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 am Marie Hordern. Join us each
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Speaker 2: Bloomberg Terminal and the Bloomberg Business app. Let's talk about
Speaker 2: the bond market. Lisa's favorite, the tenure government bondyard is
Speaker 2: lower on this week for a seventh consecutive week, the
Speaker 2: longest streak in more than five years. Steve Major of HSBC,
Speaker 2: good friend of this program, good friend of ours, joined
Speaker 2: us here in New York.
Speaker 3: Steve, It's good to see you.
Speaker 1: Good morning.
Speaker 2: What's behind that rally of almost two months on tenure
Speaker 2: government bondyards?
Speaker 4: I think you touched on some of it in the
Speaker 4: pre am can't call it a preamble. Yeah, So how
Speaker 4: do you disseggregate this this bond valley? Because it probably
Speaker 4: it probably starting with something really simple. It could be
Speaker 4: the market was just too cheap. So there's a valuation angle,
Speaker 4: and you can see it in swap spreads. You can
Speaker 4: see it in US bond yields versus the rest of
Speaker 4: the world. You can see it in real yields being
Speaker 4: above two, all that kind of thing. So maybe point
Speaker 4: one it was just too cheap, and then you get
Speaker 4: some trigger events or you get something that that starts
Speaker 4: to spark it. Maybe and I think maybe there was
Speaker 4: a bit more confidence in the fiscal position and and
Speaker 4: so I think you mentioned dog that could that could
Speaker 4: be key. In between the date of the election back
Speaker 4: in November and the inauguration, I think markets were also
Speaker 4: sensing the regulatory shift, which meant there could have been
Speaker 4: some pre positioning which was more favorable towards treasuries. Now
Speaker 4: that was coming in the treasuries versus swap spread, right,
Speaker 4: So there's a bunch of things that were happening. You've
Speaker 4: talked about seven weeks of bond rally. I think it's
Speaker 4: been helped by some of the forward looking data, so
Speaker 4: Atlanta fed GDP, now some of the survey data think
Speaker 4: about what's going to happen to confidence when uncertainty goes up,
Speaker 4: so uncertainty is not volatility. Uncertainty in the real world,
Speaker 4: in the real economy means people sit on their hands
Speaker 4: and they don't do stuff. It means that the investments
Speaker 4: aren't made, decisions aren't made, and that's not good for growth.
Speaker 4: Uncertainty in markets normally means there's a big dispersion in
Speaker 4: opinion about what's going to happen. But I think in
Speaker 4: the real world it's actually consistent with the surveys softening
Speaker 4: ahead of the real data.
Speaker 2: It's completely against the grain compared to where we were
Speaker 2: at the end of last year. And that's what's intriguing
Speaker 2: for us on this program. At the end of last year,
Speaker 2: when Donald Trump won the presidency, we saw curve steepen
Speaker 2: and you're to push at the long end of the curve,
Speaker 2: and people were talking about things like tax cuts, more issuance,
Speaker 2: heavier supply, its st come.
Speaker 3: Have we just parked that story? Can we ignore that story?
Speaker 4: Again? Positioning is important. We came into the year with
Speaker 4: the consensus position and the position being a bearish steepening
Speaker 4: of the curve, inflation, fiscal blah blah blah. I did
Speaker 4: in an interview with Manus at the start of the
Speaker 4: year and I said, I'm not meeting any bomballs. That's
Speaker 4: because there weren't any, right, So once you get a
Speaker 4: bit of momentum, then people become a bit more confident.
Speaker 4: And it's a bit scary the recency bias in these
Speaker 4: markets and that people do like a bit of momentum.
Speaker 4: And so I think the first move was positioning and
Speaker 4: the consensus and then some trigger points. And now for
Speaker 4: this ruddy to be continued, for it to be sustained,
Speaker 4: you're going to have to get something in the data.
Speaker 4: You mentioned payrolls, but it's really economy data. So the
Speaker 4: economy is kind of being retrofitted to where the Fed
Speaker 4: already took rates. Does that make sense, right, The idea
Speaker 4: that maybe they cut too much time, Nobody was really
Speaker 4: saying it, but at the time it seems that they
Speaker 4: were cutting into a window where there was an opportunity
Speaker 4: to come. And then of course bond yields went up
Speaker 4: a lot, even though policy rates had come down one
Speaker 4: hundred basis points, so something was wrong. So the bond
Speaker 4: market is moving back into line, but really the economy
Speaker 4: has to be fitted to where the policy rates are
Speaker 4: as well. So there's a lot of this going on
Speaker 4: that I think explains the bond ready move, and we
Speaker 4: can get through four percent on the tens in the
Speaker 4: next few weeks with this momentum continuing. If we're talking
Speaker 4: about ten weeks of bond really, in three weeks time,
Speaker 4: we'll be through four solutely.
