00:00:02 Speaker 1: Bloomberg Audio Studios. 00:00:04 Speaker 2: Podcasts. Radio. 00:00:06 Speaker 3: News. 00:00:12 Speaker 1: This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. 00:00:27 Speaker 4: Yields ticking higher. And that kind of is one of the challenges for this market in a world with global interest rates higher. It's not just the U.S. 00:00:36 Speaker 5: Folks. 00:00:36 Speaker 4: It's around the world. What does that mean for global stocks? Well, one of the folks we can chat with is Sebastian Page. He's co-head of global investments and CIO of this little shop down in Baltimore called T. Rowe Price, one of my all-time favorite spots. Some really smart people down there over the years I've worked with. Sebastian, what are the conversations you're having with global investors here are saying, hey, rates higher for longer. What does that mean for various asset classes out there? How do you think about that? 00:01:04 Speaker 2: Paul, thank you. And first of all, I'm dreaming of the day where you'll refer to T. Rowe Price as a big shop. We're at $ 1. 9 trillion. We're working on getting to big, Paul. T. 00:01:17 Speaker 4: Rowe is my biggest and best client for like 30 years. That's how good they are, folks. 00:01:24 Speaker 2: I know. Thank you, Paul. Look, everybody's talking about rates and long rates. And the main question is, why are long rates rising? You could say maybe because of growth and productivity. You could say maybe because of inflation. You could say maybe because rates are rising in other countries. You could say, well, it's this wonky term, the term premium, and we don't really know how it's measured, but maybe it's that. Or you could say it's the deficits. The prevailing narrative, Paul, is that it's probably the deficits. But I've been looking into this, how the 10-year is trading relative to oil prices. I calculated the rolling 30-day correlation between changes in the 10-year and changes in oil prices. And I went back 40 years. And guess what? It's at 80%. plus 80% correlation between oil and the 10-year yield, and that is the 99th percentile, basically as high as it's been over that 40-year period. Right now, the 10-year is actually quite responsive to oil prices, so I would not underestimate the inflation impact, and also the fact that Market participants might be thinking, well, if the war continues, that means more deficits as well. So these things are all related. But my message is do not underestimate the oil price and inflation component of rising long rates. 00:02:51 Speaker 6: Okay. Are markets overdoing, though, the idea of rate hikes? I mean, looking at Bloomberg's chief US economist, Anna Wong, I'll take her word for it, that August will see tepid jobs growth. This month usually surprises to the downside. So, we've got the marquee report on Friday, the non-farm payrolls number, and then the CPI out next week. So, are we overdoing it? 00:03:18 Speaker 2: Potentially. Our U.S. economist, Lorena Irucci, who's often on Bloomberg, as you know, she has the probability of a hike following Jackson Hole at about 50%, and the market is pricing maybe a hike of 70%. So the bigger question is, is this going to move markets, whether we get a small hike or not? I think we tend to overestimate the impact of the Fed when we have $ 3 trillion, $ 1 trillion a year expected of annual spending for the AI trade. And when corporate earnings are growing, S & P earnings are growing at 30%, 50% if you add the special adjustments. So, Caroline, I would say sometimes you just overthink the role of the Fed in the macro economy and in S & P earnings. 00:04:08 Speaker 4: Sebastian, what is the I don't know. What is the AI trade today in the marketplace? Where do you think we are in the evolution of investors thinking about AI? 00:04:19 Speaker 2: You know, Paul, I don't know when you covered T. Rowe, how many analysts we had, but we had over 300. Across our platform, our analysts published 10,000 research notes a year. They do 4,000 CEO meetings. It's one of the top research platforms in the world. End of discussion. in our investment meetings is about the, your question, the definition of the AI trade. Where are the bottlenecks? The bottlenecks are moving. The AI trade itself is quote unquote broadening. It's not just CPUs or it's memory, it's cooling systems, it's the electrical grid, it's even in some ways aerospace. And even in some small companies that end up producing this little golden component, right? This little piece of the supply chain for AI that becomes a bottleneck. And all of a sudden those stocks go vertical. So studying, understanding the AI trade, where the bottlenecks are moving is a big role for fundamental analysts. Now, the bottom line, when we look at all of it, is that the AI trade continues. You just need to be, and I hate to say it because it sounds like a cliche, but you do need to be selective in how you play the AI trade. 00:05:42 Speaker 7: Yeah, okay, selective. 