00:00:00 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We'll begin this out with stock sliding as the tech route deepens. Peter Cheer of Academy writing is the cost of using AI rising even faster than the benefits. The growing angst is something companies need to aggressively address before it becomes a problem. Pete joins us now from more Peak and Mornic. You wrote that coming into this month, and already this month things are shifting pretty quickly. I've got to ask the question, if were capacively constrained, why is SpaceX, what is matter have excess capacity? 00:01:01 Speaker 3: It is strange here. We just went through three headlines, all of which certainly could have negative connotations for this industry. I don't think we've had a day like that, right, there's clearly positive interpretations of all these, but I think it does bring that question have we overbuilt? It reminds me again we talked about this a couple of years ago, and we haven't had a strong opinion on it. But the fiber industry, right, fiber built out everywhere. Then we had excess fiber for a number of years. So you know, it's this every small little agentic AI startup, meeting and willing to pay for compute so they can ipo. It's hard to tell, but this feels like that some of this kind of circular narratives starting to break apart. 00:01:35 Speaker 2: So one trade, one big trade that developed more recently over the last few months, was to get long the campex takers and get shot some of the hyperscalers. So the trade about to flip. 00:01:45 Speaker 4: Whoo. 00:01:45 Speaker 3: You know, I feel maybe everything kind of slides for a little bit. Right, Everything's kind of been pretty highly valued. We've been building out. It's we've had this kind of almost two tier economy, right, the AI build out, everything associated with the AI build out and everything else and everything else is doing okay, build those been driving things. Maybe people start to question that again, there's been all sorts of debt issues. People are you know, it's come to the markets come well, people want it. But are we hitting that point where people say, let's see how this actually plays out again? I think everyone right now when I go to conferences we talk to people, no one wants to hear about AI. Generically they want to hear what's your use case, what have you done with it? What have you been successful with it? They want case studies. And it tells me I think we're all going through this sort of process where here we're using it. Here we're now getting our bill for our tokens? Did I get enough value for that tokens? And that's a very different conversation than this time last year where everything was kind of free right, you could play around with it, it was very cheap. I think this is kind of where the rubber hits the road and meets the road and are we getting enough? And do we see a slowdown in AI spending? 00:02:45 Speaker 1: Are you surprised that equity investors are pushing back more than debt investors? 00:02:50 Speaker 3: Not really. I think these companies have such large market caps such potential that credits so well protected, and again credit's looking for you know, we've been so dull in credit. 00:02:58 Speaker 5: It's I used to talk about this all the. 00:02:59 Speaker 3: Time, right, you know, these CDX indicies, the Bloomberg, you know, corporate oas spread, it barely moves anymore. So I think anything that gives excess potential returns is you know, taking in. People want that. And I do think what we're seeing is people across the globefer US corporate credit to US government debts. So I think US government debts become very generic corporate credit with the extra spreads. That's interesting, and it's the only place to get that is US for tech. 00:03:24 Speaker 1: Just to be contrarian, if I'm hearing you talk, I would say, well, that means that the thesis is still intact. It's just sort of a question around volatility in a summer after a lot of gains and pulling back just a little bit as people get nervous, which is a positive thing, frankly, and it should make you actually more excited. Why doesn't it make you more excited to think that there is some discernment. These are three separate stories, all talking about pressuring prices lower as demand continues to increase by pretty much all accounts. 00:03:47 Speaker 3: Well, I think everyone's been very nervous about the valuation side, and I think you know, the cost me shows this again. There's so many structured products out there linked to these names that when you know, buying togets buying, and unfortunately selling begets selling. 00:03:58 Speaker 1: Right. 00:03:58 Speaker 3: We have so many leverage each the triple socks, leverye GTF right, when those go up, they put extra pressure and no one wants to talk about that. Everyone, No, it's my decision. 