00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. 00:00:36 Speaker 3: We begin this hour with starks climbing with upbeat tech, easing some of the AI jitters. Keith Erner of Truest Writing Earnings remain our north star. 00:00:44 Speaker 1: We remain long term tech bulls, continuing. 00:00:47 Speaker 3: To see AI as the dominant secular theme driving this market cycle. Keith joins us now from Mark Keith, great to see you. How much did Corweave and super Micro tip the needle to optimism from skepticism about financing? 00:01:00 Speaker 4: Well? 00:01:00 Speaker 5: I guess for one day it has, but I really think the border story is going back. During this whole earning season. You know what happened a few weeks ago is what we saw this really strong rebound after Tech had corrected double digits, and the big story to me was that we were seeing revenue growth of twenty percent plus from a lot of these hyperscalers and especially in the cloud business. So that was I think eased as far as you know, the question around are we going to monetize all this spending, and a lot of the bigger companies were saying yes, we are seeing that transformation. And then I think, as you said overnight, this is you know, another positive saying that there is some modestization. 00:01:37 Speaker 4: But I would also just be clear that I do think. 00:01:39 Speaker 5: We're in this stage where there is going to be much more winners than losers. We have a gauge of correlations for the S and P and that's the lowest we've seen in thirty years, so I think that's likely to continue. 00:01:51 Speaker 1: When does cash flow matter? 00:01:53 Speaker 3: I mean it sort of mattered vaguely for Alphabet, and then when you see what happened with corewief. On one hand, they beat expectations on sales, but their cash flow was much more negative than people had expected given some of their borrowing and spending plans. I mean it just sort of highlights how it depends in the day, how much this actually matters. 00:02:11 Speaker 5: Yeah, we we talk about the kind of love hate relationship with tech, with investors in tech, and I think a lot of times that matters where you're at. 00:02:19 Speaker 4: In the cycle. 00:02:20 Speaker 5: And you know, back off the March lows until June, you know, the market tech was up forty seven percent, semis were up ninety percent. 00:02:27 Speaker 4: So then you come out with earnings. 00:02:28 Speaker 5: There's negative cash flow that you know that that. 00:02:31 Speaker 4: Puts some initial you know, selling pressure. But I think listen zooming back out. 00:02:35 Speaker 5: I mean, we had this once in a generation build out, and you would expect that there's going to be a lot of spending and then you know, there's almost a little bit of you know, faith that these companies will will figure it out and turn to profit. So that's why I think you're just going to see this kind of really high volatility back and forth over not over the next couple of months this year, but probably over the next few years because that cash flow for some companies that have all the businesses likely comes to you than others. 00:03:01 Speaker 4: But we ultimately think and again given the AI bull market. 00:03:05 Speaker 5: The benefit of doubt that these big players will figure it out. 00:03:08 Speaker 4: They have a history of doing so. 00:03:09 Speaker 6: Keith, when you say that the potential is going to be some of these cash flow concerns and questions swirling around cash flow, is that why you think the second half of the year is going to be bumpy or there are other risks on the horizon that could potentially be annoying for the bull market run. 00:03:23 Speaker 4: Yeah, I think there's a lot of the things that we've been talking about. 00:03:25 Speaker 5: I want to be focused that the primary trend is in place, supported by fundamentals. Valuations this year for the S and P are down about ten percent because we've had these earnings overwhelm the pe contraction in these higher rates. 00:03:37 Speaker 4: But I think there's things we're talking about. 00:03:39 Speaker 5: You know, oil prices bouncing around each and every day. We still have ncertainty around the new FED chair, and we often talked about how the new FED chair gets tested as in certainty around inflation. 00:03:50 Speaker 4: We have the midterm elections. 00:03:52 Speaker 5: Historically, just seasonally, that tends to be you know, a bumpy a path overall. 00:03:57 Speaker 4: But again, even though. 00:03:58 Speaker 5: We think it's going to be a bumpy of path, we still think the destination is still higher based on the way of the evidence as far as an economy that still is relatively resilient even in the face of all these things I just discussed. We have earning estimates continue to move higher this earning season. Every earning season beats estimates, we know that, but this one we have eighty five percent of companies beating estimates. We have revenue beats at seventy five percent, and the forward earning estimates for the SMP, for small caps, for mid caps, emerging markets keep moving higher. Going back to that north Star phrase that I mentioned earlier, earning's earning earnings. 00:04:32 Speaker 6: So when you look at today and the inflation print, how important is it to you? 00:04:38 Speaker 4: It's important for the next twenty four hours. I mean right now. 00:04:41 Speaker 5: I think you mentioned at the front of the show that the FED Fund's futures for September is pricing in basically a fifty to fifty chance of a raid hike or staying pat. But i'd also remind investors that we have, you know, Jackson Hole in August, we have another PCE report, we have another CPI report before the next. 00:05:01 Speaker 4: FED meeting as well, and then another. 