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 Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app. W Yoda of JP
Speaker 2: Morgan writing, we view the upcoming earning season as important
Speaker 2: for the market as we work through downward revisions. We
Speaker 2: have widened our base case range to fifty seven hundred
Speaker 2: to sixty two hundred to reflect increased volatility and uncertainty.
Speaker 2: Abby joined us now for morgod Morning. Gabby, good morning.
Speaker 2: There's plenty of uncertainty, let's put it that way, and
Speaker 2: companies are using different approaches to offer clarity and visibility
Speaker 2: to investors. Southwest was upfront, brutal, direct, We're in recession.
Speaker 2: What do you have an sway?
Speaker 3: Well, so I actually think all we're talking about last
Speaker 3: week and how strong the performance was. And obviously there
Speaker 3: was a lot going on from a macro perspective and
Speaker 3: the discussions around trade, but on like, actually we were
Speaker 3: getting pretty good earnings results, and particularly as it released
Speaker 3: the aipower demand side, I would say that was like
Speaker 3: an area of particular strength. And I think in terms
Speaker 3: of the way that companies are approaching their guidance, Look,
Speaker 3: this is obviously a very difficult environment for them, but
Speaker 3: we thought it was going to be a lot like
Speaker 3: twenty twenty where they kind of just like no guidance.
Speaker 3: You know, we don't know what's going to happen, so
Speaker 3: we're just going to pull this. And that's not really
Speaker 3: what's happening. Like you're getting them trying to work through
Speaker 3: these different scenarios. Like sometimes you're getting two different scenarios.
Speaker 3: Maybe you're getting a muddle through. And it's been really
Speaker 3: interesting to hear which companies and in our view, become
Speaker 3: more de risk. Let's say they extrapolate April second teriff
Speaker 3: rates throughout the year like that to us is an
Speaker 3: attractive entry point for whatever company that may be. But like,
Speaker 3: you're not really getting these these massive guide downs in
Speaker 3: terms of the full year outlook into US that's you know,
Speaker 3: a lot of that is really driven by the AI
Speaker 3: power demand story that happened last week, but overall has
Speaker 3: just been better than expected in terms of earning.
Speaker 2: Some of the earnings themselves have been pretty decent to
Speaker 2: your point, But I'm finding get difficult door distinction between
Speaker 2: good underlying demand and just a rebuild of Infantry's word
Speaker 2: about supply not being there.
Speaker 3: Yeah, I mean, I think that's a really difficult like
Speaker 3: line to thread in terms of what really is real demand.
Speaker 3: But I think for the most part, right if we're
Speaker 3: thinking about the banks who reported earlier on like overall,
Speaker 3: like the overall spend outlook like you didn't see a
Speaker 3: massive bump in terms of it was like mid single
Speaker 3: digit spend. In terms of a consumer outlook, that's pretty
Speaker 3: in line with what we've seen over the past couple
Speaker 3: of months. And importantly, looking forward, you know, you didn't
Speaker 3: see really massive reserve builds in terms of the banks either,
Speaker 3: so their outlook doesn't feel like it's that uncertain as
Speaker 3: it relates to the consumer.
Speaker 4: At the moment, I'm feeling a massive disconnect right now.
Speaker 4: We just spoke with Christian Keller if Barclay is talking
Speaker 4: about how recession of the US's base came. So we
Speaker 4: were talking with Lori Calvasina of RBC. We said, if
Speaker 4: a session actually does transpire in the US, you're talking
Speaker 4: about forty two hundred to forty five hundred for the
Speaker 4: baseline S and P five hundred, you're talking about gains
Speaker 4: from here. Fifty seven hundred is you're low in terms
Speaker 4: of this range at a time where we're currently at
Speaker 4: fifty five twenty five. Why is there such a disconnect
Speaker 4: between economists and stock analysts.
Speaker 3: Well, because, look, I think and taking a step back
Speaker 3: and thinking about where we came into the year, like
Speaker 3: we're coming off of a really strong base. Like I
Speaker 3: think comparing this to like the twenty eighteen period is
Speaker 3: a little bit difficult because it was a completely different
Speaker 3: economic backdrop. Right, We're coming into the year and we're
Speaker 3: in like a pretty solid footing from both a consumer
Speaker 3: and a corporate standpoint, And so you do like there
Speaker 3: is a position of strength that we're coming from that
Speaker 3: like we can take somewhat of a hit. Obviously, time
Speaker 3: is taking in terms of how long this uncertainty persists.
Speaker 3: And you know, the President heard this from some companies
Speaker 3: last week when he met with them, saying like, look,
Speaker 3: this is a matter of weeks in terms of empty shelves,
Speaker 3: and that is very important, right, Like, the longer this
Speaker 3: goes on, the more uncertain and the uncertainty pervades, the
Speaker 3: less likely, you know, the upside becomes becomes a reality.
