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 Amerie Hordert. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
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Speaker 2: Terminal and the Bloomberg Business App. Heading into Jackson Hole
Speaker 2: in about a week's time, and an important speech just
Speaker 2: around the corner from a so far tight lip fed
Speaker 2: share Kevin Warsh will hear from him in a week's time.
Speaker 2: Joining us now to extend the conversation on the Federal Reserve.
Speaker 2: The San Francisco President Mary Daily joined us for more.
Speaker 2: President Day, always good to hear from you, So thanks
Speaker 2: for making some time for Bloomberg surveilor I want to
Speaker 2: bring up the bond market, and I'm sure you anticipated
Speaker 2: I would go there first, the long bond and the
Speaker 2: rise we're seeing in yields. President Day, from your standpoint,
Speaker 2: what signal, if any do you take from the sal
Speaker 2: for the long end, Well.
Speaker 3: You know, when you look at the long end, it
Speaker 3: is typically driven by structural factors like fiscal sustainability, geopolitical rebalancing,
Speaker 3: the massive AI investment for this industrial renaissance which people
Speaker 3: are very excited about, and those factors are driving this.
Speaker 3: The thing that I look at specifically is this is
Speaker 3: happening across the globe.
Speaker 4: It's not just a US phenomena.
Speaker 3: It's a global phenomena, and it doesn't give us a
Speaker 3: lot of signal about what we should do in the
Speaker 3: policy adjustments or the policy calibration for the Fed. And
Speaker 3: there we look at the short end more than the
Speaker 3: longer end, paying attention to the longer end, but really
Speaker 3: focusing on the job number one, which is restoring price stability.
Speaker 1: Right now, do you think President Daily that the long
Speaker 1: end of the yield curve is doing some of the
Speaker 1: work for the Federal Reserve by tightening monetary conditions in
Speaker 1: a more significant way.
Speaker 3: You know, I always hesitate to say that the markets
Speaker 3: do our work, but what I will say is it
Speaker 3: begs the question, what problem are we trying to solve
Speaker 3: by adjusting policy preemptively. You know, there's a lot of
Speaker 3: discussion about our credibility there. I don't see our credibility
Speaker 3: at risk. I also hear a lot about should we
Speaker 3: be making preemptive cuts or hikes rather, and I don't
Speaker 3: see a lot of evidence that that's an urgent problem
Speaker 3: to solve. So really this is about watching the inputs
Speaker 3: from the financial markets, looking at the thirty, the ten,
Speaker 3: and the two, and asking are we getting mixed signals
Speaker 3: or different signals?
Speaker 4: And you know, right now, on the.
Speaker 3: Shorter end of the yield curve, markets seem to have
Speaker 3: priced in a little bit more tightening, but they're reacting
Speaker 3: to the data just like we would expect them to.
Speaker 3: Inflation prints a little softer than they expect, the labor
Speaker 3: market a little softer than they expect, They push out
Speaker 3: rate hikes that they had priced in, and adjust as
Speaker 3: the data comes. So I think they seem to be
Speaker 3: signaling to us that they understand our reaction function. And importantly,
Speaker 3: I'm looking at inflation compensation and inflation expectations and you
Speaker 3: don't see any you know, worrisome swings in those pieces
Speaker 3: of data either.
Speaker 4: So I think policy is in a good place.
Speaker 3: But watching this ten and thirty to see what we
Speaker 3: need to think about what are the structural factors. It's
Speaker 3: giving us a signal about something, and I think one
Speaker 3: of the big signals is the AI demand.
Speaker 1: President Dala, We'll get into AI demand. But I am
Speaker 1: curious about the reaction function. You said that the market
Speaker 1: seems to be understanding the Fed's reaction function. What is
Speaker 1: your reaction function in terms of incoming information that would
Speaker 1: make you think that an adjustment higher for rates would
Speaker 1: be required.
Speaker 3: Well, you know, last week I gave a speech where
Speaker 3: I talked about really there's you know, there's many scenarios
Speaker 3: that could occur, but two seem very important for me
Speaker 3: at this point. One is the one that I would
Speaker 3: suggest is the modal outlook. My modal outlook is that
Speaker 3: you know, and also you saw in the minutes, it's
Speaker 3: it's a majority of the participant modal outlook that inflation
Speaker 3: is being driven up by a series of shocks, and
Speaker 3: those shocks will roll up, they'll roll down, they'll roll through,
Speaker 3: and as that dissipates, that inflation will we turned to
Speaker 3: target in part because we have policy at a very
Speaker 3: slightly restrictive level.
