: Before we get a new FED chair, we could see

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Speaker 6: the FED cutting interest rates. When do you have this

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Speaker 6: all timed out well?

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Speaker 3: So at Barclay's economists have stilled two cuts of the year,

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Speaker 3: so you know, September December. I think that at the

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Speaker 3: end of the day, whether this is one cut two

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Speaker 3: cuts in twenty twenty five. I wouldn't say it's a

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Speaker 3: relevant that I think. I would say it's marginal because

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Speaker 3: we're trying to sort of forecast member equities are supposed

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Speaker 3: to be a four disco mechanism. They're supposed to be

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Speaker 3: thinking six, twelve, two years out, especially for long dated

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Speaker 3: securities that don't have many profits today. So in that case,

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Speaker 3: it really I don't think it matters enormously.

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Speaker 6: So for small caps you want to be exposed ahead

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Speaker 6: of September?

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Speaker 3: Correct, Yes, I think I think the small cap story

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Speaker 3: is really not just about positioning, but it's about that

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Speaker 3: fed pivot or Dare I say, is the equity market

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Speaker 3: moving into a new regime, away from just thinking about

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Speaker 3: the narrowness of leadership and into something a little bit

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Speaker 3: more broad?

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Speaker 2: Strange things happen in August? Are you hopeful we'll have

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Speaker 2: one of those nice quiet summers?

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Speaker 3: I mean, I'm going on vacation on fridaytime. I would

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Speaker 3: very much hope.

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Speaker 1: So.

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Speaker 3: But as you say, August is notoriously volatile, or so

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Speaker 3: I say, August can be notoriously volatile. If we all

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Speaker 3: recall last year what happened with the boj and so

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Speaker 3: on and so forth, I would say that the fact

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Speaker 3: is we still to your first question, we still have

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Speaker 3: that confluence of events straddling month end, and any of

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Speaker 3: those could potentially derail this LOWVOLL environment.

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Speaker 5: What was volume like at the moment? Just volume volume?

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Speaker 3: Well, volume is okay, but it's massively skewed by the

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Speaker 3: retail cohorts. So we're seeing this enormous turnover with and

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Speaker 3: a small number of securities as a function of the

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Speaker 3: small investor, which is again a part of a large

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Speaker 3: disc I just.

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Speaker 2: Follow up on that, what securities are they concentrated in

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Speaker 2: the ones we talk about every day or different kind

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Speaker 2: of companies?

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Speaker 3: I mean, just for the purpose, I won't name specific names,

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Speaker 3: but let's give I'll give you an example that for security.

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Speaker 3: I think it was middle of last week, four securities

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Speaker 3: accounted for eleven percent of total nicety volume. The collective

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Speaker 3: market cap of those four was two point six basis

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Speaker 3: points of US capitalization. So these aren't stocks that you

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Speaker 3: talk about in a daily base.

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Speaker 2: Eleven percent of volume, two point six basis points of

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Speaker 2: market cap?

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Speaker 3: Yes, of US market cap?

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Speaker 5: That's amazing. Yes, have you ever seen it like that before?

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Speaker 5: We have not known? What do you think is behind there.

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Speaker 3: So that is I would say retail euphoria. So you've

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Speaker 3: had this prevalence on shift of obviously a multi year

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Speaker 3: structural phenomenon post COVID where small investors have become a

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Speaker 3: lot and larger portion of the tape. They now account

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Speaker 3: for about twenty five percent systematic flows, quantitaive flows account

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Speaker 3: for another fifty percent, and those numbers have just been

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Speaker 3: growing over time. So the only time we came close

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Speaker 3: to this was in twenty twenty one. Obviously, very different

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Speaker 3: real rate environment.

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Speaker 5: A different bank drob completely.

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Speaker 2: So I'm trying to figure out just in real time

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Speaker 2: what's unlished this recent bout because it feels like a

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Speaker 2: very different bank drob to where we were all those

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Speaker 2: years ago.

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Speaker 3: This goes back to my point of whether are we

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Speaker 3: in a bubble or not, because we're talking about animal spirits,

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Speaker 3: we're talking about euphoria. We're talking about the fact that

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Speaker 3: there's a lot of a lot of small investors still

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Speaker 3: haven't lost their jobs, still getting income growth, still basically

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Speaker 3: seen the stock market at the highst and if you

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Speaker 3: remember at the beginning of the year when we spoke

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Speaker 3: on this show, there's a reflexivity in stocks because the

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Speaker 3: economy is so financialized. Seventy percent of financial household net

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Speaker 3: worth is tied to the stock market. So on the

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Speaker 3: way down it feels terrible. On the way up it

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Speaker 3: feels fantastic.

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Speaker 4: Is this stupid money or is this smart money? Because

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Speaker 4: they've been the winners and a lot of people used

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Speaker 4: to dismiss this and say it's a bubble and this

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Speaker 4: means that the market's going to tank. Are people looking

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Speaker 4: at this and saying this means they're more gains ahead.

