1 00:00:02,520 --> 00:00:07,440 Speaker 1: Bloomberg Audio Studios, podcasts, radio News. 2 00:00:07,280 --> 00:00:09,879 Speaker 2: Where pleased to welcome Torsen Slock. He is chief econmist 3 00:00:09,960 --> 00:00:14,120 Speaker 2: at Apollo for this macro conversation and Tordson, you heard 4 00:00:14,120 --> 00:00:16,599 Speaker 2: what Mike was saying about inflation expectations, and we see 5 00:00:16,600 --> 00:00:21,560 Speaker 2: that in some measures, what are you thinking about inflation expectations? 6 00:00:21,560 --> 00:00:25,280 Speaker 2: Because there's market based measures, there's also survey based measures. 7 00:00:25,640 --> 00:00:28,000 Speaker 2: It's not really time to worry until everything points in 8 00:00:28,000 --> 00:00:29,440 Speaker 2: the same direction right well, And the. 9 00:00:29,400 --> 00:00:32,280 Speaker 1: Key issue is that, of course headline inflation is showing 10 00:00:32,320 --> 00:00:35,000 Speaker 1: signs of high inflation. That makes total sense because headline 11 00:00:35,000 --> 00:00:38,040 Speaker 1: inflation also consists of food and of course importantly energy. 12 00:00:38,360 --> 00:00:41,160 Speaker 1: Call inflation expectations. We don't quite know yet what they 13 00:00:41,320 --> 00:00:43,400 Speaker 1: are doing. But what we do know is that when 14 00:00:43,400 --> 00:00:46,120 Speaker 1: you look at various other sensiment indicators, including today, we've 15 00:00:46,120 --> 00:00:48,600 Speaker 1: got consumer confidence also starting to go down. If you 16 00:00:48,600 --> 00:00:51,680 Speaker 1: look at the daily indicators for consumer sentiment from morning 17 00:00:51,680 --> 00:00:54,720 Speaker 1: consult is also going down for low income, middle income 18 00:00:54,760 --> 00:00:56,960 Speaker 1: and high income households. But the key issue at this 19 00:00:57,000 --> 00:00:59,080 Speaker 1: point is that if you look at the actual spending, 20 00:00:59,400 --> 00:01:01,800 Speaker 1: the daily for how many people travel on airplanes is 21 00:01:01,800 --> 00:01:04,520 Speaker 1: still good. The weekly data for red Book, same store 22 00:01:04,560 --> 00:01:07,200 Speaker 1: retail sales meaning what was sales in Stars last week 23 00:01:07,360 --> 00:01:09,639 Speaker 1: relative to the same week a year ago is actually 24 00:01:09,640 --> 00:01:12,119 Speaker 1: also still very strong. And what you're also seeing even 25 00:01:12,120 --> 00:01:15,240 Speaker 1: hotel demand on a weekly basis from Star is also 26 00:01:15,319 --> 00:01:17,959 Speaker 1: very strong. Both Red fire strong, the data readly strong, 27 00:01:18,000 --> 00:01:20,199 Speaker 1: the occupants you're ready strong. So there's a very different 28 00:01:20,240 --> 00:01:23,760 Speaker 1: divergence between what a consumer's saying relative to what are 29 00:01:23,760 --> 00:01:26,399 Speaker 1: they actually doing. So at this point, the duration of 30 00:01:26,400 --> 00:01:28,920 Speaker 1: the shark has simply not been long enough to actually 31 00:01:28,920 --> 00:01:32,080 Speaker 1: create that demand destruction that we all worry so much about, right. 32 00:01:31,920 --> 00:01:33,880 Speaker 2: And in fact, if you look at longer term inflation 33 00:01:33,920 --> 00:01:37,080 Speaker 2: expectations and you see that within University of Michigan Sentiment 34 00:01:37,160 --> 00:01:39,959 Speaker 2: survey today, those are well anchored. 