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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business app. We beginning our Solf story,
Speaker 2: another heart set that expected inflation print pushing gat rate
Speaker 2: cut bets ahead of next week's Fed decision. John Stolfus
Speaker 2: of Oppenheimer still expecting the end of free money to
Speaker 2: come to a close. Quote for those of us who
Speaker 2: began our careers when ten year treasury yields, corporate yields,
Speaker 2: and mortgage rates were at double digit levels, the phrase
Speaker 2: none of me thanks or none for me thanks comes
Speaker 2: readily to mind. Should the Fed cut rates too early?
Speaker 2: In place to say that? John joins us. Now, John,
Speaker 2: we talked about the scentsif snackflation. Do you Smeuth the
Speaker 2: sensive snackflation.
Speaker 3: I think it's a little too early to call that, John.
Speaker 3: I think a couple of hot numbers in terms of
Speaker 3: hotter that expected numbers in terms of inflation in the
Speaker 3: process of a fed fud's pipe cycle that has been
Speaker 3: remarkably sensitive to its effects on the economy just tells
Speaker 3: us this is part of the bumpingness to get coming
Speaker 3: out of where we have been going into a sustainable
Speaker 3: economic recovery at moderate pace with what is the equivalent
Speaker 3: of full employment three to four percent unemployment.
Speaker 1: There is one takeaway though from some of the price action, John,
Speaker 1: and it's that all the hopes and dreams of a
Speaker 1: broadening out in the rally seem to die when we
Speaker 1: have the idea of rate hikes to laid deferred or
Speaker 1: put off indefinitely. Really, that has been the takeaway for
Speaker 1: me is that this week, when people were worried about
Speaker 1: fewer rate cuts or even no rate cuts, you saw
Speaker 1: the equal weight underperformed dramatically the S and P.
Speaker 2: Five hundred.
Speaker 1: Do you take away something about that in terms of
Speaker 1: how vulnerable that trade.
Speaker 4: Is too short a period to take away you know
Speaker 4: and think that this vulnerability does not exist.
Speaker 3: It certainly does exist. But at the same time, we're
Speaker 3: headed in the right direction from what we can tell,
Speaker 3: and you've got just extraordinary times when it comes to innovation,
Speaker 3: the resilience that's seen by business in the latest earning
Speaker 3: season for the S and P five hundred with earnings
Speaker 3: up close just under eight percent, revenue growth about four percent. Sorry,
Speaker 3: and with that, you know, four sectors double digit earnings growth.
Speaker 3: And not all tech things are good. It's just that
Speaker 3: they're not as great as people would like to see.
Speaker 3: We're not there yet. You know, we're in the car.
Speaker 3: Are we there yet?
Speaker 1: Not yet? Okay, So you're waiting for the there to happen.
Speaker 1: You're not waiting for the stiflation to happen. And I
Speaker 1: guess what's the line between the two, Because ultimately, what
Speaker 1: we did see yesterday, our minds have to kind of
Speaker 1: go to the ciflation point, like John was mentioning, given
Speaker 1: the fact that we saw inflation come in hotter than expected,
Speaker 1: retail sales come in lighter than expected. When do we
Speaker 1: start to get some sort of definitive read on which
Speaker 1: it is. Is it the strength or is it the slowdown?
Speaker 3: It probably it probably comes from a combination of both.
Speaker 3: It's the combination of the resilience with the slow and
Speaker 3: because you've got the FED, I mean, in the last
Speaker 3: two years hasn't been on holiday. It's been involved, you know,
Speaker 3: bringing down the rate of inflation. But inflation is an
Speaker 3: insidious thing. The other thing I think that we're waiting
Speaker 3: to see, and it's beginning to happen in food. We've
Speaker 3: seen it in some aspects in clothing, not really yet
Speaker 3: in rents. But is competition competition, you know, when you
Speaker 3: go into inflation. Originally, those who experience height input costs,
Speaker 3: they eat the inflation, don't pass it on. Then once
Speaker 3: everybody knows inflation is weird, its ugly head, they pass
Speaker 3: it on to their customers. And then once the FED
Speaker 3: does what it's supposed to do and begin to have
Speaker 3: some significant success, then suddenly those that originally eat the
Speaker 3: inflation then pass it on, hold on passing it on
Speaker 3: for a bit longer so they can make up for
Speaker 3: the losses at the beginning of the cycle. And then
Speaker 3: somebody says, hey, you know what, I think I can
Speaker 3: sacrifice my unit a price and maybe make it up
Speaker 3: in volume. And that is what we're waiting to see.