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Speaker 3: Well, I don't want to call them stupid money, because

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Speaker 3: the fact of the matter is they've made more money

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Speaker 3: than most professional investors have recently. I would just simply

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Speaker 3: say that these guys are doing what they've been doing

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Speaker 3: or condition to do, which is by the dip. I

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Speaker 3: think what's important to consider, though, is back to this

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Speaker 3: regime shift. Is the market telling us that we're moving

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Speaker 3: to a lower interest rate environment where actually it's a

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Speaker 3: lot of the less profitable stocks that end up being

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Speaker 3: the market leaders. And if you look at things like

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Speaker 3: certain factor behaviors, the only time we've seen this before,

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Speaker 3: these what will be engineered as a short squeeze, but

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Speaker 3: it's not a short squeeze two thousand and nine, twenty twenty,

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Speaker 3: twenty twenty one, neither of which were just short squeezes.

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Speaker 3: They were regime changers. And so I think that's what

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Speaker 3: we're pointing towards. That's why we're thinking about small caps more,

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Speaker 3: because it may not just be the stupid small investor.

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Speaker 3: It may actually be something a little bit more paradigmy.

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Speaker 5: Those numbers are amazing.

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Speaker 2: Eleven percent of volume across four names, which account for

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Speaker 2: two point six basis points of US market cap. Yeah, unreal,

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Speaker 2: and it's good to see you. I love to think

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Speaker 2: about it. Thank you, Thank you, sir Alex Selman. There

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Speaker 2: Barclay's Russell brownback of black Crow Colling. This quite one

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Speaker 2: of the most compelling fixed income opportunity sets in decades.

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Speaker 5: Russell joins a snaw from more Russell. Good morning morning.

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Speaker 2: We've seen a bit of a Rantian treasuries over the

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Speaker 2: previous few days. What's behind that big wall of demand?

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Speaker 7: So you know that we're calling it one of several

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Speaker 7: transcendent influences today that really sort of drive market outcomes,

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Speaker 7: and that is this wall of money that exists today.

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Speaker 7: So you look in the United States two hundred and

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Speaker 7: eighteen trillion dollars of private sector net worth and you

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Speaker 7: put that in comparison to the size of the asset

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Speaker 7: markets today, it really is a world where there's too

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Speaker 7: much money and not enough yielding assets. And so that's

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Speaker 7: a you know, a transcendent influence in the face of

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Speaker 7: lots of policy uncertainty that along with a resilient economy.

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Speaker 2: Everything seems to have sett soed down over the past

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Speaker 2: few months. There's something even the team is set. The

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Speaker 2: genuine economic risk is mutes it. What do you mean

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Speaker 2: by that?

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Speaker 7: It's this series of structural foundational influences that have transcended

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Speaker 7: uncertainties that the economy has faced in twenty twenty three,

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Speaker 7: with the regional banking crisis and acrimonious election last year,

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Speaker 7: and the uncertainty about the sequencing of policies and implementation

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Speaker 7: this year. And yet you get these momentary pullbacks of

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Speaker 7: consumption or investment just as velocity slows as uncertainty sort

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Speaker 7: of cycles through the system. But then it rebounds, and

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Speaker 7: you've seen the economy accelerate into the fourth quarter each

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Speaker 7: of the last two years. It's my expectation you'll see

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Speaker 7: the exact same thing unfold this year.

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Speaker 4: Which is the reason why you've been reducing your position

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Speaker 4: in cash and deploying still seeing spread compression through the

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Speaker 4: remainder of the year. I just wonder if the book's

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Speaker 4: really been written on the policies that have them implemented,

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Speaker 4: the policy uncertainty and the ramification on the economy. Why

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Speaker 4: do you think that we have enough information to say

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Speaker 4: we will still see that reaccelerate even if some of

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Speaker 4: those tariff ramifications haven't been fully felt yet.

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Speaker 7: So again, because these underlying influences are so powerful, these

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Speaker 7: policy evolutions are only marginally incrementally determined to outcomes. And listen,

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Speaker 7: I think markets have correctly assessed the tariff situation as

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Speaker 7: benign at the end of the day. At the end

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Speaker 7: of day, tariffs are a tax, and so the debate

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Speaker 7: about whether they're inflationary. You think about if we were

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Speaker 7: sitting here talking about an income tax, we wouldn't be

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Speaker 7: discussing whether it's inflationary or not. We'd be discussing its

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Speaker 7: impacts on growth. And so when you think about and

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Speaker 7: many guests have been on your program over recent days

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Speaker 7: talking about how that tariff impact is spread out over

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Speaker 7: so many different nodes of that value chain between the

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Speaker 7: point at which the good arrives at port and when

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Speaker 7: it ends up on the store shelf. So these are

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Speaker 7: marginal sort of shifts in underlying economic actors.

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Speaker 1: And the influences there.

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Speaker 7: But overall these foundational supports or what's driving.

