December 16, 2024 • 24 mins
- Steve Chiavarone, Head of Multi-Asset Solutions, Federated Hermes
- Kelsey Berro, Fixed Income Portfolio Manager, JPMorgan Asset Management
- Lydia Boussour, Senior Economist, EY
Steve Chiavarone of Federated Hermes says, "we are underestimating the growth that's going to come from the policies and overestimating the inflation," about the incoming Trump administration. Kelsey Berro of JPMorgan warns despite labor market resilience, "the unemployment rate is actually creeping higher." Lydia Boussour of EY is expecting a "more business-friendly environment" next year.
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Speaker 1 (00:00):
Boo, 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 Amrie 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
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anywhere else you listen, and as always on the Bloomberg
(00:34):
Terminal and the Bloomberg Business App. Steve Shefvarroond of Federated
hermes looking for the rally in the equity market to continue.
Terry Haynes of Pangea Policy on mysterious drone sightings along
the East Coast, and three Kunch of Governant of Aberdeen
on Germany's political future. We begin this hour kicking off
the final full trading week of the year, looking ahead
to a Federate decision on Wednesday. Steve Shefvrod of Federated
(00:55):
remains optimistic on stocks. The combination of accelerating earnings growth
and rake cuts It is rare and generally positive for
equity some places side that state joins US now stave Goomona,
good morning, It's good to see you. The equity market
rip is on the masstack. It's some big tech. It's
not on the S and P five hundred iter cerentainly
not on the small caps. We've talked a lot about
negative breadth. I've been listening to the team over the
last week. This was not the back coming out of
(01:17):
the election. So what's gone wrong?
Speaker 3 (01:19):
No, I look, I think growth is surprised to the
upside since the election. You know, outside of last week's
kind of sell off. The bond market did settle after
the election, right, you had that run kind of a
four fifty on the ten year and then that kind
of settled back in. But what we think, and we
made a move last week in our asset allocation to
reflect this, is it's just harder and harder to justify
owning non US developed markets. And I think you've seen
(01:42):
capital leave places like Europe where now you have political instability,
not only in France, not only in the UK, but
now you also have Germany. They sit kind of at
the forefront potentially of tariff risk. Growth has been soft
and so I think you're seeing capital flood in the
United States and it's helping growth.
Speaker 4 (02:02):
And I think you really saw that last week.
Speaker 2 (02:04):
So the risk I gets to next year recording to
a Parliament Tolston Slock and we's all lots about this
Thory VI hour a Polom and Tolston Slock sets of
repeat of twenty twenty two.
Speaker 5 (02:13):
We all remember twenty twenty two.
Speaker 2 (02:14):
It's band for buf stalks and banfoot bums, which you
push back against that.
Speaker 3 (02:18):
I do you know, I think I think it's gonna
be an interesting week, and I think you know Powell,
who always likes to surprise us, he may have another
surprise in store for twenty four and that is I
think the market's gotten a little bit too concerned and
hawkish about inflation.
Speaker 1 (02:34):
Right.
Speaker 4 (02:34):
Inflation has been sticky.
Speaker 3 (02:35):
It has been a little bit re accelerant in the
last few months, but if you look, it hasn't really
broken out.
Speaker 4 (02:39):
Of any kind of long term range.
Speaker 3 (02:41):
It still appears to be grinding down. And I think
you may see a pal that's a little bit more
dubbish than what the market's expecting this week.
Speaker 4 (02:51):
Because he does that to us, hold on, he does
that to us.
Speaker 6 (02:54):
He does this to us.
Speaker 5 (02:54):
You say, he always surprises us.
Speaker 4 (02:56):
He doesn't surprise us.
Speaker 7 (02:57):
He outdoves every expectation from the mark.
Speaker 3 (03:00):
You think that's going to be the repeat, Well, if
you look at it, Look, the market has priced in
a terminal rate here that's somewhere now between three seventy
five and four. We still think it's between three and
three fifty just going to take you into twenty six
to get there. On the dot plots, right, you generally
don't see the fed erase two cuts in one dot plot, right.
(03:21):
Maybe they pull one in, maybe they push one out,
And so.
Speaker 4 (03:25):
You've got a street that you know.
Speaker 3 (03:27):
You've got to fed with five cuts between now in
the middle of twenty eight or I'm sorry, twenty six.
In their dot plots, you've got a street that only
has three more cuts. Again, I think what you may
see him do is deliver the cut in December and
then talk about how their rhetoric is really about a
reduction in pace, not in a reduction direction. So we're
going to go to once a quarter next year, but
(03:49):
you shouldn't expect that we're anywhere near the end of
a rate cut cycle.
Speaker 7 (03:52):
The backdrop to this is that you push back completely
against Torsten Slock's point of view, as John was out
laying out that basically we're going to have a very
inflationary and potentially styflationary policy where you get growth flowing
on the heels of some of these terrifts, but you
don't necessarily have inflation coming in. You actually think it's
the opposite, that a lot of Trump's policies are going
to be more pro growth and less inflationary than feared.
Speaker 5 (04:15):
Why.
Speaker 4 (04:16):
Well, a couple of reasons.
Speaker 3 (04:18):
One, I think when you're talking about a tariff, for example,
it can't be both a tax and inflationary. It's got
to be one or the other, right, because if it
really is a tax, then there's an offsetting demand piece
to it. You also have to take into account that
that tariff increase is likely going to come in the context.
Speaker 4 (04:35):
Of major tax cuts.
Speaker 3 (04:36):
You have deregulation, you have some shedding of government jobs.
Both of those can be either certainly pro growth but
also disinflationary because they take some costs out of the system.
Speaker 4 (04:48):
And so I think when you put that.
Speaker 3 (04:49):
Package together, what's happening right now in the market is
we are underestimating the growth that's going to come from
the policies and overestimating the inflation. I think the Fed
would be wise to be patient here see what actually
gets through the sausage making process of Washington. There's a
lot of steps to go between a concept an actual policy,
(05:10):
and I think if the FED were to react in
anticipation of that, they may end up being more hawkish
than they need to be in an environment where the
labor markets are softening.