35 00:01:39,680 --> 00:01:42,480 Speaker 1: Absolutely so, both on a market basis and a survey basis, 36 00:01:42,480 --> 00:01:45,440 Speaker 1: long term FLA inflation expectations are very very stable and 37 00:01:45,520 --> 00:01:47,200 Speaker 1: have not shown any signs of going up. In fact, 38 00:01:47,240 --> 00:01:49,200 Speaker 1: some of them have acually started to go down. So 39 00:01:49,480 --> 00:01:52,720 Speaker 1: exactly the FIT would mainly worry about our markets getting 40 00:01:52,720 --> 00:01:55,360 Speaker 1: worried about inflation becoming out of control. Maybe yes, in 41 00:01:55,440 --> 00:01:58,480 Speaker 1: the next year, we can call that transitory, temporary, whatever 42 00:01:58,480 --> 00:02:00,400 Speaker 1: we want to call it, but it's very clear is 43 00:02:00,400 --> 00:02:02,400 Speaker 1: saying this is absolutely something that's only here for a 44 00:02:02,480 --> 00:02:04,760 Speaker 1: very limited time, and then we will go back and 45 00:02:04,800 --> 00:02:07,760 Speaker 1: have inflation expectations at the longer run, more stable level. 46 00:02:07,960 --> 00:02:11,480 Speaker 3: Now, the one difference here between the Wall Street folks 47 00:02:11,560 --> 00:02:15,200 Speaker 3: and the Fed folks is perhaps the inflation indicators are 48 00:02:15,240 --> 00:02:19,359 Speaker 3: looking at CPI has been going down and it'll obviously 49 00:02:19,400 --> 00:02:22,519 Speaker 3: on a headline basis, go up. But PCE, even without oil, 50 00:02:22,960 --> 00:02:25,720 Speaker 3: has been rising, and that's the index that they follow. 51 00:02:26,880 --> 00:02:29,440 Speaker 3: When you listen to Fed folks. They're not talking about 52 00:02:29,520 --> 00:02:32,480 Speaker 3: rate increases yet, but have they pretty much wiped out 53 00:02:32,520 --> 00:02:35,000 Speaker 3: the idea of any rate cuts this year because the 54 00:02:35,040 --> 00:02:38,040 Speaker 3: Bloomberg survey today showed economistink, we're going to see a 55 00:02:38,120 --> 00:02:39,880 Speaker 3: rise in inflation, but we're still going to see two 56 00:02:39,880 --> 00:02:40,600 Speaker 3: cuts before. 57 00:02:40,360 --> 00:02:40,880 Speaker 2: The end of the year. 58 00:02:40,919 --> 00:02:44,280 Speaker 1: Absolutely. Denill was also very interesting the ECFC GO Bloomberg 59 00:02:44,320 --> 00:02:46,880 Speaker 1: survey was that they probabilits of recession actually went up 60 00:02:47,000 --> 00:02:49,600 Speaker 1: from twenty five percent to thirty percent. So we're almost 61 00:02:49,639 --> 00:02:52,600 Speaker 1: looking at more bifurcated distribution where either you worry a 62 00:02:52,639 --> 00:02:55,520 Speaker 1: lot about inflation being higher and potentially above three now 63 00:02:55,560 --> 00:02:57,320 Speaker 1: for a very extended period meaning at least the next 64 00:02:57,360 --> 00:02:59,799 Speaker 1: level quarters all alternative to people begin to worry about 65 00:02:59,800 --> 00:03:01,840 Speaker 1: the maybe there is a harder landing that is also 66 00:03:01,880 --> 00:03:05,120 Speaker 1: potentially an outcome. So that distribution tells you exactly what 67 00:03:05,160 --> 00:03:06,880 Speaker 1: the problem is for the fit, Namey, they worry on 68 00:03:06,880 --> 00:03:09,200 Speaker 1: the one hand about inflation being high, but they also 69 00:03:09,200 --> 00:03:11,880 Speaker 1: worry about it the label market begins to deteriorrate, including 