Speaker 4: So there's that dynamic.
Speaker 3: But then there's the dynamic of maybe the fact that
Speaker 3: we have so many shocks coming at once and they're overlapping,
Speaker 3: they can have an independent compounding effect that means that
Speaker 3: the total effect is greater than the sum of its parts.
Speaker 3: The conventional dynamics of shocks just aren't working like they were.
Speaker 3: I'm not seeing evidence of that right now, but I
Speaker 3: definitely think we should keep that in mind and watching.
Speaker 3: If that happens, we would have to we'd have an
Speaker 3: inflation problem that we would want to treat with tighter policy.
Speaker 3: In the meantime, I was very supportive of the July
Speaker 3: hold and continue to look at the information that comes
Speaker 3: between now and the next meeting about whether any signs
Speaker 3: of that worrisome dynamic would be forming. And I haven't
Speaker 3: seen them yet, And the recent prints on both inflation
Speaker 3: and the labor market didn't really change that picture for me.
Speaker 4: At this point.
Speaker 1: There's been kind of a paradox forming right now where
Speaker 1: you've seen inflation above target for more than five years
Speaker 1: at the same time that the labor market seems to
Speaker 1: be kind of meth I mean, it's okay, but people
Speaker 1: keep talking about low higher, low fire and that that
Speaker 1: kind of dynamic with real wages not keeping pace for
Speaker 1: the past five years, we'll.
Speaker 4: Lead inflation to go lower. Why hasn't it right?
Speaker 1: I mean, when does that relationship reassert itself.
Speaker 3: Well, one of the things that is true is that
Speaker 3: we've had many periods in our history with you know, essentially,
Speaker 3: if you're thinking in economics terms, with the Philip curve
Speaker 3: is very flat, and you just don't see the relationship
Speaker 3: between the labor market and price inflation. And it also
Speaker 3: kind of illustrates why the shocks have been a big
Speaker 3: component of overall inflation. You know, the tariff shock, the
Speaker 3: oil price shock, and now the AI investment boom shock.
Speaker 3: And in all of those you have to ask what
Speaker 3: is the expectation of their duration? Are they spreading to
Speaker 3: other sectors than the ones that they directly affect, and
Speaker 3: what do we think they will do if they, you know,
Speaker 3: compound with each other. Will that make a difference or
Speaker 3: will it not? So I think that's what's really driving it.
Speaker 3: I wouldn't look to the labor market. You don't see
Speaker 3: any signs that the labor market is contributing to inflation.
Speaker 3: And I really think at this point you have to
Speaker 3: look at these other factors because that link between you know,
Speaker 3: wages and price stability is often weak. We came off
Speaker 3: a period where it was very strong because we saw
Speaker 3: a very frothy labor market, very strong labor market, and
Speaker 3: people were saying that they were worried about wage price spiral.
Speaker 3: I think I've talked to you both about that, but
Speaker 3: we're way past that, and now we have to look
Speaker 3: at these other factors driving inflation. And so I'd say
Speaker 3: the main contributor to why inflation is persistent for so
Speaker 3: long under even when we've had restrictive policy, is because
Speaker 3: they have these shocks, and then of course service price
Speaker 3: inflation is just sticky or it takes a while to
Speaker 3: come down.
Speaker 2: President Deanning, I'm just going to keep our audience on
Speaker 2: top of the moves with saying at the bomb market
Speaker 2: at the long end of the curve up close to
Speaker 2: seven basis points thirties at the moment if you bring
Speaker 2: up the board around five twenty six yield hire through
Speaker 2: the levels. This is important. We've taken back much of
Speaker 2: the rally, in fact, all of it since we had
Speaker 2: that Treasury announcement this time yesterday at eight thirty Eastern
Speaker 2: time off the back of this move in the bottom market,
Speaker 2: equality futures lower yzero point six percent on the S
Speaker 2: and P five hundred, President Daily, I can imagine you'd
Speaker 2: love to avoid all the conversation about Treasury, the department
Speaker 2: and issuance, but forgive me, I have to go there.
