Speaker 1: Ye. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Ley. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot com, and of course on the Bloomberg Donald
Speaker 1: Trump was in Ohio. He said, let it go, let
Speaker 1: it go, and played it. We played the video a lot.
Speaker 1: He says, this is a tax on China? Is it thou?
Speaker 1: No economist I know agrees with that statement. That's what's
Speaker 1: so interesting about this round of tariffs. If and I say,
Speaker 1: if it is implemented on September one, these are the
Speaker 1: consumer items that were spared from the first few rounds
Speaker 1: of tariffs. It could be an incremental hit to growth
Speaker 1: if it's implemented. But this could be the thing that
Speaker 1: consumers feel if the price you fist stopped, smartphone starts
Speaker 1: to go a little bit higher. Went in on all
Speaker 1: of this. I'm pleased to say that dropping by the
Speaker 1: studio is Michelle Mayer be of a Merrill Lynch, Head
Speaker 1: of US Economics. Good morning to Michelle. Typically first Friday
Speaker 1: of the month, we'd be living with payrolls well in
Speaker 1: with trade this morning. What does that say about payrolls
Speaker 1: a little bit later? You know, I think it's the
Speaker 1: fact that you have these external factors that are overwhelming
Speaker 1: um the incoming data. So the what happens around trade
Speaker 1: is by far the most important risk factor out there,
Speaker 1: and it's going to be more of a forward looking
Speaker 1: story as well. Right, So what happens to jobs today
Speaker 1: is not necessarily going to be a function or a
Speaker 1: factor for how you think about growth in the future
Speaker 1: if these terraffs go into place. This is the view
Speaker 1: from Deutsche Bank going into the number. We're wait payrolls,
Speaker 1: but this data has been rendered largely irrelevant. If it
Speaker 1: is strong but reinforced latest bond, bold signals and negative risk.
Speaker 1: If the data is weak, how do you frame it
Speaker 1: for clients this morning, whether this data matters or not?
Speaker 1: What it means a bit strong? What it today? It's weak? Yeah,
Speaker 1: I mean I hate to say that jobs don't matter,
Speaker 1: you know, I hate to see any economic data doesn't matter,
Speaker 1: because you know, we do take all incoming information into
Speaker 1: our forecasts and think carefully about it. In jobs are important.
Speaker 1: They're important. They're telling us about you know, how many
Speaker 1: people are getting hired and how they're getting paid, etcetera.
Speaker 1: So it matters. Um, if we have a strong report,
Speaker 1: I think it tells us that there's a bit more
Speaker 1: resiliency of the U. S economy to some of these risks,
Speaker 1: and that companies, while they may be starting to cut
Speaker 1: back on their investment in capital, they're still investing in labor,
Speaker 1: and people still have jobs, and there's some ability for
Speaker 1: the consumer to withstand some of these tariffs. That said,
Speaker 1: of course, the big risk factor out there is what
Speaker 1: happens on trade, and that's where people and markets are
Speaker 1: most focused. Let's reset twelve months forward. What's your GDP call?
Speaker 1: GDP call for the United States? So we think we
Speaker 1: have growth essentially returning to trend one point eight percent
Speaker 1: on US sub two percent where you are now? And
Speaker 1: if if we put in a text on China, is
Speaker 1: the President puts it, you gotta mark that down right? Yeah,
Speaker 1: So that's the challenges. Actually, So are you modeling a grocerycession? Um?
Speaker 1: Well not yet? Um, So we think can I make
Speaker 1: some news here to come on? We think we're gonna
Speaker 1: be leveling off right around trend maybe one to two
Speaker 1: quarter basis you fast slightly below trend, but the the
Speaker 1: overall Tratractordia stuff. But but yes, I mean, I think
Speaker 1: it's partly gonna be a function of how central Bank's
Speaker 1: offset this shock from But what's important your Johan as
Speaker 1: an American politics one eight percent Michelle Meyer, trend doesn't
Speaker 1: get you reelected. That's what this is really about. Yeah,
Speaker 1: going into and the prospect of perhaps not getting a
Speaker 1: trade deal either, which seems to have been injecting submergency
Speaker 1: into the White House maybe over the last couple of days, Michelle,
Speaker 1: just on the payrolls reporting on global manufacturing. Manufacturing is
Speaker 1: in a recession worldwide at the moment. I think we
Speaker 1: can all agree on that. The risk is that it
Speaker 1: bleeds into services. Do you see that happening? Do you
Speaker 1: see it taking hold of the service sector in any
Speaker 1: way shape perform here in the United States at the moment.
Speaker 1: So it's really interesting is on manufacturing. Yes, it's a
Speaker 1: global manufacturing downturn um, but in the U s the
Speaker 1: manufacturing data has been marginally better. The I s M
Speaker 1: survey is still above fifty. It hasn't fallen into contraction.
Speaker 1: Territory manufacturing jobs based off last few reports and a
Speaker 1: DP this week are actually still increasing very modestly, but
Speaker 1: there is some growth. So I think would be really
Speaker 1: um interesting with today's report is whether or not the
Speaker 1: manufacturing sectors continue to have jobs. And then you know,
Speaker 1: what do you see on the services on the service side.
Speaker 1: So far, there's been little evidence of a spillover from
Speaker 1: these global um challenges into the service side economy, but
Speaker 1: obviously something we have to keep a very close eye on,
Speaker 1: and that's something that fed Chair Power is very concerned about.
Speaker 1: So far, so good for the U S consumers, so fast,
Speaker 1: so good for the labor market. You bring up fed
Speaker 1: Chair j Pown, So let's talk about it going into yesterday,
Speaker 1: the chances of a September right cut with fifty there
Speaker 1: and there about then after the trade news crossed the Bloomberg,
Speaker 1: guess what we approach almost percent for September right cut
Speaker 1: once more, that into play between White House trade policy
Speaker 1: and federal reserve easing. How important is that at the moment, Michelle,
Speaker 1: I think that is the key story, This idea of
Speaker 1: an adverse feedback loop where President Trump puts more pressure
Speaker 1: in terms of greater tariffs and that weekends economic growth.