Speaker 8 (05:18):
So so you don't agree with Bill Dudley, They shouldn't
assume and they should say we're going to wait for
the policies to take hold.
Speaker 3 (05:25):
I don't see what policy you're going to respond to now.
If you want to respond to inflation readings being a
little bit hotter over the last couple of months and
then decelerating too, or a slower pace of cuts, I
think that's appropriate. But again we've talked about the chess
versus the checkers.
Speaker 4 (05:42):
If you look at each one.
Speaker 3 (05:43):
Of the policy proposals that are out there, you can
look at it and say, well, this is good, or
that's bad, or that's inflationary, that's pro growth. When you
look at it together, we think what you're going to
end up with is something that is more pro growth,
somewhat pro productivity, and that's going to dampen some of
the inflation impulses.
Speaker 8 (06:00):
To Torsten Slock's note and this idea of rising inflation
twenty twenty five, he says, the risk is a repeat
of twenty twenty two with a sixty forty portfolio underpormed,
underperformed significantly. Can you not use sixty forty next year?
Speaker 4 (06:12):
Then, well, you got to remember who you're asking.
Speaker 3 (06:14):
I run multi asset, which has a lot of those
portfolios in it, so I categorically disagree with that sentiment.
Speaker 4 (06:20):
But no, Look, I think what you're going to see
is that the bond.
Speaker 3 (06:23):
Market and parts of the equity market I think have
now represent opportunities. Right A bond market that's sitting at
four point thirty four forty on the ten year with
expectations of only three cuts next year, I think there's
an upside case there. I think you see the same
thing in pockets of the equity market. Some of the
hysteria around some of the healthcare names, some of the
hysteria around some of the staples names. We look at
(06:46):
that and say, we're not canceling drug development in the
United States. We are not going to make you know
snack foods illegal, and so if you have value opportunities
there as an investor, those are good contrarian plays and
we're willing to take the other side.
Speaker 5 (07:00):
That snack face should be a leake open.
Speaker 8 (07:02):
Besides the part I knew you were going to think,
give me, forgive me, or just use beat root instead
of BHT.
Speaker 5 (07:07):
Might be you can maybe simple changes. I sure, I'm
with you.
Speaker 2 (07:10):
Should we talk about it about market might be a
less about that Over the long end of the curve
tens and thirties moves of twenty five basis points. What
do you think is driving that? Is that the data,
is that the expected policy change, or it is the
fence easing bus contributing to this move at the long
end as well.
Speaker 3 (07:25):
I think you're seeing one thing I'd say is I
think you're seeing a resurrection of the term premium. Right
when you have a thirty six trillion dollar debt, you're
running deficits at the level that we're running them.
Speaker 4 (07:38):
And you're not concerned about growth.
Speaker 3 (07:39):
Right, the market's not looking out and saying I've got
an emerging recession on our hands.
Speaker 4 (07:44):
What you're seeing is that the short end is.
Speaker 3 (07:46):
Coming down along with FED cuts, and we think that
the term premium is re establishing itself at some level. Now,
that doesn't explain last week's move, but it does explain
this idea.
Speaker 4 (07:54):
That or our big view, if.
Speaker 3 (07:56):
You want to think about it in terms of the market,
really comes from the yield curve.
Speaker 4 (08:00):
Expect short rates to come down.
Speaker 3 (08:01):
We expect long rates to stay right about where they are,
and what that means is that shorter duration fixed income
one to three year fixed we think is in the
sweet spot of total return. Equities have duration, right, small
caps have you know, thirty to fifty percent of their
their lending is variable rate bank debt on shorter term rates.
You buy value names or dividend payers based on shorter
(08:23):
term expectations that are discounted with shorter rates, and that's
one of the reasons why you know last week. Notwithstanding,
we expect this market's going to broaden out and those
shorter duration equities are going to see relief as long
rates stay high short rates come down. We think that
that ye'll curve steepening is probably the big market story of.
Speaker 2 (08:40):
Twenty five bull market this morning, bit STIPO yields Allowa
by two basis points some of ten year Lisa down
about a basis point on a thirty year consensus got
into Wednesday. Is pretty clear the market's looking for cut
this Wednesday, looking for a skip in January. Moke and
Stanley confident about today, conscious about tomorrow. Bank for America
LISA cut today post tomorrow.
Speaker 7 (08:59):
Which is a reason why people are looking at the data,
because they're saying they're data dependant just like the FED,
and the data has been confusing. The headline figure coming
in hotter than expected, but everyone pointing to the fact
that rent and owner's equivalent rent has come in quite considerably.
This idea of what happened last week, though, to me,
was interesting because essentially any upside surprise and you get
the biggest increase in yields to the ten you're going
(09:21):
back to October twenty twenty.
Speaker 5 (09:22):
Can we agree on this?
Speaker 2 (09:22):
The food wrapped in plastic shouldn't be edible after twelve months?
Should we agree on that that maybe it's not food,
that that should be the definition of food, that it
should probably have an issue with bread.
Speaker 7 (09:33):
But you can sit out on your counter for two months.
Speaker 2 (09:36):
I don't think you should be allowed to call it bread
of it still? Do you think you shoultill not got
mold on it after a month?
Speaker 4 (09:41):
That's a cracker.
Speaker 5 (09:43):
Yes, you should call it all right, come on you bread.
Speaker 2 (09:47):
If the Europeans are listening, they're thinking, probably that's a
good idea. Steve's going to see it, Steve chevroon de federated.
They love the regulations and rules over in Europe.
Speaker 5 (10:04):
Looking head to the federal serve. As always, it's what
we do here.
Speaker 2 (10:07):
Traders are waiting for the final decision of the year
that comes on Wednesday. Lydia Basort of Ey writing, given
calling labor market conditions, strong productivity growth, and moderating inflation trends,
we continue to expect a rake cut of twenty five
basis points at the December meeting, Lydia joins US now
for more. Lydia, welcome to the program. It's a three
part act. As you know, it's not just the decision,
it's also the news conference. But we also get the
(10:29):
economic projections in the SEP and I wonder when you
look across CPI, when you look across growth and unemployment,
the changes that you and the team are expecting this Wednesday,
what would those changes.