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Speaker 4: Markets and that's driving credit, that's driving equities. How should

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Speaker 4: this really play through in the bond the treasury space,

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Speaker 4: given the fact that we have potential rate cuts coming

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Speaker 4: down the pike even with strength in the economy, and

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Speaker 4: a real question around how much it's going to be

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Speaker 4: an inflationary push over the next six months.

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Speaker 7: Yeah, so I think the bond market has found an

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Speaker 7: equilibrium all throughout this year. It's twist steepened in deference

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Speaker 7: to slow in growth and inflation that's still above target

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Speaker 7: and a FED that will likely deliver a couple of

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Speaker 7: rate cuts by the end of the year. The front

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Speaker 7: end of the curve is anchored to FED policy, the

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Speaker 7: back end is anchored to nominal growth, and if you

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Speaker 7: think about a four and a half five percent nominal

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Speaker 7: growth outcome this year, that's exactly where the bond market

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Speaker 7: is today. We see this fixed income regime as one

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Speaker 7: where there isn't a big interest rate bet to make.

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Speaker 7: It's about clipping that coupon. It's about the income associated

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Speaker 7: with the fixed income competition?

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Speaker 2: Is that another way saying this FED conversation is not

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Speaker 2: that relevant?

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Speaker 7: So you know, listen, I actually think the debate that

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Speaker 7: is taking place today is a healthy one where there's

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Speaker 7: credible arguments on both side.

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Speaker 1: Don't cut or cut.

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Speaker 7: I happen to be in the camp that says the

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Speaker 7: setting of policy today is suboptimal. You think about the

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Speaker 7: K shaped evolution of the economy today. I don't call

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Speaker 7: it a K shape recovery because I don't think the

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Speaker 7: US economy is actually cyclical, but the current policy setting today.

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Speaker 7: Think about the savers, which is really the purview of

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Speaker 7: the wealthy and higher income cohorts today, one hundred and

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Speaker 7: fifty billion dollars a month of interest income accruing to

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Speaker 7: those economic actors, low income.

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Speaker 1: Low wealth cohort households as for all. The floating rate.

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Speaker 7: Debt is today your credit card debt, your auto debt.

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Speaker 7: And so the policy stance today is simultaneously helping the

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Speaker 7: savers and hurting those lower income cohorts. So an adjustment

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Speaker 7: downward I would argue might be a bit more optimal.

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Speaker 2: On aggricate and that benefit on that negative, it sounds

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Speaker 2: like a net negative to keep to keep rice where

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Speaker 2: they are.

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Speaker 7: Listen the economy again, these trends and influencers. The policy

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Speaker 7: setting today is not going to dent the trajectory of

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Speaker 7: the economy.

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Speaker 1: It's being influenced at the.

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Speaker 7: Margin by velocity which slowed earlier in the year and

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Speaker 7: is set to become unleashed in the back half. I

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Speaker 7: think it would be more optimal if the rate came

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Speaker 7: down a little bit and met where the market's pricing

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Speaker 7: cuts today.

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Speaker 2: Russell, appreciate your time. Thank you, sir, Russell Brown Bacter

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Speaker 2: of Black Frock. On the credible arguments on either side.

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Speaker 2: Sam zef If JP Morgan writing, despite signs of US

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Speaker 2: economic resilience, we expect further declines in the dollar of

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Speaker 2: an a medium term Sam Joint just now for more, Sam, good.

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Speaker 5: Mornick, your morning. What are the pillars of this dollar weakness? Fieu, Yeah,

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Speaker 5: because there's really two main ones. One cyclical convergence.

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Speaker 8: The US labor market is still loosening.

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Speaker 5: The FED.

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Speaker 8: We can argue when it's going to happen, but it's

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Speaker 8: probably over the next couple of matings going to start

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Speaker 8: resuming interest rate cuts. And most of these other major

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Speaker 8: central banks you're the Easy or anywhere else have kind

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Speaker 8: of finished a lot of their cutting cycle, So we

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Speaker 8: do expect some cyclical convergence there, some convergence between growth

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Speaker 8: and interest rates and broad and then second is a

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Speaker 8: global asset reallocation story that's continuing, so global investors, we're

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Speaker 8: not seeing any signs of liquidation of US assets. You know,

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Speaker 8: there's hyperbole around, there's none of that, but we're definitely

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Speaker 8: seeing incrementally less inflows into the US. And when you

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Speaker 8: set it against a backdrop of a US with a

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Speaker 8: very very large trade deficit, a very large current account deficit,

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Speaker 8: it needs those inflows just to offset the depreciation pressure

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Speaker 8: on the dollar. So the more that you just see

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Speaker 8: incrementally less inflows into the US, we think the bias.

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Speaker 5: For the dollars to leak loan.

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Speaker 2: Let's address each point individually, and two points. The first

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Speaker 2: one rate convergence. The pushback there would be that Europe

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Speaker 2: is facing a disinflationary shock and maybe America is facing

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Speaker 2: an inflationary shell, and the rates profile is going to

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Speaker 2: be different because of that. What's your counterpoint to that?