Speaker 3: And right now, I think it's a good thing that
Speaker 3: the consumer, based on those consumer set of IT indices,
Speaker 3: shows that they are beginning to think genuinely inflation will
Speaker 3: be here for longer. Indeed, it may be very well,
Speaker 3: but at the same time, the direction of the growth
Speaker 3: of inflation is on the way down, and that's where
Speaker 3: we see the op tunity remains in the equity market.
Speaker 2: So, as Emory pointed out, look out for you mentioned
Speaker 2: a little bit later for consumer inflation expectations, John, I
Speaker 2: want to look ahead to next week a risk factor
Speaker 2: in the near term, and you could talk to me
Speaker 2: about how big a risk this is. Is it that
Speaker 2: median dot in the FED projections comes down from three
Speaker 2: to two. Is that a big deal to you, given
Speaker 2: that this market has gone from seven to three and
Speaker 2: equities are still close to all time heighs.
Speaker 3: I don't think it's a really big deal. I think
Speaker 3: the Feds, it's not just the Fed's hard is in
Speaker 3: the right place, but the general tone of FED speak
Speaker 3: is very much aware of what is going on. It's
Speaker 3: into this idea. Well they won't say it, but it's
Speaker 3: going gently into that good night, you know, in this case,
Speaker 3: in the sense that they are very sensitive to what
Speaker 3: is the essentially the mandate of the FED, which is
Speaker 3: to produce an economy that grows at a sustainable pace
Speaker 3: without horrible inflation, with manageable rates of inflation. And then
Speaker 3: when it comes to employment unemployment as defined by somewhere
Speaker 3: between three and four person unemployment, and it looks like
Speaker 3: they're doing the job. And I don't think Powell and
Speaker 3: his FED wanted to be have a legacy of either
Speaker 3: cutting too soon or staying staying at the high levels
Speaker 3: where we are now relative to where we were before
Speaker 3: for too much long. That said, we continue to think
Speaker 3: it's a second half of the year when we see
Speaker 3: the rate cuts happen. We never expected the five to
Speaker 3: seven that others were. We always thought it would be
Speaker 3: likely one to two, perhaps three, which is what the
Speaker 3: FED had initially intimated towards the end of last year.
Speaker 2: You've been outspoken about that, John, I just want to
Speaker 2: finish out by talking about sectors and what you like
Speaker 2: in the equity market. I know you like cyclicals over defensives. Now,
Speaker 2: traditionally defensives would include things like healthcare. Now healthcare has
Speaker 2: this GLP one element to it which makes it almost offensive.
Speaker 2: It's where a lot of money is going in this
Speaker 2: bull market at the moment, John, what is defensive to you?
Speaker 3: The defensive would be consumer staples, the utes, a significant
Speaker 3: portion of healthcare outside the weight loss drugs, and some
Speaker 3: of the the the offsets that come to that, or
Speaker 3: rather the additional things that come with that related to
Speaker 3: perhaps what can what can be done against the heart
Speaker 3: attacks and things like that with the same drugs. But
Speaker 3: we can't help but think that you want to be
Speaker 3: you want to be in technology, consumer discretionary industrials, financials UH.