Speaker 1: It creates some greater risk factors out there, and then
Speaker 1: you have the power put that becomes ever more powerful
Speaker 1: um and you see a central bank response. So for
Speaker 1: the markets to say, Okay, the terroors might happen, but
Speaker 1: we have a backstop that chair power is just going
Speaker 1: to cut. Do we have a backstop? I think we've
Speaker 1: got to talk about that. This belief that the chairman
Speaker 1: can underwrite trade policy from the White House, can it
Speaker 1: actually offset the global In fact, I would make the case,
Speaker 1: and I think Powell tried to make this cases that
Speaker 1: he doesn't want to be underwriting trade policy. He's got
Speaker 1: no choice, has it. And that's really where the friction
Speaker 1: I think comes from. It's not the intention to give
Speaker 1: President Trump a green light to go ahead and be
Speaker 1: tough on trade. But if you consider what his mandate is.
Speaker 1: Mandate is to support economic growth, insure maximum employment. And
Speaker 1: if you have a big shock, which they are taking
Speaker 1: as external, they assume this is a pure exhaugen of shock.
Speaker 1: They're not being political about it. They're saying, Okay, we
Speaker 1: have a big shock, we need to offset in la
Speaker 1: terre policy. If I look at the yields on my
Speaker 1: Bloomberg screen in the United States, one seventy two year
Speaker 1: year stunning to thirty year bond? Are those quote unquote
Speaker 1: good for America? So? You know, it sure looks like
Speaker 1: what two I'm thinking? You know, is that good for
Speaker 1: I mean, I know it's good for real estate guys
Speaker 1: like the guy who lives above the Gucci store on
Speaker 1: Fifth Avenue. But is it good for America? You know?
Speaker 1: So what it's I think the idea? Is that what
Speaker 1: it's signaling about where we are as an economy. No,
Speaker 1: it's not good, you know it would it be a
Speaker 1: much better signal if we had a love three percent
Speaker 1: on the tenure or even four percent a ten year,
Speaker 1: that would be a signal of an economy that's growing.
Speaker 1: GDP growth is trending three percent, inflation is running two percent.
Speaker 1: You know, that would obviously be a better story. Um
Speaker 1: so the fact that interest rates are so low it
Speaker 1: is indicative of an economy that trend growth is lower
Speaker 1: and inflation is more stubbornly low. Can we pretend it's
Speaker 1: a normal Friday? What's your non farm payrolls? Oh good,
Speaker 1: I've been waiting for that. I never asked today I
Speaker 1: will because nobody cares what it's we're looking for a
Speaker 1: hundred and seventy thousand, now, okay, one seventy car record?
Speaker 1: Dost want any five? Michelle Meyer? Thankanks, Michelle. I apologize
Speaker 1: we didn't do anything in the housing. I'm sorry. Next
Speaker 1: time we'll do that. Let's right now, fold this economics
Speaker 1: and the Trump uh is? He said in all Io
Speaker 1: tax on China shock into what it means for Washington.
Speaker 1: Henrietta trades joins us love having a run from Beta Partners.
Speaker 1: I mean, Henrietta, you're gonna tell me the House and
Speaker 1: the Senate support the President Trump's tax on China. Hey,
Speaker 1: tom Um, you know I was thinking. One of the
Speaker 1: best anecdotes I've got is when I was in a
Speaker 1: meeting with the Senate Majority whip at the time, John Corner,
Speaker 1: and speaking with his chief of staff and he and
Speaker 1: I asked him, you know, on a scale from one attend,
Speaker 1: how big a deal is this trade war? How big
Speaker 1: a deal are these China tariffs? And point blank the
Speaker 1: answer was three. It's the three. I would say, now,
Speaker 1: maybe it's at like a five or six based on
Speaker 1: my conversations with Senior Council in the last twenty four hours,
Speaker 1: but they're not inclined to stop them. The one the
Speaker 1: one tariff that really does spook them is the potential
Speaker 1: for tariffs on automobiles against the EU. But they'll only
Speaker 1: act on that after those. So, I mean, they don't
Speaker 1: care about the fiscal policy, one point x trillion dollar
Speaker 1: debt coming down the pike, what we're doing to our grandchildren, etcetera.
Speaker 1: You're telling me they're not going to matter about cell
Speaker 1: phone tariff and consumer product tariffs across all of America.
Speaker 1: I sincerely believe that. And they are looking at polling
Speaker 1: data from their constituents and amongst the Republican Party, you've
Speaker 1: got roughly approval for Republicans. I don't disagree. Yeah, and so,
Speaker 1: and that's what they're that's what's driving them. Um. I
Speaker 1: had one client who very astutely said, you know, if
Speaker 1: I was the president, I put this on in August
Speaker 1: when everybody's thought, nobody's going to pay attention, and that's
Speaker 1: low and behold, August first comes around, and that's what
Speaker 1: we got and it goes into effect September one. I
Speaker 1: just wonder what the minimum condition for progresses to back
Speaker 1: away from that any ideation. You know, I appreciate the question,
Speaker 1: but I would just push back a little bit because
Speaker 1: I get this from investors on the minute. The reality
Speaker 1: is it's USCR policy to provide a grandfather clause for
Speaker 1: inventories that have been ordered by the business community to
Speaker 1: travel from across the Pacific to get to their port
Speaker 1: in the United States. That is something we have seen
Speaker 1: five consecutive times in a row with the first, second, third,
Speaker 1: and fourth chranches and then uh the escalation to they
Speaker 1: provide three to five weeks of leeway for cargo to
Speaker 1: come across the ocean if they're on a ship, or
Speaker 1: if they're in the air, or what have you. And
Speaker 1: they even granted in an extra fifteen days in the
Speaker 1: last May escalation. This is not an indicator that they're
Speaker 1: not serious. There are there's no scenario above five percent
Speaker 1: odds that they don't put these tarasson September one. This
Speaker 1: four week grace period is literally the least they could
Speaker 1: do to prevent disruption to existing inventories. So let's talk
Speaker 1: about counter measures, then, Henriette the Chinese out this morning.
