July 22, 2025 • 27 mins
- Andrew Hollenhorst, Chief US Economist at Citi
- Russell Brownback, Head: Global Macro Positioning at BlackRock
- Samuel Zief, Head: Global FX Strategy at JPMorgan
- Alexander Altmann, Global Head: Equities Tactical Strategies at Barclays
Andrew Hollenhorst, Chief US Economist at Citi, discusses US inflation, the market rally, and Fed independence. Russell Brownback, Head: Global Macro Positioning at BlackRock, discusses what the bond market is signaling about the US economy. Samuel Zief, Head: Global FX Strategy at JPMorgan, talks about a weakening US dollar and whether there is a bull case for the dollar this year. Alexander Altmann, Global Head: Equities Tactical Strategies at Barclays, talks about the persistence of the equity bull run and where equities could land in the second half.
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Speaker 1 (00:00):
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 a Marie Hordern. Join us each
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(00:33):
Bloomberg Terminal and the Bloomberg Business App. Alex Oltman of
Barclay's writing, ultimately it remains all eyes on that confluence
of the f MC, PCEE, NFP megacap earnings window with
a sprinkle of tariff threads or relief. Alex joins us
now for more. Good morning, Alex, good morning. How we
price for all of that?
Speaker 3 (00:51):
Well, the SMP is pricing in about a one percent
move every day over that three day window. But what's
really interesting is that we've obviously had a long streak
of very little volatility. The market's pricing in a three
day window of volatility, and then it's pricing in no
volatility again, so I would say there's still a relatively
high amount of complacency even over those that three day
(01:11):
window of three letter.
Speaker 2 (01:13):
Acronyms tariff threats or tariff relief. The difference between the two,
what is the difference between the two? Is this a
market do you feel that's betting against the administration following
through or betting on corporate resilience in the face of tariffs.
Speaker 3 (01:27):
I would say the latter. It's quite clear in the
SMP is trading on basically at its cap of what
it's been trading from a valuation perspective in a post
COVID era, which is about twenty two to twenty two
and a half times. And so if we break out
of that, we're starting to question if we're getting into
a new regime of valuation and of call. Dare I
say bubble, which is clearly going to be moving towards
(01:49):
tariff relief than tariff fear.
Speaker 4 (01:50):
Well, but Chris Harvey had an interesting argument about this.
You use the word bubble, but he made the argument
that we should be getting to hire valuation levels given
the fact that this is a much more are tech
dominant index that it has been traditionally and we have
had this huge industrial revolution underpinning some of the efficiency
gains that have allowed companies to absorb some of the
tear off costs, etc.
Speaker 5 (02:11):
With relative grace.
Speaker 4 (02:13):
What do you make of that that there needs to
be just generally a higher valuation, a higher multiple put
on US equities as a result.
Speaker 3 (02:20):
I think that's generally been the path over time. If
you look at the path of the equity market multiple POSTGFC,
as profit margins have increased, you've generally seen an improvement
in invaluations. I would like to pivot slightly in to
talk about small caps a little bit, because we're talking
to talk about a technological revolution and we need to
start thinking outside the box a bit beyond just the
(02:40):
hyperscalers and the immediate picks and shovels beneficiaries of AI.
Let's talk about the fact that consumers get a huge
benefit from AI and basically a subsidized cost as a
result of these Hyperscale is investing quite frankly, trillions of
dollars into this investment at what is currently a low
ROI think about the consumer benefit, about the small business benefits,
(03:02):
businesses that now you're democratizing the process of that AI
revolution into call it small caps. And that's why I
actually think the valuation anomally might actually be in the
smaller cap space, which basically has been overlooked for years now.
Speaker 4 (03:15):
So this is the argument that people were making last
year that didn't really come to pass, that we'd see
a broadening out away from the hyperscalers and the big
tech names to the rest of the index because you
are seeing that diffusion of some of the tech prowess.
Is that sort of what you're expecting now, Is that
kind of where you're leaning in it is?
Speaker 3 (03:31):
And also, let's sort forget like breadth. This year has
been pretty good, so we've already seen a broadening out.
Best performing sectors in twenty twenty five have actually been
things like industrials. It hasn't been necessarily been just the megacaps.
But then we've also got to start thinking about a
regime shift, which has already been discussed in this forum here,
which is what are the FED going to do if
we're going to move away from a higher for longer
(03:51):
narrative to a lower interest rate environment. Consider the fact
that small caps forty five percent of small caps of
variable interest rate debt. They're going to get the direct
benefit of interest rate cuts. So we can pontificate about
whether mister Powell is going to resign all the rest
of it, and we will. However, However, the fact of
the matter is is that we will end up with
a replaced FED chair at this time next year, and
(04:13):
we are pretty convinced that the path is of interest
rates is therefore lower. So we need to think about
less about the near term and more about if interest
rates are lower, who's going to be the direct beneficiary.
So it's not just the AI angle. You've got lower
interest rates, and you've also got the positioning, which has
been our guiding light since the beginning of beginning of June.
From a positioning perspective, look at CFTC data on small cabs.
It's currently the most short since last summer, right before
(04:36):
we had that big squeeze.
Speaker 1 (04:37):
As well, even.
Speaker 6 (04:37):
Before we get a new FED chair, we could see
the FED cutting interest rates. When do you have this
all timed out well?
Speaker 3 (04:43):
So at Barclay's economists have stilled two cuts of the year,
so you know, September December. I think that at the
end of the day, whether this is one cut two
cuts in twenty twenty five. I wouldn't say it's a
relevant that I think. I would say it's marginal because
we're trying to sort of forecast member equities are supposed
to be a four disco mechanism. They're supposed to be
thinking six, twelve, two years out, especially for long dated
(05:05):
securities that don't have many profits today. So in that case,
it really I don't think it matters enormously.
Speaker 6 (05:10):
So for small caps you want to be exposed ahead
of September?
Speaker 3 (05:14):
Correct, Yes, I think I think the small cap story
is really not just about positioning, but it's about that
fed pivot or Dare I say, is the equity market
moving into a new regime, away from just thinking about
the narrowness of leadership and into something a little bit
more broad?
Speaker 2 (05:30):
Strange things happen in August? Are you hopeful we'll have
one of those nice quiet summers?
Speaker 3 (05:34):
I mean, I'm going on vacation on fridaytime. I would
very much hope.
Speaker 1 (05:38):
So.
Speaker 3 (05:39):
But as you say, August is notoriously volatile, or so
I say, August can be notoriously volatile. If we all
recall last year what happened with the boj and so
on and so forth, I would say that the fact
is we still to your first question, we still have
that confluence of events straddling month end, and any of
those could potentially derail this LOWVOLL environment.
Speaker 5 (06:00):
What was volume like at the moment? Just volume volume?
Speaker 3 (06:03):
Well, volume is okay, but it's massively skewed by the
retail cohorts. So we're seeing this enormous turnover with and
a small number of securities as a function of the
small investor, which is again a part of a large
disc I just.
Speaker 2 (06:14):
Follow up on that, what securities are they concentrated in
the ones we talk about every day or different kind
of companies?
Speaker 3 (06:20):
I mean, just for the purpose, I won't name specific names,
but let's give I'll give you an example that for security.
I think it was middle of last week, four securities
accounted for eleven percent of total nicety volume. The collective
market cap of those four was two point six basis
points of US capitalization. So these aren't stocks that you
talk about in a daily base.