00:04:06 Speaker 1: To buy these. 00:04:07 Speaker 3: There's a lot of pressure coming from zero data expiration options, all these leverage gtfs, and unfortunately it works in reverse. 00:04:13 Speaker 5: Right the last two days. 00:04:14 Speaker 3: We haven't seen yet today how it'll play out, but we seem about ridiculously well on the month end close. Then yesterday seem a particularly week on nothing. So I feel like the market structure is very weak. There's not the depth of liquidity people need. And if you really start seeing hedge funds or faster money say hey, this trade's over, I think there's more selling pressure because that liquidy is not true and it hits these other products. 00:04:36 Speaker 4: But in the short term, is this a buying opportunity. 00:04:40 Speaker 3: I want to wait a little bit. I want to see where this plays out again. These valuations have gone phenomenally high, and maybe you want to start looking at who are some of the companies that you know have maybe been blamed for spending too much and might pull back and maybe you see that stock price come back right agin. You know, we used to talk about the debt diet where companies kind of get restricted and they did something to take care of their debt. We're not seeing that yet, but maybe you start seeing a different narrative. Right this is the first time kind of wake up in the morning like we need to spend and the only problem we could have is not building enough compute. That doesn't necessarily sound like that's today's problem. 00:05:09 Speaker 2: At least I mentioned it. The big signal, the instructive signal coming from the market. Mets rallied had a really nice day, and you wanted the c suite over at say Microsoft pays attention and says, you know what, I'll have some of that. The issue is and you alluded to it. It's not just the market story. We've got an economic story as well. The market story increasingly becoming one trait and the economy increasingly firing on one engine. If they start pulling back on spending, do we have a macro risk starting to build hit I think so. 00:05:33 Speaker 3: I think that would certainly hurt the economy. It would hurt the growth that we have and the flip side of this, And I'll talk maybe a little bit about the open EIE story where you're talking about One of the risks that we've said is that the AI industry has not done a really good job. I think in community outreach right, they haven't gone a good job convincing people A it's important for national security. B it's good for your community if we build a data center AI near you. I think they have to get back on track. And some of this is open AI and you start looking. I think it was Utah, one of the people who lost recent election blame that their support for the data center cost them that. So I think this is becoming a political issue and I could see things where you start seeing politicians run on. 00:06:09 Speaker 5: Or we're going to tax the AI. 00:06:10 Speaker 3: We're going to tax this. I don't know how they would do it, but it doesn't really matter. I think that momentum is building and far faster than I would have expected. I would have expected that to be a twenty twenty eight issue. It feels like some politicians are going to be savvy and catch this mood. And I think the AI industry has to get out in front of it better than they've done. It's really got to be like the energy industry other things, community outreach, explaining their story. 00:06:31 Speaker 4: Better stay with us. 00:06:33 Speaker 2: More Bloomberg surveillance coming up after this Premister of JP Morgan writing, it will be important to look under the hood and which sanctory is striving jobs to see if the pace of job creation is broadening and or becoming a source of inflation. Prayer joins is now for more Preyer, Good morning, Larning. What did the early endicated is suggest So, I. 00:07:00 Speaker 5: Would say it's it's still not really the labor. 00:07:03 Speaker 6: Market doesn't seem to be a source of inflation here. You know, we're looking at wage wage numbers, they're not really picking up. The unemployment rate hasn't been falling. We're in this low higher low fire economy. There's a massive AI trade, you know, there's this sort of case shaped consumer, so you know, but we've had a very resilient economy and we've had. We've had lots of shocks, you know, between the oil shock, between tariffs, between five hundred basements of rate hikes, and the economy has been resilient. So I think the big question you were just talking about the shifting narrative. I think there's also a shifting narrative in the macro you know world. There is the labor market reaccelerating. You know, we've had three months of solid growth. We at the point where the labor markets about to take off. The growth is broadening out. If it's broadening out, then we should be talking about a higher neutral rate. 00:07:54 Speaker 5: We should be. 00:07:54 Speaker 6: Talking about federate hikes. We're not convinced we're there. I mean, we're expecting some slo but you have to look on the herd. I would push back. I think the labor market's extremely important. 