Speaker 1: If the US is going to implement the additional tariffs,
Speaker 1: China will have to take necessary counter measures. What did
Speaker 1: those counter measures look like? Well after the second round
Speaker 1: of tariffs, they switched from doing a dollar per dollar
Speaker 1: retaliation into a percentage based retaliation. So right now both
Speaker 1: sides the tariff roughly sixty percent of each other's inventories.
Speaker 1: This billion escalation from the U s side represents about
Speaker 1: UM maybe given the President decided that it was going
Speaker 1: to be a little bit more than that, UM, So
Speaker 1: I would expect China to retaliate by putting tariffs on
Speaker 1: maybe eight billion, which would be as a percentage basis
Speaker 1: tip for tat. And then we saw yesterday that they
Speaker 1: canceled from significant pork purchases. UM. There are anecdotal reports
Speaker 1: from the business community of increased red tape and all
Speaker 1: that that will continue. I'm glad you bring this up
Speaker 1: because it's eluded in the last twelve hours off this
Speaker 1: bombshell from the President that they have not purchased the
Speaker 1: agricultural products. Do you have evidence of that, Henrietta? Um? Well,
Speaker 1: I thought in your reporting from yesterday morning, UH that
Speaker 1: they canceled the port purchase, so I assume that that's valid. UM.
Speaker 1: And what we're looking for is not just a couple
Speaker 1: of million UM purchases from Swabians. So we need we
Speaker 1: need some were in the range of two hundred to
Speaker 1: three hundred billion dollar commitments from China in the next
Speaker 1: two years in order for President Trump to feel like
Speaker 1: he's delivered. Where will that come from? Where does that?
Speaker 1: I mean, does that corn or wheat or you know,
Speaker 1: it's got to be everything. So that's gotta be everything
Speaker 1: from soybeans to sorghum, corn wheat. Idiots? Why would they agree? Look,
Speaker 1: you're great at the non rudeness the Grace of Washington.
Speaker 1: John Farroll was extremely rude and I'm less extremely rude,
Speaker 1: but still rude. You're not the president made this announcement.
Speaker 1: I believe Secretary Monution was upset because he didn't brief
Speaker 1: the Chinese before the announcement. Why are they at the
Speaker 1: margin going to buy more agricultural products on this Friday morning. Oh,
Speaker 1: I wouldn't expect that they would, and they have basically
Speaker 1: said since um I want to I want to say, really,
Speaker 1: since December second, Argentina they committed to making substantial agriculture
Speaker 1: purchoses and that was what like seven months ago. They
Speaker 1: still have not. Okay, we gotta leave it there. Thanks
Speaker 1: for the great briefing. Henry. The Trades of Veta ellen'sner joint.
Speaker 1: She runs US Economics at Morgan Stanley. She's won every
Speaker 1: trophy out there and right now has a trophy call
Speaker 1: from the greater Morgan Stanley. A real cautious caution, I
Speaker 1: should say on the market, Ellen, are you gonna have
Speaker 1: to adjust your economic call, your Excel spreadsheet because of
Speaker 1: what the President announced yesterday? Yeah? So it's a it's
Speaker 1: a good question. I mean, you know, economists loathe making
Speaker 1: uh changes on the fly, but I think the at
Speaker 1: the very least, um subjectively, you know, you'll see recession
Speaker 1: probabilities go up. The models may not pick up these
Speaker 1: kinds of things yet, right, but subjectively, um, you you
Speaker 1: have to assume more risk and more recession risk specifically
Speaker 1: on the back of this kind of renounce What what's
Speaker 1: your run rate now twelve months forward? So twelve months forward,
Speaker 1: we've still got probability, um, but you can easily see
Speaker 1: that going higher. Uh, you know at at one in three.
Speaker 1: I would not be surprised right now, right because it's
Speaker 1: just the amount of uncertainty is incredible. Now, what's been
Speaker 1: keeping recession probabilities low in terms of just models, the
Speaker 1: real data, And one reason why the Fed resisted. UH.
Speaker 1: Many of the policymakers ended up resisting, delivering fifty basis points,
Speaker 1: which was, as you know, against our advice. UM. But
Speaker 1: UH failed to do that because they just traditional monetary
Speaker 1: policy making is I want to see it in the
Speaker 1: data first. I really don't like being pre emptive. I
Speaker 1: think chair pal had made a push to try to
Speaker 1: be preemptive, UM, but traditional monetary policy making one on
Speaker 1: Wednesday and they decided just to cut twenty five basis
Speaker 1: points because they couldn't see it in the real data.
