August 5, 2025 • 22 mins
- Jack Caffrey, Equity Portfolio Manager, JPMorgan Asset Management
- Lauren Goodwin, Chief Market Strategist/Economist, NY Life Insurance
- Amanda Lynam, Head of Macro Credit Research, BlackRock
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:11):
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
with Lisa Bromwitz and am Marie Hordern. 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
(00:33):
Bloomberg Terminal and the Bloomberg Business app.
Speaker 1 (00:36):
We begin this hour wiz stocks rising after having their
best day since my on solid corporate earnings and a
renewed rate cut bed. Meanwhile, Jack Haffrey of JP Morgan,
writing with the weakness, we have gone from a market
with distinct cyclical and secular underpinning bias to a more
unique setup. Jack Noud joins us.
Speaker 3 (00:55):
Now, Jack, the unique.
Speaker 1 (00:56):
Setup has a lot to do with AI and the
fact that that seems to overwhelm all concerns is that
how you see.
Speaker 4 (01:02):
It, Certainly, when you look through the market continues to
be dominated by the Magnificent seven and then to a
lot much lesser extent the forgotten for ninety three and
as we've worked our way through earning season, to some extent,
your biggest and best news has been less about the
earnings and more about the capital spending boosts that so
many of these companies have been talking about in order
(01:23):
to try to make the AI of the reality, and
then ultimately turning to how do we start incorporating how
AI is actually improving the quality of our business? Good
good That remains sort of, if you will, the trillion
dollar question in the markets of how this spending will
ultimately turn into higher margins, better growth rates, and ultimately
returns to shareholders.
Speaker 1 (01:43):
We knew this so on Friday, we knew this on Thursday.
Suddenly on Monday yesterday there was a renewed sense of
vigor and excitement. How much of this is coming from
the expectation of rate cut bets and hopes that maybe
the economic data wasn't as bad as it looked.
Speaker 4 (01:59):
Well, I think ultimately, in a world of the earnings
are in the future, the fact that you can start
trying to come up with a scenario of lower discount
rates for those future earnings makes them somewhat more valuable.
Why that'll happened yesterday morning? I wish I could come
up with a better answer than it was Monday. And
maybe there was a merger and someone had a really
(02:21):
good bit of earnings news for animal health early in
the morning, and so their stock up thirty percent, So
we should buy AI in response. You know, day to
day trying to figure out why markets moved is challenging,
even after thirty plus years of trying to do this.
Talk about eighteen twelve, eighteen twenty four months. I think
I have a better sense of what's going to be
(02:41):
driving things. And then I'll come back to the earning
story has gotten better. Two weeks ago, I would have
told you we're expecting earnings growth of five percent this year,
and now it looks like consuming closer to seven. Seven
turns to twelve next year, and it's August, and I
start turning not only to what you've done for me recently,
but what can you do for me next year? And
I think getting to this idea of trying to find
(03:02):
their way to policy clarity becomes really important. You know,
all right, we've gone from a mass of cone of
uncertainty for tariffs. Now we have a much better sense
of what they look like. For major and trading partners,
we have tax since clarity on what taxes look like,
where can I spend, how I benefit from that? And
so I think ultimately companies will do the right thing.
(03:24):
They're really good at managing their margins over the long term,
and I think that sets us up for where people
are starting to look for where's the good news coming
from next?
Speaker 3 (03:32):
When it comes to policy, we have an outline of
what the policy is, but now it's going to take
effect last year this time last year, we had a
teriff rate of two point five percent on average. Now
it's going to be about twenty percent. How is that
going to hit the earnings and the companies you're watching,
especially the four ninety three, not the seven in the
S and P.
Speaker 2 (03:49):
Five hundred.
Speaker 4 (03:50):
Well, I think let's start with the US economy is
really a consumption economy, and so ultimately we have to
figure out how much of that tariff boost that twenty
percent is shared between the consumer companies reducing their margins,
or will the exporters actually decide, you know what, I'm
going to give the US a discount. And I do
(04:12):
think that we have ongoing academic debate on whether tariffs
are won and done from an inflation perspective, the fact that,
as you pointed out five minutes ago, that what we
think is certainty is actually not certainty because this this
hammer in the toolbox seems to be deployed frequently, and
so will you have consistent impacts on inflation rates coming
(04:34):
through the variability of policy, you know, And that's where
I think today's data should really you know, my issue
is what does the ism services come back to, because again,
this is this consumer led economy tariff' Ultimately, if you
thought that they were designed to try to encourage reindustrial
reindustrialization of the United States, policy which is both desired
(04:56):
by Democrats and Republicans, you know, runs into we already
have six hundred as an empty manufacturing jobs trying to hire.
How do you actually convince people to take those jobs
without paying them more? And last time I checked, that
was a potential supply shock to inflation.
Speaker 3 (05:10):
You said you're looking forward to the data that comes
out today. Where do you where you thinking in terms
of the credibility of a data given the fact of
the President last week didn't like the jobs number and
then fire the head of the BLS.
Speaker 4 (05:22):
You know, I think US economic data is the envy
of the world in general, but we do know that
there are some issues. You've been having stories for at
least a year now about falling response rates, and the
reality is, you know, we haven't completely used AI to
get all the economic data in real time. Certainly, the
one thing I have certainty end in life is economic
data will be revised. And when I sit back and
(05:45):
think what we were hearing, you know, a week and
a half ago at this probably sitting in the seat
someone talking about I'm seeing real weakness in the goods
producing sector of the economy. And yet then when we
got the data on Friday, the weakness was actually the visions,
and that weakness in the revisions was primarily in government.