00:08:03 Speaker 5: I know, if you just. 00:08:04 Speaker 6: Watch chair wash, you might say it's all about inflation, it's about trend inflation. He's actually actually opening the door here. 00:08:11 Speaker 5: For we may need to look at more data. 00:08:12 Speaker 6: We may need to look at that trend number, and that's where the labor market comes in. So watch under the hood, is the still really. 00:08:20 Speaker 5: AI and sort of these secular things. 00:08:22 Speaker 6: We're all getting older, so you know, if it's all healthcare, I wouldn't say that that's a source of inflation. Do we see broad based, you know, job growth. I think then we would say hikes should be really. 00:08:32 Speaker 5: On the data. 00:08:33 Speaker 2: Did you think it close to that? 00:08:35 Speaker 6: I don't see that. I still see hiring trends remaining low. You know, we look at all sorts of whether you look at consumers, So if I'm in the market looking for a job, those numbers a week, so centiment numbers a week. 00:08:45 Speaker 5: If I look at companies, what are you doing with all the money you're raising. 00:08:49 Speaker 6: Capex, I still don't hear hiring, So I don't think we're there. I mean, let's see, the numbers are noisy, so you can always get that world Cup effect in a high number. 00:08:58 Speaker 5: But if it's all. 00:08:58 Speaker 6: Leisure, hospitality, if it's healthcare, I'm not convinced that we're at the point where the labor market's about to take off. But I think that's the key question, especially as we sort of contemplate rate hikes in a no forward guidance or no framework guidance world. 00:09:12 Speaker 1: You know what's interesting is in the ADP report, it wasn't coming as much from leisure in hospitality. I don't know we can read into it from that. How much will it matter to you if suddenly we see people being hired to build out data centers, to do construction work, to do some of the highly technical mechanics. I mean, how much do those jobs give you a sense of positivity or not? Is that a broadening out or is that the same trade? 00:09:36 Speaker 6: If you just show me it's construction and it's really non residential. 00:09:40 Speaker 5: Constructions, that's data center. 00:09:41 Speaker 6: I don't know if I would be convinced that this is broadening out, it would be good. 00:09:45 Speaker 5: Every job is good. 00:09:46 Speaker 6: But is that a source of inflation that the FED might want to clamp down or you know, in this focus on price stability we need to push back again. I guess that's what we'll be watching. And do you see that showing up and spending? Look at personal conssumption this year. I mean, despite the resilience, personal consumption is actually slowing. So I'd like to see the broadening out of the job gains as well as personal consumption picking up, not just the upper part of the KY, but some broadening out as oil prices decline, do we see that tailwind for the consumer, and then you know, that might make us more positive thing that the FED may have to raise rates. And then I think the market's going to struggle it because how much are we talking about raising rates? 00:10:25 Speaker 5: You know, because without. 00:10:26 Speaker 6: Forward guidance, is it just a mid cycle adjustment? Is it risk management hikes or is this a hiking cycle. I think the market narrative will shift. I'm not even sure risk assets will love that. 00:10:37 Speaker 5: I mean the rates market. 00:10:38 Speaker 6: Will price in some risk premium or rate hikes, but I think you will need to see that consumption along with the broadening out of job gains to get there. 00:10:46 Speaker 1: Is there anything I'm going to ask you the question that we were talking about with Mark TNONI, is there anything you could see in this labor market report that could put to lie and play? 00:10:54 Speaker 5: Oh, wages? 00:10:55 Speaker 6: If we see a pickup in wages and I would like to see that along with you know, no sort of seasonal impact or this is just driven by one sector, then I think July, you know the market's going to price in this risk premium now that I think we all have to get used to higher risk premiums, you know. 00:11:11 Speaker 5: Chairwah stays of the market is a pure way to see it. 00:11:14 Speaker 6: But if you're not sure of the reaction function, you're not sure what is that trigger point for the Fed to actually raise rates, then at that point you're going to price in that you know, some decent chance of a July hike, So wages hours worked broadening out, and then of course we have CPI in two weeks, so we'll be watching that. If you see core services starting to pick up and it's not just software, but it's actually broader, you know, every service that we spend, then that will be a sign that maybe the inflation pressures are not just oil, because we know headline inflation is going to be negative, I mean most likely month over month. 