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Speaker 8: I kind of went to that is when you look

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Speaker 8: at real interest rates and inflation adjusted interest rates, then

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Speaker 8: as the Fed starts to cut even in the face

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Speaker 8: of a slightly higher inflation environment, which you know is

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Speaker 8: probably warranted given the labor market loosening, your real interest

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Speaker 8: rates decline, and that's the convergence that we're expecting, maybe

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Speaker 8: not so much a nominal space, but real and that's

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Speaker 8: what's going to allow the dollars to weaken.

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Speaker 4: To the second point, the pushback would be that you

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Speaker 4: aren't seeing necessarily outflows from the United States, and you're

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Speaker 4: still seeing quite a bit of allocation to US dollar

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Speaker 4: to nominated assets. People are just hedging more, which is

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Speaker 4: leading to a weakening in the dollar, but not necessarily

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Speaker 4: any sort of reallocation away from the US. What's the

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Speaker 4: counterpoint to that.

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Speaker 8: Well, you're right, I think I for the dollar, it

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Speaker 8: doesn't really matter which one it is. Right, If you

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Speaker 8: think about a global institutional investment fund, Let's say the

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Speaker 8: first thing they're going to do is raise those FX

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Speaker 8: head ratios, which they've allowed to decline in recent years,

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Speaker 8: and that puts selling pressure on the dollar, and then

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Speaker 8: as the assets that they own mature, they decide to

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Speaker 8: undergo an asset reallocation. That's the next leg. And so yes,

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Speaker 8: I do think immediately what's been happening is an increase

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Speaker 8: in FXS head ratios. The next way that it continues

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Speaker 8: is that asset allocation story continues. Either way it results

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Speaker 8: in a slightly weakening pressure on the dollar.

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Speaker 4: How does a FED independent story fit in with the

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Speaker 4: potential weakening of the dollar further?

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Speaker 8: Yeah, I mean it's not a pillar of our view,

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Speaker 8: but if you set it against the backdrop we're already

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Speaker 8: investors are demanding some more compensation to finance the US

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Speaker 8: fiscal deficit, to finance the current account deficit, then this

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Speaker 8: just adds another risk to forcing investors to demand more

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Speaker 8: compensation to that. So it doesn't really factor into our

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Speaker 8: direct baseline forecast, but pushes downside risks to the dollar

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Speaker 8: outbot So at.

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Speaker 6: The moment, do you think all this criticism is just noise?

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Speaker 8: I think our view honestly has been it doesn't really

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Speaker 8: matter who the FED chair is. They're one vote among twelve,

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Speaker 8: but the perception of the Fed's independence is crucial to

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Speaker 8: thinking about the right.

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Speaker 5: Value for the dollar.

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Speaker 8: Or the value of long term treasure yields.

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Speaker 6: So in that respect, who they appoint to be the

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Speaker 6: next FED chair for May when Powell's term is up

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Speaker 6: is important.

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Speaker 8: In the signal it sense over how political the Fed

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Speaker 8: might be. Honestly, what that person's view is on monetary

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Speaker 8: policy probably doesn't actually matter all that much. You need

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Speaker 8: to convince the entire committee to either lower or increase

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Speaker 8: interest rate.

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Speaker 2: How close do you think the committee is right now

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Speaker 2: to reducing interest rights.

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Speaker 8: I think in the next couple of meetings it's going

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Speaker 8: to make sense. I think what's interesting about the debate

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Speaker 8: OVERFED independence, again I won't come in one way or

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Speaker 8: the other, is that if the call was fifty to fifty,

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Speaker 8: then honestly, it's probably incrementally slightly harder to cut interest

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Speaker 8: rates just because it's been couched in such a political environment.

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Speaker 8: But I do think either way over the next couple

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Speaker 8: of meetings, like we think that there's fifty basis points

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Speaker 8: of cuts this year and probably fifty basis points next year.

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Speaker 4: Does it concern you that your call is very consensus

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Speaker 4: and that there is a lot of barishness right now

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Speaker 4: priced into the market with positioning against the.

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Speaker 8: Dollar on a medium term no, because fine, maybe fast

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Speaker 8: money players hedge fund CTAs had gotten very short dollars,

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Speaker 8: although honestly I would argue over the last week or

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Speaker 8: two that some of that's been cleaned out. But the

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Speaker 8: medium term story, the asset allocation story, the increase in

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Speaker 8: havex heage ratios, these are funds, these are players that

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Speaker 8: take a.

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Speaker 5: Long time to make these decisions.

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Speaker 8: I know from speaking from our clients at the Private Bank,

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Speaker 8: they are having more of this conversation than we've probably

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Speaker 8: ever had before. And still it's a slow moving process.

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Speaker 8: To move from your current asset allocation to another could

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Speaker 8: play out of the years, not just weeks and months.

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Speaker 4: That point, to me, was really salient this idea that

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Speaker 4: we've seen the hedging. But that's the first step. The

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Speaker 4: second step is the allocation shift, and that's what I

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Speaker 4: think a lot of people are very dismissive of. By saying, look,

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Speaker 4: the numbers don't show it right now, so it's not

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Speaker 4: going to happen, doesn't mean to say that that actually

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Speaker 4: won't happen down the line.