So to some extent, we knew when you've been talking
(06:06):
about the scale of job reductions in the federal government,
at some point that was going to work its way
into either initial claims, it would work its way into
job elimination. So you're left with we didn't know timing,
but we knew that we knew that was something that
was going to work its way into the system. Unfortunately,
it managed to work its way into the system the
same day that the actual job creation numbers on the
(06:28):
weaker side. I'm not sure that eliminating a job because
you don't like the answer. It feels kind of very
ancient Roman in terms of how you respond.
Speaker 1 (06:39):
Sure, at the same time, some people are saying this
actually gives a FED. Actually most people are saying this
gives it FED a lot of ammunition to cut race.
And you're seeing a ninety one percent chance priced into
FED funds futures.
Speaker 3 (06:48):
How much do you see.
Speaker 1 (06:49):
This really mandating a cut in September and mandating at
least two cuts this year, and that actually being a
positive for equity is given the fact that the underlying
weakness might not be as great is maybe the revisions
might suggest.
Speaker 4 (07:02):
I mean, consensus has been I think for two cuts
this year. The question was really was it going to
be July? Was it going to be August? By the way,
Jackson Hole coming up in a few weeks tends to
have add it sort of an above average policy impact
ever since the global financial crisis. So I do think
that we certainly have a nice big window for the
FED to consider look at the data. I think, you know,
(07:24):
coming back to this idea, of the direction is lower rates.
I think the question is that we get it quickly
or not. If you look at, you know, the slope
of the eel curve two tens suggests that that is
more or less priced in three months, ten years, you
know that curve is still inverted. So I do think
you do wind up looking at the bond market is trying,
(07:45):
if you will, to force the Fed's hand, and the
FED is left with I've got two mandates I hadn't
seen until Friday, the employment picture actually cracking or weakening.
And I've got inflation that's still running two eight, two,
seven to nine, depending on which survey you look at,
still comfortably above two you know, lives to and licensed statisticians,
is that forty percent above trend or eighty basis points?
Speaker 1 (08:07):
You know?
Speaker 4 (08:08):
Yeah, Depending on which channel you listen to, you get
a different take on it.
Speaker 1 (08:12):
Jack Caffrey of David Morgan Asset Management, thank you so
much for joining us staking with the FED. Lauren Goodwin
of New York Life, writing this, we discourage investors from
assuming a September cut would signal a series of cuts thereafter.
(08:32):
Our FED cuts checklist still signals risks from all sides,
Lauren joins us. Now with what is increasingly out of
consensus view, Lauren, how do you look at what we
got on Friday and the jet labor market data as
well as the lack of some sort of sustained inflationary impulse.
Put that together and so we could even be talking
about a right hike.
Speaker 5 (08:52):
Yeah.
Speaker 6 (08:52):
Well, so I think what the market is telling us
after Friday is that the Fed will be leaning more
towards the demand destruct and we're seeing in the labor
market than inflation in September, and on balance, I agree,
I think that we're likely to see a rate cut
in September, pending the data that we get between now
and then. Where we caution investors is assuming that a
cut in September means anything about October or December or
(09:15):
meetings thereafter. And the reason for that is that as
we look at the things that the FED cares about
the labor market, we're seeing some weakness on the demand side,
but we're also seeing a deterioration in labor supply. And
this is something that I think the market conversation is
not paying enough attention to because that deterioration in labor
market supply might mean that fifteen twenty thousand jobs a
(09:37):
month is actually a healthy labor market. It might mean
that the unemployment rate isn't going anywhere, or that wages
are moving potentially even higher. That's a market reaction function
that we're not used to as investors and something that
I think we have to consider as we see more
data between now and September.
Speaker 1 (09:55):
So are you saying that we could still see one
rate cut this year or maybe two? Thing more than that?
Is your argument, essentially that people are overestimating any potential
weakening in the labor market that could curtail the inflationary
kind of overlays.
Speaker 6 (10:10):
That's my view today. Now, if we think about the
things that the FED cares about, We've talked a little
bit about the labor market inflationary pressures. I tend to
agree with the market that we're unlikely to see a
major reacceleration of inflation, certainly nothing like we saw a
couple of years ago. But we are probably going to
be seeing prices move core PCE inflation move back above
(10:30):
three percent over the next few months. That's a tricky
situation for the FED. And if you add that financial
market conditions have been very loose. Equity valuations look great,
credit spreads are tight, the availability of credit is good.
Chairpal pointed to this last week. That's a balance of
data that doesn't call for an enormous amount of cuts. Now,
I do think that what we saw on Friday, in
terms of the demand side of the labor market, that
(10:52):
does concern me. But that balance of data is not
only tricky, but a lot of the things that are
impacting the data are supply factors, things that the FED
can't control when.
Speaker 3 (11:02):
It comes to the demand side of the labor market
and the supply side are you looking at. Potentially there's
less participation because of immigration policy out of Washington or
what we're seeing in terms of the Ai revolution.