00:05:03 Speaker 5: Employment report, which also unusual is you know, the employment report, I you know, was negative on the headline, and again there was a lot of factors behind that as probably was overstated, but it would be very unusual for the Fed to raise rates historically, and we've seen a negative print within two months of a FED meeting. 00:05:21 Speaker 4: But again there was some distortion show. 00:05:23 Speaker 5: I think that next employment report will be saying like this is the most important employee report of all time. Right so again to your question, it will be very important in the no terren where rates do and the reaction to it. But there's a long way to go between now and the actual FED meeting. 00:05:35 Speaker 3: This is an increasingly data dependent market given the fact that there's not a lot of forward guidance coming. 00:05:40 Speaker 1: From this Federal Reserve. 00:05:41 Speaker 3: Cherry, I am curious whether you think the pendulum is shifted back to fixed income. For a while, it seemed like equity is for very much of the driver's seat with respect or returns. At this point, though, yields have gone up significantly and there are more questions about perhaps being surprised to the Duvish when it comes to both the Veederal Reserve as well as some of the economic data. 00:06:00 Speaker 1: You leaning into bonds a little bit more so. 00:06:03 Speaker 5: We're still overweight equities of all, but we would be leaning into the bonds here as well for fixed income investors. And I think maybe just as a starting point, you know, with that higher income or that carrier that we're seeing really provides quite a buffer for investors, we kind of stress tested and say, okay, let's just say that yields move up another fifty basis points on a one year forward basis. On a total return basis, if a fixed income investors, say buying the tenure US Treasury, you would still have a positive return. 00:06:29 Speaker 4: It would be somewhat small. 00:06:30 Speaker 5: But if instead the market or the interest rates are flatted down, then the upside becomes more attractive. 00:06:37 Speaker 4: So in our mind, the risk reward is actually improving for fixed income here. We still think, listen. 00:06:42 Speaker 5: If we have a dubbish number, that would probably be better for equities as far as the overall return, but I think we would be leaning into fixed income, you know, at these levels. 00:06:52 Speaker 3: Really quickly here, Keith, how much are you watching Japan to understand just how disruptive things could get in the bond market given the fact that the currency is basically give up a significant part of the intervention, and we're not getting a clear signal on whether either fiscal authorities or monetary policy authorities in Japan will take action on their end. 00:07:11 Speaker 4: Yeah, I think it's important. 00:07:11 Speaker 5: We're also seeing this kind of global yield story, so I don't want to be my opic by just looking at the US, and I mean it's it's I think it was a couple of years ago where we saw in August the end cause at least a short term hiccup in the market. So I think it's I think it is important. I think it can certainly add to some swings in the market. I don't think it's the main factor for the over market. I do think that if it gets you know, if we see some jitis, I think that we'll see not only Japan but also the US step in to kind of cool that down. So I think it's going to come old me back to earnings. And then obviously this FED meeting in September, stay with US multilanbag Savannah's coming up off to this. 00:07:58 Speaker 3: Here's the latest bust and FED presidency and Collins adding to the debate over a possible interest rate HIG as soon as September, telling the Financial Times inflation is too high ahead of today's CPR report do out in less than an hour. Former Philly FED President Patrick Harker, writing, watch core, not headline Core, and specifically shelter is what decides. September. Patrick joins us now for more. Patrick, great to see you. Really appreciate you taking the time. How much is core going to really make a difference if it still is above two percent, given the fact that we're hearing a degree of impatience about it being more than year five that we've been above the Fed's target. 00:08:34 Speaker 7: That's right, sir, Thanks for having me. If core is above two, significantly above two, I think you're going to see the FED raise now. I think it's they have to at this point. As you said, we've been above target for over five years, so the Fed has an issue of credibility. They have to act. They can't just talk about being tough one inflation. 00:08:59 Speaker 3: Actually have to do something about it at this point, though, Patrick, some people would argue that we're seeing inflation come in, particularly when it comes to shelter, that the expectation is for core to be at the lowest level at three point four it excuse me, two point four percent potentially going back to March of twenty twenty one. 00:09:18 Speaker 1: Is that enough? 00:09:20 Speaker 4: I don't know. 00:09:21 Speaker 7: I mean, the committee is very split, as you said, and we're seeing a lot of people not only the the centers the people are voting, but the non dissenters speaking out. So they are clearly signaling that some increase, whether it's this meeting or next meeting is in the cars. 00:09:40 Speaker 3: You said the FED has a credibility problem at this point. Would that be true regardless of whether the FED chair was Kevin worsh or if it was still Jerome Powell? 