Speaker 3: And we're gaining the addigital exposure to materials here. And
Speaker 3: it just looks like people are looking at the world
Speaker 3: and thinking China may be having real problems that it
Speaker 3: still has to address, but the rest of the world
Speaker 3: is in a process of normalization where we're in a better,
Speaker 3: better situation. We're leaving the emergency status of the world
Speaker 3: economy UH and in that process moving towards a more
Speaker 3: stable environment. Now that doesn't mean anything can happen that
Speaker 3: would counter that. Okay, So you have to be diversified,
Speaker 3: and you have to know what you own, why you
Speaker 3: own it, and have light sized expectations you can't get
Speaker 3: too gaga over the market here. You have to be
Speaker 3: you know, that's why our target. We're only one percent
Speaker 3: away from our year end target now. And you know
Speaker 3: we people were asking us through most of the first quarter,
Speaker 3: why don't you raise your target? Well, when we started
Speaker 3: out in December, we showed we were indicating thirteen percent upside.
Speaker 3: We just didn't relox like how fast food we're going
Speaker 3: to move?
Speaker 1: John to that point, are you going to upgrade your forecast?
Speaker 3: Ah, we'll have to see. At Lisa, I'm looking at
Speaker 3: all this stuff you're looking at and John's looking at
Speaker 3: and when I think of it, we've got to give
Speaker 3: a consideration. But I must say, from where we're sitting
Speaker 3: here today, it would seem like the likelihood of being
Speaker 3: forced to raise might be necessary after all these bears
Speaker 3: of suddenly gotten under the bull case. But they're talk
Speaker 3: Some of these guys are talking out of both sides
Speaker 3: of their mouth, you know, stagflation. Other people within their
Speaker 3: groups saying, oh, it's going to go higher. I don't know.
Speaker 3: I try to avoid the noise, to separate the signal
Speaker 3: from the noise.
Speaker 2: H John, appreciate your time. I think there was a
Speaker 2: diplomatic way of dancing around that question and answering yes,
Speaker 2: maybe perhaps at some point in the next couple of days,
Speaker 2: Sarah Hunt of Outpine Saxon words right in this there
Speaker 2: is a tension between the idea that not cutting rates
Speaker 2: means financial conditions will passively tighten if inflation continues to
Speaker 2: wend its way lower, and concerns that when there's enough liquidity,
Speaker 2: the conditions are still too loose. Sarah and place to
Speaker 2: say it joins us. Now, Sarah, what do you think
Speaker 2: of that data? PPI upside surprise, CPI upside surprise. How
Speaker 2: does it change next week's FED mating?
Speaker 5: It's going to be interesting because I agree with the
Speaker 5: guests that you've had on earlier in which you guys
Speaker 5: have been talking about the FED wants to cut right.
Speaker 5: They're looking for an excuse to cut because they don't
Speaker 5: want to get to the point where they're passively tightening
Speaker 5: as opposed to you know, they don't want that to happen.
Speaker 5: But I think that this data was not does not
Speaker 5: give them any help in that the odd I mean,
Speaker 5: they could just sort of ignore it and say, well, yes,
Speaker 5: we're looking at other things. To your point, memory that
Speaker 5: you know, we're going to look for the PC. We're
Speaker 5: not using this, but I think that it makes it
Speaker 5: a little bit tougher for them to do it on
Speaker 5: the timeframe that they were looking at. If this had
Speaker 5: been a more benign number, I think you would have
Speaker 5: seen that may call come back, and I think, I mean,
Speaker 5: I don't think anyone was looking for anything in March,
Speaker 5: so they may just not say a whole lot about it.
Speaker 2: But we'll see.
Speaker 5: I mean, it's going to be interesting to see what
Speaker 5: they say.
Speaker 2: Should jompless claims make them comfortable or should retail sales
Speaker 2: make them uncomfortable? Yes, yes too, yes to both.
Speaker 5: I mean, and that's the problem, right, because we keep
Speaker 5: getting these different pieces. The labor market has stayed stronger.
