June 10, 2025 • 28 mins
- Mike Wilson, Chief US Equity Strategist at Morgan Stanley
- Matt Luzzetti, Chief US Economist at Deutsche Bank
- Henrietta Treyz, co-founder at Veda Partners
- Tony Rodriguez, Head of Fixed Income Strategy at Nuveen Asset Management
Mike Wilson, Chief US Equity Strategist at Morgan Stanley, discusses whether the equity rally since April can continue with less choppiness than many anticipate. Matt Luzzetti, Chief US Economist at Deutsche Bank, joins for a preview of CPI and where he believes the path for interest rates and inflation is in 2025. Henrietta Treyz, co-founder at Veda Partners, discusses the latest on the tax bill and other political headlines. Tony Rodriguez, Head of Fixed Income Strategy at Nuveen Asset Management, discusses warnings from the bond market in 2025 and whether the market could experience a credit crunch amid a tight economic environment.
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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 Amrie Hordern. Join us each day
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anywhere else you listen, and as always on the Bloomberg
(00:34):
Terminal and the Bloomberg Business app. Might Wilson and morgod
stand be taking a very constructive view on things, writing
the rate of changes turn for the better on most fronts.
This keeps us positive on US equities on a twelvemonth basis.
We expect pullbags to be shallow and unsatisfying to those
looking for a fatter pitch. Mike joins us now from
what Mike, Good morning, Good morning Jane. I love the
(00:54):
reson No, don't fight it. So let's talk about don't
fight what? What elements of the market move shouldn't we fight?
Speaker 3 (00:59):
Well, it's kind of what we're doing talking about.
Speaker 4 (01:00):
I mean, the headlines remained very noisy and uncertain, and
I think, you know, this has been the case for
the whole year.
Speaker 3 (01:05):
Our view, as you know, has been a bit different.
Speaker 4 (01:07):
We came in thinking the first half would be tougher
and the way to change and a lot of things
like Earnie's re visions and some of the headline would
be negative.
Speaker 3 (01:14):
And in fact that what we think happens.
Speaker 4 (01:16):
That all got priced in the week after Liberation Day, right,
it was violent, it was a de leveraging and so
now as we look at the data itself, it's all
inflected higher. And so you know, don't ignore everything, but
ignoring the headlines is probably a good strategy and just
focus on the data has turned up for the most part.
And I think, you know, I don't know where the
trade negotiations are going. Nobody does, but I think it's
(01:38):
very unlikely we're going to go back to where we were,
you know, a month and a half ago, like we
bottomed in terms of the pain of that initial you know,
announcement and how bad those tariffs were. So unless it
really re escalates in a negative fashion, I don't think
the trade issue is even going to be enough to
kind of take the momentum out of.
Speaker 3 (01:56):
This market right now.
Speaker 2 (01:56):
You know what the bad view sounds like. They would
say that maybe some of the data, some of the
innings we've seen have been flatted by pull forward and
we'll get the bill for that lakes to this summer.
Do you think we priced for that kind of slowed down,
that weakness we could see in a summer months.
Speaker 3 (02:08):
That's probably right.
Speaker 4 (02:09):
And when we had that view too, there was a
pull forward in Q one Q one of being better
than they feared because you know, the numbers came down
a bunch. I think the second quarter, though, is expected
now to be weaker, so that's going to be the key.
I think the biggest risk for the market's going to
probably be either rates as we've talked about in the past,
you know, north of four and a half percent, or
we do go in an earning season it's not as
good as you know, people were hoping for, and we
(02:29):
have maybe a five to seven percent correction, but that's
not what people kind of want. People want a ten
you know, another ten to fifteen percent draw down to
get better, to get more exposure, and I just don't
think you're going to get that. I mean, I've seen
this a million times you want it, but you're just
going to have to have a shorter trigger finger.
Speaker 5 (02:47):
Well, you had seen retail largely buying the dip, that's
who participated when you got those ruptures in April. If
we're not going to get dips like that anymore, what
is the willingness of institutions to continue to put money
to work right now? Especially they didn't even buy the
past dips we saw.
Speaker 4 (03:02):
Yeah, I think institutions have re risk, but there's still
more to go. The one the area I think that
you have to watch is the is the systematic strategies,
the CTAs that price momentum money. We saw almost five
hundred billion dollars of de leveraging in that period of
early March through mid April, and they've re risked maybe
thirty forty percent of that. So that's another bid that's
(03:23):
sort of it's not fundamentally driven, it's just price momentum.
Speaker 3 (03:26):
So that's that's going to be kind of underlying bid.
Speaker 4 (03:28):
And then I think, you know, most institutions have re risk,
but one thing I haven't talked about yet is it's
people are still making the quality bet and we agree
with that, meaning this isn't the beginning of a news cycle.
Speaker 3 (03:39):
It's once again an extension of.
Speaker 4 (03:41):
The existing cycle, and the Fed's probably going to be
cutting at some point later this year early next year,
and that really behooves the large cap quality equities.
Speaker 5 (03:50):
Does it behoove companies specifically who can also weigh out
some of the tariff uncertainty because this has been a
big part of the narrative, right no one's making decisions
cap exsually stalled unless your tech is there an element
where even though we don't have tears resolved, that you
get companies who just get on with it and start
to put capital to work.
Speaker 4 (04:08):
Yeah, they got to run a business. And that's another
reason why large cab quality businesses can do this. They
can mitigate some of these risks, whether it's terrifs, whether
it's you know, maybe the government cutting back on certain
types of spending. And one of the things that is
getting through this tax build that I think is still
underappreciate is the tax incentives for cap X and R
and D spending. We think that could add three to
five percent to earnings growth or cash earnings for these
(04:31):
large multinationals.
Speaker 3 (04:33):
That's a big tail. In addition to the weaker dollars.
Speaker 4 (04:35):
So there's just a lot of tailwinds I see from
an earning standpoint, And this is almost a perfect.
Speaker 3 (04:39):
Environment to climb the wall of worry because.
Speaker 4 (04:41):
The economic data, the political geopolitical data is messy, it's noisy,
it's scary sometimes. But as long as the revision factors
for earnings are heading north, it's just hard for stacks
to go down.
Speaker 2 (04:52):
When you say campex, I just think of a handful
of tech companies. Do you think it goes beyond just
tech leadership?
Speaker 3 (04:57):
Oh? Absolutely.
Speaker 4 (04:58):
I think this is about capital goods. I think this
is not just about AI capbacks. Also, one thing to
just keep in mind, the IT capbacks that's been good
the last several years has really been concentrated just in AI. Okay,
the traditional kind of upgrades you see in the enterprise
and in the household have not been happening because there
was a giant pull forward, remember in twenty twenty and
(05:19):
twenty twenty one for.
Speaker 3 (05:20):
Work from home.
Speaker 4 (05:21):
So if you actually look at the IT capback cycle
from twenty two to twenty four, it was kind of
a software session. And that's another part of our thesis.