70 00:03:11,919 --> 00:03:14,680 Speaker 1: of course also if AI puts up with pressure on unemployment, 71 00:03:14,880 --> 00:03:17,480 Speaker 1: and all those factors have of cost. The challenges for the fit, 72 00:03:17,560 --> 00:03:20,000 Speaker 1: namely how much should they put up weight on inflation 73 00:03:20,240 --> 00:03:22,280 Speaker 1: relate to how much weight should they put on the 74 00:03:22,400 --> 00:03:25,040 Speaker 1: risk of the labor market might begin to deteriorate over 75 00:03:25,040 --> 00:03:25,880 Speaker 1: the next seven months. 76 00:03:26,200 --> 00:03:28,160 Speaker 2: Well, let's stay with the labor market, because the job 77 00:03:28,200 --> 00:03:30,600 Speaker 2: of claim numbers that we got this week ticked up 78 00:03:30,639 --> 00:03:34,040 Speaker 2: slightly but remain pretty much in your historically low levels. 79 00:03:34,440 --> 00:03:37,640 Speaker 2: Is the low higher low fire market still intact and 80 00:03:37,680 --> 00:03:39,800 Speaker 2: at this point not an immediate source of concern. 81 00:03:40,160 --> 00:03:42,520 Speaker 1: Absolutely. I think it was low higher low fire because 82 00:03:42,560 --> 00:03:44,480 Speaker 1: of the trade wall for most of last year, and 83 00:03:44,520 --> 00:03:46,600 Speaker 1: now I think it's low higher low fire because of 84 00:03:46,600 --> 00:03:49,760 Speaker 1: the energy shock. So that's why companies are responding in 85 00:03:49,880 --> 00:03:53,040 Speaker 1: probably the most rational way by saying, we don't really 86 00:03:53,040 --> 00:03:55,280 Speaker 1: know exactly how long time the shock will last. We 87 00:03:55,280 --> 00:03:57,360 Speaker 1: don't know what other prices will go to. So for 88 00:03:57,400 --> 00:04:00,240 Speaker 1: that reason it makes sense that the labelmark continues show 89 00:04:00,280 --> 00:04:04,360 Speaker 1: this fairly cautious overall properties, especially as you mentioned Scarlet, 90 00:04:04,600 --> 00:04:07,000 Speaker 1: that jobless claims continue to be reatively low. 91 00:04:07,160 --> 00:04:09,880 Speaker 2: What we need to see in the jobs data, whether 92 00:04:09,920 --> 00:04:13,200 Speaker 2: it's high frequency data or the monthly reports, to signal 93 00:04:13,360 --> 00:04:14,760 Speaker 2: some kind of fed reliefs on the way. 94 00:04:14,960 --> 00:04:16,600 Speaker 1: Well, the key issue, of course is next Friday, and 95 00:04:16,600 --> 00:04:18,600 Speaker 1: particularly for fixed income more abroady, that is the most 96 00:04:18,600 --> 00:04:22,000 Speaker 1: important number across the board, both for rates and for credit. Namely, 97 00:04:22,200 --> 00:04:25,120 Speaker 1: is the economy still producing jobs or as we saw 98 00:04:25,200 --> 00:04:27,479 Speaker 1: last month, are we still losing jobs the way that 99 00:04:27,520 --> 00:04:29,880 Speaker 1: we did within ninety two thousand decline that we saw 100 00:04:30,080 --> 00:04:32,119 Speaker 1: in the previous month, And the key issue therefore becomes 101 00:04:32,120 --> 00:04:35,200 Speaker 1: the labor market data is just taking a very very prominent, 102 00:04:35,279 --> 00:04:38,800 Speaker 1: more important role than usual because inflation is telling us 103 00:04:38,800 --> 00:04:40,800 Speaker 1: to hike. But now we certainly have that the other 104 00:04:40,839 --> 00:04:43,280 Speaker 1: side of the dual mandate, namely label market might begin 105 