Speaker 5: You know, in December when they pivoted, one of the
Speaker 5: things that they that char Pal said was we now
Speaker 5: see the risks as being balanced between inflation and a
Speaker 5: labor market, whereas before that everybody like they're going to
Speaker 5: try to kill the labor market. So I think that
Speaker 5: the fact that we are seeing still good labor, they
Speaker 5: really don't want to put the country into a bad
Speaker 5: labor market. They don't want to do that, So that's
Speaker 5: going to be helpful, but it's just the other data
Speaker 5: was just not that great.
Speaker 1: It strikes me in some of my conversations that just hypothetically,
Speaker 1: some people might be very bored with the muddle because
Speaker 1: it's been muddle for quite a while. What does a
Speaker 1: board trader do given the fact that we've got a
Speaker 1: lot of them, Well.
Speaker 5: They probably take out too many leverage bets that come
Speaker 5: back to bite them.
Speaker 3: I don't know.
Speaker 5: I mean, this is the problem of having the non
Speaker 5: directional you were asking earlier on the FX trade, like
Speaker 5: we're looking for someone's looking for a big directional trade.
Speaker 5: We have these little incremental moves where the moves are incremental,
Speaker 5: but the zeitgeist swings from oh my god, we're going
Speaker 5: into recession to oh, the economy is so great, we
Speaker 5: don't have to cut rates. Mean, there's been a lot
Speaker 5: of moving back and forth, but it's the same from
Speaker 5: the same two places, and that does tend to get people.
Speaker 5: You know, you can't quite figure out what's going on.
Speaker 5: If people are not worried about rate cuts being pushed
Speaker 5: out because the economy is good, well that's great for
Speaker 5: the market that they're getting pushed out because.
Speaker 2: Inflation is bad. That's bad for the people are so spoiled.
Speaker 2: The fact that people are bored. We've just had an
Speaker 2: all time high in Japan, haven't seen one since nineteen
Speaker 2: eighty nine. I've had records in Europe. Record state side,
Speaker 2: we've got two huge bull markets taking place, one in
Speaker 2: Ai another in GLP. Once I understand that they want more.
Speaker 2: We always want more. But seriously, some of the levels
Speaker 2: we've here in the last few months have been pretty incredible.
Speaker 1: Yeah, but they haven't been a street shot up. It's
Speaker 1: been basically and it hasn't been with any.
Speaker 2: Convintions feby alone. Yes, we had two if the biggest
Speaker 2: single day market cap gains on single names in the
Speaker 2: history of this stock market.
Speaker 1: But has it been because people are just plowing in
Speaker 1: and just so excited and looking for their upside surprise
Speaker 1: or is it because basically it's just been the story
Speaker 1: that keeps on giving. You've won by not shifting around
Speaker 1: your portfolio at all, which is hard to do.
Speaker 2: That's why they're bored, because they're waiting for the rotation
Speaker 2: that hasn't developed in the way they wish it was.
Speaker 2: I mean, we caught up with Seaburn Mandy Zoo earlier
Speaker 2: this week, and she said they're positioning upside by US,
Speaker 2: upside by some way light on WALP smow caps right
Speaker 2: that board. Because the same things keep winning, should they
Speaker 2: start to get used to the same things winning all
Speaker 2: the time or is that going to change sometime soon?
Speaker 5: Well there's also the issue of you know, the same
Speaker 5: things are winning, but that then echoes a lot of
Speaker 5: other market bubbles and people start worrying about a market
Speaker 5: bubble too, So there's that problem as well. I think
Speaker 5: to the extent that the AI stocks are winning, there
Speaker 5: is a they're really making money. There's actual cash flow there.
Speaker 5: This isn't a group of stocks that is running on
Speaker 5: a promise, right, It's running on some actual results.
Speaker 2: So there's that So I.
Speaker 5: Think that that is say sticky.
Speaker 2: But on the other.
Speaker 5: Side, there is some concern that you're seeing these big
Speaker 5: run ups in things like the glpeople there's but there's
Speaker 5: real money there. But then what happens to the rest
Speaker 5: of the market. And there's a lot of parts of
Speaker 5: the market that haven't been participating.