Speaker 5: What I'm hearing from you is that if we get
Speaker 5: some weaker economic data, we could see this bond rally accelerate.
Speaker 5: Wee get the ten year below four percent and the
Speaker 5: idea of real growth concerns bleeding through the entire treasury space. Yeah,
Speaker 5: how much do you buy the idea that this bond
Speaker 5: market and this federal reserve is going to be constrained
Speaker 5: by stiflationary fears, cyclation light, et cetera. How much does
Speaker 5: policy play into this?
Speaker 4: Quite rightly to qualify it with stagflation light, because you
Speaker 4: know that pure stagflation requires recession and accelerating inflation. We're
Speaker 4: nowhere near either of those at the moments, so you're
Speaker 4: quite right to qualify that. It strikes me that inflation
Speaker 4: between two and the three is not a problem for anyone,
Speaker 4: and it's probably part of what's really desired because there's
Speaker 4: too much debt, and the process of dissolving the debt
Speaker 4: requires inflation to be a touchover target. I don't think
Speaker 4: anyone's going to worry about two to three on inflation.
Speaker 4: The Fed's already pivoted to a growth focus. They did
Speaker 4: that last year and now we're seeing validation of that pivot. So,
Speaker 4: as I said, the economy needs to fit to where
Speaker 4: the to where the path of lower rates needs it
Speaker 4: to be. That may sound like a reverse, a reverse
Speaker 4: in the causality, but this sometimes is how it works.
Speaker 3: Right.
Speaker 4: So I'm not that worried about inflation and your famous
Speaker 4: last words, but.
Speaker 6: You're not that worried about inflation, but FED officials.
Speaker 5: Are, and they're talking about the potential for having to choose,
Speaker 5: having to weigh the evils of whether inflation is sticky
Speaker 5: or even accelerating modestly and some sort of downside to growth. Yeah,
Speaker 5: as barn investors, how do you grapple with it?
Speaker 4: It's fair what you've said. That is part of their job,
Speaker 4: and there are some in the FED who don't completely
Speaker 4: worry about inflation so much, right, so that you have
Speaker 4: a range of views, just like in any essential bank,
Speaker 4: the fiscal policy I think is dominance. You've heard of
Speaker 4: fiscal dominance. For the bond deal to be at the
Speaker 4: right level for the fiscal policy, it needs to be
Speaker 4: at four percent or below. The CBO. The Budget Office
Speaker 4: is budgeting four point one zero on the ten year. Now,
Speaker 4: back in September we were at three point six almost,
Speaker 4: so it was nicely inside. So to be able to
Speaker 4: afford this level of debt with the interest payments that
Speaker 4: come from it, we need the yields below four. So
Speaker 4: I think that by having a fiscally responsible treasury set
Speaker 4: up and the expense cuts coming through and the economy cooling,
Speaker 4: you haven't got to worry about inflation so much. I
Speaker 4: think it is their job to be to be a
Speaker 4: bit hawkish on inflation, but I don't really think it's
Speaker 4: a problem.
Speaker 2: I'll ask a simple question which requires a very thoughtful answer,
Speaker 2: and I know you've given it some thought.
Speaker 3: Does the supply matter?
Speaker 4: No? Next question?
Speaker 3: Why not?
Speaker 2: Right?
Speaker 4: So I have this conversation every day of the week
Speaker 4: with clients. Right, and you think about from a trader's perspective,
Speaker 4: it does matter because they've got to take down all
Speaker 4: this supply and auctions and syndications and so there's a
Speaker 4: concession around the supply that must that should not be confused.
Speaker 4: That concession around the supply should not be confused with
Speaker 4: their strategic view, because the bond yield is a function
Speaker 4: of today's policy rate and expectations for that policy rate
Speaker 4: where it ends up in the future. Right, And it
Speaker 4: strikes me that it could be a double counting on
Speaker 4: the yields if we start adding too much additional term
Speaker 4: premium to what's already in the price. So if the
Speaker 4: Federal Reserve thinks that the deficits are problem and is
Speaker 4: causing inflation, then they're not going to cut rates. They
Speaker 4: might even be hiking them, right. But if the Federal
Speaker 4: Reserve things this economy is cooling down and the stock
Speaker 4: of the debt and the interest payments are weighing on
Speaker 4: future growth, and in fact, there's a path to lower rates,
Speaker 4: and the second half of the year they are cutting
Speaker 4: along that path.
Speaker 5: Right.