Speaker 2: There are many people who believe we'll see a continuation
Speaker 2: of this Treasury Department under Scott Besson of the policies
Speaker 2: that we saw under Janney Yellen, and that will see
Speaker 2: less issuance of the long end and more supply at
Speaker 2: the front end. If T bill issuance continues to climb
Speaker 2: and account for more and more of the issuance coming
Speaker 2: from the Treasury. President Day, how does that view, How
Speaker 2: does that change your view on what to do and
Speaker 2: what not to do with policy? What does it mean
Speaker 2: for the everyday workings of the Federal Reserve, who is
Speaker 2: very focused on managing short term rates.
Speaker 3: Well, I'd say these are early days, and I wouldn't
Speaker 3: want to be preemptive and sort of discussing those types
Speaker 3: of things until we've had a chance to think through
Speaker 3: those issues. But the Treasury Secretary is different than the Fed.
Speaker 3: The Fed is talking about price stability and full employment.
Speaker 3: And what I do know, and we've historically been able
Speaker 3: to do this, is that we have a goal and
Speaker 3: we can achieve those goals through our policy implementation, and
Speaker 3: we will find a way to do the job that
Speaker 3: Congress gave us, which is restore inflation to two percent
Speaker 3: as our goal as we define it, and do that
Speaker 3: price stability. So I think we don't want to worry
Speaker 3: about the mechanics of how to do that as much
Speaker 3: as the commitment to achieve it.
Speaker 2: Forgive me for going there, but it's in conflict with
Speaker 2: what you're trying to achieve when.
Speaker 3: You see the treasure rates at this point. I ultimately
Speaker 3: I think this is really important, but it's the Treasury
Speaker 3: Secretary's job, not the federal reserves job, and we have
Speaker 3: our own job which is very important. But also we're
Speaker 3: not quite there yet, So I'm going to focus there.
Speaker 2: The Treasury Secretary at the moment, and you'll forgive me
Speaker 2: for pushing, is actually trying to influence financial conditions. You
Speaker 2: could see that yesterday yields came in. You could see
Speaker 2: the dollar weaken as well. Given the moves happening Gauseware
Speaker 2: and financial markets particularly and crude. You do have to wonder, President,
Speaker 2: and if that's an increasing challenge for the Federal Reserve
Speaker 2: that they might have to confront.
Speaker 4: It sounds like that's something you're interested in.
Speaker 3: But again, I really am in the work for the
Speaker 3: Federal Reserve, and I think importantly, you know what, and
Speaker 3: I'm pushing back in this, the important thing the American
Speaker 3: people need to know is that the Federal Reserve cares
Speaker 3: about its independence and its credibility and sticks to its remit.
Speaker 3: You know, we take in all the information, we look
Speaker 3: at everything, because those are important inputs, but we know
Speaker 3: what our job is and we focus.
Speaker 4: On doing that and that.
Speaker 3: You know, if you want to talk about inflation, compensation
Speaker 3: and expectations and FED credibility, I'm happy to talk about
Speaker 3: those things with the labor market. But I really do
Speaker 3: think that with our job right in the importance area
Speaker 3: here and we aren't meeting our target yet, we really
Speaker 3: have to focus there.
Speaker 1: President, how would you characterize right now the overall economy?
Speaker 1: And we've talked about how there is this sort of
Speaker 1: heat coming, but right now, do you think that it's solid,
Speaker 1: do you think it's expanding, or do you think that
Speaker 1: it's decelerating.
Speaker 3: You know what I'm really seeing and it's an interesting time.
Speaker 3: You know, I think people say it's confusing, there's contradictory data.
Speaker 3: It is true that the typical historical ways we think
Speaker 3: and measure the economy, the dynamics, and the inter relationships
Speaker 3: don't seem to be squaring up like they would typically do.
Speaker 3: So then what do you think? What do you look
Speaker 3: at when you talk to businesses. They're cautiously optimistic, and
Speaker 3: they're cautiously optimistic beyond the AI sector where they're just
Speaker 3: optimistic and they're optimistic. They think of this, they call
Speaker 3: it an industrial renaissance. We are in the next industrial revolution.
Speaker 3: So they have all that enthusiasm. But what I really
Speaker 3: watch is what are other businesses saying? What are other
Speaker 3: businesses thinking? And they're focused on the fact that consumers
Speaker 3: are trading down and feel a little bit tighter in
Speaker 3: their pocket.
Speaker 4: Books, and they're spending.