We've been going through these rolling recessions. And look, to me,
the big catalyst to keep in mind for broadening out
is going to be when the FED starts to signal
they're more dubbish. I don't know when that's going to be,
but my guess is sometime in the third coorter they're
going to start to signal that, and that's where you're
(05:43):
going to get a more broadening out to the lower
quality parts of.
Speaker 2 (05:45):
Just the Why matter, do we need it because inflation
has comeing in or is it going to be because the
labor market is cracking?
Speaker 4 (05:51):
Well, I mean, look at last fall it was both right.
The labor market was cracking last summer. As soon as
they signaled they were ready to step in, the market.
Speaker 3 (05:59):
Went up anyway.
Speaker 4 (05:59):
So that's why I mean, I actually think of recession.
If we finally get the broad recession labor cycle, I
don't think the equity markets are going anywhere near the
April lows because the FED will be able to act quickly,
and we're like Pavlovian, right, And if retail is buying
when the FED wasn't even cutting, if they are cutting,
there's going to be a big bid there.
Speaker 3 (06:17):
So look, there's always risks in the market.
Speaker 4 (06:19):
There's always something to be worried about, there's always things
to be bearishan, and there's things to be bullish on.
Speaker 3 (06:23):
And that's our job.
Speaker 4 (06:24):
And I think, you know, this year we've navigated that
pretty well, being in the right places. And I think
we're going to continue to have to shift what we
want to own, not so much how much you want
to own.
Speaker 2 (06:32):
You've acknowledged the one thing that could be a handwind
for equities. It's interest rates. He wrote about it over
the weekend. What is it about four fifty that's challenging
to this equity market? Because based on the running we've
seen over the past few weeks, we don't see much
of a challenge.
Speaker 3 (06:44):
Well, it's stabilized at four fifty.
Speaker 4 (06:46):
So we've identified this level like almost two years ago,
and it's been like a charm. I mean, as soon
as you cross four to fifty in the fside, the
correlation between stocks and rates goes negative and vice versa. Now,
I do think that we kind of want to four
seventy in the April period and then they calm down again.
I think the market is getting comfortable that they have
enough tools, because you know, the Treasury Secretary has talked
(07:08):
about that to keep it four fifty or below if
they need to, And I think we talked about this
last time I was here. Four seventy five is like
the worst place because that's where markets get really nervous.
Five percent I actually get bullish because then I know
that they're going to come and intervene with either liquidity
injections or they're going to use these other tools that
the treasure secretary has talked about. So we're, you know,
(07:30):
we're we're optimistic that that could be managed. And in
other words, that risk could be a risk for five
or seven percent, but ultimately that risk will get managed.
Speaker 2 (07:37):
To do you get CLIENTSOSKC and you now about the
dead oceans, asking the equity strying to just about the
dead otions that take place in the week.
Speaker 4 (07:43):
Well, I really ask the equity folks, But I mean
people do ask about it.
Speaker 3 (07:47):
For sure.
Speaker 4 (07:47):
I mean, and once again we have seen many auctions,
soft auctions for the last two or three years, seen
this occur and then.
Speaker 3 (07:54):
They get control of it. Again.
Speaker 4 (07:56):
I don't want to dismiss the risk from the back
end of the market that is still to me. The risk,
I mean, is the risk not only for markets. It's
the risk for the US, like we have too much
debt and this is a focus. And if we don't,
I mean ultimately, if we don't you know, cut the
budget over time like and maybe the market is now
giving them a lead like okay, we'll give you twelve months,
(08:18):
you know, but if we don't get serious about you know,
budget reconciliation and actually reducing the size of the budget
over time, this is an issue that's going to stay
with us.
Speaker 2 (08:27):
Mike Wilson of Morgan Stanley three words out of the weekend,
don't fight it. Don't fight this market, Mike, Thank you, sir.
They appreciate it. Joining us now to continue the conversation.
Hendra to Trace of Veda pantas Hen, Welcome to the program.
(08:48):
So this was frame quite simply yesterday going into the room,
we would tell the US would push to drop some
restrictions on their site in order to ease the limits
on rare earth shipments from the Chinese side. Now, I
guess we've got two. Now, either that's proving more difficult
to do as we go intoday two or they're shooting
for something much bigger than just that. Is there reason
to believe it's one and maybe not the other.
Speaker 1 (09:11):
Well, I'd like to offer a third alternative and connect
a few dots here. I don't think we're talking about
tariffs anymore, and.
Speaker 6 (09:18):
I think that's something that this street is.
Speaker 1 (09:19):
Coming to understand right now, and China has already grasped,
which is that when we got a CBO score suggesting
that these tariffs that are in place today are generating
two point eight trillion dollars in revenue, and the White
House starts immediately putting out memos incorporating that threshold into
their public presentations on the state of the tax bill
(09:40):
and the reconciliation package.
Speaker 6 (09:42):
We're not negotiating for tariffs to come down.
Speaker 1 (09:45):
The tariffs that are in place today are very likely
to continue across all nations, not just China, but Japan,
South Korea, the EU, and they're going to also see
sectoral tariffs on pharmaceuticals, semiconductors, trucking, aircraft in the months ahead.
Being negotiated are the extraneous issues that, of course, since
the Geneva meeting, both sides have ratcheted up, whether that's
(10:06):
on limiting student access to the United States for Chinese
students or the Huawei chips or AI or rare earth magnets.
They're expanding the scope of this war and no longer
negotiating just the tariff rates.
Speaker 6 (10:19):
I think that they're looking for an excuse.
Speaker 1 (10:21):
To get past Liberation Day, which in this case is
in August, and come up with any reason to keep
tarifrates where they are while they fight on different fronts.
Speaker 5 (10:30):
Henrietta, can they use tariffs as a crutch then? Can
they use the terriffs in the negotiation or are you
suggesting that they are just completely to one side. They
will remain and that's not going to be touched for
the foreseeable future.
Speaker 1 (10:43):
I think they can go up. I don't think that
they're going to come much further down. Thirty percent, as
we all recall, is obviously way lower.
Speaker 6 (10:50):
Than the President initially wanted.
Speaker 1 (10:52):
He gave best at the go ahead to drop rates
down to eighty. We know that anything above fifty percent
is effectively a embargo on trade, and thirty percent, you know,
cargo is just.
Speaker 6 (11:02):
Now starting to get back to where it was in before.
Speaker 1 (11:04):
April second, or before Trump took office. I don't think
they're going to go much lower than thirty percent. Again,
that revenue score of two point eight straight is just
too attractive. So the threat is permanently there of tariff's rising,
and I believe they will on a sector basis. And
I was speaking with another former USTR recently and he
suggested that one or two nations could be made an
example of Nicaragua.
Speaker 6 (11:25):
For example.
Speaker 1 (11:26):
But for the most part, these tariffs are here, they're
here to stay, and we're going to have to fight
on other fronts.