Speaker 4: How many companies are actually gaming out that anything even
Speaker 4: close to the tariffs as announced on Liberation Day are
Speaker 4: going to stick? In other words, how many of the analysts,
Speaker 4: how much of the ranges and the outlooks that companies
Speaker 4: are coming up with are basically expecting to go back
Speaker 4: to something like that ten percent baseline as well as
Speaker 4: subsectoral tariffs.
Speaker 3: Well, so I would say the amount of companies that
Speaker 3: are going back to April second is like kind of
Speaker 3: few and far between. And again those are like kind
Speaker 3: of gems to us in terms of the opportunity set.
Speaker 3: But what you are getting is you're getting some idea
Speaker 3: of like what it's going to cost from a tariff
Speaker 3: perspective from companies. And this is across the board, Like
Speaker 3: pharma companies, We've heard from a lot of healthcare companies
Speaker 3: and like we haven't even had those sectoral tariffs announced,
Speaker 3: and they're trying to like figure out how much they're
Speaker 3: going to have to spend, and so we're assuming it's
Speaker 3: based on the current environment, right without having to really extrapolate,
Speaker 3: and so there is like a cost structure around it,
Speaker 3: and there's obviously a revenue headwind that they're trying to
Speaker 3: take into account. So wrapping heads around how they're getting
Speaker 3: there is like important for us to help us think.
Speaker 5: Through the ear ahead.
Speaker 3: But I wouldn't say there was like a ton of
Speaker 3: companies that took April second and extrapolated, but they're at
Speaker 3: least incorporating I think that ten percent universal.
Speaker 1: When you think of the potential upside to your figures,
Speaker 1: what would it take? Is it policy?
Speaker 2: Is it the Fed?
Speaker 3: Yeah, it's policy. I mean I think the Fed. You know,
Speaker 3: if for like a couple of weeks ago and you
Speaker 3: got asked like what would be the bull like what
Speaker 3: would cause the bowl case? I think it would have
Speaker 3: included the FED, and it would have included some policy
Speaker 3: pivot from the administration. I think a FED pivot at
Speaker 3: this point wouldn't necessarily be short term positive, right because
Speaker 3: it would be because the FED saw weakness. So I
Speaker 3: think really The only like bullish outcome is that you
Speaker 3: see this pivot from the administration, and the market obviously
Speaker 3: seems to be sniffing that out. In terms of what
Speaker 3: we're seeing from a PE perspective, we're at like close
Speaker 3: to twenty times again and again only down two percent
Speaker 3: since Liberation Day, So there is an element of that,
Speaker 3: But I do think that's where the ball case is now.
Speaker 1: They're talking a lot about these eighteen deals. I can
Speaker 1: get with other trading partners, but when you're talking about
Speaker 1: a bullish case, talking about one, right it's China, what
Speaker 1: do you need to see?
Speaker 3: Well, I mean, I think in terms of what the
Speaker 3: market's probably thinking, it's closer to like thirty to fifty percent.
Speaker 3: In terms of the effective teriff right there. I think
Speaker 3: that would bring down the overall terif rate, like effective
Speaker 3: terror rate for the US something between ten to fifteen percent,
Speaker 3: which is like digestible and something that like if we
Speaker 3: think about again going back into expectations for the beginning
Speaker 3: of the year, that's probably where it would have been,
Speaker 3: right like ten to fifteen maybe worst case scenario, still
Speaker 3: a massive increase in terms of where we were prior.
Speaker 3: But I think at least more digestible than the twenty
Speaker 3: five to thirty percent that we had on Liberation Day.
Speaker 4: This week is going to be check full of things
Speaker 4: other than tariff talk, which is going to be exciting
Speaker 4: for people looking to sink their teeth into something that's
Speaker 4: more concrete with numbers and that reflect things that.
Speaker 5: Have already happened.
Speaker 4: I wonder how you look at some of the economic
Speaker 4: data that we're going to be getting. A labor market
Speaker 4: report that a lot of people preemptively are dismissing is
Speaker 4: backward looking and not really important jolts, data, ism, manufacturing.
Speaker 4: How much does it matter to you based on what
Speaker 4: you just said, which we are coming from a very
Speaker 4: different place economically than we were in twenty eighteen.
Speaker 3: Well, I think, Look, I think it's important, but I
Speaker 3: think it's also juxtaposed to what's happening in terms like
Speaker 3: we're going to be focused mostly on earnings. Like you said,
Speaker 3: we have forty percent of market cap reporting and some
Speaker 3: of the biggest names, and I think that's going to
Speaker 3: be Like what has been the story for the S
Speaker 3: and P five hundred over the past couple of years.