Speaker 2 (06:39):
Eleven percent of volume, two point six basis points of
market cap?
Speaker 3 (06:42):
Yes, of US market cap?
Speaker 5 (06:44):
That's amazing. Yes, have you ever seen it like that before?
We have not known? What do you think is behind there.
Speaker 3 (06:49):
So that is I would say retail euphoria. So you've
had this prevalence on shift of obviously a multi year
structural phenomenon post COVID where small investors have become a
lot and larger portion of the tape. They now account
for about twenty five percent systematic flows, quantitaive flows account
for another fifty percent, and those numbers have just been
(07:09):
growing over time. So the only time we came close
to this was in twenty twenty one. Obviously, very different
real rate environment.
Speaker 5 (07:15):
A different bank drob completely.
Speaker 2 (07:16):
So I'm trying to figure out just in real time
what's unlished this recent bout because it feels like a
very different bank drob to where we were all those
years ago.
Speaker 3 (07:23):
This goes back to my point of whether are we
in a bubble or not, because we're talking about animal spirits,
we're talking about euphoria. We're talking about the fact that
there's a lot of a lot of small investors still
haven't lost their jobs, still getting income growth, still basically
seen the stock market at the highst and if you
remember at the beginning of the year when we spoke
on this show, there's a reflexivity in stocks because the
economy is so financialized. Seventy percent of financial household net
(07:46):
worth is tied to the stock market. So on the
way down it feels terrible. On the way up it
feels fantastic.
Speaker 4 (07:51):
Is this stupid money or is this smart money? Because
they've been the winners and a lot of people used
to dismiss this and say it's a bubble and this
means that the market's going to tank. Are people looking
at this and saying this means they're more gains ahead.
Speaker 3 (08:01):
Well, I don't want to call them stupid money, because
the fact of the matter is they've made more money
than most professional investors have recently. I would just simply
say that these guys are doing what they've been doing
or condition to do, which is by the dip. I
think what's important to consider, though, is back to this
regime shift. Is the market telling us that we're moving
to a lower interest rate environment where actually it's a
(08:21):
lot of the less profitable stocks that end up being
the market leaders. And if you look at things like
certain factor behaviors, the only time we've seen this before,
these what will be engineered as a short squeeze, but
it's not a short squeeze two thousand and nine, twenty twenty,
twenty twenty one, neither of which were just short squeezes.
They were regime changers. And so I think that's what
we're pointing towards. That's why we're thinking about small caps more,
(08:43):
because it may not just be the stupid small investor.
It may actually be something a little bit more paradigmy.
Speaker 5 (08:49):
Those numbers are amazing.
Speaker 2 (08:50):
Eleven percent of volume across four names, which account for
two point six basis points of US market cap. Yeah, unreal,
and it's good to see you. I love to think
about it. Thank you, Thank you, sir Alex Selman. There
Barclay's Russell brownback of black Crow Colling. This quite one
(09:12):
of the most compelling fixed income opportunity sets in decades.
Speaker 5 (09:15):
Russell joins a snaw from more Russell. Good morning morning.
Speaker 2 (09:18):
We've seen a bit of a Rantian treasuries over the
previous few days. What's behind that big wall of demand?
Speaker 7 (09:22):
So you know that we're calling it one of several
transcendent influences today that really sort of drive market outcomes,
and that is this wall of money that exists today.
So you look in the United States two hundred and
eighteen trillion dollars of private sector net worth and you
put that in comparison to the size of the asset
markets today, it really is a world where there's too
(09:44):
much money and not enough yielding assets. And so that's
a you know, a transcendent influence in the face of
lots of policy uncertainty that along with a resilient economy.
Speaker 2 (09:53):
Everything seems to have sett soed down over the past
few months. There's something even the team is set. The
genuine economic risk is mutes it. What do you mean
by that?
Speaker 7 (10:03):
It's this series of structural foundational influences that have transcended
uncertainties that the economy has faced in twenty twenty three,
with the regional banking crisis and acrimonious election last year,
and the uncertainty about the sequencing of policies and implementation
this year. And yet you get these momentary pullbacks of
(10:26):
consumption or investment just as velocity slows as uncertainty sort
of cycles through the system. But then it rebounds, and
you've seen the economy accelerate into the fourth quarter each
of the last two years. It's my expectation you'll see
the exact same thing unfold this year.
Speaker 4 (10:41):
Which is the reason why you've been reducing your position
in cash and deploying still seeing spread compression through the
remainder of the year. I just wonder if the book's
really been written on the policies that have them implemented,
the policy uncertainty and the ramification on the economy. Why
do you think that we have enough information to say
we will still see that reaccelerate even if some of
(11:01):
those tariff ramifications haven't been fully felt yet.
Speaker 7 (11:05):
So again, because these underlying influences are so powerful, these
policy evolutions are only marginally incrementally determined to outcomes. And listen,
I think markets have correctly assessed the tariff situation as
benign at the end of the day. At the end
of day, tariffs are a tax, and so the debate
(11:26):
about whether they're inflationary. You think about if we were
sitting here talking about an income tax, we wouldn't be
discussing whether it's inflationary or not. We'd be discussing its
impacts on growth. And so when you think about and
many guests have been on your program over recent days
talking about how that tariff impact is spread out over
so many different nodes of that value chain between the
(11:47):
point at which the good arrives at port and when
it ends up on the store shelf. So these are
marginal sort of shifts in underlying economic actors.
Speaker 1 (11:56):
And the influences there.
Speaker 7 (11:57):
But overall these foundational supports or what's driving.
Speaker 4 (12:01):
Markets and that's driving credit, that's driving equities. How should
this really play through in the bond the treasury space,
given the fact that we have potential rate cuts coming
down the pike even with strength in the economy, and
a real question around how much it's going to be
an inflationary push over the next six months.
Speaker 7 (12:18):
Yeah, so I think the bond market has found an
equilibrium all throughout this year. It's twist steepened in deference
to slow in growth and inflation that's still above target
and a FED that will likely deliver a couple of
rate cuts by the end of the year. The front
end of the curve is anchored to FED policy, the
back end is anchored to nominal growth, and if you
think about a four and a half five percent nominal
(12:40):
growth outcome this year, that's exactly where the bond market
is today. We see this fixed income regime as one
where there isn't a big interest rate bet to make.
It's about clipping that coupon. It's about the income associated
with the fixed income competition?
Speaker 2 (12:55):
Is that another way saying this FED conversation is not
that relevant?
Speaker 7 (12:58):
So you know, listen, I actually think the debate that
is taking place today is a healthy one where there's
credible arguments on both side.
Speaker 1 (13:06):
Don't cut or cut.
Speaker 7 (13:07):
I happen to be in the camp that says the
setting of policy today is suboptimal. You think about the
K shaped evolution of the economy today. I don't call
it a K shape recovery because I don't think the
US economy is actually cyclical, but the current policy setting today.
Think about the savers, which is really the purview of
the wealthy and higher income cohorts today, one hundred and
(13:29):
fifty billion dollars a month of interest income accruing to
those economic actors, low income.
Speaker 1 (13:35):
Low wealth cohort households as for all. The floating rate.
Speaker 7 (13:39):
Debt is today your credit card debt, your auto debt.
And so the policy stance today is simultaneously helping the
savers and hurting those lower income cohorts. So an adjustment
downward I would argue might be a bit more optimal.