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Speaker 2: Sam Strong defense of your code the BREFET time, Thank you,

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Speaker 2: thank you very much.

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Speaker 5: Sam.

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Speaker 2: Safe there of JP Morgan, Private Bank, Andrew Homehoorst of

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Speaker 2: City writing, the FED remains on courst resume rate cuts

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Speaker 2: in September. Andrew john Is now for More Andrew ka Mornick.

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Speaker 2: Why September and what's leaning in that direction already?

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Speaker 9: Well, I think there's kind of a fundamental argument around September,

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Speaker 9: which is the slowing that we've seen in core inflation.

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Speaker 9: We still have tariff effects upcoming, but services especially look

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Speaker 9: like there's slowed down. Labor market looks strong, but beneath

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Speaker 9: the surface there are some details that look a little

441
00:20:05,000 --> 00:20:07,280
Speaker 9: bit concerning. You'd want to be moving towards neutral. That's

442
00:20:07,320 --> 00:20:09,840
Speaker 9: a fundamental explanation, but then there's also just a FED

443
00:20:09,920 --> 00:20:12,280
Speaker 9: rhetoric explanation. They've set this up now. They've said, we're

444
00:20:12,280 --> 00:20:14,439
Speaker 9: going to watch the data over the summer, we're going

445
00:20:14,480 --> 00:20:16,960
Speaker 9: to make a decision in September. In their dot plot,

446
00:20:16,960 --> 00:20:19,640
Speaker 9: they've got two rate cuts this year, fifty basis points

447
00:20:19,640 --> 00:20:21,720
Speaker 9: of rate cuts this year. That would also make sense

448
00:20:21,720 --> 00:20:23,639
Speaker 9: with the September cut, So they've kind of set it

449
00:20:23,720 --> 00:20:26,119
Speaker 9: up for September. You could argue it's going to be

450
00:20:26,160 --> 00:20:28,959
Speaker 9: premature in September to know how big an effect from

451
00:20:29,000 --> 00:20:31,000
Speaker 9: tariffs we're going to get or not in inflation. It's

452
00:20:31,000 --> 00:20:33,240
Speaker 9: not clear that that's really the month when you're going

453
00:20:33,320 --> 00:20:35,440
Speaker 9: to have all questions answered, but looks like that's where

454
00:20:35,440 --> 00:20:36,159
Speaker 9: they're headed.

455
00:20:35,920 --> 00:20:38,240
Speaker 2: On the labor market. In the last statement, the labor

456
00:20:38,280 --> 00:20:42,240
Speaker 2: market conditions remain solid. Can they repeat that line this month?

457
00:20:42,520 --> 00:20:44,679
Speaker 9: I think they can still say that. There is a

458
00:20:44,720 --> 00:20:48,760
Speaker 9: debate about how solid is solid. Some FED officials have

459
00:20:48,840 --> 00:20:50,960
Speaker 9: used the word solid. Other FED officials have used the

460
00:20:51,000 --> 00:20:53,000
Speaker 9: word fragile. So you kind of wonder, how can the

461
00:20:53,080 --> 00:20:55,400
Speaker 9: labor market be solid and fragile at the same time.

462
00:20:55,600 --> 00:20:57,359
Speaker 9: You look at the headline, you know, we're getting one

463
00:20:57,400 --> 00:21:00,439
Speaker 9: hundred and forty thousand jobs per month. That's a strong reading,

464
00:21:00,960 --> 00:21:04,199
Speaker 9: a four point one percent unemployment rate, that also looks solid.

465
00:21:04,280 --> 00:21:06,600
Speaker 9: But then you look beneath the surface and you see

466
00:21:06,600 --> 00:21:09,080
Speaker 9: those one hundred and forty five thousand jobs, well, really

467
00:21:09,160 --> 00:21:11,120
Speaker 9: half of them we're in the government sector and there's

468
00:21:11,119 --> 00:21:13,960
Speaker 9: probably some seasonal adjustment issue there. You look at that

469
00:21:14,040 --> 00:21:16,240
Speaker 9: unemployment rate, part of the reason it's low is because

470
00:21:16,240 --> 00:21:18,760
Speaker 9: the participation rate has gone down, and that's because some

471
00:21:18,800 --> 00:21:21,840
Speaker 9: workers are actually leaving the workforce because they're not finding jobs.

472
00:21:22,000 --> 00:21:23,159
Speaker 1: That doesn't look as strong.

473
00:21:23,440 --> 00:21:26,080
Speaker 9: So I think there is this kind of coexistence of

474
00:21:26,400 --> 00:21:30,040
Speaker 9: a top line number, a headline number that looks resilient,

475
00:21:30,280 --> 00:21:32,639
Speaker 9: and the labor market overall has been resilient. But then

476
00:21:32,680 --> 00:21:34,560
Speaker 9: these details that do cause you some concern.