00:05:44 Speaker 6: I mean, and you're also very hopeful about the next quarter in terms of earnings out of the U.S. I really have to flip the narrative because when I sit in Europe and I'm in London anchoring A lot of it is about the difficulties, the pressure that European businesses are under to grow. I come to New York. I'm energized. Businesses are growing. What are you thinking about this quarter and the strength of earnings that we're going to see? I mean, expectations are higher now. 00:06:13 Speaker 2: You know, it's the same on our asset allocation committee. Our colleagues dialing in from Europe tend to be a bit more bearish and worried about, I think the big risk for Europe is just the energy prices and the sensitivity of the economy to the energy prices because you don't have this massive AI CapEx cycle. But the valuations ultimately are more attractive relative to the US. We land in our asset allocation committee neutral between Europe, maybe slightly underweight and we add a little bit more to emerging markets equities because believe it or not, emerging markets are now a way to play the AI trade, maybe a cheaper way to play it as well. But we see the exact same distinction between the mood in New York City and London. And a lot of it has to do, you look at oil prices with this energy. I don't want to say an energy shock, but it's been quite a while with elevated oil prices. And this will have more of an impact on energy dependent economies. 00:07:16 Speaker 4: Sebastian, I see the Russell 2000 up 17, 18 percent this year, kind of beating the S & P 500. Is this a prolonged outperformance period, do you think, for small and mid-cap stocks? 00:07:27 Speaker 2: We like the broadening trade. We've been long the small and mid caps for over a year. There is a convergence in the earnings growth at some point between small and mid caps and large caps. You do have an economy in the US to the prior question that's growing at maybe 6% nominal. That's decent growth impulse for small caps. Small caps are also now participating in different ways in the AI trade. There are lots of opportunities to differentiate between stocks for skilled active management. And the valuation, well, if you look at the S & P 600, which has the companies that are generating positive earnings, that index relative to large cap in terms of its price earnings ratio is still in the bottom 30%. of its long-run historical range. So you have a valuation advantage. And while small and mid-caps are participating increasingly in the AI trade, this golden component, for example, it is clear that when markets sell off on AI news, counterintuitively, because you think of small and mid-caps as more cyclical, they actually do better. There's a sort of a diversification aspect to being long, small, and mid-cap in a world that is essentially AI on and AI off. 00:08:49 Speaker 4: Sebastian, thanks so much. We always appreciate getting a few minutes of your time. Sebastian Page, he's co-head of global investments and CIO of this massive financial complex down there in Baltimore, Maryland. That'd be T. 00:09:01 Speaker 5: Rowe Price. 00:09:04 Speaker 7: Stay with us. More from Bloomberg Surveillance coming up after this. 00:09:15 Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube. 00:09:28 Speaker 4: In our studio right now, we're joined by Kelly Kowalski, head of investment strategy. I'm going to take that back. Let's try this. 00:09:33 Speaker 2: Yeah. 00:09:33 Speaker 4: Head of investment strategy, mass mutual. I got that right. Kelly, thanks so much for joining us here. We heard last week From Jackson. 00:09:41 Speaker 3: Hole, Wyoming. 00:09:42 Speaker 4: I was not there, but all the big players were there. We heard from our Fed chairman, Mr. Warsh, his thought on rates, on inflation, on this economy. Did he do enough to kind of give the market a sense that he's kind of with the market, he gets it? Well, good morning, Paul. 00:10:00 Speaker 3: Thanks for having me. I think what's interesting about his comments last week is that he spent a lot of time critiquing forward guidance, and yet the market took his comments as forward guidance. And now we're staring at a two-thirds probability of a hike in September. And I think he set himself up and really put himself in a position because going into that speech, You didn't want to sound too dovish, right? The long end's already been selling off. We know how Secretary Besant feels about that. And now we're set up, markets are going into September, pricing a hike. So I think he's a little bit backed into a corner, depending on what happens with the jobs number Friday, depending on what happens with CPI next week, where if you don't hike, again, you risk sort of that July 2.0 and more sell-off in the long end. 00:10:49 Speaker 6: What do you make of the scale and the speed of the bond market sell-off so far? 00:10:56 Speaker 3: I think that's an important point because rates moving up at a more measured pace is obviously more digestible for equity markets. And we are coming from a point of multiples have already sort of compressed in equity markets. And the way we look at it as you really can't rely on multiples to get more of your gains going forward just because of uncertainty around terminal values and AI. But certainly we're in an uncomfortable zone for yields, you know, sort of that four and three quarters to five percent. And it's going to be hard. We're going into a seasonally difficult month of September for equity markets to really get their footing. And it's really a tug of war between earnings and interest rates right now. 00:11:39 Speaker 4: So on that earnings front, boy, you get to argue earnings have more than done their job. I mean, coming through the first half of this year, how do you think about the back half into next year as a risk. 00:11:49 Speaker 3: I think that's a good point. And looking at sort of, we got Dell and Palo Alto yesterday, which were great and some great data points, I think, on agentic AI that investors should pay attention to. But you make a really important point because of sort of the, it's a deceleration, right? We had earnings growth this year that you expect coming out of recession. And that step changed down to sort of a low teens earnings growth. How do markets wrap their arms around that after just so many blowout quarters? So I think it's going to be a grind in the next few months and looking into next year. And again, it's got to be earnings driven versus sort of multiple expansion. 