Speaker 2 (13:51):
On aggricate and that benefit on that negative, it sounds
like a net negative to keep to keep rice where
they are.
Speaker 7 (13:58):
Listen the economy again, these trends and influencers. The policy
setting today is not going to dent the trajectory of
the economy.
Speaker 1 (14:05):
It's being influenced at the.
Speaker 7 (14:07):
Margin by velocity which slowed earlier in the year and
is set to become unleashed in the back half. I
think it would be more optimal if the rate came
down a little bit and met where the market's pricing
cuts today.
Speaker 2 (14:17):
Russell, appreciate your time. Thank you, sir, Russell Brown Bacter
of Black Frock. On the credible arguments on either side.
Sam zef If JP Morgan writing, despite signs of US
economic resilience, we expect further declines in the dollar of
(14:38):
an a medium term Sam Joint just now for more, Sam, good.
Speaker 5 (14:40):
Mornick, your morning. What are the pillars of this dollar weakness? Fieu, Yeah,
because there's really two main ones. One cyclical convergence.
Speaker 8 (14:48):
The US labor market is still loosening.
Speaker 5 (14:49):
The FED.
Speaker 8 (14:50):
We can argue when it's going to happen, but it's
probably over the next couple of matings going to start
resuming interest rate cuts. And most of these other major
central banks you're the Easy or anywhere else have kind
of finished a lot of their cutting cycle, So we
do expect some cyclical convergence there, some convergence between growth
and interest rates and broad and then second is a
global asset reallocation story that's continuing, so global investors, we're
(15:12):
not seeing any signs of liquidation of US assets. You know,
there's hyperbole around, there's none of that, but we're definitely
seeing incrementally less inflows into the US. And when you
set it against a backdrop of a US with a
very very large trade deficit, a very large current account deficit,
it needs those inflows just to offset the depreciation pressure
on the dollar. So the more that you just see
incrementally less inflows into the US, we think the bias.
Speaker 5 (15:35):
For the dollars to leak loan.
Speaker 2 (15:36):
Let's address each point individually, and two points. The first
one rate convergence. The pushback there would be that Europe
is facing a disinflationary shock and maybe America is facing
an inflationary shell, and the rates profile is going to
be different because of that. What's your counterpoint to that?
Speaker 8 (15:50):
I kind of went to that is when you look
at real interest rates and inflation adjusted interest rates, then
as the Fed starts to cut even in the face
of a slightly higher inflation environment, which you know is
probably warranted given the labor market loosening, your real interest
rates decline, and that's the convergence that we're expecting, maybe
not so much a nominal space, but real and that's
what's going to allow the dollars to weaken.
Speaker 4 (16:08):
To the second point, the pushback would be that you
aren't seeing necessarily outflows from the United States, and you're
still seeing quite a bit of allocation to US dollar
to nominated assets. People are just hedging more, which is
leading to a weakening in the dollar, but not necessarily
any sort of reallocation away from the US. What's the
counterpoint to that.
Speaker 8 (16:26):
Well, you're right, I think I for the dollar, it
doesn't really matter which one it is. Right, If you
think about a global institutional investment fund, Let's say the
first thing they're going to do is raise those FX
head ratios, which they've allowed to decline in recent years,
and that puts selling pressure on the dollar, and then
as the assets that they own mature, they decide to
undergo an asset reallocation. That's the next leg. And so yes,
I do think immediately what's been happening is an increase
(16:48):
in FXS head ratios. The next way that it continues
is that asset allocation story continues. Either way it results
in a slightly weakening pressure on the dollar.
Speaker 4 (16:55):
How does a FED independent story fit in with the
potential weakening of the dollar further?
Speaker 8 (17:00):
Yeah, I mean it's not a pillar of our view,
but if you set it against the backdrop we're already
investors are demanding some more compensation to finance the US
fiscal deficit, to finance the current account deficit, then this
just adds another risk to forcing investors to demand more
compensation to that. So it doesn't really factor into our
direct baseline forecast, but pushes downside risks to the dollar
(17:21):
outbot So at.
Speaker 6 (17:22):
The moment, do you think all this criticism is just noise?
Speaker 8 (17:26):
I think our view honestly has been it doesn't really
matter who the FED chair is. They're one vote among twelve,
but the perception of the Fed's independence is crucial to
thinking about the right.
Speaker 5 (17:38):
Value for the dollar.
Speaker 8 (17:39):
Or the value of long term treasure yields.
Speaker 6 (17:41):
So in that respect, who they appoint to be the
next FED chair for May when Powell's term is up
is important.
Speaker 8 (17:47):
In the signal it sense over how political the Fed
might be. Honestly, what that person's view is on monetary
policy probably doesn't actually matter all that much. You need
to convince the entire committee to either lower or increase
interest rate.
Speaker 2 (18:00):
How close do you think the committee is right now
to reducing interest rights.
Speaker 8 (18:04):
I think in the next couple of meetings it's going
to make sense. I think what's interesting about the debate
OVERFED independence, again I won't come in one way or
the other, is that if the call was fifty to fifty,
then honestly, it's probably incrementally slightly harder to cut interest
rates just because it's been couched in such a political environment.
But I do think either way over the next couple
of meetings, like we think that there's fifty basis points
(18:25):
of cuts this year and probably fifty basis points next year.
Speaker 4 (18:27):
Does it concern you that your call is very consensus
and that there is a lot of barishness right now
priced into the market with positioning against the.
Speaker 8 (18:35):
Dollar on a medium term no, because fine, maybe fast
money players hedge fund CTAs had gotten very short dollars,
although honestly I would argue over the last week or
two that some of that's been cleaned out. But the
medium term story, the asset allocation story, the increase in
havex heage ratios, these are funds, these are players that
take a.
Speaker 5 (18:53):
Long time to make these decisions.
Speaker 8 (18:54):
I know from speaking from our clients at the Private Bank,
they are having more of this conversation than we've probably
ever had before. And still it's a slow moving process.
To move from your current asset allocation to another could
play out of the years, not just weeks and months.
Speaker 4 (19:09):
That point, to me, was really salient this idea that
we've seen the hedging. But that's the first step. The
second step is the allocation shift, and that's what I
think a lot of people are very dismissive of. By saying, look,
the numbers don't show it right now, so it's not
going to happen, doesn't mean to say that that actually
won't happen down the line.
Speaker 2 (19:23):
Sam Strong defense of your code the BREFET time, Thank you,
thank you very much.
Speaker 5 (19:27):
Sam.
Speaker 2 (19:27):
Safe there of JP Morgan, Private Bank, Andrew Homehoorst of
City writing, the FED remains on courst resume rate cuts
in September. Andrew john Is now for More Andrew ka Mornick.
Why September and what's leaning in that direction already?
Speaker 9 (19:50):
Well, I think there's kind of a fundamental argument around September,
which is the slowing that we've seen in core inflation.
We still have tariff effects upcoming, but services especially look
like there's slowed down. Labor market looks strong, but beneath
the surface there are some details that look a little
bit concerning. You'd want to be moving towards neutral. That's
a fundamental explanation, but then there's also just a FED
rhetoric explanation. They've set this up now. They've said, we're
(20:12):
going to watch the data over the summer, we're going
to make a decision in September. In their dot plot,
they've got two rate cuts this year, fifty basis points
of rate cuts this year. That would also make sense
with the September cut, So they've kind of set it
up for September. You could argue it's going to be
premature in September to know how big an effect from
tariffs we're going to get or not in inflation. It's
not clear that that's really the month when you're going
(20:33):
to have all questions answered, but looks like that's where
they're headed.