Speaker 6 (11:14):
At this moment, it's more related to immigration policy. So
we're seeing, and this was confirmed in the numbers on Friday,
fewer people participating in the labor force. Frankly, just less
labor supply, less labor availability. We're also seeing that companies
are hesitant on hiring, and that has more to do
with trade policy and let's call it general uncertainty. And
(11:34):
so that balance of factors is one where there's not
a lot of new jobs created that's not the end
of the world. But where I think it's tricky for
the FED is when you have not a whole lot
of new jobs created while still having an unemployment rate
that isn't going anywhere. That makes the again the reaction
function for the market looking at a weaker payrolls payrolls
(11:55):
gain as something that actually isn't negative.
Speaker 3 (11:58):
When you say that, in the next few months you
see inflation ticking up, is it all tariff induced?
Speaker 6 (12:02):
It's mostly tariff induced, So we see some stickiness in
the housing market related to rates. Other than that, services
disinflation has been pretty well pronounced, and it's one of
the reasons why we do think that the FED will
be able to look through some of the goods related
inflation we're seeing and move towards a cut in September.
But the challenge is that we've only just started to
see that goods related inflation hasn't included things like holiday
(12:25):
bar buying that are just starting now, and so we
do anticipate that prices are going to be moving in
the wrong direction later this year.
Speaker 1 (12:32):
It's hard to figure out what's going on. It's even
harder when you've got accusations of political interference. You've got
questions about just how accurate the data to collection is
given the low response rates. You have a really interesting
take on this, Lauren. The political interference with the FED
or the Bureau of Labor Statistics will push long rates higher,
not lower. Why is the market not coming to that
(12:53):
conclusion right now?
Speaker 6 (12:55):
My read on this, and I've thought a lot about
this over the weekend, but my read on this is
that the market isn't seeing evidence of actual interference.
Speaker 1 (13:04):
Yet.
Speaker 6 (13:05):
We don't know whose take is stepping into FED or
BLS seats. We don't have really in any indication that
there is interference with these important independent functions. I think
that calculus would change if the market does see that evidence,
does see that data or FED decision making is being
tampered with. And the reason that we think that's important
is that, especially in monetary policy making, credibility is one
(13:28):
of the most important policy tools. And though there are
an increasing amount of evidence that the FED could be
cutting rates slowly, stably over the next let's call it
six to twelve months, some of the conversations I have
with investors are, Oh, if we have a new FED
share and we get two hundred basis points of cuts.
You know right away that type of activity, though I
(13:49):
think incredibly unlikely, is going to derail inflation expectations. In
anticipation that there were even let's call it modest political interference,
I think would mean that market interest rates like the
ten year yield would be moving higher even if the
policy rate removing lower.
Speaker 1 (14:05):
One thing that a number of analysts have said is
private data points cannot replace the gold standard, cannot replace
the Bureau of Labor Statistics, and even some of the
peripheral surveys don't really don't really serve as a counterpoint
for the labor market report, given the potential for the
market to not being tracking, not to not be tracking
(14:26):
the actual economy in real time. The way that they thought,
are there certain gauges that you're watching for a better sense?
Is im service? Is that much more important? Is CPI?
What sort of the gold standard? Increasingly for you.
Speaker 6 (14:39):
I have to say that the labor market statistics have
had trouble now for more than a year, more than
actually more than a couple of years, as response rates
have declined in response to the pandemic. The BLS is
still the gold standard. Of course, there's this mattering of
data and evidence that we look at regardless of what
phase of the cycle that we're in. But when it
(15:00):
comes to the labor market, it is about the BLS statistics. Now,
what do we do to acknowledge that revisions are becoming larger,
more likely, etc. Goes back to essentially economic fundamentals. One
data point does not make a trend. I think what
was really important about Friday's data point is that it
showed that some of the early signs of cracks in
(15:22):
the labor market actually did make a trend with the
revisions that we saw.
Speaker 1 (15:27):
Lauren Goodwin, thank you so much for being here. Lauren
Goodwin of New York Life. Amanda linam a Blackrock joins
this now. Amanda, wonderful to see you. Thank you for
being here. How much are we looking at the FED
(15:47):
rescuing markets from weakness before the weakness happens?
Speaker 5 (15:51):
Good morning, Thank you for having me. I think that's
exactly the point. The reason for the rate cuts, in
my view, is more important than the timing. So our
expectation is that the rate cut is most likely in
the fourth quarter. Yes, the risks are skewed till September,
but why are they cutting. Are they cutting because the
growth backdrop is deteriorating, or are they cutting because inflation
(16:11):
is cooperating. It's looking more and more like they would
be cutting because the growth backdrop is deteriorating. I'm not
sure that's a great outcome for risk assets. It does
feel like the market is preempting this a bit. In
our world of corporate credits, spreads are still resilient. There's
some differentiation under the surface. But I actually think the
market is looking through this a bit. And the reason
I say that is you've had folks like Beth Hammock
(16:33):
last week talking about how we're not that far from neutral.
So leaving aside the timing of the cutting, and if
we focus on the reason and actually the scope for
the depth of the rate cutting cycle, I'm not sure
that there's that much relief in train absent a sharp
downturn and growth.
Speaker 1 (16:47):
Why did people shrug off the labor market report on
Friday and there revisions that were incredibly negative and caused
the firing of the BLS chief.
Speaker 5 (16:56):
What I think it is is that Chair Pal almost
went out of his way in the press conference to
talk about how he's emphasizing the unemployment rate over the
number of payrolls gained in any month, because, as he noted,
the break even rate of payrolls growth is slowing because
immigration is coming down. So if you look at we
are at four point one percent as of the July FMC,
(17:17):
we're now four point two, edging up on four point three.