00:12:28 Speaker 6: What do you make of the AI story right now? I mean, we heard from Jensen Wong this week speaking to Bloomberg. Now there's this hugging face deal. What would you think of that kind of deal? Is this a new step by NVIDIA? 00:12:44 Speaker 3: I think we got to think about the AI and sort of phases and where the demand is coming from, right? A lot of the compute demand was coming from training previously. Now it's coming from inference. If you look at sort of what Dell said yesterday, they made some very important points. They said that inference tokens are going to grow by 87 times through 2030. They said that enterprise agentic workloads are going to be the largest workloads into 2028. So this adaption, I think, of agentic AI is driving sort of new trends in the types of compute, the types of equipment that are needed. So I think that, you know, we're in a structural bull market for compute demand, and we're only seeing, you know, indicators that it's continuing and growing stronger. 00:13:34 Speaker 4: What's the best value out there for you guys right now? Stocks, bonds, commodities. What are you guys most excited about? 00:13:39 Speaker 3: So we're primarily bond investors. And MassMutual, $ 300 billion general investment account, primarily investment-grade bonds. Challenges, nothing's cheap. 00:13:51 Speaker 6: Yep. 00:13:52 Speaker 4: I mean, you just got a flood of investment-grade bonds coming out of the technology space. Did you pick up the phone call when the banks were calling you guys? 00:14:00 Speaker 3: We're taking a very patient approach to sort of the AI trade, especially in debt markets. Because if you think about sort of investing in AI from a debt versus an equity standpoint, right, you're getting all the upside in the equity trade. And in debt markets, there's only downside or getting your principal back. So I think we're being very patient about that. But overall, spreads are tight, excluding sort of the hyperscalers. And if you look on a long-term basis, you're not getting paid for going down in quality. You're not getting paid for taking longer credit risk. So we're favoring sort of more short, intermediate, looking at some private market opportunities. 00:14:37 Speaker 8: But it's still. 00:14:39 Speaker 3: An environment, I think, to be selective and judicious, especially with the AI trade and more issuance certainly coming. 00:14:46 Speaker 4: 30-year SpaceX debt. The bid's like 87, 88 here. 00:14:50 Speaker 2: I don't know. 00:14:51 Speaker 4: Maybe take a bid there. 00:14:52 Speaker 2: I don't know. 00:14:53 Speaker 4: Kelly Kowalski, appreciate it. Head of Investment Strategy at MassMutual.com. 00:14:58 Speaker 7: Stay with us. More from Bloomberg Surveillance coming up after this. 00:15:09 Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. 00:15:15 Speaker 2: Eastern. 00:15:16 Speaker 1: Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube. 00:15:22 Speaker 4: Let's get back to these markets. Frances Donald joins us. She's the chief economist at RBC, the Royal Bank of Canada. Frances, we were just talking about oil, energy broadly defined. The prices are higher. There is supply presumably coming online out of Venezuela. How do you think about the impact on inflation when you back out energy and just trying to get a sense of what the core inflation is out there in the economy? 00:15:48 Speaker 8: It's such a great question, Paul, because so much of the inflation conversation has been focused around energy. Well, energy is a problem with U.S. inflation, but it's not The problem, in fact, I have this chart pack. It's got about 15 charts on inflation, and they're all either stuck or going in the wrong way. Whether you look at inflation from the acycle versus cyclical, both are going in the wrong way. Demand-driven versus supply-driven, both are going in the wrong way. And to give you a sense that this isn't just an energy story, 50% of the items in the CPI basket are running above 3%. probably with more to come. There's still food inflation in the pipeline. There's more tariffs for the Americans to deal with. There is energy that doesn't seem to be going away. So as much as we're not talking about catastrophic pandemic era type of inflation, in the past two to three months, inflation is not working in the Fed's favor or in the favor of the American people. 00:16:45 Speaker 5: Yeah. 00:16:47 Speaker 6: In terms of the data that we've got coming, the marquee event will be non-farm payrolls on Friday. The ADP numbers this morning, U.S. companies adding 38,000 jobs in August. Are we overestimating the strength of the U.S. jobs market? August, as Anna Wong here at Bloomberg has pointed out, is typically a slightly softer month. What's your expectation for Friday? 