Speaker 4: So it just strikes me that it's very dangerous to
Speaker 4: say always a lot of supply, the yield goes up,
Speaker 4: because there is no empirical evidence for that. Look what's
Speaker 4: going on in China and Japan, and also look at
Speaker 4: the bond yield which is above four percent, it's around
Speaker 4: four twenty five. The policy rate is four twenty five,
Speaker 4: four point fifty. It doesn't strike me that there's a
Speaker 4: lot wrong with a bond yield that reflects the view
Speaker 4: that the policy rate is going to stay unchanged for
Speaker 4: quite a long time. If you change that view to
Speaker 4: the fact that the Fed is back on the path
Speaker 4: of lower rates, the bond yield should come down. But
Speaker 4: I don't know, there's this intuition that the supply matters.
Speaker 4: It's informed by the auctions and the syndication and the
Speaker 4: concessions that the dating rooms have to take in to
Speaker 4: take into account. Right, but not to be confused for
Speaker 4: the strategic view and where bonios would be staith.
Speaker 2: I knew that would eventually States just face SAE.
Speaker 3: State's going to say why why.
Speaker 7: More clarity and more tariffs.
Speaker 8: That's the message from the White House when it comes
Speaker 8: to this deadline on Tuesday, that pause for twenty five
Speaker 8: percent on Canada and Mexico unless they showed they were
Speaker 8: doing enough to stop the flow of migrants and also
Speaker 8: really fentanyl. Then those tariffs go into play, and then
Speaker 8: the President ad really is spat on the works, adding
Speaker 8: an additional ten percent when it comes to China. So
Speaker 8: let's break all this down because the calendar is getting
Speaker 8: very busy.
Speaker 7: On the trade front. Kelly and Shaw joins me.
Speaker 8: She's now with Hogal Lovers, but she was a former
Speaker 8: senior White House trade advisor.
Speaker 7: And negotiator under Trump. One point zero. Let's just start
Speaker 7: with the calendar. March fourth, this.
Speaker 8: Pause, but the directives already there, so unless they come
Speaker 8: out with another executive order, those tariffs on Mexico and
Speaker 8: Canada twenty five percent go into place, and then Donald
Speaker 8: Trump added an additional ten percent on China March twelfth,
Speaker 8: twenty five percent on steel and aluminum. April first, we
Speaker 8: get the whole report of where trade is right now
Speaker 8: in terms of reciprocity with America partners and April second,
Speaker 8: auto tariffs, reciprocal tariffs across the board.
Speaker 6: What are you focused on?
Speaker 9: Can I say all of the above. It has certainly
Speaker 9: been a busy week from trade, and on top of that,
Speaker 9: we just got the confirmation of US Trade Representative Jamison Greer,
Speaker 9: as well as the announcement after the Donald Trump and
Speaker 9: Starmer bilateral of a US UK FTA which will be
Speaker 9: negotiated soon so any one of these would be enough
Speaker 9: to derail a trade lawyer's week. And so we have
Speaker 9: all of these happening at once. So what I can
Speaker 9: say is I think the President is just gearing up.
Speaker 9: I think the calendar is only going to get even
Speaker 9: more full, especially as we get closer to that April
Speaker 9: line for all of those reports that are due, and
Speaker 9: I fully expect him to continue this trade train for
Speaker 9: the next several months and next couple of years.
Speaker 8: How do you read the tea leaves right now? When
Speaker 8: it comes to Canada Mexico. Let's start there, because those
Speaker 8: are coming into place Tuesday. We have the Mexican Economy
Speaker 8: official Minister here in Washington, d C.
Speaker 7: Yesterday I met with Jamison Greer. Today is going to
Speaker 7: meeting with Commerce Secretary Howard Lutnik.
Speaker 8: We have the Canadian ventinyls are meeting with Tom.
Speaker 6: Holman this week.
Speaker 8: Do you think these two countries are offering enough concessions
Speaker 8: for Trump to put out an EO saying the twenty
Speaker 8: five percent will not go through.
Speaker 7: Yeah.
Speaker 9: I mean, when I'm picking up are somewhat positive signals
Speaker 9: from both the Canadians and Mexicans in terms of how
Speaker 9: those conversations are going. However, it is very clear that
Speaker 9: what the President wants is a reduction in deaths related
Speaker 9: defentanyl and cooperation in terms of the border and border security.
Speaker 9: And so what I think will likely play out over
Speaker 9: the next couple of days is a high pressure situation
Speaker 9: in which the President is asking both Canada and Mexico
Speaker 9: for more so that they could potentially announce on Tuesday
Speaker 9: or Monday night some sort of suspension for an additional
Speaker 9: thirty days or period of time. But you cannot fix
Speaker 9: these issues overnight. I think it's going to take several months,
Speaker 9: if not years, to resolve some of these core concerns
Speaker 9: of the president. So my expectation is that best case
Speaker 9: scenario from the perspective of Canada and Mexico, we see
Speaker 9: another suspension that continues to get renewed periodically as these
Speaker 9: issues continue to be resolved. But I'm hopeful that there
Speaker 9: is that opportunity and.
