Speaker 1: Bloomberg Audio Studios, podcasts, radio News.
Speaker 2: Where pleased to welcome Torsen Slock. He is chief econmist
Speaker 2: at Apollo for this macro conversation and Tordson, you heard
Speaker 2: what Mike was saying about inflation expectations, and we see
Speaker 2: that in some measures, what are you thinking about inflation expectations?
Speaker 2: Because there's market based measures, there's also survey based measures.
Speaker 2: It's not really time to worry until everything points in
Speaker 2: the same direction right well, And the.
Speaker 1: Key issue is that, of course headline inflation is showing
Speaker 1: signs of high inflation. That makes total sense because headline
Speaker 1: inflation also consists of food and of course importantly energy.
Speaker 1: Call inflation expectations. We don't quite know yet what they
Speaker 1: are doing. But what we do know is that when
Speaker 1: you look at various other sensiment indicators, including today, we've
Speaker 1: got consumer confidence also starting to go down. If you
Speaker 1: look at the daily indicators for consumer sentiment from morning
Speaker 1: consult is also going down for low income, middle income
Speaker 1: and high income households. But the key issue at this
Speaker 1: point is that if you look at the actual spending,
Speaker 1: the daily for how many people travel on airplanes is
Speaker 1: still good. The weekly data for red Book, same store
Speaker 1: retail sales meaning what was sales in Stars last week
Speaker 1: relative to the same week a year ago is actually
Speaker 1: also still very strong. And what you're also seeing even
Speaker 1: hotel demand on a weekly basis from Star is also
Speaker 1: very strong. Both Red fire strong, the data readly strong,
Speaker 1: the occupants you're ready strong. So there's a very different
Speaker 1: divergence between what a consumer's saying relative to what are
Speaker 1: they actually doing. So at this point, the duration of
Speaker 1: the shark has simply not been long enough to actually
Speaker 1: create that demand destruction that we all worry so much about, right.
Speaker 2: And in fact, if you look at longer term inflation
Speaker 2: expectations and you see that within University of Michigan Sentiment
Speaker 2: survey today, those are well anchored.
Speaker 1: Absolutely so, both on a market basis and a survey basis,
Speaker 1: long term FLA inflation expectations are very very stable and
Speaker 1: have not shown any signs of going up. In fact,
Speaker 1: some of them have acually started to go down. So
Speaker 1: exactly the FIT would mainly worry about our markets getting
Speaker 1: worried about inflation becoming out of control. Maybe yes, in
Speaker 1: the next year, we can call that transitory, temporary, whatever
Speaker 1: we want to call it, but it's very clear is
Speaker 1: saying this is absolutely something that's only here for a
Speaker 1: very limited time, and then we will go back and
Speaker 1: have inflation expectations at the longer run, more stable level.
Speaker 3: Now, the one difference here between the Wall Street folks
Speaker 3: and the Fed folks is perhaps the inflation indicators are
Speaker 3: looking at CPI has been going down and it'll obviously
Speaker 3: on a headline basis, go up. But PCE, even without oil,
Speaker 3: has been rising, and that's the index that they follow.
Speaker 3: When you listen to Fed folks. They're not talking about
Speaker 3: rate increases yet, but have they pretty much wiped out
Speaker 3: the idea of any rate cuts this year because the
Speaker 3: Bloomberg survey today showed economistink, we're going to see a
Speaker 3: rise in inflation, but we're still going to see two
Speaker 3: cuts before.
Speaker 2: The end of the year.
Speaker 1: Absolutely. Denill was also very interesting the ECFC GO Bloomberg
Speaker 1: survey was that they probabilits of recession actually went up
Speaker 1: from twenty five percent to thirty percent. So we're almost
Speaker 1: looking at more bifurcated distribution where either you worry a
Speaker 1: lot about inflation being higher and potentially above three now
Speaker 1: for a very extended period meaning at least the next
Speaker 1: level quarters all alternative to people begin to worry about
Speaker 1: the maybe there is a harder landing that is also
Speaker 1: potentially an outcome. So that distribution tells you exactly what
Speaker 1: the problem is for the fit, Namey, they worry on
Speaker 1: the one hand about inflation being high, but they also
Speaker 1: worry about it the label market begins to deteriorrate, including
Speaker 1: of course also if AI puts up with pressure on unemployment,
Speaker 1: and all those factors have of cost. The challenges for the fit,
Speaker 1: namely how much should they put up weight on inflation
Speaker 1: relate to how much weight should they put on the
Speaker 1: risk of the labor market might begin to deteriorate over
Speaker 1: the next seven months.