Speaker 5 (11:30):
What does that say about negotiations with other countries? Henrietta,
When the ninety day pause comes due in July, is
it your expectation that we also get a resumption of
higher levels of tariff, something like we saw in Liberation Day.
Speaker 6 (11:44):
I don't think so. For most nations.
Speaker 1 (11:46):
I think that the administration is looking for an excuse
to extend the July ninth date out into the future.
Speaker 6 (11:51):
I don't have a good sense of.
Speaker 1 (11:53):
How long they want to extend it out into thirty
sixty ninety days.
Speaker 6 (11:56):
But one thing that I.
Speaker 1 (11:58):
Really can't square is that the Liberation Day of two
point zero July ninth is well before.
Speaker 6 (12:05):
When I anticipate the tax bill passing.
Speaker 1 (12:07):
So you have this awkward dance between Republican lawmakers trying
to pass this bill on the Hill, and the July fourth,
you know, fourth of July rally that the President is
helping to have, and then the July ninth expiration date.
So I think the dates are a little bit fuzzy
and they don't really quite have a streamlined narrative. The
tariffs and the tax bill haven't quite blended perfectly, and
(12:29):
I wonder whether that might come into the conversation.
Speaker 2 (12:31):
There's one more piece of a parzzle at the moment,
as you know, the White House increasingly distracted by what's
happening on the West coast in Los Angeles, Henrietta, do
you take the point, maybe make the argument that they're
much more comfortable with that story developing in Los Angeles,
and maybe that takes some heat off the passage of
the bill, the tax bill in Washington.
Speaker 6 (12:48):
Oh yeah, they got to love it. And the timing
is perfect.
Speaker 1 (12:50):
Tomorrow or Thursday, the Judiciary Committee is putting out their
one hundred and seventy five billion dollar package that is
going to spend.
Speaker 6 (12:58):
Money on immigration.
Speaker 1 (12:59):
And one of the things that has been lost in
the last week of Elon Musk and.
Speaker 6 (13:02):
Donald Trump feuding over Twitter is that the whole package.
Speaker 1 (13:05):
The reason we're doing one big, beautiful bill and set
it too is because there's a tremendous amount of dessert
in this bill. There's three hundred and fifty billion dollars
in funding for the military and immigration, and that's.
Speaker 6 (13:16):
What's going to carry this bill over the finish line.
I've only seen one Senator come out against those spending levels,
and that's Rand Paul.
Speaker 1 (13:22):
And even he wants some level of spending, it's seventy
five billion. He just doesn't think we need the full
one hundred and seventy five billion.
Speaker 6 (13:27):
So I one hundred.
Speaker 1 (13:28):
Percent expect for this immigration conversation, the raids in LA
sending in the National Guard advances. My odds that the
OBBB gets signed into law.
Speaker 2 (13:38):
When all is set and down, how different will that
bill look to what was passed in the House.
Speaker 6 (13:43):
It's going to be substantially more deficit increasing.
Speaker 1 (13:45):
I'd say at least four hundred billion dollars more in deficits.
Speaker 6 (13:49):
The saltcap is not going to be as generous.
Speaker 1 (13:51):
The IRA tax credits cannot be cut back as much
as they have been. This is just a tremendous job
growth in Key states that need it include Alaska, North Carolina,
where there's that risk for publican members, it's.
Speaker 6 (14:03):
Going to change quite a bit.
Speaker 2 (14:04):
I'm going to trace if I depart, I to thank you.
So here's the like this this morning. One hundred and
nineteen billion dollars in treasury notes up for auction this
week as try to look to gage appetite for US debt.
(14:25):
Tony Rodriquez a Neuveine writing long duration is attractive as
a hedge for equities and broader risk assets. Tiny joint
us Now for more, Tonyk Mornic.
Speaker 7 (14:33):
Come morning, Jackthon.
Speaker 2 (14:34):
Could you think that more comfortable correlation does return that?
Speaker 8 (14:37):
Are you seeing signs of that?
Speaker 7 (14:38):
We are seeing signs of that.
Speaker 9 (14:39):
You've seen that in some of the little hiccups we've
had in the equity market, and we think about why
that's taking place, is that we finally have a yield
level that's reasonably attractive, and you also have markets that
we would argue are fully valued. Whether you look at
the equity market where you look at risk assets, it's
hard to argue anything's super cheap. So now when you're
(15:00):
looking at the economy slowing down, rates being high, an
investor is looking for income and a hedge. We think
you'll see that rally and treasuries because we think that
will really reduce any inflationary pressure that comes into the
economy through wage pressures, and therefore rates can fall in
a really negative outcome, which is not our base case,
(15:22):
but in that tail risk, we think it will serve
as a good head.
Speaker 2 (15:25):
That's the risk version test for the treasury. Let's talk
about the supply test for the treasury market this week.
Four fifty close to that on tens, close to five
percent on thirty sufficient levels to bring in that demand
when we get those auctions this week.
Speaker 9 (15:37):
Yeah, we don't think they're cheap enough to bring in
access demands, so you're not going to get the strongest
auction statistics you've ever seen. Who we think we're at
fair value, so we're not expecting to see a failed
auction this time. But we haven't really seen that right
so bit the coverations has been okay, the tails have
been average. We're expecting a similar story, but everybody's on
(15:59):
alert for that first auction that actually, you know, shows
a really negative soft outcome.
Speaker 5 (16:05):
It seems like we've been on alert for a while, Tony,
and it has yet to happen. Where it has happened
is abroad. You saw weak auctions from Japan and that
was enough to move around the US treasury market. How
fragile and how exposed are we still to international results
from auctions and just more generally higher bond yields across
the ocean.
Speaker 9 (16:21):
Yeah, they're very correlated markets. We've seen term premium rise
across multiple global markets, right, we've seen yields rising, so
very integrated. So we are sensitive to that. But the
good news is that you've seen policymakers also respond to that.
So the bankers Japan responded to that, so they're quantitative tiding.
Speaker 7 (16:39):
They might slow that down.
Speaker 9 (16:40):
We saw the US Treasury Secretary say that they may
consider adjusting some of their supply you expectations over the
coming months. So policymakers are responding to the potential for
soft demand and longer duration assets and that's supportive.
Speaker 5 (16:59):
Is that not a problem though, that policymakers have to
respond Tony. This is usually the thing you see in
emerging markets that there's not enough demand for longer term debts,
so you get changes, or you get inability to actually
issue longer term debt is the very actions within the
then selves. The fact that they have to do it
a problem.
Speaker 9 (17:17):
Yeah, we don't think it's a problem, but we do
think it's reflective of the fact that the fiscal pressures
that we are seeing globally that dominated really by the
US right now in terms of six to seven percent deficits,
those are going to be something that has to be
reckoned with.
Speaker 7 (17:32):
It's just that.