Speaker 2 (20:35):
On the labor market. In the last statement, the labor
market conditions remain solid. Can they repeat that line this month?
Speaker 9 (20:42):
I think they can still say that. There is a
debate about how solid is solid. Some FED officials have
used the word solid. Other FED officials have used the
word fragile. So you kind of wonder, how can the
labor market be solid and fragile at the same time.
You look at the headline, you know, we're getting one
hundred and forty thousand jobs per month. That's a strong reading,
a four point one percent unemployment rate, that also looks solid.
(21:04):
But then you look beneath the surface and you see
those one hundred and forty five thousand jobs, well, really
half of them we're in the government sector and there's
probably some seasonal adjustment issue there. You look at that
unemployment rate, part of the reason it's low is because
the participation rate has gone down, and that's because some
workers are actually leaving the workforce because they're not finding jobs.
Speaker 1 (21:22):
That doesn't look as strong.
Speaker 9 (21:23):
So I think there is this kind of coexistence of
a top line number, a headline number that looks resilient,
and the labor market overall has been resilient. But then
these details that do cause you some concern.
Speaker 4 (21:34):
We often say the stock market is not the economy.
The stock market's not the economy. We see the stock
market doing really well on the heels of earnings by
companies that are doing really well. How do you counter
companies doing very well with an overall backdrop that you
see as weakening, as less favorable just overall.
Speaker 9 (21:55):
And so if we look at the economic data, you
look at services spending. I think good spending has been
very polatile, so it's hard to read too much into that.
Services spending we've been slowing and that's really been the
engine of growth for the US economy.
Speaker 1 (22:06):
You see that in Q one.
Speaker 9 (22:07):
I think we're going to see that again in Q two,
and that's telling us that that consumer demand is slowing down.
Speaker 1 (22:12):
We have a real mystery.
Speaker 9 (22:13):
And how if you kind of look at the data,
Because we know someone is bearing the costs of terriffs.
It could be foreign exporters, it could be domestic firms,
it could be consumers. We don't see consumer prices going
up a lot, yet we don't see foreign exporters reducing
their prices a lot, at least in the data. So
then that I would say that some domestic firms are
absorbing some of these costs that should be negative maybe
(22:35):
not reflected in what we're hearing so far.
Speaker 4 (22:36):
So why do you think that we're not going to
see any kind of inflationary pressure that would pressure the
FED maybe to remain on hold despite some of the
noise that we're hearing from Washington, DC.
Speaker 1 (22:46):
So I think we will see some inflation.
Speaker 9 (22:48):
I don't think that that's going to end up constraining
the FED in a big way. And that's because the
inflation that we're going to see is going to be
in goods inflation. Now, if you looked at the June
inflation report.
Speaker 1 (22:57):
You could kind of see it two ways.
Speaker 9 (22:58):
On the one hand, didn't have a big inflationary effect.
On the other hand, you had a few categories of
goods home furnishings in particular, where you're seeing some of
those early tariff effects, and we'll probably see that in
some other categories of goods. But the big question, and
this is what Governor Waller has really emphasized. The big
question is is this going to be just restricted to
goods inflation or is this something that broadens. Are we
(23:20):
getting broad based pressure and services inflation, in wages that
are going up and just a general inflationary trend in
the economy.
Speaker 1 (23:27):
There's no evidence that that's what's happening here.
Speaker 6 (23:29):
Do we need to have the final rates to understand
that story?
Speaker 9 (23:32):
I don't think we can wait until we have the
final rates you would like to right, And that kind
of goes back to is September the right month to
be moving If the objective was to wait until you
had all questions answered, They're not all going to be
answered in September. Maybe you'll have some clarity on the
August first, but maybe not right Some of these negotiations
may continue. And then even if new tariff's going to
affect August first, we know where those rates are, how
(23:54):
much do they pass through to consumers, what is the
timeline on that, what's the extent of that tariff increase.
Speaker 1 (24:00):
We're not going to have all those questions answered.
Speaker 6 (24:01):
Say it is just a ten percent baseline overall, then
maybe some different intricate deals for bigger partners. Do you
think companies will be forced at all to pass on
to consumers or they're going to hold what they're doing
right now, which to eat a lot of it.
Speaker 9 (24:13):
I mean, I think you'll see some of that passed
on to consumers. Like I was saying, we're seeing some
price increases already, but ten percent, that's pretty manageable. I
think that that's something that firms largely could internalize and
you probably don't see that much passing through into consumer prices.
Speaker 2 (24:28):
How I could out inflation expectations, let's consumer based on
market based?
Speaker 9 (24:33):
Yeah, I mean, it depends a little bit on which
measure you look at, and then you can really get
into the issue of are you just cherry picking the
one that you like.
Speaker 5 (24:40):
Which you think is more credible.
Speaker 9 (24:41):
Well, University of Michigan is the one that's been all
over the place, right That one is much higher now
it's come lower again. If you look at the New
York Fed expectations, so ito's have been more stable. I
tend to look at the market expectations. There are issues
with the market expectations too. I'm not saying that there aren't,
but at the end of the day, people are putting
money on the line on those expectations or expectations that
in some sense are a stronger read on what people
(25:05):
really think, what investors think about inflation, and those have
not moved.
Speaker 4 (25:07):
To levels that are concerning right now, I'm looking right
now at a market that has just defied all expectations
when it comes to looking through all of these ramifications.
What are you looking to hear from the Fed next week?
Speaker 9 (25:19):
Well, I'm not sure that we're going to get a
lot of new information from this said meeting. We know
that we have a pretty big division across Fed officials.
We have some that don't want to cut it all
this year, we have others that think you should be
cutting in July. That's one interesting element of this meeting.
We could get a descent from up to two governors.
Governor Waller really sounded like he is planning to dissent
at that meeting. We'll see if he goes through with that.
(25:41):
That's really notable. We had a descent from Boweman in
twenty twenty four. Before that, you have to go back
to two thousand and five before you had a governor
dissenting on rape policy.
Speaker 1 (25:49):
So that would be.
Speaker 9 (25:50):
Kind of a signal that there's a pretty big.
Speaker 1 (25:51):
Division across FED officials.
Speaker 9 (25:53):
I think what we hear from Powell is wait and see,
we're waiting to look at the data over the summer.
Speaker 1 (25:58):
We're going to tell you in September.
Speaker 2 (26:00):
But it's got to acknowledge the split on the committee. Andrew,
I don't think he can get away with going into
the news conference to attempt to reflect the consensus that
doesn't exist.
Speaker 5 (26:07):
This clearly division.
Speaker 2 (26:09):
You see that in the sep You see that and
the speeches from all the FED officials. How tricky is
that going to be in the news conference?
Speaker 9 (26:14):
Yeah? I think this is very difficult, right, This is
very very difficult time for the chair when you have
even your governors right that are maybe at odds over
what the FED should be doing.
Speaker 1 (26:23):
So I think what he does is he goes back
to the data.
Speaker 9 (26:25):
That's what FED officials typically do and say that's why
we're waiting, and that's what we're watching in July and
alluguess and honestly probably hoping to some extent from Chair
Poal's perspective, that they will get a clearer signal.
Speaker 1 (26:35):
And it goes back to what we were discussing with
the labor market with.
Speaker 9 (26:38):
The inflation did you can read this data a little
bit two ways, and that's part of why there's a division.