Speaker 3: Is this AI story which nobody seems to be talking
Speaker 3: about anymore. So you're getting these like very you know,
Speaker 3: high growth, high quality companies at a discount at the
Speaker 3: moment obviously aside from what we saw last week, but
Speaker 3: still trading at a discount. And so that's really where
Speaker 3: our focus is right because it's part of our bullish
Speaker 3: thesis is that you continue to see that spend and
Speaker 3: that's pervasive through the rest of the market in terms
Speaker 3: of a capack. So we're going to get a lot
Speaker 3: of information there and I think that's what we're going
Speaker 3: to be focused on from an equity market standpoint this
Speaker 3: week's aside from mac.
Speaker 2: The thing that conflicts with that, as you know, is
Speaker 2: that they are cycular Gris, but they're also facing an
Speaker 2: international bank job which is increasingly fragmented. I'm thinking more
Speaker 2: like Apple directly. Apple. I'm just going to bring up
Speaker 2: the name directly. They're facing a big situation China. They
Speaker 2: can have to spend a lot of money moving supply
Speaker 2: out of China into places like India. For those kind
Speaker 2: of companies have difficult Is this moment for them, Well, look.
Speaker 3: I think this isn't the first time they've seen this.
Speaker 3: These tensions have been going on in terms of trade
Speaker 3: as it relates to particular industries like semiconductors since twenty eighteen,
Speaker 3: it was continued throughout you know, the past couple of
Speaker 3: years under the Biden administration as well, So this isn't
Speaker 3: new news. And obviously a lot of this and a
Speaker 3: lot of that re routing had already taken place post
Speaker 3: twenty eighteen. So look, it's not easy. It's still difficult,
Speaker 3: but they have you know, their global supply chains. They
Speaker 3: at least have negotiating power as it relates to you know,
Speaker 3: other other countries and suppliers, so they at least are
Speaker 3: coming from a position of strength. And that standpoint when
Speaker 3: I'm talking about these large diversified companies, and so I think,
Speaker 3: I think it's not easy, but if anyone's going to
Speaker 3: be able to navigate it, I think it would be
Speaker 3: these larger companies.
Speaker 2: So that one's a must watch. Apple reporting on Thursday,
Speaker 2: IBB be good to say a soays thanks for being here,
Speaker 2: Abbyoda that of JP Morgan, a former senior Trump try
Speaker 2: devisor canay on Shaw writing, I do not expect to
Speaker 2: see a full blown US China trade deal this year.
Speaker 2: Callyan joins US now for more Kenney and welcome to
Speaker 2: the program. What can be achieved in the interim between
Speaker 2: now and gear end?
Speaker 5: Good morning, Thanks for having me.
Speaker 6: Well, we're certainly in a he said, She said, when
Speaker 6: it comes to US China relations, and I'll put that
Speaker 6: to the side just for a moment. I think in
Speaker 6: the short term, the administration is looking to ink potentially
Speaker 6: up to seventeen deals. Now that those won't be full
Speaker 6: blown trade deals, but they will be agreements in principle,
Speaker 6: and we'll get the details of those written by lawyers
Speaker 6: in the months to come. But that is part of
Speaker 6: the negotiation strategy with China, and that is to lay
Speaker 6: the groundwork where the US has deals with a number
Speaker 6: of key trading partners, going into a broader discussion with
Speaker 6: China so that they have more of a leg up.
Speaker 6: China is taking a very similar strategy, and it's charm
Speaker 6: offensive with a number of countries around the world. But
Speaker 6: this US China relationship is going to get worked out
Speaker 6: over years.
Speaker 5: And not months.
Speaker 2: Kelly on how do the Europeans fits in.
Speaker 6: Well, A US europe deal has eluded multiple administrations for decades. Now,
Speaker 6: I do think that there is a genuine effort between
Speaker 6: the administration and some European leaders to see what they
Speaker 6: can do in terms of stopping the bleeding with respect
Speaker 6: to these twenty percent reciprocal tariffs. But the European Union
Speaker 6: is a very advanced and entrench regulatory system and it's
Speaker 6: going to be very very hard for them to pivot
Speaker 6: and to change and to concede on some of the
Speaker 6: requests that the Trump administration has.
Speaker 5: So I'm not particularly optimistic, Kelly.
Speaker 1: What are those requests that the Trump administration is telling
Speaker 1: the Europeans they have to see in order to get
Speaker 1: a trade agreement.
Speaker 6: Well, they haven't made those demands public except for this
Speaker 6: National Trade Estimate, which President Trump and Jamison Grewer have
Speaker 6: held up on multiple occasions and said, here are the
Speaker 6: list of non tariff barriers. But they are long stan
Speaker 6: and well known. So they are talking about the VAT tax,
Speaker 6: but some of the regulatory barriers in agriculture, in automotive,
Speaker 6: some of the EU's subsidy programs, the digital services taxes
Speaker 6: that a number of EU countries maintain. There are quite
Speaker 6: a few barriers to trade that are going to make
Speaker 6: it very very challenging. And tariffs really are just the
Speaker 6: tip of the iceberg.
Speaker 1: When it comes to China. What needs to happen for
Speaker 1: one of them, either Beijing or Washington, to blink, because
Speaker 1: right now it's just a tremendous amount of noise.