Chair Pale characterized that four point one as being close
to maximum employment. So, yes, the revisions were very large,
not unprecedented, but large. But actually, if you look at
the unemployment rate with inflation still above target, I still
think there's actually some tension in that dual mandate. And
so it's not for me a base case or very
(17:41):
clear cut that they will cut in September, because I
think if you look back to the July FMC, Chair
Palm made a point to emphasize that unemployment rate, and
I think that's part of that undercurrent. When the market
had a bit of time to digest it, focusing on that,
I think you could come up with a different path.
But I think, to be clear, the direction of travel
is very clear. Rates are coming down. It's almost a
(18:01):
moot point. Is it September or October? Not sure it
quite matters.
Speaker 3 (18:04):
Well, the market's pricing a ninety percent chance, and now
of September, what would it take you to say it
is September.
Speaker 5 (18:09):
I think if you started to see some cooperation and inflation,
I think that could get you there. That actually that
tension on that price stability side of the mandate could
ease up a bit. And then, of course we do
have some more data between now and then, so if
you start to see some real continued weakening in the
labor market, We've already seen weakening, but if that is persistent,
I think that could really push them. There's a lot of.
Speaker 3 (18:29):
Politics surrounding right now, the data and the FED, and
the President is going to have a chance to now
he's going to put a new name in for the
BLS commissioner, which he fired, and Adriana Kugler, the FED governors,
will step down in January. She resigned early. Are you
concerned that all this is getting politicized and there's no
independent credibility.
Speaker 5 (18:46):
Our conversations with investors are very much focused on the fundamentals,
so I think there is a lot of noise in
the background, but actually top of mind in our conversation
is how are companies navigating this and what are the
levers that companies can going forward if the growth inflation
mix becomes more challenging as we expect. What I find
striking is that second quarter earnings have given us some
(19:07):
data points that companies in some instances are lowering their
estimated impact of tariffs relative to what they communicated in
the first quarter. Certainly not every company. There's a lot
of dispersion, but if you look at the myriad of
operational levers that are available to companies to navigate this,
that could include things like changing product mix, accelerating cost
cutting in other areas, there's actually a fair amount of levers.
(19:29):
It kind of reminds me of twenty twenty two, when
there was a swift rate hiking cycle. There were imminent
expectations for a recession. It didn't materialize. I'm wondering if
the several quarters of above trend growth from twenty twenty
three and twenty twenty four actually built up some cushions
in the corporate sector and there's resilience there.
Speaker 1 (19:45):
There's also the one big beautiful Bill, and we haven't
talked about it as much as maybe we should have
in terms of the ramification for companies. But the Wall
Street Journal put out a story just highlighting the free
cash fload. How much its increased on the heels of
this particular piece of legislation. How much is that buffering
a lot of companies in ways that might have been
(20:05):
underestimated going into this.
Speaker 5 (20:06):
It's a great point. You noted a company earlier this
morning that I think raise their guidance on be on.
Related to that, we also saw earlier in this earning
season a telecom company do the same, So I think
it's a great point. The two sided risks are very real.
It's not just about the downside risks to growth and
the tariffs, but it's also about the deregulation. Actually, M
and A strategic North American m and A is running
(20:28):
at the highest pace since twenty twenty one year today,
which and we know twenty twenty one was a banner
year for strategic deal making. So I can't help but
think that under the surface, and to the noise point
you mentioned, Henry, there is a fair amount of corporate
confidence that is coming through, and I think that is
why we are very mindful of two sided risks.
Speaker 1 (20:46):
At the same time, it's priced in right and you're
looking at various tight spreads this is all kind of
priced perfection. A number of people have mentioned, where do
you still see value given that, Yes, there is a
lot of positivity, but it's also something a lot of
people have recognized riight.
Speaker 5 (21:00):
I would say, if I had to pick one area,
it would be selectively moving down in credit quality within
corporate credit. So if an investor is confined to IG,
we like that triple B pocket of the cohort. If
there's a more flexible mandate, we like moving into the
high end of high yield. You make a great point,
there's not a lot of scope for absolute spread tightening
at current levels. Episodes of widening are short lived. The
dips get bought, so to speak. But similarly, I think
(21:23):
the bar for sustained selloff in widening in credit spreads
is actually quite high. And of course, as you know,
the yield based demand is a very real technical So
we're pretty constructive on corporate credit risk. That said, not
everything is participating. Triple c's are still lagging. I think
that's appropriate. I think that reflects discipline in the market.
Speaker 1 (21:39):
Yeah, maybe actually a market and not necessarily something that's
bad that's propped up by a particular policy of mandeli
of Blackrock. Thank you so much for being with us.
Speaker 2 (21:48):
This is the Bloomberg Sevenants podcast, bringing you the best
in markets, economics, an gie politics. You can watch the
show live on Bloomberg TV weekday mornings from six am
to nine am Eastern. Subscribe the podcast on Apple, Spotify
or anywhere else you listen, and, as always, on the
Bloomberg Terminal and the Bloomberg Business app.
Speaker 5 (22:10):
Mm hmm
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:11):
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
with Lisa Bromwitz and am Marie Hordern. 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
(00:33):
Bloomberg Terminal and the Bloomberg Business app.