00:11:48 Speaker 5: But if it's broadening. 00:11:49 Speaker 6: Out, I think then the Fed will sort of tell us that they're getting a little impatient with being abuff target for this long. 00:11:55 Speaker 5: I think the market then brings July in play. 00:11:58 Speaker 4: Does this metastory actually help them, because Kevin wash almost yesterday admitted that AI is inflationary in the short term. 00:12:06 Speaker 5: I'm glad you bring that up. 00:12:07 Speaker 6: I mean, I think Kevin WASH's he said it a little bit in the press conference, and he brought it up again yesterday. I think the FED it's easy for us to see the demand side of AI. It's showing up in data centers, showing up in software prices. The supply side is unknown, you know. I go back to the nineties. It took a long time to show up in the productivity data. Jair Walsh is bringing that up. He brought it up again yesterday. So I don't know if it's the metal story or a broader but if there's a sense that you know, the pricing power aspect is there, but you're seeing the pickup in productivity, you don't need to kill growth. 00:12:42 Speaker 5: Then you don't have that cruel. 00:12:43 Speaker 6: Choice to make productivity is picking up. 00:12:45 Speaker 5: This is something we were debating. 00:12:46 Speaker 6: We just had a quarterly you know, meeting for fixed income last week and we were debating the expansion is there we feel good about the expansion. 00:12:55 Speaker 5: Is it productivity leading or is it? Is it inflationary? 00:12:59 Speaker 6: And that has him locations across asset class. I think we're more in the productivity can but we have to see. 00:13:04 Speaker 5: That in the data. 00:13:04 Speaker 6: And I think wages, hours, all of these consumption would be one source of that. 00:13:09 Speaker 2: Oh, let's go there. If we get a meta shift is that ambullish development for bonds. 00:13:14 Speaker 6: And I think bonds actually look good. I don't want to talk my book. 00:13:16 Speaker 5: But you have the income. 00:13:19 Speaker 6: Look at the income you're getting in fixed income, and I will highlight how much I mean, income's back. 00:13:25 Speaker 5: Really, yields are positive. You've had thirty percent. 00:13:27 Speaker 6: Higher investment grate corporate supply this year, and spreads have been remarkably stable. So people are voting with flows. They're looking at all in yields of six percent, and you know, you look under the hood, there's a lot of dispersion high yield investment grade. We can get high quality investment grade paper close to six percent. So I think fixed income I would generally say that there's a case to be made. I think if this is just a I mean, I would argue, look at the economy. 00:13:56 Speaker 5: It's a lot of it is AI driven. So if some air is coming out. 00:13:59 Speaker 6: Of that building, maybe people are going to say, Okay, I'd like to see broadening out. 00:14:02 Speaker 5: If I'm not convinced, maybe Barnes. 00:14:05 Speaker 6: Risk adjusted yields, you're giving me six percent, that looks attractive. 00:14:08 Speaker 5: So short a long answer to your question, yes, but. 00:14:12 Speaker 6: I would say it's attractive even here, and that's why we're seeing the influenced. 00:14:15 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. So we got the job's number just miments ago, who came at fifty seven k. The estimate our survey was one thirteen the previous number. Revised down. The unemployment rate for a bunch of reasons. We'll spend some time on that dropped back from four point three percent to four point two with this runner table. Stephanie Ratha Wolf Research, Stephanie, good morning. 00:14:46 Speaker 5: Good morning. 00:14:47 Speaker 2: What would you put waste on this morning looking at this report? 00:14:49 Speaker 7: Yeah, and I think the main message from the report is perils had been overstated to some extent in the recent prints. We're sitting in a labor market that's largely in balance. 00:14:56 Speaker 4: The unemployment rate. 00:14:57 Speaker 7: Yes, it took down, but realistically, you know, the household and the establishment surveys have been telling you slightly different signals. 00:15:03 Speaker 5: It kind of makes sense. 00:15:04 Speaker 7: It tells you the labor market is fine. There's no real concern, certainly no urgency for the Fed to be hiking, and that buys them time. The longer that they have to buy time. By that point, inflation will be slowing down a bit and that will probably allow them to stay on hold. 00:15:18 Speaker 2: If the chairman used the word to describe this particular jobs market, he said it was steady. Would you call it steady the lamb of market? 