477
00:21:34,760 --> 00:21:37,400
Speaker 4: We often say the stock market is not the economy.

478
00:21:37,440 --> 00:21:39,480
Speaker 4: The stock market's not the economy. We see the stock

479
00:21:39,520 --> 00:21:42,480
Speaker 4: market doing really well on the heels of earnings by

480
00:21:42,560 --> 00:21:46,919
Speaker 4: companies that are doing really well. How do you counter

481
00:21:47,280 --> 00:21:51,080
Speaker 4: companies doing very well with an overall backdrop that you

482
00:21:51,160 --> 00:21:54,679
Speaker 4: see as weakening, as less favorable just overall.

483
00:21:55,000 --> 00:21:57,080
Speaker 9: And so if we look at the economic data, you

484
00:21:57,119 --> 00:21:59,600
Speaker 9: look at services spending. I think good spending has been

485
00:21:59,680 --> 00:22:01,760
Speaker 9: very polatile, so it's hard to read too much into that.

486
00:22:01,960 --> 00:22:04,399
Speaker 9: Services spending we've been slowing and that's really been the

487
00:22:04,440 --> 00:22:06,200
Speaker 9: engine of growth for the US economy.

488
00:22:06,480 --> 00:22:07,560
Speaker 1: You see that in Q one.

489
00:22:07,600 --> 00:22:09,360
Speaker 9: I think we're going to see that again in Q two,

490
00:22:09,720 --> 00:22:12,359
Speaker 9: and that's telling us that that consumer demand is slowing down.

491
00:22:12,680 --> 00:22:14,000
Speaker 1: We have a real mystery.

492
00:22:13,680 --> 00:22:15,000
Speaker 9: And how if you kind of look at the data,

493
00:22:15,080 --> 00:22:18,080
Speaker 9: Because we know someone is bearing the costs of terriffs.

494
00:22:18,080 --> 00:22:20,640
Speaker 9: It could be foreign exporters, it could be domestic firms,

495
00:22:20,680 --> 00:22:23,600
Speaker 9: it could be consumers. We don't see consumer prices going

496
00:22:23,680 --> 00:22:27,080
Speaker 9: up a lot, yet we don't see foreign exporters reducing

497
00:22:27,119 --> 00:22:29,159
Speaker 9: their prices a lot, at least in the data. So

498
00:22:29,200 --> 00:22:31,600
Speaker 9: then that I would say that some domestic firms are

499
00:22:31,600 --> 00:22:34,960
Speaker 9: absorbing some of these costs that should be negative maybe

500
00:22:35,000 --> 00:22:36,760
Speaker 9: not reflected in what we're hearing so far.

501
00:22:36,920 --> 00:22:38,840
Speaker 4: So why do you think that we're not going to

502
00:22:38,880 --> 00:22:42,240
Speaker 4: see any kind of inflationary pressure that would pressure the

503
00:22:42,280 --> 00:22:44,879
Speaker 4: FED maybe to remain on hold despite some of the

504
00:22:44,880 --> 00:22:46,360
Speaker 4: noise that we're hearing from Washington, DC.

505
00:22:46,720 --> 00:22:48,240
Speaker 1: So I think we will see some inflation.

506
00:22:48,640 --> 00:22:50,520
Speaker 9: I don't think that that's going to end up constraining

507
00:22:50,520 --> 00:22:51,920
Speaker 9: the FED in a big way. And that's because the

508
00:22:51,960 --> 00:22:53,840
Speaker 9: inflation that we're going to see is going to be

509
00:22:53,960 --> 00:22:56,440
Speaker 9: in goods inflation. Now, if you looked at the June

510
00:22:56,480 --> 00:22:57,520
Speaker 9: inflation report.

511
00:22:57,240 --> 00:22:58,520
Speaker 1: You could kind of see it two ways.

512
00:22:58,800 --> 00:23:02,119
Speaker 9: On the one hand, didn't have a big inflationary effect.

513
00:23:02,240 --> 00:23:03,920
Speaker 9: On the other hand, you had a few categories of

514
00:23:03,960 --> 00:23:06,520
Speaker 9: goods home furnishings in particular, where you're seeing some of

515
00:23:06,520 --> 00:23:09,199
Speaker 9: those early tariff effects, and we'll probably see that in

516
00:23:09,240 --> 00:23:12,320
Speaker 9: some other categories of goods. But the big question, and

517
00:23:12,480 --> 00:23:14,840
Speaker 9: this is what Governor Waller has really emphasized. The big

518
00:23:14,920 --> 00:23:17,720
Speaker 9: question is is this going to be just restricted to

519
00:23:17,760 --> 00:23:20,080
Speaker 9: goods inflation or is this something that broadens. Are we

520
00:23:20,119 --> 00:23:23,879
Speaker 9: getting broad based pressure and services inflation, in wages that

521
00:23:23,920 --> 00:23:26,439
Speaker 9: are going up and just a general inflationary trend in

522
00:23:26,480 --> 00:23:27,119
Speaker 9: the economy.