00:04:43,360 --> 00:04:46,640 Speaker 1: to show some more cooling, especially now that immigration restrictions 106 00:04:46,800 --> 00:04:49,479 Speaker 1: and the label supply is also weighing down on the 107 00:04:49,520 --> 00:04:52,120 Speaker 1: overall out of a nonfun payroll. So that's why next 108 00:04:52,120 --> 00:04:54,960 Speaker 1: week is becoming very critical for thinking about what is 109 00:04:54,960 --> 00:04:56,680 Speaker 1: the fit going to do because so far it's been 110 00:04:56,680 --> 00:04:58,880 Speaker 1: easy for them in the SEP this week to just 111 00:04:58,920 --> 00:05:02,279 Speaker 1: say overly's up in and they also revised LOPGDP. But 112 00:05:02,360 --> 00:05:04,440 Speaker 1: if the label market begins to show softness, then that 113 00:05:04,480 --> 00:05:06,200 Speaker 1: would of course become more challenging for them. 114 00:05:06,560 --> 00:05:09,160 Speaker 3: I have to ask you, when I was studying economics, 115 00:05:09,240 --> 00:05:11,480 Speaker 3: they taught us a couple of rules. One was it's 116 00:05:11,520 --> 00:05:15,120 Speaker 3: never different this time and another was you can make 117 00:05:15,160 --> 00:05:18,520 Speaker 3: a point forecast or a time forecast, but never two 118 00:05:18,560 --> 00:05:21,440 Speaker 3: at the same time. But in your chart this week, 119 00:05:22,760 --> 00:05:25,240 Speaker 3: and this has gotten a lot of play in social media, 120 00:05:25,520 --> 00:05:27,800 Speaker 3: you say we're going to have a very short term 121 00:05:28,600 --> 00:05:33,280 Speaker 3: disturbance in the bond market and fifty years of security 122 00:05:33,320 --> 00:05:35,799 Speaker 3: in the Middle East that will keep down oil prices. 123 00:05:36,560 --> 00:05:39,080 Speaker 3: That's quite a time forecast, that's true. 124 00:05:39,200 --> 00:05:41,400 Speaker 1: But I think the logic really here for investors is 125 00:05:41,520 --> 00:05:43,560 Speaker 1: quite simple. We should all be stepping back and looking 126 00:05:43,560 --> 00:05:46,039 Speaker 1: at this with a much more long term perspective. Let's 127 00:05:46,040 --> 00:05:48,839 Speaker 1: agree that the situation we have today. It's not sustainable. 128 00:05:48,880 --> 00:05:51,360 Speaker 1: We cannot have this. We can discuss for how long time, 129 00:05:51,400 --> 00:05:54,520 Speaker 1: but we cannot have this for several years, definitely not 130 00:05:54,760 --> 00:05:56,839 Speaker 1: and we cannot perhaps even have it for several months. 131 00:05:56,920 --> 00:05:59,039 Speaker 1: And if that's the case, we should expect to have 132 00:05:59,120 --> 00:06:02,520 Speaker 1: some resolution. It makes sense that it's complicated for everyone 133 00:06:02,600 --> 00:06:04,680 Speaker 1: to figure out what is the military strategy, what's going 134 00:06:04,720 --> 00:06:07,480 Speaker 1: to response on both sides. But the conclusion must be 135 00:06:07,520 --> 00:06:09,839 Speaker 1: that from a market perspective, we're getting closer to the 136 00:06:09,839 --> 00:06:12,719 Speaker 1: midterm election in eight months. From that perspective, there's probably 137 00:06:12,720 --> 00:06:15,599 Speaker 1: also some political considerations, both in Iran and in the US. 138 00:06:15,800 --> 00:06:16,480 Speaker 1: That comes to the. 139 00:06:16,400 --> 00:06:17,839 Speaker 3: Conclusion fifty years. 