Speaker 8: Then Tuesday night, I'll have this joint addressed to Congress,
Speaker 8: so potentially he can go and say, look at all
Speaker 8: these concessions I got when it comes to immigration, which
Speaker 8: I was elected to really clean up. And that's the
Speaker 8: president's words when it comes to China. Is this additional
Speaker 8: ten percent real?
Speaker 7: I think so.
Speaker 9: I think so because I don't see scope for the
Speaker 9: United States and China to resolve the president's core fentanyl
Speaker 9: concerns between now and Tuesday. I see Canada and Mexico here,
Speaker 9: I see active negotiations. They have a representative from almost
Speaker 9: every agency and every province of their respective governments. Those
Speaker 9: conversations aren't happening between the United States and China. Rather,
Speaker 9: I think some of those conversations are going to happen
Speaker 9: after April.
Speaker 6: That's when we've got.
Speaker 9: The report on the Phase one compliance. We have the
Speaker 9: report on the Biden administration's eighteen billion dollars of additional tariffs,
Speaker 9: and we also have that report on China's IP practices
Speaker 9: that are all due to the President with recommendations. And
Speaker 9: that's what I think is going to tee up a
Speaker 9: broader conversation that also involves s fentanyl on some of these.
Speaker 7: Other issues with China.
Speaker 8: So China responded overnight, and this is what the Commerce
Speaker 8: Ministry said. If the US and system having its own way,
Speaker 8: China will counter with all necessary measures to defend its
Speaker 8: legitimate rights.
Speaker 7: And then previously, though in February.
Speaker 8: The response is we would take corresponding steps. So counter
Speaker 8: versus corresponding, what kind of reciprocal action could we see
Speaker 8: from Beijing.
Speaker 9: Yeah, and I think you're seeing an uptick in the
Speaker 9: rhetoric in response from MOFCOM this time. I mean ten
Speaker 9: percent to twenty percent. You're doubling the tariff impact. I
Speaker 9: do think that both sides have interest in not driving
Speaker 9: the relationship off an economic cliff before those talks begin
Speaker 9: after April first. But that said, China's going to have
Speaker 9: to respond, and we've seen that play out for the
Speaker 9: first four years of the Trump administration. I think we'll
Speaker 9: see that same pattern play out in these second four years,
Speaker 9: which is that for every action, there's an equal and
Speaker 9: opposite reaction on the side of China and the United States.
Speaker 9: So I do think we'll see retaliation. It could be
Speaker 9: more tariffs, it could be additional entities added to the
Speaker 9: Unreliable Entity list, the export controls, there could be a
Speaker 9: number of things that China does.
Speaker 7: But again, I think it's going.
Speaker 9: To be fairly moderate in terms of their response because
Speaker 9: there is an opportunity to resolve some of these things
Speaker 9: in the short term.
Speaker 7: You were in the room.
Speaker 8: So Phase one, the trade deal that Trump didn't trump
Speaker 8: one point zero, What do you think he wants this time?
Speaker 7: Well, I think it's not as clear.
Speaker 9: So during the first four years, what was clear to
Speaker 9: us as negotiators is that the President was looking for
Speaker 9: China to stop stealing US technology, stop engaging in unfair
Speaker 9: trading practices, and stop subsidizing industries at the impact of
Speaker 9: US exporters and third country markets. But what was challenging
Speaker 9: for US is the fact that China has a state
Speaker 9: directed economy and they're not going to back away from that.
Speaker 9: They're not going to stop doing some of these things
Speaker 9: that are so impactful for the United States. And so
Speaker 9: it's not really clear what the President is going to
Speaker 9: be asking of China this time. Certainly living up to
Speaker 9: Phase one, certainly help and cooperation on fentanyl, but beyond that,
Speaker 9: it's not clear what the acts are going to be
Speaker 9: on the administration side, and by the way, on China
Speaker 9: side as well, they're interested in the US backing off
Speaker 9: on export controls, potentially backing off on some of these
Speaker 9: national security measures, and I'm not sure there's really a
Speaker 9: runway there for both sides to land the plane.
Speaker 8: If you in the administration now and you are at
Speaker 8: the table negotiating this. Does it help or hurt that
Speaker 8: there's a barrage of trade headlines every single day?
Speaker 9: Well, I think this is just the way it is, right.
Speaker 9: I mean, President Trump, as you said, ran on immigration,
Speaker 9: you ran on inflation, you ran on tariffs. And so
Speaker 9: he's doing what he set out to do, and I
Speaker 9: think he.
Speaker 7: Only has warriors to do it.
Speaker 9: And so to the extent he's looking to fundamentally change
Speaker 9: the global trading system and enact some of these policies
Speaker 9: he's been talking about for decades, even before he was
Speaker 9: elected president, All of that has to happen quite quickly,
Speaker 9: and so that's what I think you're seeing play out.