523
00:23:27,400 --> 00:23:29,320
Speaker 1: There's no evidence that that's what's happening here.

524
00:23:29,359 --> 00:23:31,480
Speaker 6: Do we need to have the final rates to understand

525
00:23:31,480 --> 00:23:32,040
Speaker 6: that story?

526
00:23:32,920 --> 00:23:35,240
Speaker 9: I don't think we can wait until we have the

527
00:23:35,240 --> 00:23:37,480
Speaker 9: final rates you would like to right, And that kind

528
00:23:37,480 --> 00:23:39,760
Speaker 9: of goes back to is September the right month to

529
00:23:39,840 --> 00:23:42,240
Speaker 9: be moving If the objective was to wait until you

530
00:23:42,280 --> 00:23:44,399
Speaker 9: had all questions answered, They're not all going to be

531
00:23:44,400 --> 00:23:46,800
Speaker 9: answered in September. Maybe you'll have some clarity on the

532
00:23:46,800 --> 00:23:49,880
Speaker 9: August first, but maybe not right Some of these negotiations

533
00:23:49,960 --> 00:23:52,639
Speaker 9: may continue. And then even if new tariff's going to

534
00:23:52,680 --> 00:23:54,760
Speaker 9: affect August first, we know where those rates are, how

535
00:23:54,840 --> 00:23:56,879
Speaker 9: much do they pass through to consumers, what is the

536
00:23:56,920 --> 00:23:59,879
Speaker 9: timeline on that, what's the extent of that tariff increase.

537
00:24:00,040 --> 00:24:02,040
Speaker 1: We're not going to have all those questions answered.

538
00:24:01,720 --> 00:24:04,639
Speaker 6: Say it is just a ten percent baseline overall, then

539
00:24:04,680 --> 00:24:07,119
Speaker 6: maybe some different intricate deals for bigger partners. Do you

540
00:24:07,160 --> 00:24:10,000
Speaker 6: think companies will be forced at all to pass on

541
00:24:10,040 --> 00:24:12,080
Speaker 6: to consumers or they're going to hold what they're doing

542
00:24:12,119 --> 00:24:13,359
Speaker 6: right now, which to eat a lot of it.

543
00:24:13,920 --> 00:24:16,119
Speaker 9: I mean, I think you'll see some of that passed

544
00:24:16,119 --> 00:24:18,480
Speaker 9: on to consumers. Like I was saying, we're seeing some

545
00:24:18,680 --> 00:24:22,600
Speaker 9: price increases already, but ten percent, that's pretty manageable. I

546
00:24:22,640 --> 00:24:26,320
Speaker 9: think that that's something that firms largely could internalize and

547
00:24:26,320 --> 00:24:28,840
Speaker 9: you probably don't see that much passing through into consumer prices.

548
00:24:28,880 --> 00:24:31,920
Speaker 2: How I could out inflation expectations, let's consumer based on

549
00:24:32,040 --> 00:24:32,679
Speaker 2: market based?

550
00:24:33,080 --> 00:24:34,720
Speaker 9: Yeah, I mean, it depends a little bit on which

551
00:24:34,760 --> 00:24:36,360
Speaker 9: measure you look at, and then you can really get

552
00:24:36,400 --> 00:24:39,480
Speaker 9: into the issue of are you just cherry picking the

553
00:24:39,520 --> 00:24:40,400
Speaker 9: one that you like.

554
00:24:40,520 --> 00:24:41,720
Speaker 5: Which you think is more credible.

555
00:24:41,800 --> 00:24:43,920
Speaker 9: Well, University of Michigan is the one that's been all

556
00:24:43,960 --> 00:24:46,119
Speaker 9: over the place, right That one is much higher now

557
00:24:46,119 --> 00:24:48,320
Speaker 9: it's come lower again. If you look at the New

558
00:24:48,359 --> 00:24:50,720
Speaker 9: York Fed expectations, so ito's have been more stable. I

559
00:24:50,960 --> 00:24:53,320
Speaker 9: tend to look at the market expectations. There are issues

560
00:24:53,359 --> 00:24:55,840
Speaker 9: with the market expectations too. I'm not saying that there aren't,

561
00:24:56,359 --> 00:24:57,680
Speaker 9: but at the end of the day, people are putting

562
00:24:57,720 --> 00:25:01,040
Speaker 9: money on the line on those expectations or expectations that

563
00:25:01,119 --> 00:25:04,960
Speaker 9: in some sense are a stronger read on what people

564
00:25:05,000 --> 00:25:07,480
Speaker 9: really think, what investors think about inflation, and those have

565
00:25:07,560 --> 00:25:08,080
Speaker 9: not moved.

566
00:25:07,920 --> 00:25:10,919
Speaker 4: To levels that are concerning right now, I'm looking right

567
00:25:10,920 --> 00:25:14,280
Speaker 4: now at a market that has just defied all expectations

568
00:25:14,320 --> 00:25:17,120
Speaker 4: when it comes to looking through all of these ramifications.