Speaker 1 (26:42):
Maybe we'll have some more clarity in the data by September.
Speaker 2 (26:45):
Andrew, appreciate it. Good to see you, Andrew homhost That City.
This is the Bloomberg Seventans podcast, bringing you the best
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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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(00:33):
Bloomberg Terminal and the Bloomberg Business App. Alex Oltman of
Barclay's writing, ultimately it remains all eyes on that confluence
of the f MC, PCEE, NFP megacap earnings window with
a sprinkle of tariff threads or relief. Alex joins us
now for more. Good morning, Alex, good morning. How we
price for all of that?
Speaker 3 (00:51):
Well, the SMP is pricing in about a one percent
move every day over that three day window. But what's
really interesting is that we've obviously had a long streak
of very little volatility. The market's pricing in a three
day window of volatility, and then it's pricing in no
volatility again, so I would say there's still a relatively
high amount of complacency even over those that three day
(01:11):
window of three letter.
Speaker 2 (01:13):
Acronyms tariff threats or tariff relief. The difference between the two,
what is the difference between the two? Is this a
market do you feel that's betting against the administration following
through or betting on corporate resilience in the face of tariffs.
Speaker 3 (01:27):
I would say the latter. It's quite clear in the
SMP is trading on basically at its cap of what
it's been trading from a valuation perspective in a post
COVID era, which is about twenty two to twenty two
and a half times. And so if we break out
of that, we're starting to question if we're getting into
a new regime of valuation and of call. Dare I
say bubble, which is clearly going to be moving towards
(01:49):
tariff relief than tariff fear.
Speaker 4 (01:50):
Well, but Chris Harvey had an interesting argument about this.
You use the word bubble, but he made the argument
that we should be getting to hire valuation levels given
the fact that this is a much more are tech
dominant index that it has been traditionally and we have
had this huge industrial revolution underpinning some of the efficiency
gains that have allowed companies to absorb some of the
tear off costs, etc.
Speaker 5 (02:11):
With relative grace.
Speaker 4 (02:13):
What do you make of that that there needs to
be just generally a higher valuation, a higher multiple put
on US equities as a result.
Speaker 3 (02:20):
I think that's generally been the path over time. If
you look at the path of the equity market multiple POSTGFC,
as profit margins have increased, you've generally seen an improvement
in invaluations. I would like to pivot slightly in to
talk about small caps a little bit, because we're talking
to talk about a technological revolution and we need to
start thinking outside the box a bit beyond just the
(02:40):
hyperscalers and the immediate picks and shovels beneficiaries of AI.
Let's talk about the fact that consumers get a huge
benefit from AI and basically a subsidized cost as a
result of these Hyperscale is investing quite frankly, trillions of
dollars into this investment at what is currently a low
ROI think about the consumer benefit, about the small business benefits,
(03:02):
businesses that now you're democratizing the process of that AI
revolution into call it small caps. And that's why I
actually think the valuation anomally might actually be in the
smaller cap space, which basically has been overlooked for years now.
Speaker 4 (03:15):
So this is the argument that people were making last
year that didn't really come to pass, that we'd see
a broadening out away from the hyperscalers and the big
tech names to the rest of the index because you
are seeing that diffusion of some of the tech prowess.
Is that sort of what you're expecting now, Is that
kind of where you're leaning in it is?
Speaker 3 (03:31):
And also, let's sort forget like breadth. This year has
been pretty good, so we've already seen a broadening out.
Best performing sectors in twenty twenty five have actually been
things like industrials. It hasn't been necessarily been just the megacaps.
But then we've also got to start thinking about a
regime shift, which has already been discussed in this forum here,
which is what are the FED going to do if
we're going to move away from a higher for longer
(03:51):
narrative to a lower interest rate environment. Consider the fact
that small caps forty five percent of small caps of
variable interest rate debt. They're going to get the direct
benefit of interest rate cuts. So we can pontificate about
whether mister Powell is going to resign all the rest
of it, and we will. However, However, the fact of
the matter is is that we will end up with
a replaced FED chair at this time next year, and
(04:13):
we are pretty convinced that the path is of interest
rates is therefore lower. So we need to think about
less about the near term and more about if interest
rates are lower, who's going to be the direct beneficiary.
So it's not just the AI angle. You've got lower
interest rates, and you've also got the positioning, which has
been our guiding light since the beginning of beginning of June.
From a positioning perspective, look at CFTC data on small cabs.
It's currently the most short since last summer, right before
(04:36):
we had that big squeeze.
Speaker 1 (04:37):
As well, even.
Speaker 6 (04:37):
Before we get a new FED chair, we could see
the FED cutting interest rates. When do you have this
all timed out well?
Speaker 3 (04:43):
So at Barclay's economists have stilled two cuts of the year,
so you know, September December. I think that at the
end of the day, whether this is one cut two
cuts in twenty twenty five. I wouldn't say it's a
relevant that I think. I would say it's marginal because
we're trying to sort of forecast member equities are supposed
to be a four disco mechanism. They're supposed to be
thinking six, twelve, two years out, especially for long dated
(05:05):
securities that don't have many profits today. So in that case,
it really I don't think it matters enormously.
Speaker 6 (05:10):
So for small caps you want to be exposed ahead
of September?
Speaker 3 (05:14):
Correct, Yes, I think I think the small cap story
is really not just about positioning, but it's about that
fed pivot or Dare I say, is the equity market
moving into a new regime, away from just thinking about
the narrowness of leadership and into something a little bit
more broad?
Speaker 2 (05:30):
Strange things happen in August? Are you hopeful we'll have
one of those nice quiet summers?
Speaker 3 (05:34):
I mean, I'm going on vacation on fridaytime. I would
very much hope.
Speaker 1 (05:38):
So.
Speaker 3 (05:39):
But as you say, August is notoriously volatile, or so
I say, August can be notoriously volatile. If we all
recall last year what happened with the boj and so
on and so forth, I would say that the fact
is we still to your first question, we still have
that confluence of events straddling month end, and any of
those could potentially derail this LOWVOLL environment.
Speaker 5 (06:00):
What was volume like at the moment? Just volume volume?
Speaker 3 (06:03):
Well, volume is okay, but it's massively skewed by the
retail cohorts. So we're seeing this enormous turnover with and
a small number of securities as a function of the
small investor, which is again a part of a large
disc I just.
Speaker 2 (06:14):
Follow up on that, what securities are they concentrated in
the ones we talk about every day or different kind
of companies?
Speaker 3 (06:20):
I mean, just for the purpose, I won't name specific names,
but let's give I'll give you an example that for security.
I think it was middle of last week, four securities
accounted for eleven percent of total nicety volume. The collective
market cap of those four was two point six basis
points of US capitalization. So these aren't stocks that you
talk about in a daily base.
Speaker 2 (06:39):
Eleven percent of volume, two point six basis points of
market cap?
Speaker 3 (06:42):
Yes, of US market cap?
Speaker 5 (06:44):
That's amazing. Yes, have you ever seen it like that before?
We have not known? What do you think is behind there.
Speaker 3 (06:49):
So that is I would say retail euphoria. So you've
had this prevalence on shift of obviously a multi year
structural phenomenon post COVID where small investors have become a
lot and larger portion of the tape. They now account
for about twenty five percent systematic flows, quantitaive flows account
for another fifty percent, and those numbers have just been
(07:09):
growing over time. So the only time we came close
to this was in twenty twenty one. Obviously, very different
real rate environment.