Speaker 9 (17:33):
Unlike in emerging market countries where that debt balloon pops
and you get an immediate crisis, the debt balloon in
a country like the US is more like Japan in
the nineties, where the air comes out slowly. So the
US is not going to, in our minds, have some
sort of immediate sharp crisis, but it will have this
kind of slower weakening that takes place from elevated rates
(17:56):
that are a weight on growth, that take away some
of the supply and ability for companies to finances attractively,
and so that just places a dampener on growth broadly.
So it's a slower kind of pain than necessarily a
sharp disruption.
Speaker 2 (18:11):
You said risk and says with fully value, does that
include credit and high yield?
Speaker 9 (18:15):
Yeah, we think it's fully valued. In terms of reflecting
what are strong fundamentals. So we're not expecting a lot
of price performance from tightening spreads, right, We think the
carry the yield is pretty attractive. You can kind of
earn that seven and a half percent type of return,
which is comparable to equities with a lot less risk,
and it's reflective of solid balance.
Speaker 7 (18:37):
It's good cash flow. Right.
Speaker 9 (18:39):
Defaults that are going to rise, but not very much.
Where we're a little hesitant because spreads are only fair
is to.
Speaker 7 (18:46):
Go down to the deepest end of the pool.
Speaker 9 (18:47):
So triple C credit risk might do great if the
economy really performs well, but that risk reward is not
as attractive as sitting and double bee credit higher single
bee credit, where again fair compensates you for good fundamentals
and strong technical conditions.
Speaker 5 (19:04):
You could fool yourself into thinking, though, that there's no
concern with the junkiest of credit, just given the issuance
we've seen, I think for May was the strongest amount
of junk bond issuance since October. There's demand there and
there's also taking advantage of a lull. But is it
a false sense of calm? Are we tricking ourselves into
believing that it is calmness, especially for the more risky
(19:24):
edges of the market, especially headed into July where tariff
deadlines come due.
Speaker 7 (19:29):
Yeah, we bring up a good point.
Speaker 9 (19:30):
So a lot of companies typically they fail because of
lack of liquidity and necessarily business fundamentals. It can't they
can't work through, So that liquidity is very important. The
hial market had been kind of having below normal supply,
and now that's kind of accelerated a bit, but it
hasn't gone to an excess level. In our minds, it's
just gotten back to a normal supply demand relationship. We
(19:52):
think that's healthy. We think that liquidity is going to
remain in place. So that's part of why we think
the default story. While we'll see an increase, it's not
going to be a sharp rise unless you get a
really negative kind of exogenous shock which could come from tariffs,
could come from geopolitical absent that the underlying fundamentals for
(20:12):
cash flow and the liquidity conditions are pretty supportive of
kind of remaining at these fair value levels.
Speaker 2 (20:19):
I've known you for a long time. Just listening to
you hear it feels as if April never happened and
looking at where markets are price at the moment, it
looks like April never happened. Does anything changed for you fundamentally?
Speaker 9 (20:30):
Yeah, well yes, what has happened is that the kind
of fragility that exists is greater today. So we thought
we'd be growing at two percent coming into this year
without the April news, then you can kind of absorb
a punch, whether it was oil prices, geopolitical. Now we're
thinking one percent growth, so that at one percent, any shock,
(20:52):
a disruption to a auction for example, that can now
push you into recession. So that tail risk has increased
for us, So recession risk twenty percent coming into the
year thirty five percent now still not base case, but
enough to say what gets tipped over into default in
that environment. It's those triple C weeker credits. So if
(21:14):
they survive, we avoid recession, they're going to do fine.
Speaker 7 (21:17):
But if we have that little.
Speaker 9 (21:19):
Hiccup, that's where you want to be a little bit better,
higher in quality, a little higher in liquidity, to give
your room to be able to adjust to those weaker conditions.
Speaker 2 (21:27):
It's got it, Tony, a free siat It as always
Tony Rodriguez, there a new vein on fixed income. Let's
how to get the Deutsche Bank is with this around of
table macamonic, it's going to see you, sir. Let's talk
about whether it's too early to see that kind of
(21:49):
inflation we impanc from the terrace tomorrow or not?
Speaker 8 (21:52):
Is it so?
Speaker 10 (21:52):
I think from a broad based perspective, it likely is.
I think if you look back to the to the
previous CPI, you began to see it's showing up in
some of the data points, but that's been offset by
some of the discretionary services item.
Speaker 8 (22:02):
Whereas we've seen weakness such as airfares.
Speaker 10 (22:04):
You saw it in the PPI data last month, and
it typically takes a few months for that really to
begin to show up into the CPI, And so our
baseline expectation is you get a little bit more evidence
of it in tomorrow's print, but really it takes the June,
July and then August day to get to get stronger
evidence of TAFT pass through.
Speaker 2 (22:20):
What would you need to see to say, you know what?
I think this would be sustained, This could be sticky.
It's not a one off shock.
Speaker 8 (22:26):
So I think it's going to be hard in this environment.
Speaker 10 (22:29):
I think typically what you know if you go back
to what we saw the post code environment. Initially, there
was this view that it might be transitory or temporary,
and that view was dominated by the fact that it
was narrow on a few items used cars, other core
goods at that.
Speaker 8 (22:43):
Point in time.
Speaker 10 (22:44):
I think to think about it being stickier, you want
to see it broadening out across the basket. So probably
not just in core goods items that you can readily
identify for tarff effects, but other items. So, for example,
as you get vehicle tariffs, you're likely to see car
repair pick up with some lag. Carncent insurance inflation is
going to pick up alongside of that. I think those
are the effects that you'd want to see to get
(23:04):
some sense that it's a little bit stickier than anticipated.
Speaker 5 (23:07):
There was an expectation that in this ninety day pause
with China that you'd see a lot of shipments come in,
that people would front run in and make the data messy, etc.
We haven't really seen that. There hasn't been a lot
of action in the ports. Is this still an economy
and suspended animation and when does that change?
Speaker 1 (23:21):
If so?
Speaker 10 (23:22):
I think for a lot of ways it is now
now a lot of this halting or stalling out is
just give back for surgeon imports that we had head
in Q one, and so particularly in the trade data,
you've had this massive volatility where net exports where very
weak in Q one, are going to be very strong
in Q two, lifting the GDP data. But I think
the market kind of understands that. I think, but we're
now in an environment of where's the pass through to
(23:44):
the other components of especially what the Fed cares about
the labor market. Are we seeing layffs take place and
hiring dip so far?
Speaker 8 (23:50):
I think the answer is not.
Speaker 3 (23:51):
Yes.
Speaker 10 (23:52):
Last week's jobs report was mixed, but resilient enough I
think for the market. And then second secondarily when we
begin to see it in the inflation data again, I
think we've seen in the PPI data so far, still
waiting to see it for the CPI. We're not surprised
that you haven't seen it yet. Our baseline expectation, if
you go back to twenty teen twenty nineteen, is that
it was always going to take until the June, July,
and August data to see the effect.