Speaker 6: Yeah, certainly, and drama is certainly a feature of US
Speaker 6: China trade negotiations.
Speaker 5: It was during Trump one.
Speaker 6: I fully expect it to remain a part of Trump
Speaker 6: two point zero. I do think that behind the scenes,
Speaker 6: both sides are looking for a political off ramp that
Speaker 6: saves face. These one hundred and twenty five percent and
Speaker 6: one hundred and forty five percent tariffs are not sustainable
Speaker 6: in the short or medium or long term. So I
Speaker 6: do expect to see some sort of de escalation in
Speaker 6: the coming weeks or potentially months, But in terms of
Speaker 6: a full blown trade deal, I don't know that that's
Speaker 6: possible anytime soon, if at all.
Speaker 5: Now.
Speaker 6: I do think both sides will at some point sit
Speaker 6: down and try to work out some of their shared differences.
Speaker 6: But at the end of four years, I think the
Speaker 6: US and China are going to do less trade with
Speaker 6: one another and not more.
Speaker 1: But you're talking about an off ramp potentially we could
Speaker 1: see before they sit down. When do you think that
Speaker 1: offramp would be well.
Speaker 6: I was hopeful that the two sides could have found
Speaker 6: something in.
Speaker 5: The first couple of weeks.
Speaker 6: But you've got, on the one hand, President Trump saying
Speaker 6: that I only want to do this at the leader level.
Speaker 6: On the other hand, you have President she who's saying
Speaker 6: I'm not going to do this at the leader level,
Speaker 6: appoint someone else. And so both sides are engaged in
Speaker 6: this game of chicken, arguing that the other side has
Speaker 6: more to lose than they do now. Back in Trump
Speaker 6: one point zero, we had the G twenty and these
Speaker 6: other international forum that were happening around the same time
Speaker 6: as the trade war, which gave the two leaders a
Speaker 6: political opportunity to meet on the sidelines. We don't have
Speaker 6: that in the short term. So it is either going
Speaker 6: to be President Trump saying okay, I'll appoint someone, or
Speaker 6: some backchanneling, potentially some Track one point five or Track
Speaker 6: two diplomacy between CEOs going back and forth to try
Speaker 6: to work things out.
Speaker 4: Kelly On, you pointed out that we're about two and
Speaker 4: a half months into President Trump's three month window to
Speaker 4: make trade deals with virtually every nation in the entire world,
Speaker 4: and it points to how unfeasible infeasible. This is how
Speaker 4: much is this just a period of time to reset
Speaker 4: the narrative before having another extension and then another extension
Speaker 4: before there's a realistic timeframe for how long it takes
Speaker 4: trade deals.
Speaker 5: To be inked.
Speaker 6: Yeah, And this is where there's a distinction between these
Speaker 6: full blown trade deals versus these agreements in principle. And
Speaker 6: I do think that it is possible to reach agreements
Speaker 6: in principle, which is basically an outline of some of
Speaker 6: the key components.
Speaker 5: Of what will be in those deals in a short
Speaker 5: period of time.
Speaker 6: But if you want to have drafted text that captures
Speaker 6: these trade deals, that's going to take months and months
Speaker 6: and months of time and a ton of work by
Speaker 6: various lawyers. Now, that said, if you're still dealing with
Speaker 6: seventeen or eighteen countries, that's still a lot to do
Speaker 6: between now and July ninth. So I do think for
Speaker 6: countries where substantial progress has been made, the president is
Speaker 6: likely to extend that period of time, although he has
Speaker 6: not said that he will do that. And then for
Speaker 6: countries that are maybe not as far along, the president's
Speaker 6: going to feel some pressure to turn those terrorists back
Speaker 6: on so that his threat means something and to try
Speaker 6: to squeeze some countries at the end of that ninety
Speaker 6: day period, So I think we'll see a mix.
Speaker 4: On April second, there was a big question around what
Speaker 4: the ultimate goal was of this new Terra regime. Was
Speaker 4: it revenue raising, was it penalizing national security issues or
Speaker 4: potential trade partners that hadn't been doing the right thing?
Speaker 4: Or was it fairness. Now that we've seen some of
Speaker 4: these negotiations, do we have a better sense of the
Speaker 4: overarching framework of what the goal really is.
Speaker 6: Yeah, And I think that different tariffs have different goals.
Speaker 6: So clearly one of the north stars of the administration
Speaker 6: is addressing this substantial one point two trillion dollar trade deficit,
Speaker 6: and that, to me, is what this ten percent global
Speaker 6: baseline tariff is about. But when it comes to these
Speaker 6: more advanced reciprocal tariffs like that forty six percent on Vietnam,
Speaker 6: that twenty percent on the EU, that is about fairness
Speaker 6: and leveling the playing field and addressing some of the
Speaker 6: unfair trade practices, the unbalanced trade that the President has
Speaker 6: been talking about. National security tariffs are really those sectoral tariffs,
Speaker 6: so those on semiconductors, pharma, steel, aluminum and autos. And
Speaker 6: then this revenue point which the President raises to me
Speaker 6: is more about messaging. It's about selling that domestically to
Speaker 6: the American people about why leaving tariffs in place, particularly
Speaker 6: why negotiations are ongoing, may not be the worst thing
Speaker 6: in the world because look at the tariff revenue that's
Speaker 6: coming in.