Speaker 2: Well, let's stay with the labor market, because the job
Speaker 2: of claim numbers that we got this week ticked up
Speaker 2: slightly but remain pretty much in your historically low levels.
Speaker 2: Is the low higher low fire market still intact and
Speaker 2: at this point not an immediate source of concern.
Speaker 1: Absolutely. I think it was low higher low fire because
Speaker 1: of the trade wall for most of last year, and
Speaker 1: now I think it's low higher low fire because of
Speaker 1: the energy shock. So that's why companies are responding in
Speaker 1: probably the most rational way by saying, we don't really
Speaker 1: know exactly how long time the shock will last. We
Speaker 1: don't know what other prices will go to. So for
Speaker 1: that reason it makes sense that the labelmark continues show
Speaker 1: this fairly cautious overall properties, especially as you mentioned Scarlet,
Speaker 1: that jobless claims continue to be reatively low.
Speaker 2: What we need to see in the jobs data, whether
Speaker 2: it's high frequency data or the monthly reports, to signal
Speaker 2: some kind of fed reliefs on the way.
Speaker 1: Well, the key issue, of course is next Friday, and
Speaker 1: particularly for fixed income more abroady, that is the most
Speaker 1: important number across the board, both for rates and for credit. Namely,
Speaker 1: is the economy still producing jobs or as we saw
Speaker 1: last month, are we still losing jobs the way that
Speaker 1: we did within ninety two thousand decline that we saw
Speaker 1: in the previous month, And the key issue therefore becomes
Speaker 1: the labor market data is just taking a very very prominent,
Speaker 1: more important role than usual because inflation is telling us
Speaker 1: to hike. But now we certainly have that the other
Speaker 1: side of the dual mandate, namely label market might begin
Speaker 1: to show some more cooling, especially now that immigration restrictions
Speaker 1: and the label supply is also weighing down on the
Speaker 1: overall out of a nonfun payroll. So that's why next
Speaker 1: week is becoming very critical for thinking about what is
Speaker 1: the fit going to do because so far it's been
Speaker 1: easy for them in the SEP this week to just
Speaker 1: say overly's up in and they also revised LOPGDP. But
Speaker 1: if the label market begins to show softness, then that
Speaker 1: would of course become more challenging for them.
Speaker 3: I have to ask you, when I was studying economics,
Speaker 3: they taught us a couple of rules. One was it's
Speaker 3: never different this time and another was you can make
Speaker 3: a point forecast or a time forecast, but never two
Speaker 3: at the same time. But in your chart this week,
Speaker 3: and this has gotten a lot of play in social media,
Speaker 3: you say we're going to have a very short term
Speaker 3: disturbance in the bond market and fifty years of security
Speaker 3: in the Middle East that will keep down oil prices.
Speaker 3: That's quite a time forecast, that's true.
Speaker 1: But I think the logic really here for investors is
Speaker 1: quite simple. We should all be stepping back and looking
Speaker 1: at this with a much more long term perspective. Let's
Speaker 1: agree that the situation we have today. It's not sustainable.
Speaker 1: We cannot have this. We can discuss for how long time,
Speaker 1: but we cannot have this for several years, definitely not
Speaker 1: and we cannot perhaps even have it for several months.
Speaker 1: And if that's the case, we should expect to have
Speaker 1: some resolution. It makes sense that it's complicated for everyone
Speaker 1: to figure out what is the military strategy, what's going
Speaker 1: to response on both sides. But the conclusion must be
Speaker 1: that from a market perspective, we're getting closer to the
Speaker 1: midterm election in eight months. From that perspective, there's probably
Speaker 1: also some political considerations, both in Iran and in the US.
Speaker 1: That comes to the.
Speaker 3: Conclusion fifty years.