Speaker 1: But at what point do you need to assume that
Speaker 1: that's coming? UH? And you know, the consumer is really
Speaker 1: the last holdout for the economy, you know in all
Speaker 1: your leading sectors, and the GDP benchmark revision showed this
Speaker 1: inventories down and falling, UH, investment down and falling profits
Speaker 1: and specifically undistributed profits. What do I have left over
Speaker 1: at the end of the day as a company to
Speaker 1: hire and to invest? All of that is down. So
Speaker 1: how long can you assume that the rest of the
Speaker 1: economy holds up? Ellen? We gotta let John Farrow in
Speaker 1: here because he's going to speak with free trader Lawrence
Speaker 1: car Ellen what do you want to know from the
Speaker 1: administration this morning? What do you think the main question
Speaker 1: is for so many people on Wall Street, I think
Speaker 1: we're always trying to gauge what the pin point is. Uh,
Speaker 1: you know, how can they assure American household old uh
Speaker 1: that uh, we're gonna be able to fight this fight
Speaker 1: without you losing your job? You know. And I think
Speaker 1: at the end of the day, that's what everyone wants
Speaker 1: to know. You know, at what cost are you willing
Speaker 1: to continue to play this game and keep uncertainty on
Speaker 1: such a high level. And then it just sounds felt
Speaker 1: like yesterday, And then in the little gaggle of reporters
Speaker 1: that the President spote too that he didn't seem too
Speaker 1: concerned about the market impact of his decision yesterday, that
Speaker 1: he wasn't too concerned. He said something along the lines
Speaker 1: of the market and market participants having fully understood what
Speaker 1: had happened. I'm not sure what that actually means, Ellen,
Speaker 1: but it's not a change, a little bit of a
Speaker 1: shift at this White House. Well, yeah, I think you know,
Speaker 1: early on it was always okay. The you know, President
Speaker 1: Trump's pain point is the stock market. And as long
Speaker 1: as the stock market is holding up. That's his queue
Speaker 1: that you can push this further. And if it's not
Speaker 1: holding up, then that would be uh you know, his
Speaker 1: uh uh circuit breaker, if you will, so, uh you know,
Speaker 1: apparently the FED is his circuit breaker, and that you know, uh,
Speaker 1: you know, he can get one basis points out of
Speaker 1: the f O m C in terms of interest rate
Speaker 1: cuts one way or another and one way that he's
Speaker 1: learned how to do that. Then is okay, you only
Speaker 1: delivered a basis point cut. You said that it's all
Speaker 1: about trade, I'll know to go further and get more cuts.
Speaker 1: How is he going to deliver a recession? Well, that's
Speaker 1: the So that's the risk, right, I mean, is are
Speaker 1: you really going to thread that needle so finely that
Speaker 1: you know that you can push it hard enough that
Speaker 1: the Fed's got your back so to speak, and will
Speaker 1: cut in order to keep the economy a flow because
Speaker 1: the FED can't play that game, right, They're not going
Speaker 1: to play a game of chicken with the president on
Speaker 1: the economy. Uh. And so but if you know the
Speaker 1: FED has uh your back, and then it gives you
Speaker 1: more cover to push trade further. But the risk is
Speaker 1: a course, as you note, recession risk or rising. The
Speaker 1: risk is that you push the economy into recession. And
Speaker 1: as you know, we don't elect the incumbent party. Um
Speaker 1: if we have recession in an election year. Uh, And
Speaker 1: so that is the risk, uh that that apparently the
Speaker 1: president is willing to take. So and then Chapman Pou
Speaker 1: tried his best not to get drawn into criticizing trade
Speaker 1: policy in the news conference. I'm sure he's trying his
Speaker 1: best not to be the guy that has to underwrite
Speaker 1: trade policy, but it just feels like that's who he
Speaker 1: is now. So it's September while and truly in play.
Speaker 1: Are you looking for a right cut? So after the so,
Speaker 1: as you know, we expected dipty basis points to be
Speaker 1: delivered on One of their argument was that the message
Speaker 1: that you send to markets is that you will be
Speaker 1: aggressive upfront and do whatever it takes. Having failed to
Speaker 1: do that, the market now has no confidence that the
Speaker 1: said will do whatever it takes. So that's one problem
Speaker 1: with not having started off aggressive. The risk there is
Speaker 1: that you're forced to do more as a follow up
Speaker 1: and deliver that at basis point cut. Anyway, UM, right
Speaker 1: now we have them, And this was an expectation we
Speaker 1: said on Wednesday that we have the next cut coming
Speaker 1: in October because you know, when when we look at
Speaker 1: the data pattern, inflation is going to be rising. Here
Speaker 1: going into the September meeting, we didn't see that jobs.
Speaker 1: You know, we don't see in our models that jobs
Speaker 1: are going to fall off or the consumer is going
Speaker 1: to fall off. But you know yesterday was a different day. Well,
Speaker 1: yesterday was a different day. If you were on the
Speaker 1: partial differentials on an X on the back of the equation,
Speaker 1: how much do you take down g d P with
Speaker 1: a ten percent terrifying everything remaining. So the modeling that
Speaker 1: we've done on ten percent on everything remain everything remaining
Speaker 1: ten percent if you just model it straight right, ten
Speaker 1: percent even though you're hitting a lot of consumer goods,
Speaker 1: UH does not make a material difference on GDP. And
Speaker 1: where we all weathered up about this, well, because here's
Speaker 1: the ladder, Tom, I'm getting ready to ladder you up.
Speaker 1: The ladder is in how it affects business confidence, consumer confidence,
Speaker 1: CAPEX jobs. It's in the non linearity of financialations and confidence.
Speaker 1: It's less so on just the direct mechanical impact to GDP,
Speaker 1: and of course those other factors or that's the fuzzy
Speaker 1: side of economics. There's a lot of judgment that goes
Speaker 1: into that because certainly today when margins are already running
Speaker 1: so stin, there's not a lot more room that have
Speaker 1: to absorb this kind of increase in Let's take the
Speaker 1: partition of the economy. Joelivarnio over into Texas was brilliant
Speaker 1: and emphasizing manufacturing off a cliff fine. The goods producing
Speaker 1: c p I is in the you know, deflation dis inflation.
Speaker 1: Are you predicting its service sector c p I given
Speaker 1: the Trump strategy will come down and begin to dampen
Speaker 1: general inflation like Dallas trimmed and all that. Does that
Speaker 1: roll over and come down or not? Well, not on
Speaker 1: any kind of timeline that markets certainly want to look at.
Speaker 1: So from teariffs, the mediate effect of course is again
Speaker 1: just going back to the mechanics of it. Uh is
Speaker 1: you know, import prices rise, then pp I prices, so
Speaker 1: you get at the wholesale level and then consumer prices.