Speaker 5: But I don't see that as one of the prime
Speaker 5: Mary goals.
Speaker 1: Over the weekend, the Treasury Secretary was asked about this
Speaker 1: whole strategy putting tariffs on pulling them back, and the
Speaker 1: Treasure Secretary said, actually, it's called strategic uncertainty and game theory.
Speaker 1: You were an individual at the negotiating table. Do you
Speaker 1: think this strategic uncertainty is damaging or actually useful?
Speaker 5: Well, I think it depends on where you're sitting.
Speaker 6: And as a negotiator, I used to say that, and
Speaker 6: I spent ten years as a negotiator for the US
Speaker 6: government that I had the most fun working for President
Speaker 6: Trump because my trading partner sitting on the other side
Speaker 6: really had no idea what my leader was going to do,
Speaker 6: which actually gave me a fair amount of leverage at
Speaker 6: the table to try to advance US interests. Now sitting
Speaker 6: on the other side now representing companies. That uncertainty, that
Speaker 6: lack of clarity that will we have tariffs tomorrow won't
Speaker 6: we is incredibly challenging in terms of making investment decisions
Speaker 6: and supply chain decisions. But that strategic ambiguity is really
Speaker 6: aimed at other trades partners, and the message is not
Speaker 6: for the business community, and so I think that tension
Speaker 6: makes it a bit challenging, particularly for domestic stakeholders, while
Speaker 6: the President.
Speaker 5: Works this out.
Speaker 2: Kelly, I appreciate your time as always, Kelly, I'm sure
Speaker 2: they Former senior Trump trade advisor Amanda Line of a
Speaker 2: black Rock writing, we see scope for additional spread widening
Speaker 2: and credit. Underpinning this view is our expectation for a
Speaker 2: more challenging growth inflation mix, as well as our expectation
Speaker 2: that the hard economic data will eventually catch down to
Speaker 2: the soft sentiment data. Amanda joins us now for more. Amanda,
Speaker 2: good morning, morning, Thank you for having me. Eventually, can
Speaker 2: we put some details on eventually?
Speaker 7: So I think taking a step back, the market seems
Speaker 7: to be taking a bit of I would say, a
Speaker 7: temporary reprieve from the fact that we haven't seen this
Speaker 7: soft data translate directly into hard data immediately if you
Speaker 7: actually look at what these companies are saying though, which
Speaker 7: even the companies over the last seven days of report
Speaker 7: haven't really baked in expectations of shifts and trade policy,
Speaker 7: and so I think actually what we're looking for is
Speaker 7: the second half of this year. If you look at
Speaker 7: home builders, they're not expecting higher costs to hit closing
Speaker 7: until the third quarter or fourth quarter. Industrial companies aren't
Speaker 7: expecting higher costs until they work through inventory, possibly to
Speaker 7: the second half of this year. So corporates are I
Speaker 7: think we're still figuring this out to a large degree,
Speaker 7: so it's not surprising that we haven't seen it in
Speaker 7: the hard data yet. I think just because we haven't
Speaker 7: seen it in the hard data, though, doesn't mean that
Speaker 7: it's not eventually in train, and so we are bracing
Speaker 7: for that. But I would say it's probably going to
Speaker 7: be a second half of this year.
Speaker 2: Some of the hot ice, of course flat sid by
Speaker 2: front load, and we saw that in retail sales, and
Speaker 2: I think you say in earnings as well, to some extent,
Speaker 2: how are you distinguishing between genuine underlying demand and just
Speaker 2: a stalk pile and getting ready for supply not be
Speaker 2: in there.
Speaker 7: So I've spent a lot of time in company earnings
Speaker 7: called transcripts, and they actually are even having a really
Speaker 7: difficult time figuring out what is front loading and what
Speaker 7: is actually real demand. I think it's going to be
Speaker 7: a matter of time before we see that playthrough. But
Speaker 7: even in the autos, for example, we did a really
Speaker 7: large jump in auto sales. I think you can kind
Speaker 7: of put the mosaic together and figure out that is
Speaker 7: some front loading. But I think when we take a
Speaker 7: step back a corporate credit markets, high old spreads, for example,
Speaker 7: have retraced forty seven percent of the widening since mid February.