00:17:15 Speaker 8: Typically, if I were preparing for an interview like this or answering that question, I would tell you how much job creation we think is coming through. Basically, I had to look it up last minute. 16,000 jobs is what we think is going to be created. But that's an afterthought to me now when I think about the job market because we're looking at the unemployment rate, which we expect to stay at 4.1%. This is an incredibly tight labor market, and it is no longer being measured by job creation. That's not the meaningful gauge of labor market health anymore, in large part because we are just losing supply. We're losing supply across the gamut, but particularly amongst retirees. And so the challenge for the U.S. job market is not to create jobs, it's to make sure it has enough workers. And we see this across a range of indicators. Initial jobless claims are doing just fine. Only 25% of unemployed job seekers were permanently laid off. This is in many ways we would have traditionally characterized a healthy labor market. I'm actually going to say it is a new labor market. that is changing every single month. So we are expecting to see what we've always seen. Health care is going to drive, the unemployment rate is going to stay low, and job creation is going to slow as the break-even rate remains around 20K. That will be enough for this U.S. job market to stay very tight. 00:18:42 Speaker 4: Average hourly earnings on an annualized basis, 3.1%. Is that good enough, Francesc? 00:18:51 Speaker 8: For many Americans, it is not good enough. You know, there's been a lot of discussion about is this K-shaped economy still a thing? I know we're tired of talking about it, although two years ago it seemed like a brand new concept. 00:19:03 Speaker 7: Look at the only. 00:19:04 Speaker 8: Chart that's actually doing much worse and dragging downwards, and that's consumer confidence. And consumers are consistently saying that the cost of living is still a very serious issue and that wages are just not keeping up with that perception of being able to move ahead. So you did hear Fed Chair Walsh talk a little bit more about how wages are less of a good indicator of future inflation. But certainly you're not going to see a downward move in services inflation in the United States with a labor market that is this big. 00:19:37 Speaker 1: Tight. 00:19:38 Speaker 8: So the wages story is one I'd be keeping a very close eye on and I think is contributing not just to the narrative around inflation, but also the American psyche and where consumers are heading next. 00:19:49 Speaker 4: Francis, you're based up in Canada. 30 seconds left. I'd love to get your thoughts on what folks are thinking about tariffs now. 00:19:57 Speaker 8: Canadians are pretty galvanized. A new wave of buy Canadian, diversify exports. Canadians feel like they can create the playbook for how to deal with a trade war, and they're doing a pretty good job. The economy just posted 3.3% growth for the second quarter. Job creation is strong. Exports are being diversified. So, yes, Canada hugely dependent on the U.S. 00:20:20 Speaker 6: The U.S. 00:20:21 Speaker 8: Hugely dependent on Canada as well. Most important trade partners between the two of them. But Canada might be holding its own, heading into a pretty sizable investment summit in two weeks. 00:20:31 Speaker 4: Very good, Frances. Thank you so much. Appreciate getting the on-the-street kind of feel from what's happening up there in Canada, as well as overall economic conditions. Frances Donald, she's the chief economist at RBC, the Royal Bank of Canada. 00:20:44 Speaker 7: Stay with us. More from Bloomberg Surveillance coming up after this. 00:20:56 Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. 00:21:08 Speaker 4: Some guess you can really go 30,000 feet with the view. And that's certainly the case with our next guest, Jay Pulaski. Founder of TPW Advisory. Before that, he was at Morgan Stanley. 00:21:20 Speaker 2: Let's be honest, folks. 00:21:21 Speaker 7: Jay peeked. 00:21:22 Speaker 4: In 1981 when he graduated from Duke University, and he's been trying to hold it together since then. Jay, thanks so much for joining us. We always appreciate getting a few minutes of your time. Jay, we've got seemingly higher interest rates here. Now, for you, you can go back to when we traded at these rates before, but for a lot of folks in this market, they're not used to trading stocks with a 10-year at 477, 480, pushing up to 5%. Talk to us about how you're framing out this market today. 00:21:50 Speaker 5: Well, thank you for that introduction. And I thought I was going to escape the Duke reference, given that Tom is off. But thank you for thank you for that. It is football season, and we are excited about Duke football. And we're still pretty excited about the markets and think that really, from our perspective, as you said, 30,000 feet, we are believers in what we call the TPW, or Tripolar World Spending Supercycle, which means Asia, Europe, and the Americas are all spending at the same time on AI, on defense, and on climate And that is leading to what we call a global growth long cycle, which is pushing up developed market, in particular, developed market sovereign bond yields, as you just noted. But it's also leading to a global earnings boom. And that's really the key driver for stocks. So