Speaker 3: But they're also focused on they keep coming to their business,
Speaker 3: they keep wanting to do things, and importantly, I start
Speaker 3: to see these businesses. I'm seeing these businesses using AI
Speaker 3: really working hard to see how can this technology, which
Speaker 3: is in the development stage, really how can it affect
Speaker 3: their business processes, even the physical world that they work in,
Speaker 3: and what can they do to make things better. So
Speaker 3: I'd say that there's this all this enthusiasm about the
Speaker 3: future and a lot of anxiety about the present, and
Speaker 3: that is a colliding piece. Now, if you talk to
Speaker 3: the consumer, they're still there. They're still spending, although it's
Speaker 3: slowing and they're trading down, but they do feel more precarious.
Speaker 3: You can see that in the sentiment surveys either of
Speaker 3: confidence or workers.
Speaker 4: And I think it's in this.
Speaker 3: Low fire, low higher environment that they feel. It's an
Speaker 3: uncomfortable stability. It's an uncomfortable stability that we're not really
Speaker 3: accustomed to.
Speaker 4: But the policy maker is a policy maker.
Speaker 3: We have to ask, is it sending any weakening signals?
Speaker 3: Do we see any sense that things are fragile? And
Speaker 3: I just don't see that yet. And you saw that
Speaker 3: in the claims data today. You just don't see signs
Speaker 3: that the labor market is faltering. You simply see signs
Speaker 3: that it's running around at.
Speaker 4: A very low level.
Speaker 3: And the most important question I'm asking CEOs right now
Speaker 3: about the labor market is where are your cutting back plans?
Speaker 3: You're in a low hiring, low firing. But do you
Speaker 3: have those plans moved to the front of your desk
Speaker 3: and are you watching them carefully? And right now they're there,
Speaker 3: They know what they would do, but they still see
Speaker 3: that cautious optimism of.
Speaker 4: Trying to meet output growth.
Speaker 3: Where it is and be not the last in line
Speaker 3: to do that, the first in line.
Speaker 4: To do that.
Speaker 1: President Daily, you mentioned artificial intelligence and the idea that
Speaker 1: a lot of these companies are trying to deploy AI
Speaker 1: tools and lots of creative.
Speaker 4: Ways right now.
Speaker 1: Is it still more inflationary that it is disinflationary in
Speaker 1: terms of productivity? Is that something that the FED needs
Speaker 1: to combat or address or is that something that the
Speaker 1: FED can look through with the hopes that there will
Speaker 1: be more productivity on the other side.
Speaker 3: This will all come down to something that we have
Speaker 3: to watch, which is is this a relative demand chock?
Speaker 3: Is it changing the relative price of technology goods or
Speaker 3: is it spreading more generally into think of data center buildouts.
Speaker 3: Is that pushing up the price of construction workers everywhere
Speaker 3: or is it simply you know you're getting specifically trained
Speaker 3: people or people are coming to do those things. Right now,
Speaker 3: I'm not seeing a broad spill over in the broader
Speaker 3: inflation measures. I am seeing a rise in software and
Speaker 3: technology goods. Those are pushing up, but that's a relatively
Speaker 3: small sector of the overall price indices, and so I
Speaker 3: haven't seen evidence of that, but that's what we would
Speaker 3: have to watch. And so the investment growth is very
Speaker 3: very strong, and that's affecting interest rates as you see
Speaker 3: long data yields, but you don't see that pushing itself
Speaker 3: into price inflation writ large, although you definitely see it.
Speaker 3: If you're trying to buya high and technology good you.
Speaker 4: See some effect there.
Speaker 3: So we'll watch that whether that spills over into consumer prices,
Speaker 3: consumer goods and services. So far haven't seen a lot
Speaker 3: of that, but we will. That's definitely if you if
Speaker 3: your coffee maker starts rising in price because the chips
Speaker 3: that go in, and if you buy one of those
Speaker 3: new fancy ones, then if that starts going up, that's
Speaker 3: a sign of broader based problems or audible biles.
Speaker 4: But yet we haven't. We haven't seen that of yet.
Speaker 1: President Daily, You've mentioned that policy is in a fairly
Speaker 1: good place right now as all of the members look
Speaker 1: at the incoming data Is there anything that's transpired that
Speaker 1: makes you question that, or has the data been more
Speaker 1: of the same to indicate that the FED is in
Speaker 1: a good place to keep watching the data for a
Speaker 1: while longer.
Speaker 4: I'm on the latter point you made.
Speaker 3: I think we're still in a good place to keep
Speaker 3: watching the data. As I mentioned, you know, the two
Speaker 3: prints that have come out on inflation and the labor
Speaker 3: market didn't make didn't really clear much up for me.