Speaker 9: And that's why I think this is going to be
Speaker 9: a very full plate for the next several months.
Speaker 8: When it comes to the April second tariffs, the Wall
Speaker 8: Street Journal this morning is saying administration officials are privately
Speaker 8: indicating that the full reciprocal action will take longer than
Speaker 8: April timeline to implement, up to six months or even
Speaker 8: more so, even if we get the direction of travel
Speaker 8: April first or second, When do you actually think the
Speaker 8: tariffs When it comes to the baseline reciprocal tariffs actually come.
Speaker 9: Into play well, I think it depends how they want
Speaker 9: to structure this. Legally, the President has a number of
Speaker 9: statutory authorities which he can use to impose tariffs, and
Speaker 9: he can do a reciprocal tariff, baseline tariffs, products specific tariffs,
Speaker 9: supply chain tariffs, and he's talked about some of these
Speaker 9: over the past couple of weeks, and so he can
Speaker 9: do that through these Section two thirty two investigations like
Speaker 9: we saw for copper just this week. He can do
Speaker 9: Section three oh one investigations, which is the type that
Speaker 9: he used for tariffing China during his first term, and
Speaker 9: these take several months, if not a year to complete.
Speaker 9: I think they can do them much faster than the
Speaker 9: statutory maximum of a year.
Speaker 7: But that said, it's going to be up to the
Speaker 7: team as.
Speaker 9: To how they want to structure some of these tariffs,
Speaker 9: and some of them will be overlapping because they'll involve
Speaker 9: not just like the entire economy of a country or
Speaker 9: a universal baseline style tariff, but also.
Speaker 8: Very product specific tarists specific so it's going to be
Speaker 8: a very long list. All week, we've been talking about
Speaker 8: Canada Mexico, the United Kingdom, potentially a trade deal he's
Speaker 8: announced yesterday's going to be there, the European Union. What
Speaker 8: should be looking at next? Where do you think he's
Speaker 8: going to target next?
Speaker 9: Well, I think he's starting with North America. It's very
Speaker 9: clear we have the largest trading relationships and trade deficits
Speaker 9: with Mexico and Canada, and I think China is going
Speaker 9: to be fast on the heels of North America.
Speaker 6: But he's talked a lot about.
Speaker 9: Europe and his plans for Europe over the past several
Speaker 9: weeks as well, and so in addition to the major
Speaker 9: trading partners that he's mentioned, the US Trade Representative issued
Speaker 9: a request for comments last week in which they specifically
Speaker 9: identified a number of countries that the administration is concerned about.
Speaker 9: Those include the G twenty economies as well as countries
Speaker 9: with whom we have a large trade deficit. So I
Speaker 9: also have Vietnam on my list, I have South Korea,
Speaker 9: I have Japan, and I have India on my list
Speaker 9: as major priorities of the Trump administration throughout this first year.
Speaker 8: Kelly, and thank you so much for joining us this morning.
Speaker 7: You're insight so useful. Jonathan Kelly and Shaw.
Speaker 9: There.
Speaker 2: Andrew Homeholt of City is with us around a table
Speaker 2: to break down the economicator. Andrew, good morning to you.
Speaker 2: We'll get to inflation in just a moment. Let's start
Speaker 2: with personal income versus personal spending. Income up, spending down,
Speaker 2: what gifts.
Speaker 10: Yeah, this is really interesting because we've had such strong
Speaker 10: personal spending that has been the engine of growth and
Speaker 10: resilience for the US economy, and now the month of
Speaker 10: January we're seeing that week. And we already knew some
Speaker 10: of that from the retail sales reading. We're seeing a
Speaker 10: little bit more of that. And what we're seeing in
Speaker 10: personal spending this morning, I think you have to take
Speaker 10: that with all the positive data we've had for the
Speaker 10: last several months, but this could be the start of
Speaker 10: a slowing trend.
Speaker 2: Soft data has been soft, you, Mitch on the consumer
Speaker 2: soft the conference board early this week week. I want
Speaker 2: to understand whether that is going to translate into weaker
Speaker 2: hard data. It's early to say that. Yes, we're seeing
Speaker 2: that right now with convention and confidence, but it's not
Speaker 2: what you forecasting.
Speaker 10: We think we're going to see at least some slowing
Speaker 10: in consumer spending. I think you kind of have to,
Speaker 10: just because we've had the savings rate at such a
Speaker 10: low level and you can't just continue to run spending
Speaker 10: above income forever.
Speaker 6: So it was always going to slow down. I think
Speaker 6: the question now is is it slowing a little bit
Speaker 6: more sharply?
Speaker 10: And it is interesting what you mentioned because you see
Speaker 10: this across the soft data at the consumer service and
Speaker 10: then also that services PMI.
Speaker 6: That was really the big surprise that that number.