Speaker 6 (10:39):
Be good morning.
Speaker 1 (10:41):
So when we look at the summario economic projection, we
are expecting to see you know, the dot plot showing
three recuts next year instead of four and another two
ree cuts in twenty twenty six. We're also expecting to
see an upgrade to GDP growth. We had two percent
in the under projection. We're likely to see now two
(11:02):
point four percent by year end for GDP. For the
unemployment rate, we're likely to see it nutched down to
four point two percent. And then you know, also inflation
moving higher given the latest numbers and the inflation stickiness
that we've seen in the recent months, so we're likely
to see two point eight percent for core PC from
two point six percent. So really a reflection of this
(11:25):
environment where inflation has been a little stickier and growth
has been holding up fairly well.
Speaker 2 (11:31):
Literally the last point is the important point. It's reactionary.
We're marketing to market. How much of this is going
to be anticipatory, anticipating the changes from Washington day s.
Speaker 1 (11:41):
Yeah, I think we have we have a dot lot
that's going to be useful in terms of, you know,
providing a path and a view of where the interest
rate trajectory is heading. But we also have, as we know,
a FED that's extremely data dependent. So part of this
is likely to reflect the essentially what we've seen in
the data, the data that has been coming in essentially.
Speaker 7 (12:04):
Meanwhile, we're talking about some of the ways said Wall
Street is gearing up for next year regardless of what
the policies are. We were talking about M and A,
And I'm just wondering, as an economist, given that we
are expecting a surge in mergers and acquisitions, do we
understand the economic impact of that, whether it comes to
either efficiencies of scale, whether it goes to increase productivity,
(12:26):
whether it means increase layoffs.
Speaker 4 (12:28):
Do we have a sense of that?
Speaker 1 (12:31):
Yes, So, I mean, when we look at the the
economic outlook next year and and you know what we're
seeing in terms of business sentiment, we are expecting to
see you know, an upside from a more a more
business friendly environment and a turning business sentiment. And we
do think that that's going to have you know, a
positive impulse on growth and modest a positive impulse on growth. Now,
(12:56):
when we look at the broader economic outlook, that's going
to be offten.
Speaker 6 (13:00):
Some of the other policies that are going to be
put in place.
Speaker 1 (13:03):
When we think about immigration, when we think about trade
policy and the potential for tariffs, we're likely to get
a drive from these policies, and that's going to create
an offset. So when we think about the outlook in
twenty twenty five twenty twenty six, we do think that,
you know, when you look at all these moving parts,
we're likely to see GDP growth slightly lower. So we
(13:24):
have a modest drive from all of these policies, but
there are a lot of moving parts, and some of
these impacts are going to be offset in each other.
Speaker 7 (13:31):
What are you looking for, Lydia on Wednesday when we
hear from the said, given that they're probably not going
to give a whole lot of guidance as to their
predictions for twenty twenty five, what guidance can they give us?
Speaker 2 (13:43):
Yeah?
Speaker 1 (13:44):
So, I mean when we think about the policy assumptions,
I think Powell is going to be sticking to this
idea that we don't guess, we don't speculate, and we
don't assume. So this ability idea that they're not going
to be putting any policy assumptions into their forecast. I
think when you think about fat share Powell and how
he's going to be setting the stage for a pose,
(14:04):
which is, you know, our base case in January. I
think he's going to be relying on this idea that
the economy is in a good place. Inflation also has
been a little bit stickier, and the fact that the
Fed is essentially going to be moving in this dark
room full of objects, so this idea that they need
to be moving a little more slowly. I think that's
(14:27):
the message we're going to be getting from Powell. And
that's because also he won't be able to, you know,
highlight the inflation risk from all these potential policy shifts
that we're going to get from the incoming administration.
Speaker 8 (14:40):
We'll putting these two stories together. How much could secure
inflation not just be annoying and annoyance for J. Powell,
but also be difficult for M and A and deal
making in twenty twenty five and twenty twenty six.
Speaker 1 (14:52):
Yeah, I mean this is you know, this is a
key risk in terms of the inflation aside from you know,
higher tariff and from stricter immigration. When we think about
the inflationary impulse, and we've done some scenario analysis around
some of the proposals and the latest one, which is,
you know, the twenty five percent tariff on on Canada
(15:15):
and Mexico and the ten person tariff on on China.
And we're looking at an inflationary impulse in twenty twenty
five of zero point four percentage point on inflation.
Speaker 6 (15:24):
So that's going to be a key risk.
Speaker 1 (15:27):
And we've also baked in a trajectory for inflation that's
going to be modestly higher. And now, as you know,
there is a lot of uncertainty surrounding all these policy shifts,
and that's also the reason why the Fed doesn't want
to make too many policy assumptions, you know, around tariff
but also around immigration as well. Is t really a
(15:50):
wild card for the economy in the next two years.
Speaker 8 (15:53):
You've done a lot of work on the m and
a activity we could see and you say it's expected
to rise ten percent just next year alone. Who's going
to be the biggest winner.
Speaker 1 (16:02):
Yeah, So we're expecting to see a rebounding activity and
it's really on the back of this you know, continued
positive economic environment.
Speaker 6 (16:12):
We have less uncertainty as well.
Speaker 1 (16:14):
If you think about where you know, interest rate is heading,
where the FED is heading where inflation is heading as well.
There is a bit more visibility and you know, in
this post election environment as well as we talked about
you know this more you know, business friendly environment, there
is you know, some potential positive impossible so have interest
rates gradually move lower, so you know the outlook. We're
(16:39):
you know, positive on the outlook in terms of seeing
that that rebounding inactivity in twenty twenty five.
Speaker 2 (16:46):
Alivia affree shake your time as always live so that
e y looking ahead to the federal serve as always
it's what we do here. Traders are waiting for the
final decision of the year that comes on Wednesday. Lydia
bus sort of ey writing. Given calling a labor market conditions,
(17:09):
strong productivity growth and moderating inflation trends, we continue to
expect a rate cut of twenty five basis points at
the December meeting. Lydia joins US now for more. Lydia,
welcome to the program. It's a three part act. As
you know, it's not just the decision, it's also the
news conference, but we also get the economic projections in
the SEP and I wonder when you look across CPI,
when you look across growth and unemployment. The changes that
(17:31):
you and the team are expecting this Wednesday, what would
those changes be?