Speaker 1: Including energy to some degree. And I know that you
Speaker 1: are bullets and energy, and then you pulled back a
Speaker 1: bit we're seeing this rally though that's pretty persistent. We're
Speaker 1: seeing oil prices at the highest levels going back to November,
Speaker 1: and this idea that maybe supply can't keep up finally
Speaker 1: with demand after a pretty strong have you shifted your
Speaker 1: view on a not j well?
Speaker 5: Still to your point also earlier, there is still excess
Speaker 5: supply out there right because they're still being oil held
Speaker 5: off the market. The question is it's moved up, and
Speaker 5: it's moved up in a quiet way, so the stocks
Speaker 5: haven't really caught up, so there's value in that trade
Speaker 5: right now. The question becomes, does this problem that's going
Speaker 5: on with transportation, because it's still a problem. They're still
Speaker 5: seeing that issue going through does that change because if
Speaker 5: it doesn't change, then you can see tighter markets and
Speaker 5: you're seeing them right now. And that move up hasn't
Speaker 5: been a convulsive move up. It's been like that incremental
Speaker 5: you know, it's if it's a spider move up.
Speaker 6: So it's kind of crazy that we're all excited potentially
Speaker 6: about a Breton crude move in the eighties and there
Speaker 6: is literally a hot war in the Middle East and
Speaker 6: you have Husi's still striking vessels. They're the red seat
Speaker 6: in the Gulf of Aden. I mean, how high could
Speaker 6: you see oil prices actually go?
Speaker 5: Though, Well, I think so right now you've seen the
Speaker 5: problem that that's causing, which is higher transportation costs in
Speaker 5: longer transportation times. But it hasn't hit production. It hasn't
Speaker 5: hit something like right now. That's staying within a frame
Speaker 5: work that is not problematic for the fields themselves. It's
Speaker 5: problematic for transportation. If that changes, I think you could
Speaker 5: see bigger moves because then you don't know where you're
Speaker 5: where the supply is going to come from. Right now,
Speaker 5: supply is not so much the issue.
Speaker 2: So we've got these two risk events on the calendar,
Speaker 2: the Federal Reserve in June because that's when this rate
Speaker 2: cut is going to happen. Now most people agree, And
Speaker 2: then you've got this election in November, and people just
Speaker 2: sort of look at it the calendar and say, it's
Speaker 2: out there somewhere. I don't need to think about it
Speaker 2: right now. Do they need to think about it right now?
Speaker 5: I think the difficult thing is that there is such
Speaker 5: a long period of time and that there's this expectation
Speaker 5: that any number of things could happen, and so that
Speaker 5: it's hard for anyone to pin it down, and that
Speaker 5: any changes either on the global stage or other places
Speaker 5: could shift things one way or the other. So deciding
Speaker 5: today what you think the outcome is going to be
Speaker 5: in acting on that is quite difficult, I think. With
Speaker 5: the FED, you know, there is that expectation that we're
Speaker 5: going to get some rate cuts, but as those dialed back,
Speaker 5: it's not the same as saying, you know, we were
Speaker 5: going to be down two hundred basis points right now,
Speaker 5: was going to change everything. And that's okay, and that's
Speaker 5: great for tech stocks and it's great for fall sorts
Speaker 5: of things.
Speaker 2: But on the other.
Speaker 5: Hand, the fact that you're getting interested on cash is
Speaker 5: a good thing too. So where the FED goes ultimately
Speaker 5: is going to be a big deal. And that keeps
Speaker 5: shifting around too. We keep hearing now north of three
Speaker 5: and a half, maybe it's four percent. There's a lot
Speaker 5: of change that's been going on with both of those things.
Speaker 5: So it's hard to say, yes, let's make a plan,
Speaker 5: and let's make a plan on the basis of this
Speaker 5: X going this way.