Speaker 1: So teariff going in on September one, you could see
Speaker 1: it starts to show up in cp I numbers by
Speaker 1: say November December, uh and that and so yeah, you
Speaker 1: get that impact where it lifts inflation, but of course
Speaker 1: the FED looks through that. Uh, you know, it starts
Speaker 1: to affect impact consumer spending because they're not gonna unless
Speaker 1: income is out pacing that delta, you're not going to
Speaker 1: be able to overcome that. And you start to damp
Speaker 1: in consumer demand. And so after hitting aggregate demand, then
Speaker 1: it starts to have a gravitation on inflation. But you're
Speaker 1: talking it well into next year, where then it starts
Speaker 1: to turn inflation in the other direction. I got bad news.
Speaker 1: Jim Gorman just emailed in James Gorman, and he says,
Speaker 1: are you going to talk about jobs with Ellen? What
Speaker 1: do you think of Job's day? Please? So I think
Speaker 1: job's day is going to be perfectly fine. But I
Speaker 1: think markets are going to take this as backward looking, uh,
Speaker 1: you know, jobless claims. So there are two things that
Speaker 1: you got to look at. Right Where businesses laying off, well,
Speaker 1: we know they weren't. And we're really good at predicting
Speaker 1: that because we've got weekly initial jobs still remaining extremely low.
Speaker 1: What we're not as good at. Uh. And this is
Speaker 1: not a knock to me and my team is just
Speaker 1: economists in general. We're not as good at picking up
Speaker 1: in real time, didn't hiring change? Was there some slowdown
Speaker 1: and hiring? It doesn't feel like that occurred in July.
Speaker 1: It feels like this is going to be a pretty
Speaker 1: nice number. So we've got close to a hundred ninety
Speaker 1: thousand in July. UM, and so I don't think to
Speaker 1: be a message today D eight six to get oh please,
Speaker 1: thank you? Can you go? Hundred six? Great? Alexander love Evan,
Speaker 1: thank you so much? With Morgan Stanley Place decide that
Speaker 1: Kathy Jones joined us Nashalp Center, the financial research chief
Speaker 1: Fixed Incomes Strategies. Good morning to Kathy. Your initial take please, Yeah,
Speaker 1: I would agree with Jim. This is a this is
Speaker 1: a pretty good report all the way around. UM. I'm
Speaker 1: encouraged to see the labor force participation rate picking up.
Speaker 1: That's that's certainly a good sign, and the underemployment rate
Speaker 1: coming down. It's around seven. That's ah, it's not at
Speaker 1: the historic law, but it's getting pretty close to it.
Speaker 1: Probably the only weaknesses those downward revisions taking away about
Speaker 1: forty jobs from the prior couple of months, but not
Speaker 1: not enough to really change the small picture. It's pretty
Speaker 1: good Kasey link in what you're seeing with an earnings reports,
Speaker 1: revenue reports at Schwab really coast to coast at the margin,
Speaker 1: Will we see a corporate labor cost cutting? You know,
Speaker 1: I think in some industries that's probably going to be
Speaker 1: the case. UM, But I think overall, the big swing
Speaker 1: factor here we all know is trade. Right, That's the
Speaker 1: thing that's driving business investment or lack thereof. That's the
Speaker 1: thing that's driving optimism or lack thereof. So UM, once
Speaker 1: we get a resolution on that, If we get a
Speaker 1: resolution on that, then I think that that could be
Speaker 1: an important component of of what happens with the labor market.
Speaker 1: Within the labor market, then is a wage frame for
Speaker 1: us at wage dynamic. You see right now we're seeing
Speaker 1: the gradual rise in overall average hourly earnings UM. If
Speaker 1: you look a little deeper into the wage growth, you
Speaker 1: are seeing some acceleration in certain industries, but the average
Speaker 1: is being held down by the fact that we add
Speaker 1: a lot of jobs in the lower wage sectors of
Speaker 1: the autonomy, which you know you'd expect at this point
Speaker 1: in the cycle. That's a good thing this point in
Speaker 1: the cycle. We're bringing people in and many of those
Speaker 1: are in lower wage areas, but that holds down the average.
Speaker 1: But within that starting to see some pretty good wage
Speaker 1: increases in other areas. Keith, you were talking to Jim
Speaker 1: Glassman about this before, and to me, this is the
Speaker 1: heart of the matter, and it's the number one male
Speaker 1: I get from our listeners coast to coast is they
Speaker 1: don't look at it is a good economy because they
Speaker 1: see it as an unwaited barbell or unbalanced barbell. I
Speaker 1: should say, with a lot of low wage jobs being created,
Speaker 1: I mean, I get it, it's unit job growth, but
Speaker 1: are they quality jobs? Well, you know, clearly it would
Speaker 1: be nice if at this point, with unemployment that three
Speaker 1: point seven, if we were seeing uh, stronger average wage growth.
Speaker 1: So no, a lot of these are healthcare services and
Speaker 1: many of these are lower wage jobs. But again, if
Speaker 1: you're pulling in people who have been sidelined, typically that's
Speaker 1: where you're going to see the jobs being create aided.
Speaker 1: So all jobs are good jobs in that sense. But yeah,
Speaker 1: it doesn't have a feel good factor that it might
Speaker 1: have in previous cycles. Well, well then then let's move
Speaker 1: it to the fixed income area as well. Now you've
Speaker 1: had a huge shock of what the President said yesterday afternoon.
Speaker 1: How do you adjust your fixed income strategy when you
Speaker 1: barbell an okay, labor economy with the trade war that
Speaker 1: was accentuated yesterday afternoon. Yeah, this is really tough, and
Speaker 1: barbell is kind of a key word there. What do
Speaker 1: you do with a barbell? I mean, I mean, what
Speaker 1: do I do if I've got gains and bonds right now? Well,
Speaker 1: you know, I think you need to hold on to
Speaker 1: some intermediate or long term bonds because the overall trajectory
Speaker 1: of global rates is still down. I mean, look at
Speaker 1: all the negative yielding bonds we have in Europe right now,
Speaker 1: and if the trade war continues, those fields are going
Speaker 1: to continue to fall. So you need something with duration.
Speaker 1: But we, like the Barbell idea, have some short term
Speaker 1: and have some long term. Kind of missed that middle
Speaker 1: dip in the yield curtain, I mean, to a data check.