569
00:25:17,440 --> 00:25:19,359
Speaker 4: What are you looking to hear from the Fed next week?

570
00:25:19,720 --> 00:25:21,080
Speaker 9: Well, I'm not sure that we're going to get a

571
00:25:21,119 --> 00:25:23,119
Speaker 9: lot of new information from this said meeting. We know

572
00:25:23,119 --> 00:25:25,399
Speaker 9: that we have a pretty big division across Fed officials.

573
00:25:25,440 --> 00:25:26,840
Speaker 9: We have some that don't want to cut it all

574
00:25:26,880 --> 00:25:28,760
Speaker 9: this year, we have others that think you should be

575
00:25:28,760 --> 00:25:32,439
Speaker 9: cutting in July. That's one interesting element of this meeting.

576
00:25:32,640 --> 00:25:35,119
Speaker 9: We could get a descent from up to two governors.

577
00:25:35,440 --> 00:25:38,680
Speaker 9: Governor Waller really sounded like he is planning to dissent

578
00:25:38,720 --> 00:25:41,440
Speaker 9: at that meeting. We'll see if he goes through with that.

579
00:25:41,440 --> 00:25:43,840
Speaker 9: That's really notable. We had a descent from Boweman in

580
00:25:43,880 --> 00:25:45,399
Speaker 9: twenty twenty four. Before that, you have to go back

581
00:25:45,400 --> 00:25:47,280
Speaker 9: to two thousand and five before you had a governor

582
00:25:47,320 --> 00:25:48,640
Speaker 9: dissenting on rape policy.

583
00:25:49,119 --> 00:25:50,000
Speaker 1: So that would be.

584
00:25:50,040 --> 00:25:52,000
Speaker 9: Kind of a signal that there's a pretty big.

585
00:25:51,880 --> 00:25:53,280
Speaker 1: Division across FED officials.

586
00:25:53,720 --> 00:25:56,120
Speaker 9: I think what we hear from Powell is wait and see,

587
00:25:56,280 --> 00:25:58,679
Speaker 9: we're waiting to look at the data over the summer.

588
00:25:58,800 --> 00:26:00,000
Speaker 1: We're going to tell you in September.

589
00:26:00,000 --> 00:26:02,040
Speaker 2: But it's got to acknowledge the split on the committee. Andrew,

590
00:26:02,280 --> 00:26:03,920
Speaker 2: I don't think he can get away with going into

591
00:26:03,960 --> 00:26:06,639
Speaker 2: the news conference to attempt to reflect the consensus that

592
00:26:06,720 --> 00:26:07,480
Speaker 2: doesn't exist.

593
00:26:07,800 --> 00:26:08,880
Speaker 5: This clearly division.

594
00:26:09,240 --> 00:26:11,119
Speaker 2: You see that in the sep You see that and

595
00:26:11,160 --> 00:26:13,680
Speaker 2: the speeches from all the FED officials. How tricky is

596
00:26:13,720 --> 00:26:14,879
Speaker 2: that going to be in the news conference?

597
00:26:14,960 --> 00:26:16,800
Speaker 9: Yeah? I think this is very difficult, right, This is

598
00:26:16,960 --> 00:26:18,800
Speaker 9: very very difficult time for the chair when you have

599
00:26:19,080 --> 00:26:21,800
Speaker 9: even your governors right that are maybe at odds over

600
00:26:21,880 --> 00:26:23,080
Speaker 9: what the FED should be doing.

601
00:26:23,520 --> 00:26:24,960
Speaker 1: So I think what he does is he goes back

602
00:26:25,000 --> 00:26:25,480
Speaker 1: to the data.

603
00:26:25,520 --> 00:26:28,280
Speaker 9: That's what FED officials typically do and say that's why

604
00:26:28,280 --> 00:26:30,520
Speaker 9: we're waiting, and that's what we're watching in July and

605
00:26:30,560 --> 00:26:33,560
Speaker 9: alluguess and honestly probably hoping to some extent from Chair

606
00:26:33,600 --> 00:26:35,919
Speaker 9: Poal's perspective, that they will get a clearer signal.

607
00:26:35,960 --> 00:26:37,520
Speaker 1: And it goes back to what we were discussing with

608
00:26:37,560 --> 00:26:38,359
Speaker 1: the labor market with.

609
00:26:38,400 --> 00:26:40,560
Speaker 9: The inflation did you can read this data a little

610
00:26:40,560 --> 00:26:42,560
Speaker 9: bit two ways, and that's part of why there's a division.

611
00:26:42,960 --> 00:26:45,160
Speaker 1: Maybe we'll have some more clarity in the data by September.

612
00:26:45,240 --> 00:26:48,679
Speaker 2: Andrew, appreciate it. Good to see you, Andrew homhost That City.

613
00:26:48,720 --> 00:26:52,280
Speaker 2: This is the Bloomberg Seventans podcast, bringing you the best

614
00:26:52,280 --> 00:26:55,640
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617
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619
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