Speaker 1: Michael Sharper was just talking about how either way, whoever wins,
Speaker 1: there is going to be this emphasis on trying to
Speaker 1: protect the US security, to protect US workers from some
Speaker 1: of the international competition. Does that feature in what you
Speaker 1: decide to buy, what you think might be susceptible to
Speaker 1: national security claims and real kind of interference on that level.
Speaker 5: I think that really shifted from the beginning of the
Speaker 5: pandemic even to now, because the move was for whatever
Speaker 5: reasons you want to call it was either home shoring
Speaker 5: or onshoing or friendshoring, or however you want to whatever
Speaker 5: terminology you want to use, that says, I need to
Speaker 5: make sure that I have a decent line of sight
Speaker 5: into my supply chain where is because we've had transportation
Speaker 5: issues before, we're now seeing this issue in the Red Sea.
Speaker 5: There's all sorts of things on the international stage, and
Speaker 5: or somebody who was an ally could become less of
Speaker 5: an ally and then all of a sudden they're going
Speaker 5: to threaten not to give me the things that I need.
Speaker 5: So I think that that was already happening, and I
Speaker 5: don't think that either side of the aisle right now
Speaker 5: is pushing in the opposite direction. So I think that
Speaker 5: directionally that's going to continue.
Speaker 1: Has it happened because a lot of people say that
Speaker 1: it actually hasn't happened, and the whole near shoring and
Speaker 1: front shoring was sort of a lot of lip service
Speaker 1: that didn't really come to fruition. Do you buy this
Speaker 1: story that were in the process that is going to
Speaker 1: be naturally inflationary, that's going to build in redundant seas,
Speaker 1: that's going to have legs.
Speaker 5: I think that it's not happening for a variety of reasons.
Speaker 5: There's a number of stories about the Chipsack about why
Speaker 5: that money isn't going places, and there's too many regulations
Speaker 5: and restrictions on that. But I think from a standpoint
Speaker 5: of I'm a corporate CEO, I want to make sure
Speaker 5: I know where my things are coming from. Is it
Speaker 5: going to be a chip plant in the US at
Speaker 5: some point? Probably, But in the scheme of things, I'm
Speaker 5: going to be much more attuned to that than I
Speaker 5: was before, regardless who ends up in the way.
Speaker 6: Now, how does the US talk about friendshoring when they
Speaker 6: want to block a deal from a friendly ally?
Speaker 5: That is a difficult question to answer it and I
Speaker 5: did not block back deal, so I cannot answer it.
Speaker 2: How do you prepare for that? It's almost inflexible. It's
Speaker 2: such a good question, Sarah Hunt vampired saxon words. We're
Speaker 2: seeing this repeatedly. We're dressing things up in language that
Speaker 2: might be palatable for our allies, but ultimately, look at
Speaker 2: the action, don't listen to the words. This is the
Speaker 2: difference between former president talks about America. First, starts talking
Speaker 2: about America first, Everyone's like, whoa America? First? What's this
Speaker 2: about tariffs on China? How dare he? And then here
Speaker 2: we are, same policies, same policies, dressed up in very
Speaker 2: different language, but ultimately same thing.
Speaker 6: National Security in the Wall Street Journal editorial view this
Speaker 6: morning calls it self destruction and they say, regardless of
Speaker 6: Trump or Biden, it's going to be a nasty election,
Speaker 6: but there's going to be policy damage because of it.
Speaker 2: It's the lacest this morning. Treasury selling graft after a
Speaker 2: hotter than expected inflation print, reinforcing beds that the Fed
Speaker 2: is in no rush to kind of interest rates, while
Speaker 2: lower than expected retail cells, leaving in Lincoln of Bemos
Speaker 2: saying this the pace of retail cells during Q one
Speaker 2: hints if the specter of snagflation, although it's only a
Speaker 2: couple of prints and insufficient to draw any broad based conclusion.
Speaker 2: Ian Lincoln joins us, Now for more, and let's get
Speaker 2: into this, is that what we're starting to smell the
Speaker 2: sense of stagflation this year.