140 00:06:17,960 --> 00:06:19,359 Speaker 1: But I do think that at the end of this 141 00:06:19,480 --> 00:06:21,599 Speaker 1: we will probably have a situation that is quite different 142 00:06:21,839 --> 00:06:24,200 Speaker 1: in the sense that we will probably have, at least 143 00:06:24,360 --> 00:06:27,080 Speaker 1: from the GCC side in the Middle East, probably more 144 00:06:27,120 --> 00:06:30,080 Speaker 1: connection with the US, probably more connection with Europe, and 145 00:06:30,120 --> 00:06:34,039 Speaker 1: therefore probably also more stability more broadly, relative to where 146 00:06:34,040 --> 00:06:35,400 Speaker 1: we were just a few months ago. 147 00:06:35,520 --> 00:06:37,040 Speaker 2: All right, well, I mean we have to get through 148 00:06:37,080 --> 00:06:39,800 Speaker 2: the fog of the current next few months in order 149 00:06:39,839 --> 00:06:41,880 Speaker 2: to get to that point. You did bring along a 150 00:06:41,960 --> 00:06:43,919 Speaker 2: chart with you this time that shows that there's a 151 00:06:43,960 --> 00:06:46,400 Speaker 2: lot of supply coming to market, investment grade supply. It 152 00:06:46,440 --> 00:06:49,919 Speaker 2: combined fourteen trillion dollars worth of supply. How did you 153 00:06:49,920 --> 00:06:50,920 Speaker 2: get to fourteen trillion? 154 00:06:51,000 --> 00:06:52,640 Speaker 1: Yeah, So the charge you look at here, it shows 155 00:06:52,640 --> 00:06:55,719 Speaker 1: shoes from the Treasury. They put out data for what 156 00:06:56,040 --> 00:06:58,880 Speaker 1: is the total amount of US treasury debt that needs 157 00:06:58,880 --> 00:07:00,920 Speaker 1: to be refinanced in the next twelfth months, and as 158 00:07:00,920 --> 00:07:02,799 Speaker 1: you can see in the yellow line, it is about 159 00:07:02,800 --> 00:07:05,360 Speaker 1: ten trillion dollars that needs to be refinanced. In other words, 160 00:07:05,480 --> 00:07:07,880 Speaker 1: uish government debt that rolls over. So this is bills, 161 00:07:08,160 --> 00:07:10,440 Speaker 1: this is coupons, This is across the whole curve. If 162 00:07:10,440 --> 00:07:12,640 Speaker 1: you now add to that two other things. On top 163 00:07:12,680 --> 00:07:15,000 Speaker 1: of that line, we also have two trillion in government 164 00:07:15,000 --> 00:07:17,760 Speaker 1: budget deficit, so that brings us to twelfth trillion. And 165 00:07:17,800 --> 00:07:20,440 Speaker 1: finally we're also have about two trillion in net gross 166 00:07:20,440 --> 00:07:23,960 Speaker 1: issuance from the hyperscalers and the banks in IG So 167 00:07:24,000 --> 00:07:26,520 Speaker 1: that means that the total supply of investment grade bonds 168 00:07:26,560 --> 00:07:28,560 Speaker 1: that are coming to the market is about twelve trillion 169 00:07:28,600 --> 00:07:31,840 Speaker 1: from the government and two trillion from corporates. That brings 170 00:07:31,840 --> 00:07:34,320 Speaker 1: you to a number that is roughly given US GDP 171 00:07:34,520 --> 00:07:37,600 Speaker 1: is thirty trillion, roughly fifty percent of GDP that needs 172 00:07:37,600 --> 00:07:40,320 Speaker 1: to be absorbed by financial markets. That's a very, very 173 00:07:40,360 --> 00:07:42,600 Speaker 1: the highest number we've seen in history. That's a very 174 00:07:42,600 --> 00:07:45,560 Speaker 1: substantial amount of bonds of investment grade credit and investment 175 00:07:45,600 --> 00:07:47,040 Speaker 1: grade bonds that are coming to the