Speaker 1: But I do think that at the end of this
Speaker 1: we will probably have a situation that is quite different
Speaker 1: in the sense that we will probably have, at least
Speaker 1: from the GCC side in the Middle East, probably more
Speaker 1: connection with the US, probably more connection with Europe, and
Speaker 1: therefore probably also more stability more broadly, relative to where
Speaker 1: we were just a few months ago.
Speaker 2: All right, well, I mean we have to get through
Speaker 2: the fog of the current next few months in order
Speaker 2: to get to that point. You did bring along a
Speaker 2: chart with you this time that shows that there's a
Speaker 2: lot of supply coming to market, investment grade supply. It
Speaker 2: combined fourteen trillion dollars worth of supply. How did you
Speaker 2: get to fourteen trillion?
Speaker 1: Yeah, So the charge you look at here, it shows
Speaker 1: shoes from the Treasury. They put out data for what
Speaker 1: is the total amount of US treasury debt that needs
Speaker 1: to be refinanced in the next twelfth months, and as
Speaker 1: you can see in the yellow line, it is about
Speaker 1: ten trillion dollars that needs to be refinanced. In other words,
Speaker 1: uish government debt that rolls over. So this is bills,
Speaker 1: this is coupons, This is across the whole curve. If
Speaker 1: you now add to that two other things. On top
Speaker 1: of that line, we also have two trillion in government
Speaker 1: budget deficit, so that brings us to twelfth trillion. And
Speaker 1: finally we're also have about two trillion in net gross
Speaker 1: issuance from the hyperscalers and the banks in IG So
Speaker 1: that means that the total supply of investment grade bonds
Speaker 1: that are coming to the market is about twelve trillion
Speaker 1: from the government and two trillion from corporates. That brings
Speaker 1: you to a number that is roughly given US GDP
Speaker 1: is thirty trillion, roughly fifty percent of GDP that needs
Speaker 1: to be absorbed by financial markets. That's a very, very
Speaker 1: the highest number we've seen in history. That's a very
Speaker 1: substantial amount of bonds of investment grade credit and investment
Speaker 1: grade bonds that are coming to the market. So the
Speaker 1: short answer is, if we already were about inflation going
Speaker 1: up because of Mike's child, with inflation expectations going up,
Speaker 1: we have tariff footing up bid pressure or the price
Speaker 1: of putting up boid pressure. We have a fairly strong
Speaker 1: economy also putting up with pressure, and now we also
Speaker 1: have significant supply coming to the market. That does bring
Speaker 1: the risk that there is some upside pressure on rates
Speaker 1: in the front and the long end. And there's also
Speaker 1: on top of that, because of the significant increase in IGT,
Speaker 1: it also upward pressure on credit spreads. That means that
Speaker 1: both spreads in credit are under upward pressure for these
Speaker 1: technical reasons, and also the level of yields in rates
Speaker 1: is also on the upper pressure because of this supply
Speaker 1: being so significant.
Speaker 2: So very quickly, how are you thinking about the demand
Speaker 2: dynamics then, because we already know what the supply is
Speaker 2: going to be. It's there's gonna be a ton of it.
Speaker 1: Well, that's why a lot of the people who spoke
Speaker 1: just before we started here discussing exactly saying that this
Speaker 1: is actually an interesting time to look at the level
Speaker 1: of yields, especially if there is now an environment where
Speaker 1: other prices might eventually come down, and especially if people
Speaker 1: begin to worry about that the economy might also begin
Speaker 1: to slow a bit down. If that's the case, you
Speaker 1: both have a level of base rates that's higher temporarily
Speaker 1: at the moment, but you also have spreads in credit
Speaker 1: that's also temporarily higher. And that's just given all in
Speaker 1: yield in credit, both in investment grade, but also some
Speaker 1: parts of high yield that actually looks quite juicy. Software
Speaker 1: has its own problems. For the rest of the high
Speaker 1: yield market is actually generally also looking at yield level
Speaker 1: that are at more interesting levels at the moment.
Speaker 2: All Right, Tordson Slock, thank you as always for coming
Speaker 2: in towards the Slock of Apollo. The chief economists at
Speaker 2: the firm