Speaker 7: It's been striking how quickly these markets are kind of
Speaker 7: mean reverting. So investors, I think, are getting these opportunities
Speaker 7: to put money to work at more attractive spreads, but
Speaker 7: they're becoming short lived. They're snapping back. We don't think
Speaker 7: we've seen the end of that. We're around three sixty
Speaker 7: in HILD spreads. In order to bake in a real
Speaker 7: material growth slowdown, we would need to be five fifty
Speaker 7: six fifty. A recession would be even above that. Recessions
Speaker 7: on our base case I should.
Speaker 4: Say, just to put some numbers on that, on April eighth,
Speaker 4: the average yield and high old bonds was eight point
Speaker 4: seven percent. It is currently down to seven point eight percent.
Speaker 4: Just massive snapback as everyone piled in. I want to
Speaker 4: understand the buying dynamics. How much you're seeing the buyer
Speaker 4: base for credit instruments shift maybe away from the foreign buyer,
Speaker 4: away from the Japanese, away from the Europeans, and toward
Speaker 4: a more domestic audience.
Speaker 7: So for an investor's own around one quarter of the
Speaker 7: US corporate bond market, so it's not just treasuries or equities,
Speaker 7: they also own corporate debt. I would say the marginal
Speaker 7: dollar has been in place to reallocate to European credit
Speaker 7: for a couple of years now, ever since the FED
Speaker 7: was started, ever since the ECV rather started hiking rates
Speaker 7: because you had some yield build up in that market.
Speaker 7: I would say, on the margin, given some of the
Speaker 7: optimism around the fiscal support, there is incremental interest in
Speaker 7: putting money to work in Europe. It's tempered by two things, however,
Speaker 7: One the growth backdrop in Europe isn't great either, and
Speaker 7: so we are expecting some headwinds from shifts and trade policy.
Speaker 7: You can see that and even some of the survey
Speaker 7: data from Europe. And two, the US corporate bond market
Speaker 7: is the most diverse, deep liquid market for corporate investors.
Speaker 7: So if you're looking for high quality spread product, there's
Speaker 7: not a lot of availability in Europe. So I think
Speaker 7: by that extension, investors will still need to allocate a
Speaker 7: significant amount to the US.
Speaker 4: Market, which is the reason why you haven't see the
Speaker 4: numbers fall off that much. I wonder how much of
Speaker 4: competition the credit market is getting from the treasury market.
Speaker 4: The fact that the US Treasury Department is going to
Speaker 4: be announcing their quarterly refunding estimate today and then on
Speaker 4: Wednesday their actual schedule of issue ince. How much is
Speaker 4: that creating a real challenge for you in understanding the
Speaker 4: dynamic going forward for how the fair pricing.
Speaker 5: Of credit really works.
Speaker 7: So related to this is part of the reason why
Speaker 7: we like actually moving down in quality in Europe in
Speaker 7: US corporate credit. For this reason, the treasury market has
Speaker 7: been very volatile. We're expecting steeper curves, We're expecting a
Speaker 7: rebuild and term premium. For that reason, we think it's
Speaker 7: important for investors to capture the additional spread premium where
Speaker 7: they can in corporate credit to kind of offset some
Speaker 7: of that volatility and boost those total returns. Actually, parts
Speaker 7: of high yield have outperformed investment grade on a total
Speaker 7: return basis so far this year, and even the lowest
Speaker 7: quality portions of high yield have outperformed the equity market.
Speaker 7: So actually the credit market, even though it's been a
Speaker 7: really volatile year to date, is still offering a bit
Speaker 7: of a reprieve in terms of total returns because of
Speaker 7: that spread pickup. If you move down into the high
Speaker 7: end of high yield, you're not actually foregoing that much
Speaker 7: credit quality relatives tay, for example, the low end of
Speaker 7: investment grade. So we do like moving down in quality
Speaker 7: a bit to pick up that extra spread premium to
Speaker 7: kind of cushion those total returns. As for the competition point,
Speaker 7: we're just bracing for a significant amount of treasury supply.
Speaker 7: That's been a theme for the past several quarters. We
Speaker 7: know that because of the deficits, but I do still
Speaker 7: feel that corporates recognize the difference between the sovereign risk
Speaker 7: and the corporate credit risks. There's still a really significant
Speaker 7: need for corporate credit allocations, But I think really the
Speaker 7: name of the game is actually duration has been very volatile.
Speaker 7: We're better off allocating to credit for carry and income,
Speaker 7: so favoring that short duration and picking up spread when
Speaker 7: you can.
Speaker 2: Are you seeing investors a broad discriminate between the two
Speaker 2: between self, between treasuries and psychoporate credit In America?
Speaker 7: For sure, I think the allocation to corporate credit is
Speaker 7: really in its own bucket. I think the decision for
Speaker 7: investors really from our covers has been twofold. Am I
Speaker 7: investing for total or excess returns? And so where am
Speaker 7: I aiming in the credit quality spectrum? Am I aiming
Speaker 7: for duration or not? And then also the relative value
Speaker 7: as you alluse to Lisa cross regions. The other tricky
Speaker 7: thing for Europe is that valuations haven't reset that much,
Speaker 7: So if you are allocating that marginal dollar to Europe,
Speaker 7: the valuations haven't given you a great entry point at
Speaker 7: this point.