market. So the 176 00:07:47,040 --> 00:07:49,680 Speaker 1: short answer is, if we already were about inflation going 177 00:07:49,760 --> 00:07:52,160 Speaker 1: up because of Mike's child, with inflation expectations going up, 178 00:07:52,160 --> 00:07:54,160 Speaker 1: we have tariff footing up bid pressure or the price 179 00:07:54,160 --> 00:07:55,680 Speaker 1: of putting up boid pressure. We have a fairly strong 180 00:07:55,680 --> 00:07:58,040 Speaker 1: economy also putting up with pressure, and now we also 181 00:07:58,080 --> 00:08:00,800 Speaker 1: have significant supply coming to the market. That does bring 182 00:08:00,800 --> 00:08:02,960 Speaker 1: the risk that there is some upside pressure on rates 183 00:08:03,360 --> 00:08:05,120 Speaker 1: in the front and the long end. And there's also 184 00:08:05,160 --> 00:08:07,920 Speaker 1: on top of that, because of the significant increase in IGT, 185 00:08:08,000 --> 00:08:10,600 Speaker 1: it also upward pressure on credit spreads. That means that 186 00:08:10,640 --> 00:08:13,400 Speaker 1: both spreads in credit are under upward pressure for these 187 00:08:13,440 --> 00:08:16,840 Speaker 1: technical reasons, and also the level of yields in rates 188 00:08:16,960 --> 00:08:19,000 Speaker 1: is also on the upper pressure because of this supply 189 00:08:19,040 --> 00:08:19,840 Speaker 1: being so significant. 190 00:08:19,840 --> 00:08:21,480 Speaker 2: So very quickly, how are you thinking about the demand 191 00:08:21,600 --> 00:08:24,480 Speaker 2: dynamics then, because we already know what the supply is 192 00:08:24,480 --> 00:08:25,840 Speaker 2: going to be. It's there's gonna be a ton of it. 193 00:08:25,960 --> 00:08:27,800 Speaker 1: Well, that's why a lot of the people who spoke 194 00:08:27,880 --> 00:08:30,600 Speaker 1: just before we started here discussing exactly saying that this 195 00:08:30,640 --> 00:08:32,520 Speaker 1: is actually an interesting time to look at the level 196 00:08:32,520 --> 00:08:35,520 Speaker 1: of yields, especially if there is now an environment where 197 00:08:35,520 --> 00:08:37,800 Speaker 1: other prices might eventually come down, and especially if people 198 00:08:37,800 --> 00:08:39,880 Speaker 1: begin to worry about that the economy might also begin 199 00:08:39,920 --> 00:08:42,000 Speaker 1: to slow a bit down. If that's the case, you 200 00:08:42,120 --> 00:08:44,840 Speaker 1: both have a level of base rates that's higher temporarily 201 00:08:44,840 --> 00:08:47,160 Speaker 1: at the moment, but you also have spreads in credit 202 00:08:47,200 --> 00:08:49,720 Speaker 1: that's also temporarily higher. And that's just given all in 203 00:08:49,840 --> 00:08:52,520 Speaker 1: yield in credit, both in investment grade, but also some 204 00:08:52,559 --> 00:08:55,199 Speaker 1: parts of high yield that actually looks quite juicy. Software 205 00:08:55,240 --> 00:08:57,240 Speaker 1: has its own problems. For the rest of the high 206 00:08:57,280 --> 00:08:59,960 Speaker 1: yield market is actually generally also looking at yield level 207 00:09:00,320 --> 00:09:02,480 Speaker 1: that are at more interesting levels at the moment. 208 00:09:02,559 --> 00:09:05,000 Speaker 2: All Right, Tordson Slock, thank you as always for coming 209 00:09:05,040 --> 00:09:07,559 Speaker 2: in towards the Slock of Apollo. The chief economists at 210 00:09:07,559 --> 00:09:07,880 Speaker 2: the firm