Speaker 1 (00:36):
We begin this hour wiz stocks rising after having their
best day since my on solid corporate earnings and a
renewed rate cut bed. Meanwhile, Jack Haffrey of JP Morgan,
writing with the weakness, we have gone from a market
with distinct cyclical and secular underpinning bias to a more
unique setup. Jack Noud joins us.
Speaker 3 (00:55):
Now, Jack, the unique.
Speaker 1 (00:56):
Setup has a lot to do with AI and the
fact that that seems to overwhelm all concerns is that
how you see.
Speaker 4 (01:02):
It, Certainly, when you look through the market continues to
be dominated by the Magnificent seven and then to a
lot much lesser extent the forgotten for ninety three and
as we've worked our way through earning season, to some extent,
your biggest and best news has been less about the
earnings and more about the capital spending boosts that so
many of these companies have been talking about in order
(01:23):
to try to make the AI of the reality, and
then ultimately turning to how do we start incorporating how
AI is actually improving the quality of our business? Good
good That remains sort of, if you will, the trillion
dollar question in the markets of how this spending will
ultimately turn into higher margins, better growth rates, and ultimately
returns to shareholders.
Speaker 1 (01:43):
We knew this so on Friday, we knew this on Thursday.
Suddenly on Monday yesterday there was a renewed sense of
vigor and excitement. How much of this is coming from
the expectation of rate cut bets and hopes that maybe
the economic data wasn't as bad as it looked.
Speaker 4 (01:59):
Well, I think ultimately, in a world of the earnings
are in the future, the fact that you can start
trying to come up with a scenario of lower discount
rates for those future earnings makes them somewhat more valuable.
Why that'll happened yesterday morning? I wish I could come
up with a better answer than it was Monday. And
maybe there was a merger and someone had a really
(02:21):
good bit of earnings news for animal health early in
the morning, and so their stock up thirty percent, So
we should buy AI in response. You know, day to
day trying to figure out why markets moved is challenging,
even after thirty plus years of trying to do this.
Talk about eighteen twelve, eighteen twenty four months. I think
I have a better sense of what's going to be
(02:41):
driving things. And then I'll come back to the earning
story has gotten better. Two weeks ago, I would have
told you we're expecting earnings growth of five percent this year,
and now it looks like consuming closer to seven. Seven
turns to twelve next year, and it's August, and I
start turning not only to what you've done for me recently,
but what can you do for me next year? And
I think getting to this idea of trying to find
(03:02):
their way to policy clarity becomes really important. You know,
all right, we've gone from a mass of cone of
uncertainty for tariffs. Now we have a much better sense
of what they look like. For major and trading partners,
we have tax since clarity on what taxes look like,
where can I spend, how I benefit from that? And
so I think ultimately companies will do the right thing.
(03:24):
They're really good at managing their margins over the long term,
and I think that sets us up for where people
are starting to look for where's the good news coming
from next?
Speaker 3 (03:32):
When it comes to policy, we have an outline of
what the policy is, but now it's going to take
effect last year this time last year, we had a
teriff rate of two point five percent on average. Now
it's going to be about twenty percent. How is that
going to hit the earnings and the companies you're watching,
especially the four ninety three, not the seven in the
S and P.
Speaker 2 (03:49):
Five hundred.
Speaker 4 (03:50):
Well, I think let's start with the US economy is
really a consumption economy, and so ultimately we have to
figure out how much of that tariff boost that twenty
percent is shared between the consumer companies reducing their margins,
or will the exporters actually decide, you know what, I'm
going to give the US a discount. And I do
(04:12):
think that we have ongoing academic debate on whether tariffs
are won and done from an inflation perspective, the fact that,
as you pointed out five minutes ago, that what we
think is certainty is actually not certainty because this this
hammer in the toolbox seems to be deployed frequently, and
so will you have consistent impacts on inflation rates coming
(04:34):
through the variability of policy, you know, And that's where
I think today's data should really you know, my issue
is what does the ism services come back to, because again,
this is this consumer led economy tariff' Ultimately, if you
thought that they were designed to try to encourage reindustrial
reindustrialization of the United States, policy which is both desired
(04:56):
by Democrats and Republicans, you know, runs into we already
have six hundred as an empty manufacturing jobs trying to hire.
How do you actually convince people to take those jobs
without paying them more? And last time I checked, that
was a potential supply shock to inflation.
Speaker 3 (05:10):
You said you're looking forward to the data that comes
out today. Where do you where you thinking in terms
of the credibility of a data given the fact of
the President last week didn't like the jobs number and
then fire the head of the BLS.
Speaker 4 (05:22):
You know, I think US economic data is the envy
of the world in general, but we do know that
there are some issues. You've been having stories for at
least a year now about falling response rates, and the
reality is, you know, we haven't completely used AI to
get all the economic data in real time. Certainly, the
one thing I have certainty end in life is economic
data will be revised. And when I sit back and
(05:45):
think what we were hearing, you know, a week and
a half ago at this probably sitting in the seat
someone talking about I'm seeing real weakness in the goods
producing sector of the economy. And yet then when we
got the data on Friday, the weakness was actually the visions,
and that weakness in the revisions was primarily in government.