Speaker 5 (24:11):
I just want to flag some of the language you
used when you asked, has there been weakness in the
labor market? You said not, yes, you didn't say no.
Are there pockets of weakness that you're looking at that
you're concerned might bubble up into something more concerning?
Speaker 10 (24:23):
I think you still have this labor market which has
been identified by a low hiring and firing environments. You know,
if you look at the JOLTS data last week, the
hiring rate remains low, but layoffs remain extraordinarily low as well.
That's always been a fragile equilibrium. Now nothing has broken.
That equilibrium has persist persisted, But there was worries, at
least initially that the Tarft shock, the uncertainty that's come
(24:44):
along with it, if financial conditions were tightening, that could
lead to the layoffs that could kind of break that
fraguile equilibrium with the labor market weakening more materially. We
didn't see that last week, but I think that's still
a risk as you look ahead.
Speaker 2 (24:56):
You mentioned something in a recent note about interest rates
maybe stabilized around four to four point five percent. Can
we sell on that story? Just remind us sure. I
thought it was a fascinating note. Do you think we've
adapted fully adapted to an interest rate with something close
to four percent, And what does that tell you about
how much this Fed might cut if we see some
weakness down the road.
Speaker 10 (25:14):
Yeah, so I think the main chart of that piece
was showing if you look at where the FED funds
rate has been, we've been at four point three percent
since December. If you look at headline PC inflation at least,
it's at two point one percent, basically within spinning distance
of the Fed's target. And you look at the unemployment rate,
we've been stuck at four point two percent for several months.
Speaker 8 (25:31):
At this point, that four point.
Speaker 10 (25:32):
Two percent is exactly aligned with what the FED thinks
the long run unemployment rate is.
Speaker 8 (25:36):
And so if you look at that chart, it looks like.
Speaker 10 (25:38):
You've settled into what you know, economists would call a
steady state for the economy. It actually looks like you've
simulated the economy through a model where you're at kind
of equilibrium and everything is working its way out. Now,
we've been in the high ur star camp for a while.
We've we pegged at the nominal nurturate between three and
a half and three and three quarters, So we've always
expected this cutting cycle to be shallower, But we're just
(25:59):
proposing the possibility that there's not much evidence that we're
very far away from neutral at the moment.
Speaker 2 (26:03):
This conversation was kicked to the sidelines because of the
Tower of story over the last few months. I get
all that, but it's the FED moving towards you. Do
you see the FED moving closer towards you in the
come in meetings?
Speaker 10 (26:14):
I think so, and we'll get maybe some evidence of
that next week. We'll get the dot plot next week,
where I think there's broader expectations that the FED will
signal on more hawkish stance. We'll be looking at the
long run dot. Does that continue to migrate higher? My
guess is that it does so. They've been at three
percent for the long run nominal neutral that probably continues
to move higher. I think the balance of estimates that
we look at are kind of closer to three.
Speaker 8 (26:35):
And a half percent.
Speaker 10 (26:36):
But I think to really fully embrace the idea that
neutral is materially higher, you have to get beyond the
tariff concerns that the uncertainty shock that we've had and
have a labor.
Speaker 8 (26:44):
Market that still looks resilient three to four months at.
Speaker 2 (26:46):
Essentially took us the next Wednesday. Let's sit on next Wednesday.
How useful is the rest of the SCP from the
Federal Reserve.
Speaker 10 (26:52):
I think it's an environment where you know, the Chair
Pale likes to, I think, downplay the signal from the
SCP when it's kind of convenient. This will be environment
where it's probably very convenient. I think the market will
you know, if they only show one cut next week,
which I think is broadly anticipated, the market will move
to what a next year's forecast show. Does inflation rise
a little bit? Are they showing some stickiness there? Are
(27:14):
they showing less cuts through next year? I think that
that could signal kind of a more hawker stance. But
I would also anticipate that chairpal kind of tries to
walk that back in the press conference.
Speaker 8 (27:24):
I think they don't know.
Speaker 10 (27:25):
You don't have huge confidence about what policy is going
to do this year because they're still terre related to uncertainty,
fiscal policy uncertainty. A view towards next year about policy
is going to.
Speaker 2 (27:35):
Be it's not going to be there very much at
twenty twenty six. Does that complicate signal? I think the
top of the.
Speaker 10 (27:40):
Federals f I think for now there are kind of
more focused on the near term, and so there's sending
a strong signal that they're in a wait and see mode,
that they're well positioned to respond to risks. And I
think that signal will continue, you know, certainly over the
summer months, as perhaps you get some evidence of who
President Trump may.
Speaker 8 (27:57):
Appoint to the board.
Speaker 10 (27:58):
I would expect that in replaceman of Governor Coogler in
January that that could be the next potential FED chair.
Speaker 8 (28:04):
Certainly the market focus will will shift to that.
Speaker 2 (28:06):
Malaseli if Bank Matt appreciate the time. This is the
Bloomberg Surveillance podcast, bringing you the best in markets, economics,
a gior politics. You can watch the show live on
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Subscribe to the podcast on Apple, Spotify, or anywhere else
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(28:26):
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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. Might Wilson and morgod
stand be taking a very constructive view on things, writing
the rate of changes turn for the better on most fronts.
This keeps us positive on US equities on a twelvemonth basis.
We expect pullbags to be shallow and unsatisfying to those
looking for a fatter pitch. Mike joins us now from
what Mike, Good morning, Good morning Jane. I love the
(00:54):
reson No, don't fight it. So let's talk about don't
fight what? What elements of the market move shouldn't we fight?
Speaker 3 (00:59):
Well, it's kind of what we're doing talking about.
Speaker 4 (01:00):
I mean, the headlines remained very noisy and uncertain, and
I think, you know, this has been the case for
the whole year.
Speaker 3 (01:05):
Our view, as you know, has been a bit different.
Speaker 4 (01:07):
We came in thinking the first half would be tougher
and the way to change and a lot of things
like Earnie's re visions and some of the headline would
be negative.
Speaker 3 (01:14):
And in fact that what we think happens.
Speaker 4 (01:16):
That all got priced in the week after Liberation Day, right,
it was violent, it was a de leveraging and so
now as we look at the data itself, it's all
inflected higher. And so you know, don't ignore everything, but
ignoring the headlines is probably a good strategy and just
focus on the data has turned up for the most part.
And I think, you know, I don't know where the
trade negotiations are going. Nobody does, but I think it's
(01:38):
very unlikely we're going to go back to where we were,
you know, a month and a half ago, like we
bottomed in terms of the pain of that initial you know,
announcement and how bad those tariffs were. So unless it
really re escalates in a negative fashion, I don't think
the trade issue is even going to be enough to
kind of take the momentum out of.
Speaker 3 (01:56):
This market right now.