Speaker 5 (07:15):
A different bank drob completely.
Speaker 2 (07:16):
So I'm trying to figure out just in real time
what's unlished this recent bout because it feels like a
very different bank drob to where we were all those
years ago.
Speaker 3 (07:23):
This goes back to my point of whether are we
in a bubble or not, because we're talking about animal spirits,
we're talking about euphoria. We're talking about the fact that
there's a lot of a lot of small investors still
haven't lost their jobs, still getting income growth, still basically
seen the stock market at the highst and if you
remember at the beginning of the year when we spoke
on this show, there's a reflexivity in stocks because the
economy is so financialized. Seventy percent of financial household net
(07:46):
worth is tied to the stock market. So on the
way down it feels terrible. On the way up it
feels fantastic.
Speaker 4 (07:51):
Is this stupid money or is this smart money? Because
they've been the winners and a lot of people used
to dismiss this and say it's a bubble and this
means that the market's going to tank. Are people looking
at this and saying this means they're more gains ahead.
Speaker 3 (08:01):
Well, I don't want to call them stupid money, because
the fact of the matter is they've made more money
than most professional investors have recently. I would just simply
say that these guys are doing what they've been doing
or condition to do, which is by the dip. I
think what's important to consider, though, is back to this
regime shift. Is the market telling us that we're moving
to a lower interest rate environment where actually it's a
(08:21):
lot of the less profitable stocks that end up being
the market leaders. And if you look at things like
certain factor behaviors, the only time we've seen this before,
these what will be engineered as a short squeeze, but
it's not a short squeeze two thousand and nine, twenty twenty,
twenty twenty one, neither of which were just short squeezes.
They were regime changers. And so I think that's what
we're pointing towards. That's why we're thinking about small caps more,
(08:43):
because it may not just be the stupid small investor.
It may actually be something a little bit more paradigmy.
Speaker 5 (08:49):
Those numbers are amazing.
Speaker 2 (08:50):
Eleven percent of volume across four names, which account for
two point six basis points of US market cap. Yeah, unreal,
and it's good to see you. I love to think
about it. Thank you, Thank you, sir Alex Selman. There
Barclay's Russell brownback of black Crow Colling. This quite one
(09:12):
of the most compelling fixed income opportunity sets in decades.
Speaker 5 (09:15):
Russell joins a snaw from more Russell. Good morning morning.
Speaker 2 (09:18):
We've seen a bit of a Rantian treasuries over the
previous few days. What's behind that big wall of demand?
Speaker 7 (09:22):
So you know that we're calling it one of several
transcendent influences today that really sort of drive market outcomes,
and that is this wall of money that exists today.
So you look in the United States two hundred and
eighteen trillion dollars of private sector net worth and you
put that in comparison to the size of the asset
markets today, it really is a world where there's too
(09:44):
much money and not enough yielding assets. And so that's
a you know, a transcendent influence in the face of
lots of policy uncertainty that along with a resilient economy.
Speaker 2 (09:53):
Everything seems to have sett soed down over the past
few months. There's something even the team is set. The
genuine economic risk is mutes it. What do you mean
by that?
Speaker 7 (10:03):
It's this series of structural foundational influences that have transcended
uncertainties that the economy has faced in twenty twenty three,
with the regional banking crisis and acrimonious election last year,
and the uncertainty about the sequencing of policies and implementation
this year. And yet you get these momentary pullbacks of
(10:26):
consumption or investment just as velocity slows as uncertainty sort
of cycles through the system. But then it rebounds, and
you've seen the economy accelerate into the fourth quarter each
of the last two years. It's my expectation you'll see
the exact same thing unfold this year.
Speaker 4 (10:41):
Which is the reason why you've been reducing your position
in cash and deploying still seeing spread compression through the
remainder of the year. I just wonder if the book's
really been written on the policies that have them implemented,
the policy uncertainty and the ramification on the economy. Why
do you think that we have enough information to say
we will still see that reaccelerate even if some of
(11:01):
those tariff ramifications haven't been fully felt yet.
Speaker 7 (11:05):
So again, because these underlying influences are so powerful, these
policy evolutions are only marginally incrementally determined to outcomes. And listen,
I think markets have correctly assessed the tariff situation as
benign at the end of the day. At the end
of day, tariffs are a tax, and so the debate
(11:26):
about whether they're inflationary. You think about if we were
sitting here talking about an income tax, we wouldn't be
discussing whether it's inflationary or not. We'd be discussing its
impacts on growth. And so when you think about and
many guests have been on your program over recent days
talking about how that tariff impact is spread out over
so many different nodes of that value chain between the
(11:47):
point at which the good arrives at port and when
it ends up on the store shelf. So these are
marginal sort of shifts in underlying economic actors.
Speaker 1 (11:56):
And the influences there.
Speaker 7 (11:57):
But overall these foundational supports or what's driving.
Speaker 4 (12:01):
Markets and that's driving credit, that's driving equities. How should
this really play through in the bond the treasury space,
given the fact that we have potential rate cuts coming
down the pike even with strength in the economy, and
a real question around how much it's going to be
an inflationary push over the next six months.
Speaker 7 (12:18):
Yeah, so I think the bond market has found an
equilibrium all throughout this year. It's twist steepened in deference
to slow in growth and inflation that's still above target
and a FED that will likely deliver a couple of
rate cuts by the end of the year. The front
end of the curve is anchored to FED policy, the
back end is anchored to nominal growth, and if you
think about a four and a half five percent nominal
(12:40):
growth outcome this year, that's exactly where the bond market
is today. We see this fixed income regime as one
where there isn't a big interest rate bet to make.
It's about clipping that coupon. It's about the income associated
with the fixed income competition?
Speaker 2 (12:55):
Is that another way saying this FED conversation is not
that relevant?
Speaker 7 (12:58):
So you know, listen, I actually think the debate that
is taking place today is a healthy one where there's
credible arguments on both side.
Speaker 1 (13:06):
Don't cut or cut.
Speaker 7 (13:07):
I happen to be in the camp that says the
setting of policy today is suboptimal. You think about the
K shaped evolution of the economy today. I don't call
it a K shape recovery because I don't think the
US economy is actually cyclical, but the current policy setting today.
Think about the savers, which is really the purview of
the wealthy and higher income cohorts today, one hundred and
(13:29):
fifty billion dollars a month of interest income accruing to
those economic actors, low income.
Speaker 1 (13:35):
Low wealth cohort households as for all. The floating rate.
Speaker 7 (13:39):
Debt is today your credit card debt, your auto debt.
And so the policy stance today is simultaneously helping the
savers and hurting those lower income cohorts. So an adjustment
downward I would argue might be a bit more optimal.
Speaker 2 (13:51):
On aggricate and that benefit on that negative, it sounds
like a net negative to keep to keep rice where
they are.
Speaker 7 (13:58):
Listen the economy again, these trends and influencers. The policy
setting today is not going to dent the trajectory of
the economy.
Speaker 1 (14:05):
It's being influenced at the.
Speaker 7 (14:07):
Margin by velocity which slowed earlier in the year and
is set to become unleashed in the back half. I
think it would be more optimal if the rate came
down a little bit and met where the market's pricing
cuts today.
Speaker 2 (14:17):
Russell, appreciate your time. Thank you, sir, Russell Brown Bacter
of Black Frock. On the credible arguments on either side.