Speaker 1: Right now, we have a deterioration here. All in all,
Speaker 1: we are negative twelve than we advanced higher a better
Speaker 1: tape and right now negative fifteen down futures, negative ninety
Speaker 1: yields I'm gonna say, are churning. All in all, maybe
Speaker 1: a little higher yields off of where we were before
Speaker 1: the jobs report, the ten ye yield one point eight
Speaker 1: seven percent. Gold was up twenty dollars now up eighteen
Speaker 1: dollars fourteen forty nine years. Currencies really don't play today.
Speaker 1: All in all, Sterling, I should say one twenty three
Speaker 1: Cathy Jones with us a schwab right now, Cathy, So
Speaker 1: I got a Barbell approach in bonds, but I want
Speaker 1: to go outside full faith and credit to try to
Speaker 1: capture a higher yield. Where do I do that? Yeah,
Speaker 1: it's getting tough to find great valuation. So saying the
Speaker 1: corporate market UM high yield spread versus treasuries are pretty tie.
Speaker 1: And if we do UM get a slow down, further
Speaker 1: slow down in the global economy and further slow down
Speaker 1: here because of trade UM that doesn't offer you a
Speaker 1: lot of value. So if you're going to go out,
Speaker 1: we're suggesting just higher credit quality and corporates or you know,
Speaker 1: if you if you were in a high tax state
Speaker 1: like New York, you might look at the muni market. Well,
Speaker 1: come on, you want me to look at the muni
Speaker 1: market where that's priced up pride, the feeding frenzy of
Speaker 1: acquisition there of price up and you're done. You have
Speaker 1: value in Muni's You know, you have to pick your
Speaker 1: spots really carefully on the Muni curve right now, it's
Speaker 1: very overvalued. At at the short end of the curve.
Speaker 1: You can find a little bit of value if you
Speaker 1: go intermediate term. Okay, well we call that the value
Speaker 1: of the curve. I guess um as well when I
Speaker 1: when I look at the fixed income market and it
Speaker 1: has to come over to equity. I mean, I know
Speaker 1: you and Lizenne Sanders are barely in speaking terms, but
Speaker 1: if I have a Kathy Jones bond economy, that leads
Speaker 1: to a higher reward pe multiple, right where I've got
Speaker 1: to reset my equity valuation off of your world, right Yeah.
Speaker 1: I mean, obviously the discount rate matters for valuations and equities,
Speaker 1: and that's been a probably a pretty big component of
Speaker 1: what's driven the equity market. But Luzanne would tell you
Speaker 1: to watch the part as well. So some of those
Speaker 1: downward revisions to corporate profits that we've seen in the
Speaker 1: GDP revision have her a little bit concerned. What are
Speaker 1: you seeing on the demand side right now? In terms
Speaker 1: of that insatiable desire for papers? There are a lot
Speaker 1: of issues right now to take up the demand. Yeah, yeah, absolutely.
Speaker 1: I mean if you were in a position to be
Speaker 1: a borrower right now, you would certainly want to issue
Speaker 1: bond at these yields. Kathy Jones, thank you so much, greatly,
Speaker 1: greatly appreciate it. With Schwab's morning for the President and
Speaker 1: for the Trump administration's views on the jobs report, I'm
Speaker 1: pleased to say that we joined on Bloomberg Television and
Speaker 1: on radio by Larry Cardlo, National Economic Council Director. Good
Speaker 1: morning to Larry Ryan Jackson. Thank you great to have
Speaker 1: you with us. I can't think of a Payrolls Friday
Speaker 1: where we've barely talked about payrolls Friday because everyone wants
Speaker 1: to talk to me about trade. So where do you
Speaker 1: want to start? I think we should just start with
Speaker 1: the headline. It's the trade story. So many people, Larry,
Speaker 1: are trying to figure out the minimum condition of success
Speaker 1: for the following month to avoid this September one tariff increase.
Speaker 1: If we've got any idea what that is, Larry, well,
Speaker 1: I don't want to speculate on that. Look and in
Speaker 1: some sense the story is very straightforward. Our team returned
Speaker 1: from Shanghai Bassador, Lighthouse Secretary Manuchin, we met with we
Speaker 1: all met with the President yesterday, talked about it. President
Speaker 1: himself is not satisfied with the progress of the talks
Speaker 1: with respect to agriculture, with respect to structural items. Even
Speaker 1: he's still concerned about the sale outlawing the sale of
Speaker 1: Feton mall in China. So he did tweet uh and
Speaker 1: and put on tariffs at ten percent that will come
Speaker 1: on the three billion remaining balance September one. But look, Jonathan,
Speaker 1: it was a very respectful tweet. It was a very
Speaker 1: matter of fact tweet, and he clarified some of that
Speaker 1: or added to some of that yesterday when he had
Speaker 1: his press haggel gaggle and said, really the issue of
Speaker 1: tariffs and the relationship depends on the progress or the
Speaker 1: lack of progress for a trade deal between the two
Speaker 1: great countries. Was a respectful letter and it's a constructive letter.
Speaker 1: And you know, we believe the President expects and our
Speaker 1: team expects to be meeting with the China team inter
Speaker 1: early September. Can we assume though, that if the Chinese
Speaker 1: begin buying agricultural products between now in September, we can
Speaker 1: avoid that tariff increase. Would that be sufficient? I wouldn't.
Speaker 1: I wouldn't want to speculate, you know, can't avoid and
Speaker 1: so forth. I would say from our talks internally that
Speaker 1: that would be a plus. That would be a very
Speaker 1: good plus. If they start buying agricultural products in size,
Speaker 1: it would certainly help the story at the moment. The
Speaker 1: President followed that tweet up with some more aggressive language. Larry,
Speaker 1: I think you'd say, until such time that there is
Speaker 1: a deal, we will be taxing the hell out of China. Larry,
Speaker 1: how do you expect the Chinese to respond to that language? Well,
Speaker 1: we will see. I don't want to speculate on that.