Speaker 2 (01:56):
You know what the bad view sounds like. They would
say that maybe some of the data, some of the
innings we've seen have been flatted by pull forward and
we'll get the bill for that lakes to this summer.
Do you think we priced for that kind of slowed down,
that weakness we could see in a summer months.
Speaker 3 (02:08):
That's probably right.
Speaker 4 (02:09):
And when we had that view too, there was a
pull forward in Q one Q one of being better
than they feared because you know, the numbers came down
a bunch. I think the second quarter, though, is expected
now to be weaker, so that's going to be the key.
I think the biggest risk for the market's going to
probably be either rates as we've talked about in the past,
you know, north of four and a half percent, or
we do go in an earning season it's not as
good as you know, people were hoping for, and we
(02:29):
have maybe a five to seven percent correction, but that's
not what people kind of want. People want a ten
you know, another ten to fifteen percent draw down to
get better, to get more exposure, and I just don't
think you're going to get that. I mean, I've seen
this a million times you want it, but you're just
going to have to have a shorter trigger finger.
Speaker 5 (02:47):
Well, you had seen retail largely buying the dip, that's
who participated when you got those ruptures in April. If
we're not going to get dips like that anymore, what
is the willingness of institutions to continue to put money
to work right now? Especially they didn't even buy the
past dips we saw.
Speaker 4 (03:02):
Yeah, I think institutions have re risk, but there's still
more to go. The one the area I think that
you have to watch is the is the systematic strategies,
the CTAs that price momentum money. We saw almost five
hundred billion dollars of de leveraging in that period of
early March through mid April, and they've re risked maybe
thirty forty percent of that. So that's another bid that's
(03:23):
sort of it's not fundamentally driven, it's just price momentum.
Speaker 3 (03:26):
So that's that's going to be kind of underlying bid.
Speaker 4 (03:28):
And then I think, you know, most institutions have re risk,
but one thing I haven't talked about yet is it's
people are still making the quality bet and we agree
with that, meaning this isn't the beginning of a news cycle.
Speaker 3 (03:39):
It's once again an extension of.
Speaker 4 (03:41):
The existing cycle, and the Fed's probably going to be
cutting at some point later this year early next year,
and that really behooves the large cap quality equities.
Speaker 5 (03:50):
Does it behoove companies specifically who can also weigh out
some of the tariff uncertainty because this has been a
big part of the narrative, right no one's making decisions
cap exsually stalled unless your tech is there an element
where even though we don't have tears resolved, that you
get companies who just get on with it and start
to put capital to work.
Speaker 4 (04:08):
Yeah, they got to run a business. And that's another
reason why large cab quality businesses can do this. They
can mitigate some of these risks, whether it's terrifs, whether
it's you know, maybe the government cutting back on certain
types of spending. And one of the things that is
getting through this tax build that I think is still
underappreciate is the tax incentives for cap X and R
and D spending. We think that could add three to
five percent to earnings growth or cash earnings for these
(04:31):
large multinationals.
Speaker 3 (04:33):
That's a big tail. In addition to the weaker dollars.
Speaker 4 (04:35):
So there's just a lot of tailwinds I see from
an earning standpoint, And this is almost a perfect.
Speaker 3 (04:39):
Environment to climb the wall of worry because.
Speaker 4 (04:41):
The economic data, the political geopolitical data is messy, it's noisy,
it's scary sometimes. But as long as the revision factors
for earnings are heading north, it's just hard for stacks
to go down.
Speaker 2 (04:52):
When you say campex, I just think of a handful
of tech companies. Do you think it goes beyond just
tech leadership?
Speaker 3 (04:57):
Oh? Absolutely.
Speaker 4 (04:58):
I think this is about capital goods. I think this
is not just about AI capbacks. Also, one thing to
just keep in mind, the IT capbacks that's been good
the last several years has really been concentrated just in AI. Okay,
the traditional kind of upgrades you see in the enterprise
and in the household have not been happening because there
was a giant pull forward, remember in twenty twenty and
(05:19):
twenty twenty one for.
Speaker 3 (05:20):
Work from home.
Speaker 4 (05:21):
So if you actually look at the IT capback cycle
from twenty two to twenty four, it was kind of
a software session. And that's another part of our thesis.
We've been going through these rolling recessions. And look, to me,
the big catalyst to keep in mind for broadening out
is going to be when the FED starts to signal
they're more dubbish. I don't know when that's going to be,
but my guess is sometime in the third coorter they're
going to start to signal that, and that's where you're
(05:43):
going to get a more broadening out to the lower
quality parts of.
Speaker 2 (05:45):
Just the Why matter, do we need it because inflation
has comeing in or is it going to be because the
labor market is cracking?
Speaker 4 (05:51):
Well, I mean, look at last fall it was both right.
The labor market was cracking last summer. As soon as
they signaled they were ready to step in, the market.
Speaker 3 (05:59):
Went up anyway.
Speaker 4 (05:59):
So that's why I mean, I actually think of recession.
If we finally get the broad recession labor cycle, I
don't think the equity markets are going anywhere near the
April lows because the FED will be able to act quickly,
and we're like Pavlovian, right, And if retail is buying
when the FED wasn't even cutting, if they are cutting,
there's going to be a big bid there.
Speaker 3 (06:17):
So look, there's always risks in the market.
Speaker 4 (06:19):
There's always something to be worried about, there's always things
to be bearishan, and there's things to be bullish on.
Speaker 3 (06:23):
And that's our job.
Speaker 4 (06:24):
And I think, you know, this year we've navigated that
pretty well, being in the right places. And I think
we're going to continue to have to shift what we
want to own, not so much how much you want
to own.
Speaker 2 (06:32):
You've acknowledged the one thing that could be a handwind
for equities. It's interest rates. He wrote about it over
the weekend. What is it about four fifty that's challenging
to this equity market? Because based on the running we've
seen over the past few weeks, we don't see much
of a challenge.
Speaker 3 (06:44):
Well, it's stabilized at four fifty.
Speaker 4 (06:46):
So we've identified this level like almost two years ago,
and it's been like a charm. I mean, as soon
as you cross four to fifty in the fside, the
correlation between stocks and rates goes negative and vice versa. Now,
I do think that we kind of want to four
seventy in the April period and then they calm down again.
I think the market is getting comfortable that they have
enough tools, because you know, the Treasury Secretary has talked
(07:08):
about that to keep it four fifty or below if
they need to, And I think we talked about this
last time I was here. Four seventy five is like
the worst place because that's where markets get really nervous.
Five percent I actually get bullish because then I know
that they're going to come and intervene with either liquidity
injections or they're going to use these other tools that
the treasure secretary has talked about. So we're, you know,
(07:30):
we're we're optimistic that that could be managed. And in
other words, that risk could be a risk for five
or seven percent, but ultimately that risk will get managed.
Speaker 2 (07:37):
To do you get CLIENTSOSKC and you now about the
dead oceans, asking the equity strying to just about the
dead otions that take place in the week.