Sam zef If JP Morgan writing, despite signs of US
economic resilience, we expect further declines in the dollar of
(14:38):
an a medium term Sam Joint just now for more, Sam, good.
Speaker 5 (14:40):
Mornick, your morning. What are the pillars of this dollar weakness? Fieu, Yeah,
because there's really two main ones. One cyclical convergence.
Speaker 8 (14:48):
The US labor market is still loosening.
Speaker 5 (14:49):
The FED.
Speaker 8 (14:50):
We can argue when it's going to happen, but it's
probably over the next couple of matings going to start
resuming interest rate cuts. And most of these other major
central banks you're the Easy or anywhere else have kind
of finished a lot of their cutting cycle, So we
do expect some cyclical convergence there, some convergence between growth
and interest rates and broad and then second is a
global asset reallocation story that's continuing, so global investors, we're
(15:12):
not seeing any signs of liquidation of US assets. You know,
there's hyperbole around, there's none of that, but we're definitely
seeing incrementally less inflows into the US. And when you
set it against a backdrop of a US with a
very very large trade deficit, a very large current account deficit,
it needs those inflows just to offset the depreciation pressure
on the dollar. So the more that you just see
incrementally less inflows into the US, we think the bias.
Speaker 5 (15:35):
For the dollars to leak loan.
Speaker 2 (15:36):
Let's address each point individually, and two points. The first
one rate convergence. The pushback there would be that Europe
is facing a disinflationary shock and maybe America is facing
an inflationary shell, and the rates profile is going to
be different because of that. What's your counterpoint to that?
Speaker 8 (15:50):
I kind of went to that is when you look
at real interest rates and inflation adjusted interest rates, then
as the Fed starts to cut even in the face
of a slightly higher inflation environment, which you know is
probably warranted given the labor market loosening, your real interest
rates decline, and that's the convergence that we're expecting, maybe
not so much a nominal space, but real and that's
what's going to allow the dollars to weaken.
Speaker 4 (16:08):
To the second point, the pushback would be that you
aren't seeing necessarily outflows from the United States, and you're
still seeing quite a bit of allocation to US dollar
to nominated assets. People are just hedging more, which is
leading to a weakening in the dollar, but not necessarily
any sort of reallocation away from the US. What's the
counterpoint to that.
Speaker 8 (16:26):
Well, you're right, I think I for the dollar, it
doesn't really matter which one it is. Right, If you
think about a global institutional investment fund, Let's say the
first thing they're going to do is raise those FX
head ratios, which they've allowed to decline in recent years,
and that puts selling pressure on the dollar, and then
as the assets that they own mature, they decide to
undergo an asset reallocation. That's the next leg. And so yes,
I do think immediately what's been happening is an increase
(16:48):
in FXS head ratios. The next way that it continues
is that asset allocation story continues. Either way it results
in a slightly weakening pressure on the dollar.
Speaker 4 (16:55):
How does a FED independent story fit in with the
potential weakening of the dollar further?
Speaker 8 (17:00):
Yeah, I mean it's not a pillar of our view,
but if you set it against the backdrop we're already
investors are demanding some more compensation to finance the US
fiscal deficit, to finance the current account deficit, then this
just adds another risk to forcing investors to demand more
compensation to that. So it doesn't really factor into our
direct baseline forecast, but pushes downside risks to the dollar
(17:21):
outbot So at.
Speaker 6 (17:22):
The moment, do you think all this criticism is just noise?
Speaker 8 (17:26):
I think our view honestly has been it doesn't really
matter who the FED chair is. They're one vote among twelve,
but the perception of the Fed's independence is crucial to
thinking about the right.
Speaker 5 (17:38):
Value for the dollar.
Speaker 8 (17:39):
Or the value of long term treasure yields.
Speaker 6 (17:41):
So in that respect, who they appoint to be the
next FED chair for May when Powell's term is up
is important.
Speaker 8 (17:47):
In the signal it sense over how political the Fed
might be. Honestly, what that person's view is on monetary
policy probably doesn't actually matter all that much. You need
to convince the entire committee to either lower or increase
interest rate.
Speaker 2 (18:00):
How close do you think the committee is right now
to reducing interest rights.
Speaker 8 (18:04):
I think in the next couple of meetings it's going
to make sense. I think what's interesting about the debate
OVERFED independence, again I won't come in one way or
the other, is that if the call was fifty to fifty,
then honestly, it's probably incrementally slightly harder to cut interest
rates just because it's been couched in such a political environment.
But I do think either way over the next couple
of meetings, like we think that there's fifty basis points
(18:25):
of cuts this year and probably fifty basis points next year.
Speaker 4 (18:27):
Does it concern you that your call is very consensus
and that there is a lot of barishness right now
priced into the market with positioning against the.
Speaker 8 (18:35):
Dollar on a medium term no, because fine, maybe fast
money players hedge fund CTAs had gotten very short dollars,
although honestly I would argue over the last week or
two that some of that's been cleaned out. But the
medium term story, the asset allocation story, the increase in
havex heage ratios, these are funds, these are players that
take a.
Speaker 5 (18:53):
Long time to make these decisions.
Speaker 8 (18:54):
I know from speaking from our clients at the Private Bank,
they are having more of this conversation than we've probably
ever had before. And still it's a slow moving process.
To move from your current asset allocation to another could
play out of the years, not just weeks and months.
Speaker 4 (19:09):
That point, to me, was really salient this idea that
we've seen the hedging. But that's the first step. The
second step is the allocation shift, and that's what I
think a lot of people are very dismissive of. By saying, look,
the numbers don't show it right now, so it's not
going to happen, doesn't mean to say that that actually
won't happen down the line.
Speaker 2 (19:23):
Sam Strong defense of your code the BREFET time, Thank you,
thank you very much.
Speaker 5 (19:27):
Sam.
Speaker 2 (19:27):
Safe there of JP Morgan, Private Bank, Andrew Homehoorst of
City writing, the FED remains on courst resume rate cuts
in September. Andrew john Is now for More Andrew ka Mornick.
Why September and what's leaning in that direction already?
Speaker 9 (19:50):
Well, I think there's kind of a fundamental argument around September,
which is the slowing that we've seen in core inflation.
We still have tariff effects upcoming, but services especially look
like there's slowed down. Labor market looks strong, but beneath
the surface there are some details that look a little
bit concerning. You'd want to be moving towards neutral. That's
a fundamental explanation, but then there's also just a FED
rhetoric explanation. They've set this up now. They've said, we're
(20:12):
going to watch the data over the summer, we're going
to make a decision in September. In their dot plot,
they've got two rate cuts this year, fifty basis points
of rate cuts this year. That would also make sense
with the September cut, So they've kind of set it
up for September. You could argue it's going to be
premature in September to know how big an effect from
tariffs we're going to get or not in inflation. It's
not clear that that's really the month when you're going
(20:33):
to have all questions answered, but looks like that's where
they're headed.
Speaker 2 (20:35):
On the labor market. In the last statement, the labor
market conditions remain solid. Can they repeat that line this month?
Speaker 9 (20:42):
I think they can still say that. There is a
debate about how solid is solid. Some FED officials have
used the word solid. Other FED officials have used the
word fragile. So you kind of wonder, how can the
labor market be solid and fragile at the same time.
You look at the headline, you know, we're getting one
hundred and forty thousand jobs per month. That's a strong reading,
a four point one percent unemployment rate, that also looks solid.