So to some extent, we knew when you've been talking
(06:06):
about the scale of job reductions in the federal government,
at some point that was going to work its way
into either initial claims, it would work its way into
job elimination. So you're left with we didn't know timing,
but we knew that we knew that was something that
was going to work its way into the system. Unfortunately,
it managed to work its way into the system the
same day that the actual job creation numbers on the
(06:28):
weaker side. I'm not sure that eliminating a job because
you don't like the answer. It feels kind of very
ancient Roman in terms of how you respond.
Speaker 1 (06:39):
Sure, at the same time, some people are saying this
actually gives a FED. Actually most people are saying this
gives it FED a lot of ammunition to cut race.
And you're seeing a ninety one percent chance priced into
FED funds futures.
Speaker 3 (06:48):
How much do you see.
Speaker 1 (06:49):
This really mandating a cut in September and mandating at
least two cuts this year, and that actually being a
positive for equity is given the fact that the underlying
weakness might not be as great is maybe the revisions
might suggest.
Speaker 4 (07:02):
I mean, consensus has been I think for two cuts
this year. The question was really was it going to
be July? Was it going to be August? By the way,
Jackson Hole coming up in a few weeks tends to
have add it sort of an above average policy impact
ever since the global financial crisis. So I do think
that we certainly have a nice big window for the
FED to consider look at the data. I think, you know,
(07:24):
coming back to this idea, of the direction is lower rates.
I think the question is that we get it quickly
or not. If you look at, you know, the slope
of the eel curve two tens suggests that that is
more or less priced in three months, ten years, you
know that curve is still inverted. So I do think
you do wind up looking at the bond market is trying,
(07:45):
if you will, to force the Fed's hand, and the
FED is left with I've got two mandates I hadn't
seen until Friday, the employment picture actually cracking or weakening.
And I've got inflation that's still running two eight, two,
seven to nine, depending on which survey you look at,
still comfortably above two you know, lives to and licensed statisticians,
is that forty percent above trend or eighty basis points?
Speaker 1 (08:07):
You know?
Speaker 4 (08:08):
Yeah, Depending on which channel you listen to, you get
a different take on it.
Speaker 1 (08:12):
Jack Caffrey of David Morgan Asset Management, thank you so
much for joining us staking with the FED. Lauren Goodwin
of New York Life, writing this, we discourage investors from
assuming a September cut would signal a series of cuts thereafter.
(08:32):
Our FED cuts checklist still signals risks from all sides,
Lauren joins us. Now with what is increasingly out of
consensus view, Lauren, how do you look at what we
got on Friday and the jet labor market data as
well as the lack of some sort of sustained inflationary impulse.
Put that together and so we could even be talking
about a right hike.
Speaker 5 (08:52):
Yeah.
Speaker 6 (08:52):
Well, so I think what the market is telling us
after Friday is that the Fed will be leaning more
towards the demand destruct and we're seeing in the labor
market than inflation in September, and on balance, I agree,
I think that we're likely to see a rate cut
in September, pending the data that we get between now
and then. Where we caution investors is assuming that a
cut in September means anything about October or December or
(09:15):
meetings thereafter. And the reason for that is that as
we look at the things that the FED cares about
the labor market, we're seeing some weakness on the demand side,
but we're also seeing a deterioration in labor supply. And
this is something that I think the market conversation is
not paying enough attention to because that deterioration in labor
market supply might mean that fifteen twenty thousand jobs a
(09:37):
month is actually a healthy labor market. It might mean
that the unemployment rate isn't going anywhere, or that wages
are moving potentially even higher. That's a market reaction function
that we're not used to as investors and something that
I think we have to consider as we see more
data between now and September.
Speaker 1 (09:55):
So are you saying that we could still see one
rate cut this year or maybe two? Thing more than that?
Is your argument, essentially that people are overestimating any potential
weakening in the labor market that could curtail the inflationary
kind of overlays.
Speaker 6 (10:10):
That's my view today. Now, if we think about the
things that the FED cares about, We've talked a little
bit about the labor market inflationary pressures. I tend to
agree with the market that we're unlikely to see a
major reacceleration of inflation, certainly nothing like we saw a
couple of years ago. But we are probably going to
be seeing prices move core PCE inflation move back above
(10:30):
three percent over the next few months. That's a tricky
situation for the FED. And if you add that financial
market conditions have been very loose. Equity valuations look great,
credit spreads are tight, the availability of credit is good.
Chairpal pointed to this last week. That's a balance of
data that doesn't call for an enormous amount of cuts. Now,
I do think that what we saw on Friday, in
terms of the demand side of the labor market, that
(10:52):
does concern me. But that balance of data is not
only tricky, but a lot of the things that are
impacting the data are supply factors, things that the FED
can't control when.
Speaker 3 (11:02):
It comes to the demand side of the labor market
and the supply side are you looking at. Potentially there's
less participation because of immigration policy out of Washington or
what we're seeing in terms of the Ai revolution.
Speaker 6 (11:14):
At this moment, it's more related to immigration policy. So
we're seeing, and this was confirmed in the numbers on Friday,
fewer people participating in the labor force. Frankly, just less
labor supply, less labor availability. We're also seeing that companies
are hesitant on hiring, and that has more to do
with trade policy and let's call it general uncertainty. And
(11:34):
so that balance of factors is one where there's not
a lot of new jobs created that's not the end
of the world. But where I think it's tricky for
the FED is when you have not a whole lot
of new jobs created while still having an unemployment rate
that isn't going anywhere. That makes the again the reaction
function for the market looking at a weaker payrolls payrolls
(11:55):
gain as something that actually isn't negative.