Speaker 2: Cerently, at times this month is found like old US
Speaker 2: assets are trying in one buck hit day today.
Speaker 4: Which it has except now when you look under the
Speaker 4: hood and what you've seen even in the flows is
Speaker 4: that yes, foreign investors have been shifting away on the
Speaker 4: margins from treasuries but not credit because of some of
Speaker 4: these ideas, and that's why people could say we can
Speaker 4: still get around some of the corporate story in the US,
Speaker 4: but maybe not the government story.
Speaker 2: Right now, Amanda's going to see you waste thanks to
Speaker 2: dropping by Amanda Lanea in there of black Crook, no
Speaker 2: doctor of ramdmac John. Just now for more and the
Speaker 2: welcome to the program, sir. Before we get into details, Neil,
Speaker 2: you wrote about it recently, I just want to sit
Speaker 2: on this.
Speaker 4: Just for a beat.
Speaker 2: The rock pool that we've seen to consensus, Neil, that
Speaker 2: you've written about, just frame that historically, how quick, how
Speaker 2: vicious this has been well, as you.
Speaker 8: Know, I mean, I think one of the ways recession
Speaker 8: works is through that element of surprise, So people think
Speaker 8: things are going to be okay and then they're not,
Speaker 8: and that prompts the clearing out of inventory's investment, hiring
Speaker 8: and so forth. And it's been quite dramatic. I mean,
Speaker 8: remember we went into the year looking for Q four
Speaker 8: Q four growth of around two percent and now it's
Speaker 8: around half a percent. So you've seen a fairly meaningful
Speaker 8: download revision to GDP growth expectations for twenty twenty five,
Speaker 8: and if you go outside the COVID years, the last
Speaker 8: time anything like that's happened is two thousand and nine,
Speaker 8: So it's pretty dramatic.
Speaker 2: You've been tracking some week a data, not just at
Speaker 2: the start of this year, but from the back end
Speaker 2: of last year as well. Neil, just give us the
Speaker 2: trend of things at the moment and how you'll navigate
Speaker 2: payrolls on day, because I can tell you for a
Speaker 2: lot of people in the market at the moment, they
Speaker 2: seem to be willing to ignore strength and they'll triple
Speaker 2: down on weakness. What's your approach, Well, I.
Speaker 8: Think that makes sense because I mean, you know, to me,
Speaker 8: it's to the extent that any number is strong, it's
Speaker 8: probably somewhat backward looking. And if it's weaker, it just
Speaker 8: means that the economy was even softer than we thought
Speaker 8: going into all this. But you know, take a step
Speaker 8: back and think about what happened last year. We saw
Speaker 8: a very strong growth in consumer spending that was driven
Speaker 8: primarily by or to a large.
Speaker 5: Extent, by a decline in the savings rate.
Speaker 8: If you look at real incomes excluding transfers, it's up
Speaker 8: only one and a half percent, So even if you
Speaker 8: assume the savings rate stable, you're going to get weaker consumption.
Speaker 8: At the same time, a non residential business fixed investment contracted.
Speaker 5: Towards the end of last year.
Speaker 8: It only added about thirty basis points on average to
Speaker 8: growth in twenty twenty four. Believe it or not, John,
Speaker 8: that's actually less than the contribution from healthcare services consumption.
Speaker 8: So it just tells you about the sort of cyclical
Speaker 8: momentum in the economy going into twenty twenty five. And
Speaker 8: you know, this year, I think what's been notable was
Speaker 8: the ongoing increase in completed unsold new housing inventory, which
Speaker 8: sort of begs the question about what home builders are
Speaker 8: going to do. It probably means they're going to cut
Speaker 8: back on residential construction, and I think in turn that
Speaker 8: probably means some slowing and residential construction employment. So, you know,
Speaker 8: I think the onus is really on the economic growth goals,
Speaker 8: and you know, my sense is that you know, things
Speaker 8: can get a little bit sloppy over the next couple
Speaker 8: of quarters.
Speaker 4: Let's say, Neil, every single FED official is watching right
Speaker 4: now and they're quiet period. They're taking advantage of that
Speaker 4: and reading all of your reports and saying, Okay, we're
Speaker 4: going to cut by a full percentage point. We'll cut
Speaker 4: dramatically in the next couple of meetings in order to
Speaker 4: get ahead of this.
Speaker 8: How much would that help, Well, I don't know that
Speaker 8: it would help that much, because I do think to
Speaker 8: some extent the train has sort of left the station.