00:09:51 Speaker 7: Yeah. I think if you just missed your target, you don't do your job for five years, people start to question whether you can do it at all. You think the Fed's going to have to do something to prove that it really is serious about inflation. 00:10:07 Speaker 6: It just feels odd because now we are actually see inflation get softer. Where was the FED in the last five years? Do you not think they acted appropriately? 00:10:17 Speaker 5: No? 00:10:17 Speaker 7: I think that we were looking I was there right, So, yes, we waited too long to start raising rates after the pandemic. I think that was clear, and we were early in Philadelphia wanting to raise rates. But given that, and given all the supply shocks we've seen. The FED has been in this holding pattern. But these supply shocks, you think the textbook says look through them, right, but they keep coming and they're strategic. They're not just acts of nature, acts of God. We have to really look at these now as something that is more sustainct And I hate to bring up the transient word, but these supply shops aren't so transient, and particularly with respect to Iran. 00:11:04 Speaker 6: So you think there's a potential that higher oil prices, that it's bleeding through the supply chain and those prices are becoming entrenched. 00:11:11 Speaker 8: Yeah, I do. Because do you see an end to this war? I don't. 00:11:16 Speaker 7: And I hope to God that we have an end to this war, but I don't see it. So this is going to continue on off again. Opening of the strait will just continue to create this uncertainty in the markets, particularly in the energy markets. 00:11:29 Speaker 6: But as a former FED official, is it the Fed's job to start pricing in potentially when a war may end. 00:11:37 Speaker 7: Now its job is to get inflation under control. And because of the war and other circumstances, I mean, forget that. 00:11:46 Speaker 8: Remember tariffs. 00:11:47 Speaker 7: Tariffs are still working their way through the economy, and now we look like we're having a new round of taris, so those are also inflationary. There's also a supply shocks, but we keep getting supply shock after supply shock. 00:12:00 Speaker 8: It's hard to keep looking through those. You have to act. 00:12:02 Speaker 3: Patrick, Are you on one of the task forces that are going to be potentially releasing some results now? I am curious, though, do you think that it's appropriate to start looking at the way that we evaluate inflation and to potentially look for an overhaul two point zero about exactly how the FED is conducted. 00:12:19 Speaker 7: You know, there's lots of ways of look at inflation. The academic community and the business community have developed all kinds of metrics, and your job as a policy maker is to look at all. 00:12:29 Speaker 8: There's not one single number. 00:12:31 Speaker 7: So the idea, the hope that somehow we're going to do this work and we're going to come up with the magic index. 00:12:37 Speaker 8: I just don't believe we'll never have that. 00:12:41 Speaker 3: One thing that I know you were really out front about with respect to inflation was sort of a vibe. It's not a vibe issue, but with respect to anecdotes and how important that was in factoring into your calls when you were the head of the Philadelphia Federal Reserve. What's your sense as you go around and you talk to people, and I understand no longer at the Philadelphia Fed. Do you have a sense that people still are pre eminently concerned about inflation at the economy is an incredibly solid otherwise position. 00:13:11 Speaker 7: Yeah, they're clearly worried about inflation. That's still on their list, but also the softening of the labor market is on their list, and they're concerned about particularly the bottom of the k in the K shaped economy that you're seeing credit card the faults going up, You're seeing all kinds of softness in the consumer side. So it's all of those things that are worried about as well. 00:13:36 Speaker 6: Isn't this a key debate at the Fed right now? If they hike interest rates, it's only going to hurt the lower k. 00:13:45 Speaker 4: Ah. 00:13:46 Speaker 7: But what's causing the softness in the labor market. It's not just the interest sensitive sectors. In fact, if you look manufacturing has been adding, you know it's not There are other issues. Some of those are related to immigration policy, tariff policy, and so on. Mark Zombie from Moodies has a great piece out right now looking at native versus non native workers in the economy, and the story is pretty simple, right, if you lose those immigrant workers, then non native workers also lose their jobs. So these are policies that the FED cannot control immigration policy, but they deeply affect the labor market. 00:14:34 Speaker 3: How will raising interest rates to three times reduce inflation given this backdrop. 00:14:42 Speaker 7: Well, what's driving a lot of the inflation right now? Not all of it? 00:14:45 Speaker 8: Clearly energy. You can't do a whole lot. 00:14:47 Speaker 7: But we're just trying to know your previous speaker, your guest was talking about AI and the AI build out. You know that's clearly having some inflationary effect. We don't know exactly how much. But look, if they're buying lots of stuff, they're buying all kinds of things that are looking for contractors, plumbers, electricians. So that's bidding our prices. If that slowed down a little bit, you're going to help therslation story. 00:15:10 Speaker 2: Stay with US Mault, Blindbeck, Savannah's coming. 