Speaker 3 (11:58):
When you say that, in the next few months you
see inflation ticking up, is it all tariff induced?
Speaker 6 (12:02):
It's mostly tariff induced, So we see some stickiness in
the housing market related to rates. Other than that, services
disinflation has been pretty well pronounced, and it's one of
the reasons why we do think that the FED will
be able to look through some of the goods related
inflation we're seeing and move towards a cut in September.
But the challenge is that we've only just started to
see that goods related inflation hasn't included things like holiday
(12:25):
bar buying that are just starting now, and so we
do anticipate that prices are going to be moving in
the wrong direction later this year.
Speaker 1 (12:32):
It's hard to figure out what's going on. It's even
harder when you've got accusations of political interference. You've got
questions about just how accurate the data to collection is
given the low response rates. You have a really interesting
take on this, Lauren. The political interference with the FED
or the Bureau of Labor Statistics will push long rates higher,
not lower. Why is the market not coming to that
(12:53):
conclusion right now?
Speaker 6 (12:55):
My read on this, and I've thought a lot about
this over the weekend, but my read on this is
that the market isn't seeing evidence of actual interference.
Speaker 1 (13:04):
Yet.
Speaker 6 (13:05):
We don't know whose take is stepping into FED or
BLS seats. We don't have really in any indication that
there is interference with these important independent functions. I think
that calculus would change if the market does see that evidence,
does see that data or FED decision making is being
tampered with. And the reason that we think that's important
is that, especially in monetary policy making, credibility is one
(13:28):
of the most important policy tools. And though there are
an increasing amount of evidence that the FED could be
cutting rates slowly, stably over the next let's call it
six to twelve months, some of the conversations I have
with investors are, Oh, if we have a new FED
share and we get two hundred basis points of cuts.
You know right away that type of activity, though I
(13:49):
think incredibly unlikely, is going to derail inflation expectations. In
anticipation that there were even let's call it modest political interference,
I think would mean that market interest rates like the
ten year yield would be moving higher even if the
policy rate removing lower.
Speaker 1 (14:05):
One thing that a number of analysts have said is
private data points cannot replace the gold standard, cannot replace
the Bureau of Labor Statistics, and even some of the
peripheral surveys don't really don't really serve as a counterpoint
for the labor market report, given the potential for the
market to not being tracking, not to not be tracking
(14:26):
the actual economy in real time. The way that they thought,
are there certain gauges that you're watching for a better sense?
Is im service? Is that much more important? Is CPI?
What sort of the gold standard? Increasingly for you.
Speaker 6 (14:39):
I have to say that the labor market statistics have
had trouble now for more than a year, more than
actually more than a couple of years, as response rates
have declined in response to the pandemic. The BLS is
still the gold standard. Of course, there's this mattering of
data and evidence that we look at regardless of what
phase of the cycle that we're in. But when it
(15:00):
comes to the labor market, it is about the BLS statistics. Now,
what do we do to acknowledge that revisions are becoming larger,
more likely, etc. Goes back to essentially economic fundamentals. One
data point does not make a trend. I think what
was really important about Friday's data point is that it
showed that some of the early signs of cracks in
(15:22):
the labor market actually did make a trend with the
revisions that we saw.
Speaker 1 (15:27):
Lauren Goodwin, thank you so much for being here. Lauren
Goodwin of New York Life. Amanda linam a Blackrock joins
this now. Amanda, wonderful to see you. Thank you for
being here. How much are we looking at the FED
(15:47):
rescuing markets from weakness before the weakness happens?
Speaker 5 (15:51):
Good morning, Thank you for having me. I think that's
exactly the point. The reason for the rate cuts, in
my view, is more important than the timing. So our
expectation is that the rate cut is most likely in
the fourth quarter. Yes, the risks are skewed till September,
but why are they cutting. Are they cutting because the
growth backdrop is deteriorating, or are they cutting because inflation
(16:11):
is cooperating. It's looking more and more like they would
be cutting because the growth backdrop is deteriorating. I'm not
sure that's a great outcome for risk assets. It does
feel like the market is preempting this a bit. In
our world of corporate credits, spreads are still resilient. There's
some differentiation under the surface. But I actually think the
market is looking through this a bit. And the reason
I say that is you've had folks like Beth Hammock
(16:33):
last week talking about how we're not that far from neutral.
So leaving aside the timing of the cutting, and if
we focus on the reason and actually the scope for
the depth of the rate cutting cycle, I'm not sure
that there's that much relief in train absent a sharp
downturn and growth.
Speaker 1 (16:47):
Why did people shrug off the labor market report on
Friday and there revisions that were incredibly negative and caused
the firing of the BLS chief.
Speaker 5 (16:56):
What I think it is is that Chair Pal almost
went out of his way in the press conference to
talk about how he's emphasizing the unemployment rate over the
number of payrolls gained in any month, because, as he noted,
the break even rate of payrolls growth is slowing because
immigration is coming down. So if you look at we
are at four point one percent as of the July FMC,
(17:17):
we're now four point two, edging up on four point three.