to get to your question specifically about bonds and trading at 478 or whatever, you know, one of the things I think is pretty interesting, and I looked this morning to make sure this is right, the 10-year yield in the U.S. is up a whopping five basis points over the last month. Five, not 50, five. And so I really think we need to put it in perspective a little bit. And the perspective is that we are in a normalization phase for interest rates in the developed economies, particularly in Japan, which is exiting deflation. So you would think and hope rates would go up. We're not worried about rising rates at all. And neither are Japanese equities, by the way, if you look. And in the case of the United States, we're in the trading range that we've been in for years between like four and five percent. If we get above five percent, that's going to be probably a buying opportunity. And to just finish, we have not owned a U.S. Treasury bond in our model portfolio in four years, four years. And we are thinking about it today. 00:24:05 Speaker 6: Yeah, I love your phrase, an omnivorous algo-driven market with shorter, sharper drawdowns on the equity markets. Okay. In terms of the market, though, the other major change really is Besson and the Treasury intervention. I mean, with Besson and Walsh maybe working to protect the long end, which is something that you also mentioned, what tools do they really have to do that. Is there a scenario where they can really succeed on rates and do you get a disorderly dollar decline as a result? 00:24:43 Speaker 5: Well, I do think it's interesting to pick up on that last point that, you know, with this backup in interest rates, the dollar has done nothing, right? The dollar is actually weaker. So that suggests that the yields at this level are still not really driving foreign interest. And I think that's a real issue. I think the ownership of the Treasury market, which we've written about extensively, has changed. It's no longer foreign central banks and reserve managers who hold for long periods. It's now increasingly hedge funds who are the opposite of a long-term holder. And I think that is something to consider. Regarding Besant Warsh and the U.S. policy mix, I think to be charitable, it's confused. You look at the Iran war and you look at the 10-year bond yield. The two, when Iran started, the bond yield was considerably lower than it is today. So there's a direct... tie-in between the Iran war, the price of oil, inflation concerns, and long-duration backup and yield. And so, as the U.S. continues to percolate in Iran, that's a problem for bonds. You have a kind of discontinuity between Fed Chair Warsh, who wants to let the market tell people what's happening with inflation and interest rates, versus the U.S. Treasury Secretary, who is intervening in the exact same market. So there's confusion, I think, as I say, between the policymakers in the U.S., and the market sniffs that out and presses against it. And as you say, what weapons do they really have? Well, you know, arguably, they have a lot of weapons, but the market is pressing the Treasury Secretary, I think, in particular, to demonstrate some more of that action. And as you note, over the last couple of days where he's spoken extensively, he's now backing off from his more aggressive commentary a few weeks ago. and true in Iran as well, economic D-Day. was like a two-day phrase. And so I think your point is well taken. If the US government wants to hold a line in the sand at the long end of the US Treasury curve, it needs to be much more aggressive. And will that happen? I would be surprised, frankly, if it does, in part because I don't think we need to go to those levels. I don't think the inflation picture in the US is that worrisome. 00:27:25 Speaker 4: Jay, to the extent the market's testing Secretary Besson, arguably you can say that the market is also testing Fed Chairman Warsh. He had his speech in Jackson Hole last week. What did you take away from that? 00:27:37 Speaker 5: Well, I think he was much clearer than he had been. I think he got the message from the feedback, which is a good thing, right? I mean, just paying attention. The first couple of comments from him or talks were not really well received and i think he cleared up a lot of that made it very clear what the uh what what they're looking at uh very clear about their objective very clear about how they measure that objective and now it's uh you know it's again uh kind of time to uh put up or shut up. And we'll see how the data unfolds, particularly in the jobs market, and I think also in inflation print before the next Fed meeting. And that will dictate a lot of what the Fed decides to do. And let's remember, it is a committee decision. not the chair decision alone. And at the moment, I think the market's probably right in pricing a better than 50% chance that there will be a rate hike. Whether that's the start of many rate hikes is a different story. And again, if you look at core inflation, that excludes the energy impact from Iran, it's not all that worrisome, nor is the wage picture. 00:28:51 Speaker 4: Jay, always a pleasure chatting with you. Jay Pulaski, he's the founder of TPW Advisory. They see it all across markets. 00:28:59 Speaker 1: This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 7 to 10 a.m. Eastern, on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.