(21:04):
But then you look beneath the surface and you see
those one hundred and forty five thousand jobs, well, really
half of them we're in the government sector and there's
probably some seasonal adjustment issue there. You look at that
unemployment rate, part of the reason it's low is because
the participation rate has gone down, and that's because some
workers are actually leaving the workforce because they're not finding jobs.
Speaker 1 (21:22):
That doesn't look as strong.
Speaker 9 (21:23):
So I think there is this kind of coexistence of
a top line number, a headline number that looks resilient,
and the labor market overall has been resilient. But then
these details that do cause you some concern.
Speaker 4 (21:34):
We often say the stock market is not the economy.
The stock market's not the economy. We see the stock
market doing really well on the heels of earnings by
companies that are doing really well. How do you counter
companies doing very well with an overall backdrop that you
see as weakening, as less favorable just overall.
Speaker 9 (21:55):
And so if we look at the economic data, you
look at services spending. I think good spending has been
very polatile, so it's hard to read too much into that.
Services spending we've been slowing and that's really been the
engine of growth for the US economy.
Speaker 1 (22:06):
You see that in Q one.
Speaker 9 (22:07):
I think we're going to see that again in Q two,
and that's telling us that that consumer demand is slowing down.
Speaker 1 (22:12):
We have a real mystery.
Speaker 9 (22:13):
And how if you kind of look at the data,
Because we know someone is bearing the costs of terriffs.
It could be foreign exporters, it could be domestic firms,
it could be consumers. We don't see consumer prices going
up a lot, yet we don't see foreign exporters reducing
their prices a lot, at least in the data. So
then that I would say that some domestic firms are
absorbing some of these costs that should be negative maybe
(22:35):
not reflected in what we're hearing so far.
Speaker 4 (22:36):
So why do you think that we're not going to
see any kind of inflationary pressure that would pressure the
FED maybe to remain on hold despite some of the
noise that we're hearing from Washington, DC.
Speaker 1 (22:46):
So I think we will see some inflation.
Speaker 9 (22:48):
I don't think that that's going to end up constraining
the FED in a big way. And that's because the
inflation that we're going to see is going to be
in goods inflation. Now, if you looked at the June
inflation report.
Speaker 1 (22:57):
You could kind of see it two ways.
Speaker 9 (22:58):
On the one hand, didn't have a big inflationary effect.
On the other hand, you had a few categories of
goods home furnishings in particular, where you're seeing some of
those early tariff effects, and we'll probably see that in
some other categories of goods. But the big question, and
this is what Governor Waller has really emphasized. The big
question is is this going to be just restricted to
goods inflation or is this something that broadens. Are we
(23:20):
getting broad based pressure and services inflation, in wages that
are going up and just a general inflationary trend in
the economy.
Speaker 1 (23:27):
There's no evidence that that's what's happening here.
Speaker 6 (23:29):
Do we need to have the final rates to understand
that story?
Speaker 9 (23:32):
I don't think we can wait until we have the
final rates you would like to right, And that kind
of goes back to is September the right month to
be moving If the objective was to wait until you
had all questions answered, They're not all going to be
answered in September. Maybe you'll have some clarity on the
August first, but maybe not right Some of these negotiations
may continue. And then even if new tariff's going to
affect August first, we know where those rates are, how
(23:54):
much do they pass through to consumers, what is the
timeline on that, what's the extent of that tariff increase.
Speaker 1 (24:00):
We're not going to have all those questions answered.
Speaker 6 (24:01):
Say it is just a ten percent baseline overall, then
maybe some different intricate deals for bigger partners. Do you
think companies will be forced at all to pass on
to consumers or they're going to hold what they're doing
right now, which to eat a lot of it.
Speaker 9 (24:13):
I mean, I think you'll see some of that passed
on to consumers. Like I was saying, we're seeing some
price increases already, but ten percent, that's pretty manageable. I
think that that's something that firms largely could internalize and
you probably don't see that much passing through into consumer prices.
Speaker 2 (24:28):
How I could out inflation expectations, let's consumer based on
market based?
Speaker 9 (24:33):
Yeah, I mean, it depends a little bit on which
measure you look at, and then you can really get
into the issue of are you just cherry picking the
one that you like.
Speaker 5 (24:40):
Which you think is more credible.
Speaker 9 (24:41):
Well, University of Michigan is the one that's been all
over the place, right That one is much higher now
it's come lower again. If you look at the New
York Fed expectations, so ito's have been more stable. I
tend to look at the market expectations. There are issues
with the market expectations too. I'm not saying that there aren't,
but at the end of the day, people are putting
money on the line on those expectations or expectations that
in some sense are a stronger read on what people
(25:05):
really think, what investors think about inflation, and those have
not moved.
Speaker 4 (25:07):
To levels that are concerning right now, I'm looking right
now at a market that has just defied all expectations
when it comes to looking through all of these ramifications.
What are you looking to hear from the Fed next week?
Speaker 9 (25:19):
Well, I'm not sure that we're going to get a
lot of new information from this said meeting. We know
that we have a pretty big division across Fed officials.
We have some that don't want to cut it all
this year, we have others that think you should be
cutting in July. That's one interesting element of this meeting.
We could get a descent from up to two governors.
Governor Waller really sounded like he is planning to dissent
at that meeting. We'll see if he goes through with that.
(25:41):
That's really notable. We had a descent from Boweman in
twenty twenty four. Before that, you have to go back
to two thousand and five before you had a governor
dissenting on rape policy.
Speaker 1 (25:49):
So that would be.
Speaker 9 (25:50):
Kind of a signal that there's a pretty big.
Speaker 1 (25:51):
Division across FED officials.
Speaker 9 (25:53):
I think what we hear from Powell is wait and see,
we're waiting to look at the data over the summer.
Speaker 1 (25:58):
We're going to tell you in September.
Speaker 2 (26:00):
But it's got to acknowledge the split on the committee. Andrew,
I don't think he can get away with going into
the news conference to attempt to reflect the consensus that
doesn't exist.
Speaker 5 (26:07):
This clearly division.
Speaker 2 (26:09):
You see that in the sep You see that and
the speeches from all the FED officials. How tricky is
that going to be in the news conference?
Speaker 9 (26:14):
Yeah? I think this is very difficult, right, This is
very very difficult time for the chair when you have
even your governors right that are maybe at odds over
what the FED should be doing.
Speaker 1 (26:23):
So I think what he does is he goes back
to the data.
Speaker 9 (26:25):
That's what FED officials typically do and say that's why
we're waiting, and that's what we're watching in July and
alluguess and honestly probably hoping to some extent from Chair
Poal's perspective, that they will get a clearer signal.
Speaker 1 (26:35):
And it goes back to what we were discussing with
the labor market with.
Speaker 9 (26:38):
The inflation did you can read this data a little
bit two ways, and that's part of why there's a division.
Speaker 1 (26:42):
Maybe we'll have some more clarity in the data by September.
Speaker 2 (26:45):
Andrew, appreciate it. Good to see you, Andrew homhost That City.
This is the Bloomberg Seventans podcast, bringing you the best
in markets, economics, angiot politics. You can watch the show
live on Bloomberg TV weekday mornings from six am to
nine am Eastern. Subscribe to the podcast on Apple, Spotify,
or anywhere else you listen, and as always, on the
Bloomberg Terminal and the Bloomberg Business app.
Speaker 4 (27:11):
M
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