Chair Pale characterized that four point one as being close
to maximum employment. So, yes, the revisions were very large,
not unprecedented, but large. But actually, if you look at
the unemployment rate with inflation still above target, I still
think there's actually some tension in that dual mandate. And
so it's not for me a base case or very
(17:41):
clear cut that they will cut in September, because I
think if you look back to the July FMC, Chair
Palm made a point to emphasize that unemployment rate, and
I think that's part of that undercurrent. When the market
had a bit of time to digest it, focusing on that,
I think you could come up with a different path.
But I think, to be clear, the direction of travel
is very clear. Rates are coming down. It's almost a
(18:01):
moot point. Is it September or October? Not sure it
quite matters.
Speaker 3 (18:04):
Well, the market's pricing a ninety percent chance, and now
of September, what would it take you to say it
is September.
Speaker 5 (18:09):
I think if you started to see some cooperation and inflation,
I think that could get you there. That actually that
tension on that price stability side of the mandate could
ease up a bit. And then, of course we do
have some more data between now and then, so if
you start to see some real continued weakening in the
labor market, We've already seen weakening, but if that is persistent,
I think that could really push them. There's a lot of.
Speaker 3 (18:29):
Politics surrounding right now, the data and the FED, and
the President is going to have a chance to now
he's going to put a new name in for the
BLS commissioner, which he fired, and Adriana Kugler, the FED governors,
will step down in January. She resigned early. Are you
concerned that all this is getting politicized and there's no
independent credibility.
Speaker 5 (18:46):
Our conversations with investors are very much focused on the fundamentals,
so I think there is a lot of noise in
the background, but actually top of mind in our conversation
is how are companies navigating this and what are the
levers that companies can going forward if the growth inflation
mix becomes more challenging as we expect. What I find
striking is that second quarter earnings have given us some
(19:07):
data points that companies in some instances are lowering their
estimated impact of tariffs relative to what they communicated in
the first quarter. Certainly not every company. There's a lot
of dispersion, but if you look at the myriad of
operational levers that are available to companies to navigate this,
that could include things like changing product mix, accelerating cost
cutting in other areas, there's actually a fair amount of levers.
(19:29):
It kind of reminds me of twenty twenty two, when
there was a swift rate hiking cycle. There were imminent
expectations for a recession. It didn't materialize. I'm wondering if
the several quarters of above trend growth from twenty twenty
three and twenty twenty four actually built up some cushions
in the corporate sector and there's resilience there.
Speaker 1 (19:45):
There's also the one big beautiful Bill, and we haven't
talked about it as much as maybe we should have
in terms of the ramification for companies. But the Wall
Street Journal put out a story just highlighting the free
cash fload. How much its increased on the heels of
this particular piece of legislation. How much is that buffering
a lot of companies in ways that might have been
(20:05):
underestimated going into this.
Speaker 5 (20:06):
It's a great point. You noted a company earlier this
morning that I think raise their guidance on be on.
Related to that, we also saw earlier in this earning
season a telecom company do the same, So I think
it's a great point. The two sided risks are very real.
It's not just about the downside risks to growth and
the tariffs, but it's also about the deregulation. Actually, M
and A strategic North American m and A is running
(20:28):
at the highest pace since twenty twenty one year today,
which and we know twenty twenty one was a banner
year for strategic deal making. So I can't help but
think that under the surface, and to the noise point
you mentioned, Henry, there is a fair amount of corporate
confidence that is coming through, and I think that is
why we are very mindful of two sided risks.
Speaker 1 (20:46):
At the same time, it's priced in right and you're
looking at various tight spreads this is all kind of
priced perfection. A number of people have mentioned, where do
you still see value given that, Yes, there is a
lot of positivity, but it's also something a lot of
people have recognized riight.
Speaker 5 (21:00):
I would say, if I had to pick one area,
it would be selectively moving down in credit quality within
corporate credit. So if an investor is confined to IG,
we like that triple B pocket of the cohort. If
there's a more flexible mandate, we like moving into the
high end of high yield. You make a great point,
there's not a lot of scope for absolute spread tightening
at current levels. Episodes of widening are short lived. The
dips get bought, so to speak. But similarly, I think
(21:23):
the bar for sustained selloff in widening in credit spreads
is actually quite high. And of course, as you know,
the yield based demand is a very real technical So
we're pretty constructive on corporate credit risk. That said, not
everything is participating. Triple c's are still lagging. I think
that's appropriate. I think that reflects discipline in the market.
Speaker 1 (21:39):
Yeah, maybe actually a market and not necessarily something that's
bad that's propped up by a particular policy of mandeli
of Blackrock. Thank you so much for being with us.
Speaker 2 (21:48):
This is the Bloomberg Sevenants podcast, bringing you the best
in markets, economics, an gie politics. You can watch the
show live on Bloomberg TV weekday mornings from six am
to nine am Eastern. Subscribe the podcast on Apple, Spotify
or anywhere else you listen, and, as always, on the
Bloomberg Terminal and the Bloomberg Business app.
Speaker 5 (22:10):
Mm hmm
Popular Podcasts
Fudd Around And Find Out
UConn basketball star Azzi Fudd brings her championship swag to iHeart Women’s Sports with Fudd Around and Find Out, a weekly podcast that takes fans along for the ride as Azzi spends her final year of college trying to reclaim the National Championship and prepare to be a first round WNBA draft pick. Ever wonder what it’s like to be a world-class athlete in the public spotlight while still managing schoolwork, friendships and family time? It’s time to Fudd Around and Find Out!
Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy, Jess Hilarious, And Charlamagne Tha God!