Speaker 1: There's some things coming out of Beijing today, and we
Speaker 1: will be evaluating these statements. I don't want to get
Speaker 1: ahead of the story at all. We'll see a day
Speaker 1: at a time. But again, there's certainly a month here
Speaker 1: before the tariffs go into place. A lot of things
Speaker 1: can happen in a month, A lot of good things
Speaker 1: can happen in a month. So let's just see what happens.
Speaker 1: I don't I don't like to predict or speculate on
Speaker 1: any of this. Well, Letty, I appreciate that but just
Speaker 1: to understand the premise of that statement, we will be
Speaker 1: taxing the hell out of China if these tweets become
Speaker 1: policy on September one, taxes will be coming up on
Speaker 1: US consumers as well. One night. Well, look at the
Speaker 1: consumer issue. You know, we've been down this road discussing
Speaker 1: it with respect to prior tariffs. You know, our view
Speaker 1: is any impact on US consumers is diminimous and minuscule,
Speaker 1: and we have models to show that. You know, look,
Speaker 1: probably the strongest aspect of the American economy today, including
Speaker 1: this Job's report, is precisely consumer spending and consumer income,
Speaker 1: and that includes real income because there's no inflation. We
Speaker 1: think the economic burden of these arabs has fallen most
Speaker 1: heavily on China. They've had to slash prices in order
Speaker 1: to offset tariffs. That's damaged their profitability in their growth.
Speaker 1: There's a lot of movement of production and related supply
Speaker 1: chains out of China and going elsewhere. And so I
Speaker 1: really think that in terms of the American story, our
Speaker 1: economy is quite strong. Unfortunately, in terms of the China story,
Speaker 1: I think their economy is quite weak. So Larry, relatively speaking,
Speaker 1: I think most people agree with that. But let's talk
Speaker 1: about some of those models you've modeled this impact of
Speaker 1: an extra ten percent on this three hundred billion that's
Speaker 1: been modeled internally. Can you share with us some of
Speaker 1: those findings that you've actually found. I'm going to talk
Speaker 1: to our team and see if we want to put
Speaker 1: any of that out. We have not yet. We may.
Speaker 1: I'll get back to you on that. Okay, Well, I'd
Speaker 1: love to talk to you about it, because a lot
Speaker 1: of people are confused by it. Most people assume that
Speaker 1: if you put that tariff up to ten per cent
Speaker 1: on September one, there's gonna be some real pass through
Speaker 1: to the consumer because these are the retail I him
Speaker 1: that haven't been touched so far. So you're saying that
Speaker 1: won't happen come September, Prices won't go up on everyday
Speaker 1: items for consumers because of this tariff. Well, I'm speaking
Speaker 1: in the aggregate, Jonathan. But again, our experience and our
Speaker 1: modeling suggests that any consumer impact be very very small,
Speaker 1: and that the biggest burden in economic terms is falling
Speaker 1: on China. And you know, I think the Chinese economy
Speaker 1: is in rather poor shape. I don't want the Chinese
Speaker 1: economy to be in bad shape. I'm just saying that's
Speaker 1: what's happened. Our economy is very strong. Their economy is
Speaker 1: very weak. They're losing market share, they're losing production. Uh,
Speaker 1: and they're probably not going to get that back. People
Speaker 1: are going elsewhere. Some people are coming back home to
Speaker 1: the United States. We welcome that with our very low
Speaker 1: corporate tax rates and our deregulation program and our easy
Speaker 1: access to energy and so forth. So I think it's
Speaker 1: a plus. But look, with our forecast thing. We expect
Speaker 1: to meet with the Chinese in September, and some good
Speaker 1: things may well come from that meeting. That is possible.
Speaker 1: At the moment, though, Larry, that manufacturing story abroad is
Speaker 1: starting to come into the United States. You see it
Speaker 1: in the I S M. S. I'm not saying recontraction
Speaker 1: territory here in the United States, we're starting to see
Speaker 1: them roll over. You're not worried about that that the
Speaker 1: weakness that's been triggered abroad from this trade story is
Speaker 1: starting to bleed into the U. S. Economy. There's real
Speaker 1: signs of it, Larry, I don't deny that. I mean,
Speaker 1: the United States is not immune from the world economy. Um,
Speaker 1: maybe we can talk some about problems and policy mistakes
Speaker 1: and overseas. I am, however, heartened by the way new
Speaker 1: orders in that is M were up nicely, So that's
Speaker 1: a good sign manufacturing itself. In the industrial production report,
Speaker 1: as you may know, as up nicely in May and June.
Speaker 1: And durable goods, particularly so called core capex durable goods
Speaker 1: had a big increase in June after a decent increase
Speaker 1: in May. So we're looking for a comeback there. I
Speaker 1: mean a lot of these issues, and I don't deny
Speaker 1: the hard good sector has been slower. It's the consumer
Speaker 1: sector that's really dominating. But you know, we have unfortunately
Speaker 1: faced two years of severe monetary restraint. Now hopefully that
Speaker 1: period of monetary restraint is coming to an end. And
Speaker 1: I note that the money and bond markets are predicting
Speaker 1: several more rate cuts from our central bank, so that's
Speaker 1: going to help the story. But we still have strong
Speaker 1: incentives in place to produce and work and investment. I
Speaker 1: think that our economy is going to have a very
Speaker 1: strong second half. But Larry, let's be clear here. The
Speaker 1: reason that fed fund future start to really price in
Speaker 1: a right cut in September was after that suite. It's
Speaker 1: the belief that this trade story is gonna do some
Speaker 1: real damage to the U. S economy. And that's what
Speaker 1: I'm struggling to get my head around going We've got
Speaker 1: its campaign season now, I'd love to know what the
Speaker 1: message is from the party, so the US consumer and
Speaker 1: anyone working in manufacturing that we're gonna push this, We're
Speaker 1: gonna tax the how so to say, out of China
Speaker 1: until they break and give us a deal. How far
Speaker 1: are you willing to go with this? Well, Jennathan, I
Speaker 1: just want to note in today's jobs report, not only
Speaker 1: hundred sixty four thousand, which is a solid number households,
Speaker 1: which is the small business number. Household employment was up
Speaker 1: two hundred and eighty three thousand. Here's one very important number.