Speaker 10: Came below fifty, coming into contraction, and now we're seeing
Speaker 10: it in some of the hard data. Now, again, we
Speaker 10: had really strong consumer spending in December, so I don't
Speaker 10: think you want to make too.
Speaker 6: Much of this weakness in January.
Speaker 10: Maybe February we're going to go back and just continue
Speaker 10: expanding again. But if we get a week reading in February,
Speaker 10: then that is a trend, and that does line up
Speaker 10: with what you're seeing in the survey data. So a
Speaker 10: little more of a hint here that we're slowing down.
Speaker 5: Yeah, it goes to this whole preemptive inflation anxiety. Is
Speaker 5: this the evidence of it right here that people are
Speaker 5: stockpiling more cash to earning more and they're spending that
Speaker 5: much less. You're saying it's too early to call that
Speaker 5: this time, but going.
Speaker 7: Forward, we'll have to see.
Speaker 5: You've been generally calling for a weakening in the economy
Speaker 5: even before some of this PIA. I'm curious, what are
Speaker 5: you looking at right now that gives fuel to that,
Speaker 5: even amid the otherwise pretty benign outlooks that we're hearing
Speaker 5: from companies.
Speaker 10: I mean, if you think about the things that have
Speaker 10: supported this economy, and again it's been a consumer spending story,
Speaker 10: and it was the fiscal stimulus. It was equity prices
Speaker 10: that were up twenty percent year after year, it was
Speaker 10: house prices that were up much faster.
Speaker 6: Than its typical.
Speaker 10: And none of those things are happening now right The
Speaker 10: fiscal is coming off off, you have equity markets that
Speaker 10: are kind of moving more sideways. House prices are still increasing,
Speaker 10: but not increasing at those really rapid rates that they
Speaker 10: were before.
Speaker 6: So all of.
Speaker 10: Those tailwinds to growth are diminishing. So I'm not surprised
Speaker 10: that we're seeing some slowing now. To your point, are
Speaker 10: we seeing maybe somewhat of a sharper pullback because there's
Speaker 10: some uncertainty out there, but we could be seeing that.
Speaker 6: I just think it's premature. To really say that.
Speaker 5: We know that you were calling from many more cuts
Speaker 5: sat other people and talking about the generally weakening economy
Speaker 5: paired with real disinflation. And this has been something that's
Speaker 5: come under challenge recently from a policy overlay, that maybe
Speaker 5: some of the tariffs and the rejiggering of the global
Speaker 5: trade sphere would end up with a higher level of
Speaker 5: inflation more permanently in tyflation light like.
Speaker 6: Situations.
Speaker 5: How much do you lean into that, how much do
Speaker 5: you think that that is kind of what we may see.
Speaker 10: There are no question that there's no question that there
Speaker 10: are concerns and there should be concerns about longer term
Speaker 10: structural inflation. If we're going to a more fragmented environment,
Speaker 10: that's just going to be more inflationary for the global economy.
Speaker 10: But what I'm really looking at right now is the
Speaker 10: cyclical story. What's the cyclical story that we're seeing in
Speaker 10: the US, and what we're seeing in those cyclical categories
Speaker 10: of inflation, things like shelter inflation we're just talking about
Speaker 10: that's cool, then that's probably cool persistently. So I think
Speaker 10: that's part of what we're seeing in the market. Also,
Speaker 10: is not that necessarily we've reached where we're trying to
Speaker 10: get to, or the Fed's trying to get to on inflation.
Speaker 10: Soide that we're at two percent inflation, clearly we're not.
Speaker 10: We're a bit above that, but that pathway is there,
Speaker 10: and if there's less concern about inflation staying elevated, then
Speaker 10: concerns can shift to some of these growth concerns and
Speaker 10: it becomes.
Speaker 6: A little bit less balanced.
Speaker 10: And so I think we're still very early innings of that,
Speaker 10: but maybe that's what the market's doing a little bit.
Speaker 2: Andrew, A lot of people are blaming the trade headlines,
Speaker 2: no doubt of Runmack. The argument made the case on
Speaker 2: this promegrame earlier this week that that was an ex
Speaker 2: post rationalization for a slowdown that's already starts it.
Speaker 3: Would you agree with that?
Speaker 6: I think so.
Speaker 10: I think maybe in some of the consumer sentiment data
Speaker 10: you're seeing some of those trade related anxiety is reflected,
Speaker 10: so that can affect the soft data. But spending for
Speaker 10: the month of January, I really doubt that this is
Speaker 10: being affected by trade uncertainty.
Speaker 5: You say it's a cyclical kind of weakening. At the
Speaker 5: same time, some people think that maybe the momentum is
Speaker 5: just moving away from services back to goods, and that
Speaker 5: you might see some of the weakness and services paired
Speaker 5: with some of the strength that we're seeing in the
Speaker 5: physical world.