Speaker 8: That doesn't mean I wouldn't encourage them to start thinking
Speaker 8: about recalibrating monetary policy. But I think it's important to
Speaker 8: keep in mind that, you know, think about the areas
Speaker 8: of the economy that are affected the most by the
Speaker 8: trade war. It's stuff like consumer durable goods, it's stuff
Speaker 8: like housing. So those are the areas that the FED
Speaker 8: can help. But I don't think they can offset a
Speaker 8: full impact of the trade war. So the FED is
Speaker 8: just one part of this. But really to kind of
Speaker 8: totally shift the narrative, I mean, you just see, you know,
Speaker 8: the uncertainty sort of abate.
Speaker 4: I feel like we've switched roles, Neil. It sounds like
Speaker 4: you're really downbeat, and I'm thinking, well, the companies are
Speaker 4: not sounding that downbeat. Corporate executives are coming out and
Speaker 4: saying we can manage through that, and their estimates have
Speaker 4: actually surprised to the upside in a large number of instances.
Speaker 4: Why does that not come for you and give you
Speaker 4: a sense that actually, maybe it's not as bad as
Speaker 4: people are saying.
Speaker 8: Well, I mean, you know, time will tell. I mean,
Speaker 8: I don't know that that's true. I just saw an
Speaker 8: article in the Wall Street Journal this morning talking about
Speaker 8: how companies are sort of shelving their cap X plans.
Speaker 8: You know, the fact that we're talking about a large
Speaker 8: amount of companies pulling their earnings guidance, Lisa, I mean,
Speaker 8: if they're pulling their earnings guidance, they're not spending point.
Speaker 8: You know, simple as that. So you know, I don't
Speaker 8: really see that much optimism out there. If anything, CEO
Speaker 8: confidence has been waning because people got the sequencing.
Speaker 5: Wrong, right.
Speaker 8: I mean, when they bet on Donald Trump, they bet
Speaker 8: on tax cuts, deregulation, and tariffs in that order. And
Speaker 8: obviously we started with the last thing first. And that's
Speaker 8: kind of the big, the big issue in my opinion.
Speaker 1: Because, as you know, Neil, the last thing is the
Speaker 1: thing that Trump can do unilatterly by himself. You recently
Speaker 1: had a piece out where you talked about Trump's recent
Speaker 1: comments around Powell, soothing comments around China, and you said
Speaker 1: that Trump is starting to quote feel the market, But
Speaker 1: at the end of the day, the tariffs are in
Speaker 1: place when it comes to China. How quickly, Neil, do
Speaker 1: you think that they need to start evaporating or this
Speaker 1: is going to get brutal very quickly.
Speaker 5: Well, I think we're already there.
Speaker 8: I mean, there's a lot of interesting comments that the
Speaker 8: market sort of runs with on any given day, but
Speaker 8: at the end of the day, just look at what's
Speaker 8: going on. We effectively have a trade embargo in place
Speaker 8: with one of our largest trading partners, and the primary
Speaker 8: debate right now seems to be whether are they talking
Speaker 8: or not talking? Are they fake talking, are they talking
Speaker 8: through back channels? I mean, it's a little bit ridiculous.
Speaker 8: Just focus on what's actually happening. We have an effective
Speaker 8: tariff rate in the twenties and we continue to have
Speaker 8: fairly substantial tariffs on with China. That's effectively resulting in
Speaker 8: a zero in terms of bilateral trade. To me, that's important,
Speaker 8: and that's going to mean that you inventories are going
Speaker 8: to be pretty problematic relatively soon, probably sometime over the
Speaker 8: next month.
Speaker 2: Neil final take. Kevin wash how close away to installing
Speaker 2: a shadow FED share?
Speaker 8: Well, I mean he has a habit of just you know,
Speaker 8: you talk about the blackout period. Mike McKee mentioned that
Speaker 8: I find it hysterical that he's out in the Wall
Speaker 8: Street Journal with an outbed, but you know, look I don't,
Speaker 8: I don't. I mean I took a quick read of
Speaker 8: his his outbed. You know, I think I think it's
Speaker 8: ridiculous to really say that the FED is the reason
Speaker 8: why we have profligate spending. I mean, remember when interest
Speaker 8: rates were zero and the FED was doing open ended QE.
Speaker 8: The government at the time was going out on an
Speaker 8: austerity budget and we talked about sequester and all that.
Speaker 8: So I think he has the cause and effect wrong.
Speaker 5: I mean, the reason why.
Speaker 8: Rates were so low was because probably there was austerity,
Speaker 8: not the other way around. So I mean, I think
Speaker 8: talking about firing Powell is bad. Replacing him with Kevin
Speaker 8: Wassh wouldn't be much better.
Speaker 2: No data of run back. This is the Bloomberg Surveillance Podcast,
Speaker 2: bringing you the best in markets, economics, angio politics. You
Speaker 2: can watch the show live on Bloomberg TV weekday mornings
Speaker 2: from six am to nine am Eastern. Subscribe to the
Speaker 2: podcast on Apple, Spotify, or anywhere else you listen, and
Speaker 2: as always, on the Bloomberg terminal and the Bloomberg Business app.