Speaker 3: You know, I'm not going to get on the bandwagon
Speaker 3: of c we had a softer inflation print, we should
Speaker 3: stop worrying about the risks of higher inflation. I don't
Speaker 3: think that's right, and I don't think the labor market
Speaker 3: print suggest that that there's any impending weakness there. But
Speaker 3: we have to continue to watch these things, and importantly,
Speaker 3: I think with inflation, elevate it for as long as
Speaker 3: it has been, we have to constantly discipline ourselves to
Speaker 3: watch what's happening to inflation expectations, what's happening to producer
Speaker 3: instinct to raise prices?
Speaker 4: Are they able to right now? They say they're not.
Speaker 3: They're really not pushing all their input cost increases through
Speaker 3: to prices. Consumer prices So those are the dynamics to
Speaker 3: watch and continue to watch the labor market. But if
Speaker 3: I look at the two we are missing on our
Speaker 3: inflation goal quite a bit, and the labor market is
Speaker 3: relatively stable. So a lot of my attention is on
Speaker 3: that inflation miss and how to get this back down
Speaker 3: to two percent? And when do I have a sufficient
Speaker 3: amount of confidence to say we're on our way right now?
Speaker 3: I think that's the motive view, but I don't think
Speaker 3: it's so modal. There's the probability isn't so large on
Speaker 3: that front, and you can't watch these risks.
Speaker 2: I mind the penalty books now, I feel like I
Speaker 2: might be you.
Speaker 3: Could ask her, so you're not in the penalty box.
Speaker 2: You always try it. I'll always try. Mary is good
Speaker 2: to see. Thank you, the San Francisco to marry Daddy.
Speaker 4: Thank you.
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: Nidia Richardson of ADP listening to that conversation, she joins
Speaker 2: us now in anticipation of Jackson hawaiiming and the annual
Speaker 2: FED get together next week, Nida, welcome to the program.
Speaker 2: How much pressure is on this institution heading into next
Speaker 2: week's get together.
Speaker 5: I think they're under a lot of pressure because it's
Speaker 5: coming from all directions, and some of the pressure is solvable,
Speaker 5: and some of it, frankly isn't. Tensions in the Middle
Speaker 5: East not solvable by the Federal Reserve. But what's going
Speaker 5: on get to the two and a half percent target.
Speaker 5: They're making good progress, and that's good news. But I
Speaker 5: want to draw a sharp distinction between what's good news
Speaker 5: for the markets and what's good news for the worker,
Speaker 5: because that has been growing in the gap. We have
Speaker 5: a new paper out just this week showing that. So
Speaker 5: I think the Fed has a lot of different pressures,
Speaker 5: and not all of them they're going to be able
Speaker 5: to resolve.
Speaker 1: Neila, One thing that the paper that you're talking about
Speaker 1: pointed to is this idea that wages really have not
Speaker 1: kept up for a significant proportion of overall US workers
Speaker 1: with the pace of inflation over the past five years.
Speaker 1: I just wonder whether that can continue without a downturn
Speaker 1: and consumer spending. Can you see an absorption of additional
Speaker 1: price increases if you don't have wages keeping pace.
Speaker 4: Yeah.
Speaker 5: My colleague Lee Wang and professors Eric Hers and Christina
Speaker 5: Patterson looked into sixteen million workers between twenty twenty one
Speaker 5: and twenty twenty four. To answer just that question, you know,
Speaker 5: when wages sore pay did not keep pace. And that's
Speaker 5: because employers, so those very employers that the FED is
Speaker 5: listening to, tend to have structural permanence in their wage increases.
Speaker 5: They all tend to give about the same amount of
Speaker 5: wages to the same amount of people. It's usually about
Speaker 5: three percent. It's usually whole numbers. And when inflation is
Speaker 5: sourced to seven percent, workers lose ground. And when those
Speaker 5: inflation shocks are unexpected, that loss approaching seeing power can
Speaker 5: persist for years. Fast forward to just last week, we
Speaker 5: saw consumer sentiment fall by twelve point four percent, and
Speaker 5: where was it The largest older workers who are least
Speaker 5: able to keep up with inflation increases for a variety
Speaker 5: of reasons. And so when you circle back to the
Speaker 5: FED and what really the inflation backdrop means for the
Speaker 5: consumer and the household, you have consumers whose wages are
Speaker 5: just not keeping up from past inflation, let alone current
Speaker 5: bouts of inflation that we're seeing right now.