Speaker 10: Why do you reject that, I don't necessarily reject that.
Speaker 10: You do see that to some extent in some of
Speaker 10: the survey data and some of the diffusion indicies where
Speaker 10: you see this sub fifty services diffusion index, So maybe
Speaker 10: we're actually contracting in the services sector, whereas manufacturing diffusion
Speaker 10: industries have moved above fifty now, So you do see
Speaker 10: some of that in the data. But what I would
Speaker 10: say about manufacturing is number one, it's a smaller share
Speaker 10: of the US economy than services. Services is going to
Speaker 10: be the more important driver. And number two, we still
Speaker 10: have high interest rates, we still have a strong dollar.
Speaker 10: Those are things that are going to weigh on manufacturing
Speaker 10: as well.
Speaker 3: First, right, can give us the month May. Why May?
Speaker 6: We think in May they'll see enough.
Speaker 10: FED officials will have seen enough to conclude that inflation
Speaker 10: is slowing, that growth is slowing, and resolves some of
Speaker 10: the uncertainty around tariffs and trade. April second is the
Speaker 10: day when we're supposed to get some announcements.
Speaker 3: It's March nineteenth. To snooze or not.
Speaker 6: It is just probably a wait and see meeting.
Speaker 10: Yeah, I don't know if I want to say snooze,
Speaker 10: because it's my job to make these things interesting.
Speaker 6: But I'll be tuning in. I'm not sure a lot
Speaker 6: of others will.
Speaker 2: We'll be here, Andrew Honjoso City. I hope others tune
Speaker 2: in as well. Michael Kushmer more Can Stanley joined just
Speaker 2: now for more Michael jumping into the city into the studio.
Speaker 3: Good morning, sir, Good morning.
Speaker 2: I mentioned BMP Parabah who said a few times earlier
Speaker 2: this month that the Federal Reserve was comfortably numb. How
Speaker 2: uncomfortable are they going to be in a few weeks time, it's.
Speaker 1: Gonna well, they may be uncomfortable, but they'll have more
Speaker 1: information about exactly how serious the Trump administration is on
Speaker 1: using these tariffs.
Speaker 3: Because we know that the use.
Speaker 1: Of tariffs as multiple objectives. One is to extract other
Speaker 1: concessions on other issues. That one is to raise revenue
Speaker 1: to achieve their budgetary goals. So how those are balance
Speaker 1: and the inflationary impact versus the negative economic growth impact
Speaker 1: Juggling all those things, We're not sure how they're going
Speaker 1: to weigh those things in the fedest a way to
Speaker 1: see how they're going to judge.
Speaker 2: Those go make some kind of underlying assumptions about how
Speaker 2: this is going to play out for the year ahead.
Speaker 3: What's your base case? What's the baseline for me?
Speaker 1: The base case is that in general macroeconomicist was just
Speaker 1: tariffs are stagflationaries, like a tax on the economy with
Speaker 1: like a supply shock, and it's not good at least
Speaker 1: in the short and the short term before longer term
Speaker 1: production adjustments can occur. So in some sense you would
Speaker 1: think this puts the FED in an uncomfortable position with
Speaker 1: stagflation and outcomes are ambiguous as to what you should do.
Speaker 1: How big a negative impact will have an economy in
Speaker 1: the short term for a sound inflationary it will be.
Speaker 1: And if you think about the Trump administration's policies could
Speaker 1: be there's positive things about it. There's negative things about
Speaker 1: it in terms of supply side, demand side, but the
Speaker 1: headlines in the short term are quite with the trend
Speaker 1: in spending and the economy a little weaker than expected
Speaker 1: in recently is putting this little more downward pressure, which
Speaker 1: makes I think maybe a little more nervous that maybe
Speaker 1: the next couple of months that the economy be softer
Speaker 1: that expected.
Speaker 5: It's difficult to have conviction at a time. Whereas gold
Speaker 5: Min Sachs put it, you end up with headline roulette.
Speaker 5: How can you basically come up with any kind of
Speaker 5: conviction if you're dealing with potential threats that emerge that
Speaker 5: are unclear at different moments.
Speaker 6: Do you have any conviction yet?
Speaker 1: Well, the conviction has been that the underlying momentum of
Speaker 1: the US economy has been strong, but narrowly based on
Speaker 1: the buid administration. Was a lot of government spending. Tax
Speaker 1: policy driven a growth in the economy. Employment growth was strong,
Speaker 1: but inflation was high. We kind of knew what to
Speaker 1: do with that. The Fed would cut rates if inflation
Speaker 1: was low. And there's some signs of weakening the economy.
Speaker 1: But going forward, these much more uncertain as to how
Speaker 1: the economy is going to play out, so you have
Speaker 1: to wait and see.
Speaker 3: So we've adopted a more weight and see attitude.