Speaker 6 (17:35):
Good morning.
Speaker 1 (17:36):
So when we look at the Summario economic projection, we
are expecting to see the dot plot showing three recuts
next year instead of four and another two ree cuts
in twenty twenty six. Who We are also expecting to
see an upgrade to GDP growth. We had two percent
in the September projection. We're likely to see now two
(17:57):
point four percent by year end for GDP. For the
unemployment rate, we're likely to see it nutched down to
four point two percent. And then you know, also inflation
moving higher given the latest numbers and the inflation stickiness
that we've seen in the recent months, so we're likely
to see two point eight percent for core PC from
two point six percent. So really a reflection of this
(18:20):
environment where inflation has been a little stickier and growth
has been holding up fairly well likly.
Speaker 2 (18:26):
The last point is the important point. It's reactionary. We're
marketing to market. How much of this is going to
be anticipatory, anticipating the changes from Washington day say.
Speaker 1 (18:36):
Yeah, I think we have we have a dot lot
that's going to be useful in terms of, you know,
providing a path and a view of where the interest
rate trajectory is heading. But we also have, as we know,
a FED that's extremely data dependent. So part of this
is likely to reflect essentially what we've seen in the data,
(18:57):
the data that has been coming in.
Speaker 6 (18:58):
Essentially, while we're.
Speaker 7 (19:00):
Talking about some of the ways said Wall Street is
gearing up for next year regardless of what the policies are,
we were talking about M and A, and I'm just wondering,
as an economist, given that we are expecting a surge
in mergers and acquisitions, do we understand the economic impact
of that, whether it comes to either efficiencies of scale,
(19:20):
whether it goes to increase productivity, whether it means increased layoffs.
Speaker 4 (19:23):
Do we have a sense of that?
Speaker 1 (19:26):
Yes, So, I mean, when we look at the the
economic outlook next year, and you know what we're seeing
in terms of business sentiment, we are expecting to see
you know, an upside from a more more business friendly
environment and a turning business sentiment. And we do think
that that's going to have you know, a positive impulse
(19:47):
on growth and modest a positive impulse on growth. Now,
when we look at the broader economic outlook that's going
to be offsted by some of the other policies that
are going to be put in place. When we think
about immigration, we think about trade policy and the potential
for tariffs, we're likely to get a drive from these policies,
and that's going to create an offset.
Speaker 6 (20:08):
So when we think about the.
Speaker 1 (20:09):
Outlook in twenty twenty five twenty twenty six, we do
think that you know, when you look at all these
moving parts, we're likely to.
Speaker 6 (20:16):
See GDP growth slightly lower.
Speaker 1 (20:19):
So we have a modest drive from all of these policies,
but there are a lot of moving parts, and some
of these impacts are going to be upsetting each other.
Speaker 7 (20:27):
What are you looking for, Lydia on Wednesday when we
hear from the set, Given that they're probably not going
to give a whole lot of guidance as to their
predictions for twenty twenty five, what guidance can they give us?
Speaker 6 (20:38):
Yeah?
Speaker 1 (20:39):
So, I mean when we think about the policy assumptions,
I think Powell is going to be sticking to this
idea that we don't guess, we don't speculate, and we
don't assume. So this ability idea that they're not going
to be putting any policy assumptions into their forecast. I
think when you think about fair share Powell and how
he's going to be setting the stage for a pose,
(20:59):
which which is, you know, our base case in January,
I think he's going to be relying on this idea
that the economy is in a good place. Inflation also
has been a little bit stickier, and the fact that
the fact is essentially going to be moving in this
dark room full of objects, so this idea that they
need to be moving a little more slowly. I think
(21:22):
that's the message we're going to be getting from Powell.
And that's because also he won't be able to, you know,
highlight the inflation risk from all these potential policy shift
that we're going to get from the incoming administration.
Speaker 8 (21:35):
We'll putting these two stories together. How much could steck
your inflation not just be annoying and annoyance for J. Powell,
but also be difficult for M and A and deal
making and twenty twenty five and twenty twenty six.
Speaker 1 (21:48):
Yeah, I mean this is you know, this is a
key risk in terms of the inflation abside from you know,
Hiertariff and from stricter immigration. When we think about the
inflationary impulse, and we've done some scenario analysis around some
of the proposals, and the latest one, which is, you know,
(22:08):
the twenty five percent tariff on on Canada and Mexico
and the ten person tariff on on China, and we're
looking at an inflationary impulse in twenty twenty five of
zero point four percentage point on inflation.
Speaker 6 (22:19):
So that's going to be a key risk.
Speaker 1 (22:22):
And we've also baked in a trajectory for inflation that's
going to be modestly higher.
Speaker 6 (22:29):
And as you know, there is a lot of uncertainty surrounding.
Speaker 1 (22:33):
All these policy shifts, and that's also the reason why
the Fed doesn't want to make too many policy assumptions,
you know, around tariff, but also around immigration as well.
It is really a wild card for the economy in
the next two years.
Speaker 8 (22:48):
You've done a lot of work on the m and
A activity we could see and you say it's expected
to rise ten percent just next year alone. Who's going
to be the biggest winner.
Speaker 1 (22:58):
Yeah, So we're expecting to see rebounding activity and it's
really on the back of this, you know, continued positive
economic environment we have less uncertainty as well. If you
think about where you know, interest rate is heading, where
the FED is heading, where inflation is heading as well,
there is a bit more visibility.
Speaker 6 (23:18):
And you know, in this post.
Speaker 1 (23:20):
Election environment as well, as we talked about, you know,
this more business friendly environment, there is you know, some
potential positive impossible so have interest rates gradually.
Speaker 6 (23:31):
Move lower, so you know the outlook.
Speaker 1 (23:34):
We're you know, positive on the outlook in terms of
seeing that that rebounding in activity in twenty twenty five.