Speaker 7: I think that there's a non zero probability that we
Speaker 7: find ourselves in a environment where demand continues to slow
Speaker 7: more and more certain aspects of inflation proves stickier than
Speaker 7: the FED wants to see. And then the big question
Speaker 7: is how does a Fed respond to that?
Speaker 2: What do they do?
Speaker 7: I think they've done a very good job of laying
Speaker 7: the groundwork to cut, not ease, and we're far enough
Speaker 7: into the cycle that they can justify that.
Speaker 2: So if the dual mandate goes into conflict, you think
Speaker 2: they can still kind of interest rights later this year precisely. Okay,
Speaker 2: So here's the question for the markets. The market believes
Speaker 2: now that this Federal Reserve has established a more asymmetric
Speaker 2: approach to monetary policy, that if strong growth comes through,
Speaker 2: they don't have to hike, but if growth weakens they
Speaker 2: can cut. Does it temper their ability to respond to
Speaker 2: adverse shocks of inflation remains sticky? You're saying they can
Speaker 2: still cut. I want to understand by how much are
Speaker 2: we talking about one or two versus say five plus.
Speaker 7: You know, it's interesting because I think it really comes
Speaker 7: down to the composition of inflation and where the stickiness
Speaker 7: comes in. If it ends up being on the supercore measure,
Speaker 7: which is highly correlated with wages, that's a problem for
Speaker 7: the FED.
Speaker 2: If it's housing, if it's all we.
Speaker 7: Are, If it's rent, that's a residual from what happened
Speaker 7: a year and a half ago, and if that ends
Speaker 7: up being the case, then they can easily justify moving
Speaker 7: back closer to neutral if the situation warrants it, and
Speaker 7: what warrants it It certainly isn't a flat GDP print.
Speaker 7: It would have to be well into negative territory.
Speaker 1: Which raises this question what is neutral? And I keep
Speaker 1: going to El Selinos and this idea that she was
Speaker 1: saying maybe neutral in their view is actually north to
Speaker 1: four percent. And that's what we're looking at. The sort
Speaker 1: of rolling ball of cash that's shifting into different areas
Speaker 1: and causing inflation to surge in different places that will
Speaker 1: keep inflationary pressure is higher than they have been traditionally.
Speaker 1: Can you get on board with that?
Speaker 7: I'm very much on board with the notion that neutral
Speaker 7: policy rates are a moving target and it's not a
Speaker 7: single number that will hold indefinitely over time.
Speaker 2: I think that the FED would probably.
Speaker 7: Agree that, because of a lot of the dislocations that
Speaker 7: occurred during the pandemic, that our star was higher over
Speaker 7: the course of the last couple of years. The bigger
Speaker 7: question becomes, what is it like at the moment? Are
Speaker 7: we truly in restrictive territory? The combination of the balance
Speaker 7: sheet rundown and the fact that as year over year
Speaker 7: core inflation numbers start to decline, real policy rates will
Speaker 7: increase really puts the FED in a unique situation and
Speaker 7: one that I certainly don't envy.
Speaker 1: Well, what do you think, I mean, do you think
Speaker 1: that it's restrictive based on the evidence that inflation isn't
Speaker 1: really getting tamped down as much as people expect? And
Speaker 1: sure we got one weaker as an expected retail sales number,
Speaker 1: but you look at the earnings and companies are still
Speaker 1: doing all right.
Speaker 7: So I would say that it was clearly restrictive during
Speaker 7: the second half of last year, which is why we
Speaker 7: saw the progress made on the inflation front. But the
Speaker 7: equity market doesn't believe that it's restrictive, and that's actually
Speaker 7: really problematic for the FED, since overall financial conditions are
Speaker 7: much easier than power would want them to be. And
Speaker 7: that feedback loop to a large extent, is why I
Speaker 7: believe that there is some stickiness in the inflation complex
Speaker 7: at the moment.