Speaker 1: We think credit markets are still pretty robust, corporate fundamentals
Speaker 1: are really strong. Could they deteriorate at the margin. It's possible,
Speaker 1: So we're a little leery of adding and taking big
Speaker 1: bets on in credit markets. But by the other hand,
Speaker 1: there's no these signs yet that the weakness we've seen.
Speaker 1: Late January and February were really weird months in terms
Speaker 1: of forest fire, forest fires in California, really cold weather.
Speaker 1: How this that was disruptive to a tariffs and Trump policy.
Speaker 1: How disruptive that was two people's behavior. Headlines are certainly
Speaker 1: not very conducive to being confident about the future, with layoffs,
Speaker 1: falling spending, the reductions of government spending.
Speaker 5: So what would it take for you to get bullish
Speaker 5: on long term bonds to actually think that this is
Speaker 5: going to be a growth impact.
Speaker 3: It will have to see the unemployment rate change.
Speaker 1: I think that's the FED has employment mandate and it
Speaker 1: has an inflation mandate, and the inflation situation was not
Speaker 1: great lately. But this could be better in the next
Speaker 1: couple months, or it could just go sideways. But the
Speaker 1: unemployment rate stays where it is, the Fed's going to
Speaker 1: find it tough to change policy from where we are today.
Speaker 3: But we have seen big swings.
Speaker 1: In FED attitudes towards policy in the last twelve months
Speaker 1: July and summer of last year, when inflation was going
Speaker 1: up for the first half of the year, the FED
Speaker 1: said maybe.
Speaker 3: No rate cuts, rain with the year.
Speaker 1: By September lots of rate cuts, and now maybe not
Speaker 1: so many rate cuts. I think they're very much in
Speaker 1: the thing. We don't don't trust our models. We're going
Speaker 1: to wait and see how actual data evolves. Data dependent,
Speaker 1: but they're seem to be very responsive to short term
Speaker 1: fluctuations in data, which have been fairly erratic.
Speaker 2: We've seen risk markets, risk assets get hit a little
Speaker 2: bit over the last week or so. Is the FED
Speaker 2: put constraint given the risk that they face the two
Speaker 2: way risks that some people have described.
Speaker 1: I think it's constrained from the point of of responding
Speaker 1: immediately to weakness and equities. If spending in the US
Speaker 1: economy know has been led by high the high income
Speaker 1: part of the distribution, and as we know, wealth effects
Speaker 1: have been very powerfully positive for high income people in
Speaker 1: terms of the equity market, the housing market, crypto markets,
Speaker 1: whatever you want to call it. It's all been up, up, up,
Speaker 1: So even if income growth hasn't been great, you feel wealthier.
Speaker 3: You spend more money on.
Speaker 1: Durable goods and holidays and things, things like that if
Speaker 1: that is starting to start to worry about that. And
Speaker 1: there's a story that the FED is indirectly targeting.
Speaker 3: You know, the equity market.
Speaker 1: The economy can't slow and inflation can slow unless the
Speaker 1: equity market does worse, because that will slow spending of
Speaker 1: high income people.
Speaker 3: Does that help will hert the tenure?
Speaker 6: It helps the ten ure?
Speaker 1: I mean there is a story I've seen around that
Speaker 1: maybe you know, the Trump administration is not targeting you know,
Speaker 1: the S and P. As a measure of success is
Speaker 1: the tenure treasury. The lower it goes, the better.
Speaker 5: So let's just use some scenario analysis next year. By
Speaker 5: the way, I'm turning into TK with my throat claim
Speaker 5: and I apolished this, you know, he said this, Tara
Speaker 5: is something one thing that leads to another. I am
Speaker 5: curious next week on March fourth, if their tariffs are
Speaker 5: put on, what happens to the tenure?
Speaker 7: Does it rally or does it sell off?
Speaker 3: I think it rallies.
Speaker 6: Significantly.
Speaker 3: I think that that I think.
Speaker 1: The markets are more concerned with downside implications for growth
Speaker 1: than they were about upside inflation surprises.
Speaker 5: What shifted from late last year till now?
Speaker 1: I think it's the actual data that's been weakening prior
Speaker 1: to all this this tariff stuff, when people were not
Speaker 1: sure that the demonstration was serious about imposing terrors.
Speaker 3: Well this is just a negotiating tactics of go away.
Speaker 1: But data has actually been weakening into this environment. So
Speaker 1: it's the economy is more fragile, not for weak growth,
Speaker 1: but weaker growth. So you think US growth has been
Speaker 1: targeting artment toggling two and three percent, Well, if we
Speaker 1: fall below two percent, I think the said put starts
Speaker 1: becoming more operative again.
Speaker 2: Michael Krishmer of Morgan Stanley loves to think about sir.
Speaker 3: Thank you.
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