Speaker 2 (23:41):
Hi, Alivia, I appreciate your time. As always, the episode
that of ey. This is the Bloomberg Seventans podcast, bringing
you the best in markets, economics, antio politics. You can
watch the show live on Bloomberg TV weekday mornings from
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as always on the Bloomberg Terminal and the Bloomberg Business
(24:04):
out
Speaker 3 (24:08):
Mm hmm
Boo, 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 Amrie 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 Bloomberg
(00:34):
Terminal and the Bloomberg Business App. Steve Shefvarroond of Federated
hermes looking for the rally in the equity market to continue.
Terry Haynes of Pangea Policy on mysterious drone sightings along
the East Coast, and three Kunch of Governant of Aberdeen
on Germany's political future. We begin this hour kicking off
the final full trading week of the year, looking ahead
to a Federate decision on Wednesday. Steve Shefvrod of Federated
(00:55):
remains optimistic on stocks. The combination of accelerating earnings growth
and rake cuts It is rare and generally positive for
equity some places side that state joins US now stave Goomona,
good morning, It's good to see you. The equity market
rip is on the masstack. It's some big tech. It's
not on the S and P five hundred iter cerentainly
not on the small caps. We've talked a lot about
negative breadth. I've been listening to the team over the
last week. This was not the back coming out of
(01:17):
the election. So what's gone wrong?
Speaker 3 (01:19):
No, I look, I think growth is surprised to the
upside since the election. You know, outside of last week's
kind of sell off. The bond market did settle after
the election, right, you had that run kind of a
four fifty on the ten year and then that kind
of settled back in. But what we think, and we
made a move last week in our asset allocation to
reflect this, is it's just harder and harder to justify
owning non US developed markets. And I think you've seen
(01:42):
capital leave places like Europe where now you have political instability,
not only in France, not only in the UK, but
now you also have Germany. They sit kind of at
the forefront potentially of tariff risk. Growth has been soft
and so I think you're seeing capital flood in the
United States and it's helping growth.
Speaker 4 (02:02):
And I think you really saw that last week.
Speaker 2 (02:04):
So the risk I gets to next year recording to
a Parliament Tolston Slock and we's all lots about this
Thory VI hour a Polom and Tolston Slock sets of
repeat of twenty twenty two.
Speaker 5 (02:13):
We all remember twenty twenty two.
Speaker 2 (02:14):
It's band for buf stalks and banfoot bums, which you
push back against that.
Speaker 3 (02:18):
I do you know, I think I think it's gonna
be an interesting week, and I think you know Powell,
who always likes to surprise us, he may have another
surprise in store for twenty four and that is I
think the market's gotten a little bit too concerned and
hawkish about inflation.
Speaker 1 (02:34):
Right.
Speaker 4 (02:34):
Inflation has been sticky.
Speaker 3 (02:35):
It has been a little bit re accelerant in the
last few months, but if you look, it hasn't really
broken out.
Speaker 4 (02:39):
Of any kind of long term range.
Speaker 3 (02:41):
It still appears to be grinding down. And I think
you may see a pal that's a little bit more
dubbish than what the market's expecting this week.
Speaker 4 (02:51):
Because he does that to us, hold on, he does
that to us.
Speaker 6 (02:54):
He does this to us.
Speaker 5 (02:54):
You say, he always surprises us.
Speaker 4 (02:56):
He doesn't surprise us.
Speaker 7 (02:57):
He outdoves every expectation from the mark.
Speaker 3 (03:00):
You think that's going to be the repeat, Well, if
you look at it, Look, the market has priced in
a terminal rate here that's somewhere now between three seventy
five and four. We still think it's between three and
three fifty just going to take you into twenty six
to get there. On the dot plots, right, you generally
don't see the fed erase two cuts in one dot plot, right.
(03:21):
Maybe they pull one in, maybe they push one out,
And so.
Speaker 4 (03:25):
You've got a street that you know.
Speaker 3 (03:27):
You've got to fed with five cuts between now in
the middle of twenty eight or I'm sorry, twenty six.
In their dot plots, you've got a street that only
has three more cuts. Again, I think what you may
see him do is deliver the cut in December and
then talk about how their rhetoric is really about a
reduction in pace, not in a reduction direction. So we're
going to go to once a quarter next year, but
(03:49):
you shouldn't expect that we're anywhere near the end of
a rate cut cycle.
Speaker 7 (03:52):
The backdrop to this is that you push back completely
against Torsten Slock's point of view, as John was out
laying out that basically we're going to have a very
inflationary and potentially styflationary policy where you get growth flowing
on the heels of some of these terrifts, but you
don't necessarily have inflation coming in. You actually think it's
the opposite, that a lot of Trump's policies are going
to be more pro growth and less inflationary than feared.
Speaker 5 (04:15):
Why.
Speaker 4 (04:16):
Well, a couple of reasons.
Speaker 3 (04:18):
One, I think when you're talking about a tariff, for example,
it can't be both a tax and inflationary. It's got
to be one or the other, right, because if it
really is a tax, then there's an offsetting demand piece
to it. You also have to take into account that
that tariff increase is likely going to come in the context.
Speaker 4 (04:35):
Of major tax cuts.
Speaker 3 (04:36):
You have deregulation, you have some shedding of government jobs.
Both of those can be either certainly pro growth but
also disinflationary because they take some costs out of the system.
Speaker 4 (04:48):
And so I think when you put that.
Speaker 3 (04:49):
Package together, what's happening right now in the market is
we are underestimating the growth that's going to come from
the policies and overestimating the inflation. I think the Fed
would be wise to be patient here see what actually
gets through the sausage making process of Washington. There's a
lot of steps to go between a concept an actual policy,
(05:10):
and I think if the FED were to react in
anticipation of that, they may end up being more hawkish
than they need to be in an environment where the
labor markets are softening.
Speaker 8 (05:18):
So so you don't agree with Bill Dudley, They shouldn't
assume and they should say we're going to wait for
the policies to take hold.
Speaker 3 (05:25):
I don't see what policy you're going to respond to now.
If you want to respond to inflation readings being a
little bit hotter over the last couple of months and
then decelerating too, or a slower pace of cuts, I
think that's appropriate. But again we've talked about the chess
versus the checkers.