Speaker 2: I got two questions. You've kind of alluded to the
Speaker 2: fact that you think he cares about equity markets, but
Speaker 2: bat he talks about financial conditions when we raise the
Speaker 2: fact that equity is a cloister all time highs and
Speaker 2: credit spreads a super tih get people come on this
Speaker 2: program and site. That's not that important to cham and
Speaker 2: Pound anymore. Why do you think it is impultant.
Speaker 7: I think that he's very strategic in the way that
Speaker 7: he chooses to emphasize the relevance of financial conditions when
Speaker 7: they were tighter at the end of last year. It
Speaker 7: was very important because it was consistent with the messaging
Speaker 7: that he was putting forward, which is we're nearing the
Speaker 7: point where we're going to start cutting rates. If the
Speaker 7: FED starts to reintroduce the conversation about financial conditions, that's
Speaker 7: hawkish in this environment. It's not dubvish, and that would
Speaker 7: suggest that while the market seems content to price in
Speaker 7: a June rate cut at this moment, maybe the real
Speaker 7: departure point for normalization is July or.
Speaker 2: Later twenty twenty dollars co for you now trys to
Speaker 2: remark it, what do I do with the longend? You've
Speaker 2: teld me what you think is going to happen with
Speaker 2: a federal serf to some extent, well, that could make
Speaker 2: for the front end of the curve. What do I
Speaker 2: do with a ten year What does that look like?
Speaker 2: In the world that was starting to sense is development
Speaker 2: in twenty twenty four.
Speaker 7: So I would say that we are in a period
Speaker 7: where we might see upward pressure continue to develop in
Speaker 7: the longer end of the curve, but ten year yields
Speaker 7: aren't going back to five percent, And eventually we will
Speaker 7: find ourselves in a situation where inflation does start to moderate,
Speaker 7: and that means break evens will compress, and that means
Speaker 7: that ten year yields above let's call it four thirty
Speaker 7: five or four fifty start to look attractive.
Speaker 1: But we're not there yet, which is really the reason
Speaker 1: why I was going to El Selinos's call, and people
Speaker 1: might say our star neutral rate, my eyes glaze over,
Speaker 1: I don't care. But the idea here is that if
Speaker 1: the overnight rate is more than four percent, it doesn't
Speaker 1: make sense for ten year treasures to be trading at
Speaker 1: four point two seven percent. Currently they would be trading
Speaker 1: at a much higher rate. So at what point does
Speaker 1: this market sniff that out? Since right now there is
Speaker 1: none of that being priced in.
Speaker 7: I would say that logic holds very well for the
Speaker 7: two year sector, and the operative issue is whether or
Speaker 7: not the Fed ever chooses to review the two percent
Speaker 7: inflation target, because even if our star is higher, if
Speaker 7: the Fed is going to get us back to two percent,
Speaker 7: that just means they have to risk greater demand destruction
Speaker 7: to get us there. And so, like I said, I'm
Speaker 7: very very on board with Barish in the front end
Speaker 7: of the curve. Really hard to justify a ten year
Speaker 7: yields at five percent even if our star is one
Speaker 7: hundred basis points higher to put.
Speaker 1: A ball on it. Are you basically saying the biggest
Speaker 1: risk case for next week is for FED chair by
Speaker 1: j Pal to come out and say I care about equities.
Speaker 7: I would say the biggest risk for next week is
Speaker 7: that we all look at the twenty twenty four and
Speaker 7: it says fifty, not seventy five business points worth of
Speaker 7: rate cuts, and that's what triggers a more dramatic beer steepening.
Speaker 2: Andrew Harnenholser said he just published on that. He said,
Speaker 2: seventy five basis points. The medium dot will still imply
Speaker 2: seventy five basis points. Can we have your base case?
Speaker 2: Is it fifty or seventy five? Next week?
Speaker 7: This cases fifteen, this case is seventy five, but there
Speaker 7: is a real risk of fifty.
Speaker 2: Interesting, Thank you, sir, really thoughtful stuff in link and
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