Speaker 1: You know what happens when you include people who change
Speaker 1: jobs and maybe got a pay increase.
Speaker 4: That's the power of the worker.
Speaker 5: That's the only way really that workers can really use
Speaker 5: their leverage in the workplace to outrun inflation. We saw them,
Speaker 5: we called it the Great Resignation, and we saw that
Speaker 5: workers were switching jobs. But guess what, these were low
Speaker 5: wage workers mostly that were able to take advantage of it.
Speaker 5: They were The advantage didn't last long because once you
Speaker 5: switch a job, you're still stuck in that permanent, sticky
Speaker 5: wage increase, and so it didn't have lasting effects. Thirty
Speaker 5: seven percent of workers, whether they switched jobs or stayed,
Speaker 5: saw real wage increases in those four years, according to
Speaker 5: our paper. And that's why when you go back to
Speaker 5: the Michigan sentiment survey, only eight percent of respondents said
Speaker 5: that their real incomes are going to keep up with inflation.
Speaker 4: That's a very low number.
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: Stocks failing to hold onto gains as bond yeards continue
Speaker 2: to climb. Mana. Mahajanabedwick Jones writing, the Treasury announcement may
Speaker 2: help ease near term liquidity pressures and improve market functioning. However,
Speaker 2: it does not address what we consider the key factors
Speaker 2: driving yields. Many joins us now for more man, welcome
Speaker 2: to the program. Look, it's easy to get dramatic whenever
Speaker 2: we see yields start to drift higher. But how concerned
Speaker 2: are you about what's happening at the long end of
Speaker 2: this yield curve?
Speaker 4: Yeah?
Speaker 6: You know, Look, I think we have seen the tenure
Speaker 6: over this cycle over the last several years hit a
Speaker 6: five percent plus level. It didn't stay there long. But
Speaker 6: could we be heading in that direction? Absolutely? And I
Speaker 6: think that is really kind of the line in the
Speaker 6: sand for a lot of investors. At that point, some
Speaker 6: quantitative investors do tend to step back into the market.
Speaker 6: But could this time be different in that we have
Speaker 6: no resolution to your point earlier on the fiscal deficit,
Speaker 6: we have a massive amount of AI issuance and supply
Speaker 6: coming to the market, and by the way, global yields
Speaker 6: are trending all in the same direction. Now, keep in mind,
Speaker 6: what does rising yields.
Speaker 4: Do to the real economy?
Speaker 6: Well, yes, it pressures puts upward pressures on costs, cost
Speaker 6: of borrowing for consumers, for corporations, but it also creates
Speaker 6: an alternative to equities. And keep in mind that old
Speaker 6: adage there is no alternative. Well, now, with thirty years
Speaker 6: at five plus percent and the ten you're at four
Speaker 6: point seven or so, could there be an alternative for
Speaker 6: those that are seeking yield, maybe in retirement, near retirement,
Speaker 6: or just looking from income opportunities that we think is
Speaker 6: the silver lining here for those that are looking for
Speaker 6: relatively risk free income opportunities versus what we've seen in
Speaker 6: this rally in equities. There could be some opportunities on
Speaker 6: the horizon.
Speaker 2: Here following this take for take now it's now a
Speaker 2: seven basis point move for the long end. I think
Speaker 2: it's fair to say based on where we were at
Speaker 2: eight thirty East and yesterday morn we've taken back all
Speaker 2: of the move post the announcement at eight thirty from
Speaker 2: the Treasury. Let's just stay on that. Because of all
Speaker 2: the research we've all read in the last twenty four hours,
Speaker 2: most of it talks about twenty twenty three and echoes
Speaker 2: of twenty twenty three and the moment you got the scent,
Speaker 2: the whiff that Yellen was blinking, that was the moment
Speaker 2: to buy. There is a group on Wall Street that
Speaker 2: suggests we've just seen that moment from Treasury Secretary Scott
Speaker 2: Best and there's another group on Wall Street that says,
Speaker 2: this is a very very different unforgiving bond market bank drop,
Speaker 2: it requires a much bigger solution, which camp you in.