Speaker 4 (05:42):
If you look at each one.
Speaker 3 (05:43):
Of the policy proposals that are out there, you can
look at it and say, well, this is good, or
that's bad, or that's inflationary, that's pro growth. When you
look at it together, we think what you're going to
end up with is something that is more pro growth,
somewhat pro productivity, and that's going to dampen some of
the inflation impulses.
Speaker 8 (06:00):
To Torsten Slock's note and this idea of rising inflation
twenty twenty five, he says, the risk is a repeat
of twenty twenty two with a sixty forty portfolio underpormed,
underperformed significantly. Can you not use sixty forty next year?
Speaker 4 (06:12):
Then, well, you got to remember who you're asking.
Speaker 3 (06:14):
I run multi asset, which has a lot of those
portfolios in it, so I categorically disagree with that sentiment.
Speaker 4 (06:20):
But no, Look, I think what you're going to see
is that the bond.
Speaker 3 (06:23):
Market and parts of the equity market I think have
now represent opportunities. Right A bond market that's sitting at
four point thirty four forty on the ten year with
expectations of only three cuts next year, I think there's
an upside case there. I think you see the same
thing in pockets of the equity market. Some of the
hysteria around some of the healthcare names, some of the
hysteria around some of the staples names. We look at
(06:46):
that and say, we're not canceling drug development in the
United States. We are not going to make you know
snack foods illegal, and so if you have value opportunities
there as an investor, those are good contrarian plays and
we're willing to take the other side.
Speaker 5 (07:00):
That snack face should be a leake open.
Speaker 8 (07:02):
Besides the part I knew you were going to think,
give me, forgive me, or just use beat root instead
of BHT.
Speaker 5 (07:07):
Might be you can maybe simple changes. I sure, I'm
with you.
Speaker 2 (07:10):
Should we talk about it about market might be a
less about that Over the long end of the curve
tens and thirties moves of twenty five basis points. What
do you think is driving that? Is that the data,
is that the expected policy change, or it is the
fence easing bus contributing to this move at the long
end as well.
Speaker 3 (07:25):
I think you're seeing one thing I'd say is I
think you're seeing a resurrection of the term premium. Right
when you have a thirty six trillion dollar debt, you're
running deficits at the level that we're running them.
Speaker 4 (07:38):
And you're not concerned about growth.
Speaker 3 (07:39):
Right, the market's not looking out and saying I've got
an emerging recession on our hands.
Speaker 4 (07:44):
What you're seeing is that the short end is.
Speaker 3 (07:46):
Coming down along with FED cuts, and we think that
the term premium is re establishing itself at some level. Now,
that doesn't explain last week's move, but it does explain
this idea.
Speaker 4 (07:54):
That or our big view, if.
Speaker 3 (07:56):
You want to think about it in terms of the market,
really comes from the yield curve.
Speaker 4 (08:00):
Expect short rates to come down.
Speaker 3 (08:01):
We expect long rates to stay right about where they are,
and what that means is that shorter duration fixed income
one to three year fixed we think is in the
sweet spot of total return. Equities have duration, right, small
caps have you know, thirty to fifty percent of their
their lending is variable rate bank debt on shorter term rates.
You buy value names or dividend payers based on shorter
(08:23):
term expectations that are discounted with shorter rates, and that's
one of the reasons why you know last week. Notwithstanding,
we expect this market's going to broaden out and those
shorter duration equities are going to see relief as long
rates stay high short rates come down. We think that
that ye'll curve steepening is probably the big market story of.
Speaker 2 (08:40):
Twenty five bull market this morning, bit STIPO yields Allowa
by two basis points some of ten year Lisa down
about a basis point on a thirty year consensus got
into Wednesday. Is pretty clear the market's looking for cut
this Wednesday, looking for a skip in January. Moke and
Stanley confident about today, conscious about tomorrow. Bank for America
LISA cut today post tomorrow.
Speaker 7 (08:59):
Which is a reason why people are looking at the data,
because they're saying they're data dependant just like the FED,
and the data has been confusing. The headline figure coming
in hotter than expected, but everyone pointing to the fact
that rent and owner's equivalent rent has come in quite considerably.
This idea of what happened last week, though, to me,
was interesting because essentially any upside surprise and you get
the biggest increase in yields to the ten you're going
(09:21):
back to October twenty twenty.
Speaker 5 (09:22):
Can we agree on this?
Speaker 2 (09:22):
The food wrapped in plastic shouldn't be edible after twelve months?
Should we agree on that that maybe it's not food,
that that should be the definition of food, that it
should probably have an issue with bread.
Speaker 7 (09:33):
But you can sit out on your counter for two months.
Speaker 2 (09:36):
I don't think you should be allowed to call it bread
of it still? Do you think you shoultill not got
mold on it after a month?
Speaker 4 (09:41):
That's a cracker.
Speaker 5 (09:43):
Yes, you should call it all right, come on you bread.
Speaker 2 (09:47):
If the Europeans are listening, they're thinking, probably that's a
good idea. Steve's going to see it, Steve chevroon de federated.
They love the regulations and rules over in Europe.
Speaker 5 (10:04):
Looking head to the federal serve. As always, it's what
we do here.
Speaker 2 (10:07):
Traders are waiting for the final decision of the year
that comes on Wednesday. Lydia Basort of Ey writing, given
calling labor market conditions, strong productivity growth, and moderating inflation trends,
we continue to expect a rake cut of twenty five
basis points at the December meeting, Lydia joins US now
for more. Lydia, welcome to the program. It's a three
part act. As you know, it's not just the decision,
it's also the news conference. But we also get the
(10:29):
economic projections in the SEP and I wonder when you
look across CPI, when you look across growth and unemployment,
the changes that you and the team are expecting this Wednesday,
what would those changes.
Speaker 6 (10:39):
Be good morning.