00:15:13 Speaker 4: Up off to this. 00:15:23 Speaker 3: Here's the latest US primary election results, shedding light on what's to come in November. Progressive Democrat Peggy Flanagan soaring to victory in the Minnesota state Senate primary, while moderate David Crowley is projected to win Wisconsin's gubernatorial primary in an upset over Democratic socialist Francesca Hong. Jessica Taylor of the Cook Political Report joins us now to build in the conversation. Jessco, just want to start with what's your takeaway from the past twenty four hours and the local elections, the primaries that have come through. 00:15:53 Speaker 9: I think it's the cannondates and campaigns matter. You sign Wisconsin that Francesca Hong really ran a shoestring campaign and didn't even run ads in the general election, and this really mattered. I think that the electability argument did ring true when she was going on there and doing so much media, when she was talking about potentially canceling Thanksgiving, there was just a raft of opposition research that Republicans were going to use against her, And I think it shows us that issues still matter too. In Minnesota, you had the ice raids there earlier this year and the killing of two citizens that really resonated in that race, especially in a state that was really savaged by metro surge. And so you had Angie Craig that voted for the Lake and Riley act. Peggy Flanagan really attacked her heavily for that. And so while this was a more traditional progressive versus centrist fight, I think it had a lot to do with issues that were also very germane to the state. 00:16:46 Speaker 6: So for the Democratic Socialists, is this just a hiccup or is this a real pivot going into the general. 00:16:53 Speaker 9: I think that Francesca Hong was a unique candidate and unique and not great ways. As reporter mentioned, Bernie Sanders, Alexandria Costio Cortez did. 00:17:04 Speaker 4: Not endorse her. She did not have. 00:17:06 Speaker 9: The candidate skills that we saw of an Abdula say Ed last week. And it should be clear that Abdula Sayed is not does not identify as as a member of the Democratic Socialist of America, while Francesca han does. But of course they're all progressive and will be painted with that more with that broader brush. But it really I think it comes down to the fact that Crowley this was a really topsy turvy primiery gubernatorial primary. You had the more moderate front Mariner, the lieutenant governor that had to get out of the race for campaign mismanagement, the sitting governor Tony ebers appeal to David Crowley to get back in the race. At this time a month ago, he wasn't even in the contest. And then you had Mandela Barnes, the lieutenant the former lieutenant governor that dropped out just a couple of weeks ago. So this made this race really hard to pull. So again, I think there were some really localized issues, really really kind of that made this race hard, hard to gauge. But I think it really speaks to I do think the electability argument in a state like Wisconsin that is the quintessential swing state that is so critical to Democratic hopes in twenty twenty eight did break through. But I think that Hong hurt herself by going on such a media tour and really saying things that felt outside of the mainstream I think even for progressives. 00:18:25 Speaker 6: I'm glad you brought up polling going into this race. Specifically, Marquette University had hung up twenty five points, State Navigate had hung up twenty nine points, Public Policy plus twenty. 00:18:36 Speaker 1: Why was the polling so off? 00:18:39 Speaker 9: Those were a little bit. This race was moving so fast. As I mentioned, you had at the end of the month and July Mandela Barnes got out, so their polling still included Barnes. Crowley had just gotten in at the middle of July. 00:18:53 Speaker 4: Again, I think it. 00:18:54 Speaker 9: Was just hard to sort of measure that late surge. And I do think some of the polling particul Lilliam primaries over samples because of the way that it's reaching younger voters. It oversamples younger voters, and I think undersamples older voters, particularly voters of color, and those were voters that both Haley Stevens last week in Michigan did better with and that David Crowley did better with in Wisconsin as well. 00:19:18 Speaker 6: Taking a step back, what does all of this say to you for the midterms in November. 00:19:24 Speaker 9: Well, Democrats are much better off with the Canada Light Crowley atop the ticket. They want to take back the state Assembly and the state Senate in Wisconsin, and they have some Keyhouse congressional races that they're also trying to flip. 00:19:35 Speaker 4: Minnesota doesn't. 00:19:37 Speaker 9: It's a competitive state, but not as much so as it's not a state that Democrats. It factors into the majority control of the Senate, So I think it just matters. What it says to me last night is that candidates and campaigns matter. You saw flanagain run a really aggressive grassroots campaign and both candidates were on TV with advertising. Hong, you know, she didn't run a traditional campaign. She didn't have consultants, she didn't have palling, she didn't run television ads. I think that in a state like Wisconsin, you have to have just the building blocks of campaigns. So it's not vibes that you should go with, it's I think Canada infrastructure and campaign infrastructure matters. 00:20:17 Speaker 2: This is the Bloomberg Survendans podcast, bringing you the best in markets, economics, an gient politics. You can watch the show live on bloom Blog TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the bloom Blog terminal and the Bloomberg Business app