00:15:25 Speaker 4: I think that's exactly. 00:15:26 Speaker 7: Right, And I mean there's been a lot of volatility in the actual data itself. It seemed odd the extent of which payrolls had been running significantly above anyone's estimates of breaking even for many months, and you weren't really seeing wages pick up. You weren't seeing it confirmed. That extent of the tightness confirmed in other surveys. So it kind of suggests that payrolls had been overstated to some extent. If you look at the birth death adjustment for this month, that was a little bit lower than it was last year at this time, So perhaps that is just adding to some of the volatility. 00:15:55 Speaker 5: It made it a little bit lower than would otherwise be the case. 00:15:57 Speaker 1: I remember speaking with San Francisco Fed President Mary Daily about a year ago, and she said that typically at turning points to the economy, you can get this churn, this lack of clarity in the labor market. 00:16:09 Speaker 5: It feels like that churn has. 00:16:10 Speaker 1: Continued for a really long time, even though usually it does tend to tip one way or another. 00:16:16 Speaker 5: Are we looking at it wrong? 00:16:17 Speaker 1: Is there something else that's happening here, some evolution, some sort of shift in terms of the emphasis going forward that we can glean from these successive labor market reports. 00:16:27 Speaker 7: I think what we've learned is, certainly there's a lot of volatility, a lot of surprises. Of course, this time the surprise has been on the negative side, and the prior months it's been on the positive side. Realistically, there's ault somewhere in the middle where lad market seems to be in pretty good balance. It's running probably close to break even, whatever your estimate may be of that. Our estimate is around seventy five thousand, So our estimate is that you're probably just in a pretty good balance. The economy is in a decent spot, and the inflationary pressures don't seem to be generated from. 00:16:53 Speaker 5: The labor market. 00:16:54 Speaker 7: It seems to be generated else elsewhere, in which case that should roll off. We expect about one hundred basis points off core PC by the end of twenty twenty seven, but it'll take a little bit of time. 00:17:03 Speaker 1: The market doesn't do well with remaining on hold. Usually people are saying, Okay, which direction are you moving in? Which is the reason why there's a subsession of what's the next move for the federal reserve? 00:17:12 Speaker 4: Rates up or. 00:17:12 Speaker 1: Rates down, partly because people want momentum. But are we really looking at is that we are at neutral and that essentially this rate is allowing the economy to kind of muddle through whatever technological transformation is underway. 00:17:24 Speaker 4: I think that's probably right. 00:17:25 Speaker 7: And by the way, the technological transformation doesn't really depend on the level of interest rates today, because that's going to happen regardless of whether rates are plus or minus twenty five basis points from here. So realistically we're in an environment where interest rates are largely neutral. Of course, that are parts of the economy that it feels restrictive. Is certainly wors should talk about in terms of housing, but generally speaking, it seems to be in a pretty good place. Consumers are spending fairly well. It's been a decent, call it two percent trend in spending. It's an economy that is in pretty decent balance, and I think that will continue through much of the summer and the rest of the year. 00:17:59 Speaker 4: What about the participate rate falling by three tens percent. 00:18:02 Speaker 5: My guess is a lot of it is noise. 00:18:04 Speaker 7: To some extent. The housefolds are is notoriously volatile. By falling by three tens is a big move. Seven hundred thousand people like we tend to get a lot of volatility in that report. And my expectation is in the next print you will see it rebound. 00:18:18 Speaker 4: What about revisions make you nervous or no. 00:18:21 Speaker 7: No, it makes me feel better because it didn't make sense of how strong the labor market is relative to anybody's expectation of break even, So, you know, seeing some revisions to the prior months that seemed stronger than what made sense I think, you know, it makes me feel better about sort of the data and the trajectory, and it makes a little bit more sense relative to where other indicators are. 00:18:44 Speaker 2: This is the Bloomberg Sevendics podcast, bringing you the best in markets, economics, antient politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen ways on the Bloomberg terminal and the Bloomberg bused this out. 00:19:06 Speaker 3: Mm hmm