Speaker 1 (10:41):
So when we look at the summario economic projection, we
are expecting to see you know, the dot plot showing
three recuts next year instead of four and another two
ree cuts in twenty twenty six. We're also expecting to
see an upgrade to GDP growth. We had two percent
in the under projection. We're likely to see now two
(11:02):
point four percent by year end for GDP. For the
unemployment rate, we're likely to see it nutched down to
four point two percent. And then you know, also inflation
moving higher given the latest numbers and the inflation stickiness
that we've seen in the recent months, so we're likely
to see two point eight percent for core PC from
two point six percent. So really a reflection of this
(11:25):
environment where inflation has been a little stickier and growth
has been holding up fairly well.
Speaker 2 (11:31):
Literally the last point is the important point. It's reactionary.
We're marketing to market. How much of this is going
to be anticipatory, anticipating the changes from Washington day s.
Speaker 1 (11:41):
Yeah, I think we have we have a dot lot
that's going to be useful in terms of, you know,
providing a path and a view of where the interest
rate trajectory is heading. But we also have, as we know,
a FED that's extremely data dependent. So part of this
is likely to reflect the essentially what we've seen in
the data, the data that has been coming in essentially.
Speaker 7 (12:04):
Meanwhile, we're talking about some of the ways said Wall
Street is gearing up for next year regardless of what
the policies are. We were talking about M and A,
And I'm just wondering, as an economist, given that we
are expecting a surge in mergers and acquisitions, do we
understand the economic impact of that, whether it comes to
either efficiencies of scale, whether it goes to increase productivity,
(12:26):
whether it means increase layoffs.
Speaker 4 (12:28):
Do we have a sense of that?
Speaker 1 (12:31):
Yes, So, I mean, when we look at the the
economic outlook next year and and you know what we're
seeing in terms of business sentiment, we are expecting to
see you know, an upside from a more a more
business friendly environment and a turning business sentiment. And we
do think that that's going to have you know, a
positive impulse on growth and modest a positive impulse on growth. Now,
(12:56):
when we look at the broader economic outlook, that's going
to be offten.
Speaker 6 (13:00):
Some of the other policies that are going to be
put in place.
Speaker 1 (13:03):
When we think about immigration, when we think about trade
policy and the potential for tariffs, we're likely to get
a drive from these policies, and that's going to create
an offset. So when we think about the outlook in
twenty twenty five twenty twenty six, we do think that,
you know, when you look at all these moving parts,
we're likely to see GDP growth slightly lower. So we
(13:24):
have a modest drive from all of these policies, but
there are a lot of moving parts, and some of
these impacts are going to be offset in each other.
Speaker 7 (13:31):
What are you looking for, Lydia on Wednesday when we
hear from the said, given that they're probably not going
to give a whole lot of guidance as to their
predictions for twenty twenty five, what guidance can they give us?
Speaker 2 (13:43):
Yeah?
Speaker 1 (13:44):
So, I mean when we think about the policy assumptions,
I think Powell is going to be sticking to this
idea that we don't guess, we don't speculate, and we
don't assume. So this ability idea that they're not going
to be putting any policy assumptions into their forecast. I
think when you think about fat share Powell and how
he's going to be setting the stage for a pose,
(14:04):
which is, you know, our base case in January. I
think he's going to be relying on this idea that
the economy is in a good place. Inflation also has
been a little bit stickier, and the fact that the
Fed is essentially going to be moving in this dark
room full of objects, so this idea that they need
to be moving a little more slowly. I think that's
(14:27):
the message we're going to be getting from Powell. And
that's because also he won't be able to, you know,
highlight the inflation risk from all these potential policy shifts
that we're going to get from the incoming administration.
Speaker 8 (14:40):
We'll putting these two stories together. How much could secure
inflation not just be annoying and annoyance for J. Powell,
but also be difficult for M and A and deal
making in twenty twenty five and twenty twenty six.
Speaker 1 (14:52):
Yeah, I mean this is you know, this is a
key risk in terms of the inflation aside from you know,
higher tariff and from stricter immigration. When we think about
the inflationary impulse, and we've done some scenario analysis around
some of the proposals and the latest one, which is,
you know, the twenty five percent tariff on on Canada
(15:15):
and Mexico and the ten person tariff on on China.
And we're looking at an inflationary impulse in twenty twenty
five of zero point four percentage point on inflation.
Speaker 6 (15:24):
So that's going to be a key risk.
Speaker 1 (15:27):
And we've also baked in a trajectory for inflation that's
going to be modestly higher. And now, as you know,
there is a lot of uncertainty surrounding all these policy shifts,
and that's also the reason why the Fed doesn't want
to make too many policy assumptions, you know, around tariff
but also around immigration as well. Is t really a
(15:50):
wild card for the economy in the next two years.
Speaker 8 (15:53):
You've done a lot of work on the m and
a activity we could see and you say it's expected
to rise ten percent just next year alone. Who's going
to be the biggest winner.
Speaker 1 (16:02):
Yeah, So we're expecting to see a rebounding activity and
it's really on the back of this you know, continued
positive economic environment.
Speaker 6 (16:12):
We have less uncertainty as well.
Speaker 1 (16:14):
If you think about where you know, interest rate is heading,
where the FED is heading where inflation is heading as well.
There is a bit more visibility and you know, in
this post election environment as well as we talked about
you know this more you know, business friendly environment, there
is you know, some potential positive impossible so have interest
rates gradually move lower, so you know the outlook. We're
(16:39):
you know, positive on the outlook in terms of seeing
that that rebounding inactivity in twenty twenty five.
Speaker 2 (16:46):
Alivia affree shake your time as always live so that
e y looking ahead to the federal serve as always
it's what we do here. Traders are waiting for the
final decision of the year that comes on Wednesday. Lydia
bus sort of ey writing. Given calling a labor market conditions,
(17:09):
strong productivity growth and moderating inflation trends, we continue to
expect a rate cut of twenty five basis points at
the December meeting. Lydia joins US now for more. Lydia,
welcome to the program. It's a three part act. As
you know, it's not just the decision, it's also the
news conference, but we also get the economic projections in
the SEP and I wonder when you look across CPI,
when you look across growth and unemployment. The changes that
(17:31):
you and the team are expecting this Wednesday, what would
those changes be?
Speaker 6 (17:35):
Good morning.