Speaker 4 (07:43):
Well, I really ask the equity folks, But I mean
people do ask about it.
Speaker 3 (07:47):
For sure.
Speaker 4 (07:47):
I mean, and once again we have seen many auctions,
soft auctions for the last two or three years, seen
this occur and then.
Speaker 3 (07:54):
They get control of it. Again.
Speaker 4 (07:56):
I don't want to dismiss the risk from the back
end of the market that is still to me. The risk,
I mean, is the risk not only for markets. It's
the risk for the US, like we have too much
debt and this is a focus. And if we don't,
I mean ultimately, if we don't you know, cut the
budget over time like and maybe the market is now
giving them a lead like okay, we'll give you twelve months,
(08:18):
you know, but if we don't get serious about you know,
budget reconciliation and actually reducing the size of the budget
over time, this is an issue that's going to stay
with us.
Speaker 2 (08:27):
Mike Wilson of Morgan Stanley three words out of the weekend,
don't fight it. Don't fight this market, Mike, Thank you, sir.
They appreciate it. Joining us now to continue the conversation.
Hendra to Trace of Veda pantas Hen, Welcome to the program.
(08:48):
So this was frame quite simply yesterday going into the room,
we would tell the US would push to drop some
restrictions on their site in order to ease the limits
on rare earth shipments from the Chinese side. Now, I
guess we've got two. Now, either that's proving more difficult
to do as we go intoday two or they're shooting
for something much bigger than just that. Is there reason
to believe it's one and maybe not the other.
Speaker 1 (09:11):
Well, I'd like to offer a third alternative and connect
a few dots here. I don't think we're talking about
tariffs anymore, and.
Speaker 6 (09:18):
I think that's something that this street is.
Speaker 1 (09:19):
Coming to understand right now, and China has already grasped,
which is that when we got a CBO score suggesting
that these tariffs that are in place today are generating
two point eight trillion dollars in revenue, and the White
House starts immediately putting out memos incorporating that threshold into
their public presentations on the state of the tax bill
(09:40):
and the reconciliation package.
Speaker 6 (09:42):
We're not negotiating for tariffs to come down.
Speaker 1 (09:45):
The tariffs that are in place today are very likely
to continue across all nations, not just China, but Japan,
South Korea, the EU, and they're going to also see
sectoral tariffs on pharmaceuticals, semiconductors, trucking, aircraft in the months ahead.
Being negotiated are the extraneous issues that, of course, since
the Geneva meeting, both sides have ratcheted up, whether that's
(10:06):
on limiting student access to the United States for Chinese
students or the Huawei chips or AI or rare earth magnets.
They're expanding the scope of this war and no longer
negotiating just the tariff rates.
Speaker 6 (10:19):
I think that they're looking for an excuse.
Speaker 1 (10:21):
To get past Liberation Day, which in this case is
in August, and come up with any reason to keep
tarifrates where they are while they fight on different fronts.
Speaker 5 (10:30):
Henrietta, can they use tariffs as a crutch then? Can
they use the terriffs in the negotiation or are you
suggesting that they are just completely to one side. They
will remain and that's not going to be touched for
the foreseeable future.
Speaker 1 (10:43):
I think they can go up. I don't think that
they're going to come much further down. Thirty percent, as
we all recall, is obviously way lower.
Speaker 6 (10:50):
Than the President initially wanted.
Speaker 1 (10:52):
He gave best at the go ahead to drop rates
down to eighty. We know that anything above fifty percent
is effectively a embargo on trade, and thirty percent, you know,
cargo is just.
Speaker 6 (11:02):
Now starting to get back to where it was in before.
Speaker 1 (11:04):
April second, or before Trump took office. I don't think
they're going to go much lower than thirty percent. Again,
that revenue score of two point eight straight is just
too attractive. So the threat is permanently there of tariff's rising,
and I believe they will on a sector basis. And
I was speaking with another former USTR recently and he
suggested that one or two nations could be made an
example of Nicaragua.
Speaker 6 (11:25):
For example.
Speaker 1 (11:26):
But for the most part, these tariffs are here, they're
here to stay, and we're going to have to fight
on other fronts.
Speaker 5 (11:30):
What does that say about negotiations with other countries? Henrietta,
When the ninety day pause comes due in July, is
it your expectation that we also get a resumption of
higher levels of tariff, something like we saw in Liberation Day.
Speaker 6 (11:44):
I don't think so. For most nations.
Speaker 1 (11:46):
I think that the administration is looking for an excuse
to extend the July ninth date out into the future.
Speaker 6 (11:51):
I don't have a good sense of.
Speaker 1 (11:53):
How long they want to extend it out into thirty
sixty ninety days.
Speaker 6 (11:56):
But one thing that I.
Speaker 1 (11:58):
Really can't square is that the Liberation Day of two
point zero July ninth is well before.
Speaker 6 (12:05):
When I anticipate the tax bill passing.
Speaker 1 (12:07):
So you have this awkward dance between Republican lawmakers trying
to pass this bill on the Hill, and the July fourth,
you know, fourth of July rally that the President is
helping to have, and then the July ninth expiration date.
So I think the dates are a little bit fuzzy
and they don't really quite have a streamlined narrative. The
tariffs and the tax bill haven't quite blended perfectly, and
(12:29):
I wonder whether that might come into the conversation.
Speaker 2 (12:31):
There's one more piece of a parzzle at the moment,
as you know, the White House increasingly distracted by what's
happening on the West coast in Los Angeles, Henrietta, do
you take the point, maybe make the argument that they're
much more comfortable with that story developing in Los Angeles,
and maybe that takes some heat off the passage of
the bill, the tax bill in Washington.
Speaker 6 (12:48):
Oh yeah, they got to love it. And the timing
is perfect.
Speaker 1 (12:50):
Tomorrow or Thursday, the Judiciary Committee is putting out their
one hundred and seventy five billion dollar package that is
going to spend.
Speaker 6 (12:58):
Money on immigration.
Speaker 1 (12:59):
And one of the things that has been lost in
the last week of Elon Musk and.
Speaker 6 (13:02):
Donald Trump feuding over Twitter is that the whole package.
Speaker 1 (13:05):
The reason we're doing one big, beautiful bill and set
it too is because there's a tremendous amount of dessert
in this bill. There's three hundred and fifty billion dollars
in funding for the military and immigration, and that's.
Speaker 6 (13:16):
What's going to carry this bill over the finish line.
I've only seen one Senator come out against those spending levels,
and that's Rand Paul.
Speaker 1 (13:22):
And even he wants some level of spending, it's seventy
five billion. He just doesn't think we need the full
one hundred and seventy five billion.
Speaker 6 (13:27):
So I one hundred.
Speaker 1 (13:28):
Percent expect for this immigration conversation, the raids in LA
sending in the National Guard advances. My odds that the
OBBB gets signed into law.