Speaker 1: Civilian labor force up three hundred and seventy thousand. Last
Speaker 1: month was up three hundred and thirty five thousand. People
Speaker 1: are coming out of the woodwork to come back to
Speaker 1: work because of better job opportunities, better job training opportunities,
Speaker 1: and higher wages. That's so important and we just got
Speaker 1: and this is so important to the story of the
Speaker 1: strength of the US. The wage and salary numbers revised
Speaker 1: up across the board the last twelve months, wages and
Speaker 1: salaries rising at five point one percent, with no I
Speaker 1: beg your pardon, five point five with an above a
Speaker 1: percent saving rate, which is absolutely phenomenal. And the biggest
Speaker 1: gainers in all of this are the low end, the
Speaker 1: middle and low end people, the blue collar workers and
Speaker 1: so forth. In fact, the bottom ten percent is the
Speaker 1: biggest gainer. Uh, some of our critics on the other
Speaker 1: side might want to check those facts to improve their
Speaker 1: own analysis. So I think we're in very, very good
Speaker 1: shape here at home, Larry. Looking at the equity market,
Speaker 1: it's not in good shape over the last couple of days. Granted,
Speaker 1: it's been a fantastic year for US equities, but it's
Speaker 1: some real weaknesses that it has emerged in the last
Speaker 1: twenty four hours. The President said to reporters yesterday he
Speaker 1: wasn't concerned at all about the negative reaction from markets.
Speaker 1: I expected that a little bit because people don't understand
Speaker 1: quite yet what's happened. Is this a change of stance
Speaker 1: from the White House. There used to be a real
Speaker 1: concern about equity markets if we pivoted. Well, no, Jonathan
Speaker 1: I'll go back to what you said two sentences ago.
Speaker 1: We you've had a heck of a year. The indexes
Speaker 1: are up more or less, and I think that is,
Speaker 1: by the way, foreshadowing a very strong economic mic growth
Speaker 1: period for the rest of and on into It's been
Speaker 1: a fabulous stock market and by the bye, encouragingly to me,
Speaker 1: at least in terms of the key sectors in the
Speaker 1: stock market, the hardwoods sectors, the industrial sector, transports have
Speaker 1: had a terrific comeback. I noticed chips and semiconductors too.
Speaker 1: That tells me that any pause in the economy and
Speaker 1: hardwoods last year undoubtedly related to the monetary tightening from
Speaker 1: the fit. That pause maybe coming to an end. And
Speaker 1: that's why I'm pretty darn optimistic. When I look at
Speaker 1: today's job numbers and I see all these literally hundreds
Speaker 1: of thousands of people returning to the labor force, I say,
Speaker 1: something very good is cooking out there. Well, let me
Speaker 1: let's just follow up on that question. Though I asked you,
Speaker 1: the President said that he's no concerned about the negative
Speaker 1: reaction from markets. Is that a change instance from the
Speaker 1: White House? Now he as as I understood that, he
Speaker 1: was just referring to the overnight mediate response. A day
Speaker 1: or two in the stock market doesn't make a trend,
Speaker 1: for heaven's sake. Well, let's have a final question on
Speaker 1: the phone exchange market, shall we. Last week was really
Speaker 1: confusing for me, confusing for many others as well. You
Speaker 1: ruled out any effects intervention. Then the President said, I
Speaker 1: didn't say I'm not going to do something, just what
Speaker 1: is the policy right now? Look in brief, I mean
Speaker 1: I have the president's quotes here. Uh, he did say
Speaker 1: I wouldn't say I'm not going to do something now,
Speaker 1: but he said, look, having a strong dollar, there's a
Speaker 1: reason it's so good having a strong dollar is having
Speaker 1: a strong dollar, having a strong currency shows what an
Speaker 1: amazing country. I stand by those remarks. I thank him
Speaker 1: for making them. We have ruled out any currency intervention.
Speaker 1: I mean. The problem here, and this president has said
Speaker 1: many times, it's not that our dollar is strong and
Speaker 1: rely independent, but we love that money is coming in
Speaker 1: here from all over the world. We are the hottest economy,
Speaker 1: were the only real major country with solid growth and
Speaker 1: investment returns. The problem here is that President is concerned
Speaker 1: correctly in my view, that other countries maybe manipulating their currencies,
Speaker 1: perhaps to get some short term trade advantage. We don't
Speaker 1: like that. We want a level playing field, and the
Speaker 1: G twenty arrangements have always called for currency stability. As
Speaker 1: Secretary Minution would attest, that's the issue. We worry more
Speaker 1: about what the others are doing. We're perfectly happy to
Speaker 1: have the US dollar as the center of the world's economy.
Speaker 1: We are the world's reserve currency, and we aim to
Speaker 1: keep it that way. With that in mind, Larry, when
Speaker 1: can we expect you to assign these countries as currency manipulates?
Speaker 1: As the Treasury Secretary has a watch list? Where's the
Speaker 1: final list of currency manipulates? As when do we get it? Well?
Speaker 1: Secretary Minition has expanded as well, Solist, that is a
Speaker 1: Treasury function. I'm going to leave it to him. He's
Speaker 1: covering it very well. He's a very smart guy and
Speaker 1: a great leader over at Treasury. So we will follow
Speaker 1: that story as it unfolds. Great to catch up with you.
Speaker 1: Appreciate all the time you've given us this morning. I've
Speaker 1: been pulled in morning as well. The National Economic Council
Speaker 1: Director joining us from the White House. Thanks for listening
Speaker 1: to the Bloomberg Surveillance Podcast. Subscribe and listen to interviews
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