Speaker 1 (17:36):
So when we look at the Summario economic projection, we
are expecting to see the dot plot showing three recuts
next year instead of four and another two ree cuts
in twenty twenty six. Who We are also expecting to
see an upgrade to GDP growth. We had two percent
in the September projection. We're likely to see now two
(17:57):
point four percent by year end for GDP. For the
unemployment rate, we're likely to see it nutched down to
four point two percent. And then you know, also inflation
moving higher given the latest numbers and the inflation stickiness
that we've seen in the recent months, so we're likely
to see two point eight percent for core PC from
two point six percent. So really a reflection of this
(18:20):
environment where inflation has been a little stickier and growth
has been holding up fairly well likly.
Speaker 2 (18:26):
The last point is the important point. It's reactionary. We're
marketing to market. How much of this is going to
be anticipatory, anticipating the changes from Washington day say.
Speaker 1 (18:36):
Yeah, I think we have we have a dot lot
that's going to be useful in terms of, you know,
providing a path and a view of where the interest
rate trajectory is heading. But we also have, as we know,
a FED that's extremely data dependent. So part of this
is likely to reflect essentially what we've seen in the data,
(18:57):
the data that has been coming in.
Speaker 6 (18:58):
Essentially, while we're.
Speaker 7 (19:00):
Talking about some of the ways said Wall Street is
gearing up for next year regardless of what the policies are,
we were talking about M and A, and I'm just wondering,
as an economist, given that we are expecting a surge
in mergers and acquisitions, do we understand the economic impact
of that, whether it comes to either efficiencies of scale,
(19:20):
whether it goes to increase productivity, whether it means increased layoffs.
Speaker 4 (19:23):
Do we have a sense of that?
Speaker 1 (19:26):
Yes, So, I mean, when we look at the the
economic outlook next year, and you know what we're seeing
in terms of business sentiment, we are expecting to see
you know, an upside from a more more business friendly
environment and a turning business sentiment. And we do think
that that's going to have you know, a positive impulse
(19:47):
on growth and modest a positive impulse on growth. Now,
when we look at the broader economic outlook that's going
to be offsted by some of the other policies that
are going to be put in place. When we think
about immigration, we think about trade policy and the potential
for tariffs, we're likely to get a drive from these policies,
and that's going to create an offset.
Speaker 6 (20:08):
So when we think about the.
Speaker 1 (20:09):
Outlook in twenty twenty five twenty twenty six, we do
think that you know, when you look at all these
moving parts, we're likely to.
Speaker 6 (20:16):
See GDP growth slightly lower.
Speaker 1 (20:19):
So we have a modest drive from all of these policies,
but there are a lot of moving parts, and some
of these impacts are going to be upsetting each other.
Speaker 7 (20:27):
What are you looking for, Lydia on Wednesday when we
hear from the set, Given that they're probably not going
to give a whole lot of guidance as to their
predictions for twenty twenty five, what guidance can they give us?
Speaker 6 (20:38):
Yeah?
Speaker 1 (20:39):
So, I mean when we think about the policy assumptions,
I think Powell is going to be sticking to this
idea that we don't guess, we don't speculate, and we
don't assume. So this ability idea that they're not going
to be putting any policy assumptions into their forecast. I
think when you think about fair share Powell and how
he's going to be setting the stage for a pose,
(20:59):
which which is, you know, our base case in January,
I think he's going to be relying on this idea
that the economy is in a good place. Inflation also
has been a little bit stickier, and the fact that
the fact is essentially going to be moving in this
dark room full of objects, so this idea that they
need to be moving a little more slowly. I think
(21:22):
that's the message we're going to be getting from Powell.
And that's because also he won't be able to, you know,
highlight the inflation risk from all these potential policy shift
that we're going to get from the incoming administration.
Speaker 8 (21:35):
We'll putting these two stories together. How much could steck
your inflation not just be annoying and annoyance for J. Powell,
but also be difficult for M and A and deal
making and twenty twenty five and twenty twenty six.
Speaker 1 (21:48):
Yeah, I mean this is you know, this is a
key risk in terms of the inflation abside from you know,
Hiertariff and from stricter immigration. When we think about the
inflationary impulse, and we've done some scenario analysis around some
of the proposals, and the latest one, which is, you know,
(22:08):
the twenty five percent tariff on on Canada and Mexico
and the ten person tariff on on China, and we're
looking at an inflationary impulse in twenty twenty five of
zero point four percentage point on inflation.
Speaker 6 (22:19):
So that's going to be a key risk.
Speaker 1 (22:22):
And we've also baked in a trajectory for inflation that's
going to be modestly higher.
Speaker 6 (22:29):
And as you know, there is a lot of uncertainty surrounding.
Speaker 1 (22:33):
All these policy shifts, and that's also the reason why
the Fed doesn't want to make too many policy assumptions,
you know, around tariff, but also around immigration as well.
It is really a wild card for the economy in
the next two years.
Speaker 8 (22:48):
You've done a lot of work on the m and
A activity we could see and you say it's expected
to rise ten percent just next year alone. Who's going
to be the biggest winner.
Speaker 1 (22:58):
Yeah, So we're expecting to see rebounding activity and it's
really on the back of this, you know, continued positive
economic environment we have less uncertainty as well. If you
think about where you know, interest rate is heading, where
the FED is heading, where inflation is heading as well,
there is a bit more visibility.
Speaker 6 (23:18):
And you know, in this post.
Speaker 1 (23:20):
Election environment as well, as we talked about, you know,
this more business friendly environment, there is you know, some
potential positive impossible so have interest rates gradually.
Speaker 6 (23:31):
Move lower, so you know the outlook.
Speaker 1 (23:34):
We're you know, positive on the outlook in terms of
seeing that that rebounding in activity in twenty twenty five.
Speaker 2 (23:41):
Hi, Alivia, I appreciate your time. As always, the episode
that of ey. This is the Bloomberg Seventans podcast, bringing
you the best in markets, economics, antio 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 any where else you listen, and
as always on the Bloomberg Terminal and the Bloomberg Business
(24:04):
out
Speaker 3 (24:08):
Mm hmm
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