Speaker 6: Yeah, you know, look, I think this administration actually is
Speaker 6: quite focused on the yield picture. And we saw it
Speaker 6: last year too, when TIFFs were creating a massive amount
Speaker 6: of uncertainty. Wasn't the equity market selling off that created
Speaker 6: this or cause it this administration to blink? It was
Speaker 6: actually bond yields moving higher. And so this administration in
Speaker 6: particular is quite sensitive to this rapid move higher in yields,
Speaker 6: and it is actually taking steps to try to kind
Speaker 6: of reverse some of the function we're seeing now. All
Speaker 6: that being said, to your point, this is putting a
Speaker 6: bandage on a very very much bigger problem. And so
Speaker 6: you know, increasing long year yield purchases from two billion
Speaker 6: to four billion in a twenty trillion plus economy doesn't.
Speaker 4: Really do much.
Speaker 6: And so what we really need to see is the
Speaker 6: structural change that we are all talking about. But no
Speaker 6: administration historically has taken on that task, and so I
Speaker 6: think that's a tall order.
Speaker 4: All that being.
Speaker 6: Said, we are also in an economy where we are
Speaker 6: seeing massive secular tailwinds from AI, their earning story remains intact.
Speaker 6: We've seen Atlanta fed GDP now at four percent, and
Speaker 6: by the way, the consumer, despite some of the near
Speaker 6: term headwinds, has held in there, especially that upper income consumer,
Speaker 6: and so not an environment where we are seeing yield's
Speaker 6: rise and a recession on the horizon. So there is
Speaker 6: still opportunity, we think in the equity market, and maybe
Speaker 6: some opportunity for those yield income consumers as well.
Speaker 1: So you're still bullish despite the fact that we've seen
Speaker 1: yields rise at the long end.
Speaker 6: You know, overall, we think the backdrop of this macro
Speaker 6: backdrop has not shifted, and we do think that equities
Speaker 6: make a lot of sense here now to your point
Speaker 6: earlier on seasonality, we had a really nice run in
Speaker 6: equities through June and July and early August, and we're
Speaker 6: heading into September and October, which historically have not been
Speaker 6: great months for the equity markets. But keep in mind
Speaker 6: we're also in a midterm election year, and historically post
Speaker 6: midterm elections, equities tend to rally as some of that
Speaker 6: uncertainty is lifted. So could some of this play out
Speaker 6: you know, history doesn't always repeat itself, but it could
Speaker 6: rhyme to some extent.
Speaker 4: These could be issues that we face in the near term.
Speaker 6: But we'll have to see how not only the treasury
Speaker 6: market plays out, but how the FED reacts to some
Speaker 6: of what we're seeing. Do they think that the treasuries
Speaker 6: are doing some of the work, some of the restriction
Speaker 6: for them, or will they have to act regardless, And
Speaker 6: that could really be the game changer in terms of
Speaker 6: how equities play out.
Speaker 1: So in other words, Mona, you don't see the rise
Speaker 1: and long end yields necessarily affecting the overall dynamic in
Speaker 1: terms of being bullish of both equities and maybe short
Speaker 1: end bonds. But if the FED takes action hikes rates,
Speaker 1: that's the game changer. That would make you more negative
Speaker 1: on stock, so to make you more positive on bonds.
Speaker 6: You know, I think generally with an earnings back drop
Speaker 6: of thirty percent this year, it is tough to fight
Speaker 6: the tape. In terms of what's happening in the equity market,
Speaker 6: if the FED has to raise one or two times,
Speaker 6: we don't think that derails the broader story. Now in
Speaker 6: terms of yields, you know, our team is looking at
Speaker 6: ten years between four and a half to five percent.
Speaker 6: If we get much above that, we could reconsider our
Speaker 6: stance on equities as well. As we noted you know
Speaker 6: there's an alternative. Then the evaluations come under pressure. There
Speaker 6: could be a shift in the narrative, but for now
Speaker 6: we remain contained in that four and a half to
Speaker 6: five percent yield range. We have the strong earnings drop
Speaker 6: supporting US and the Fed by the way we think
Speaker 6: is torn. We've seen a couple of better than expected
Speaker 6: inflation prints, we'll get one more on September eleventh before
Speaker 6: the September sixteenth meeting, and we've seen a labor market
Speaker 6: and consumer that has really been mixed. So not one
Speaker 6: where the Fed may want to continue to put pressure
Speaker 6: on and cause some other concerns in the macroeconomy as well.
Speaker 2: Mana, it's got to see you to get your reaction.
Speaker 2: Mana Mahajan there at Edwick James. This is the Bloomberg
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