Speaker 2 (13:38):
When all is set and down, how different will that
bill look to what was passed in the House.
Speaker 6 (13:43):
It's going to be substantially more deficit increasing.
Speaker 1 (13:45):
I'd say at least four hundred billion dollars more in deficits.
Speaker 6 (13:49):
The saltcap is not going to be as generous.
Speaker 1 (13:51):
The IRA tax credits cannot be cut back as much
as they have been. This is just a tremendous job
growth in Key states that need it include Alaska, North Carolina,
where there's that risk for publican members, it's.
Speaker 6 (14:03):
Going to change quite a bit.
Speaker 2 (14:04):
I'm going to trace if I depart, I to thank you.
So here's the like this this morning. One hundred and
nineteen billion dollars in treasury notes up for auction this
week as try to look to gage appetite for US debt.
(14:25):
Tony Rodriquez a Neuveine writing long duration is attractive as
a hedge for equities and broader risk assets. Tiny joint
us Now for more, Tonyk Mornic.
Speaker 7 (14:33):
Come morning, Jackthon.
Speaker 2 (14:34):
Could you think that more comfortable correlation does return that?
Speaker 8 (14:37):
Are you seeing signs of that?
Speaker 7 (14:38):
We are seeing signs of that.
Speaker 9 (14:39):
You've seen that in some of the little hiccups we've
had in the equity market, and we think about why
that's taking place, is that we finally have a yield
level that's reasonably attractive, and you also have markets that
we would argue are fully valued. Whether you look at
the equity market where you look at risk assets, it's
hard to argue anything's super cheap. So now when you're
(15:00):
looking at the economy slowing down, rates being high, an
investor is looking for income and a hedge. We think
you'll see that rally and treasuries because we think that
will really reduce any inflationary pressure that comes into the
economy through wage pressures, and therefore rates can fall in
a really negative outcome, which is not our base case,
(15:22):
but in that tail risk, we think it will serve
as a good head.
Speaker 2 (15:25):
That's the risk version test for the treasury. Let's talk
about the supply test for the treasury market this week.
Four fifty close to that on tens, close to five
percent on thirty sufficient levels to bring in that demand
when we get those auctions this week.
Speaker 9 (15:37):
Yeah, we don't think they're cheap enough to bring in
access demands, so you're not going to get the strongest
auction statistics you've ever seen. Who we think we're at
fair value, so we're not expecting to see a failed
auction this time. But we haven't really seen that right
so bit the coverations has been okay, the tails have
been average. We're expecting a similar story, but everybody's on
(15:59):
alert for that first auction that actually, you know, shows
a really negative soft outcome.
Speaker 5 (16:05):
It seems like we've been on alert for a while, Tony,
and it has yet to happen. Where it has happened
is abroad. You saw weak auctions from Japan and that
was enough to move around the US treasury market. How
fragile and how exposed are we still to international results
from auctions and just more generally higher bond yields across
the ocean.
Speaker 9 (16:21):
Yeah, they're very correlated markets. We've seen term premium rise
across multiple global markets, right, we've seen yields rising, so
very integrated. So we are sensitive to that. But the
good news is that you've seen policymakers also respond to that.
So the bankers Japan responded to that, so they're quantitative tiding.
Speaker 7 (16:39):
They might slow that down.
Speaker 9 (16:40):
We saw the US Treasury Secretary say that they may
consider adjusting some of their supply you expectations over the
coming months. So policymakers are responding to the potential for
soft demand and longer duration assets and that's supportive.
Speaker 5 (16:59):
Is that not a problem though, that policymakers have to
respond Tony. This is usually the thing you see in
emerging markets that there's not enough demand for longer term debts,
so you get changes, or you get inability to actually
issue longer term debt is the very actions within the
then selves. The fact that they have to do it
a problem.
Speaker 9 (17:17):
Yeah, we don't think it's a problem, but we do
think it's reflective of the fact that the fiscal pressures
that we are seeing globally that dominated really by the
US right now in terms of six to seven percent deficits,
those are going to be something that has to be
reckoned with.
Speaker 7 (17:32):
It's just that.
Speaker 9 (17:33):
Unlike in emerging market countries where that debt balloon pops
and you get an immediate crisis, the debt balloon in
a country like the US is more like Japan in
the nineties, where the air comes out slowly. So the
US is not going to, in our minds, have some
sort of immediate sharp crisis, but it will have this
kind of slower weakening that takes place from elevated rates
(17:56):
that are a weight on growth, that take away some
of the supply and ability for companies to finances attractively,
and so that just places a dampener on growth broadly.
So it's a slower kind of pain than necessarily a
sharp disruption.
Speaker 2 (18:11):
You said risk and says with fully value, does that
include credit and high yield?
Speaker 9 (18:15):
Yeah, we think it's fully valued. In terms of reflecting
what are strong fundamentals. So we're not expecting a lot
of price performance from tightening spreads, right, We think the
carry the yield is pretty attractive. You can kind of
earn that seven and a half percent type of return,
which is comparable to equities with a lot less risk,
and it's reflective of solid balance.
Speaker 7 (18:37):
It's good cash flow. Right.
Speaker 9 (18:39):
Defaults that are going to rise, but not very much.
Where we're a little hesitant because spreads are only fair
is to.
Speaker 7 (18:46):
Go down to the deepest end of the pool.
Speaker 9 (18:47):
So triple C credit risk might do great if the
economy really performs well, but that risk reward is not
as attractive as sitting and double bee credit higher single
bee credit, where again fair compensates you for good fundamentals
and strong technical conditions.
Speaker 5 (19:04):
You could fool yourself into thinking, though, that there's no
concern with the junkiest of credit, just given the issuance
we've seen, I think for May was the strongest amount
of junk bond issuance since October. There's demand there and
there's also taking advantage of a lull. But is it
a false sense of calm? Are we tricking ourselves into
believing that it is calmness, especially for the more risky
(19:24):
edges of the market, especially headed into July where tariff
deadlines come due.
Speaker 7 (19:29):
Yeah, we bring up a good point.
Speaker 9 (19:30):
So a lot of companies typically they fail because of
lack of liquidity and necessarily business fundamentals. It can't they
can't work through, So that liquidity is very important. The
hial market had been kind of having below normal supply,
and now that's kind of accelerated a bit, but it
hasn't gone to an excess level. In our minds, it's
just gotten back to a normal supply demand relationship. We
(19:52):
think that's healthy. We think that liquidity is going to
remain in place. So that's part of why we think
the default story. While we'll see an increase, it's not
going to be a sharp rise unless you get a
really negative kind of exogenous shock which could come from tariffs,
could come from geopolitical absent that the underlying fundamentals for
(20:12):
cash flow and the liquidity conditions are pretty supportive of
kind of remaining at these fair value levels.
Speaker 2 (20:19):
I've known you for a long time. Just listening to
you hear it feels as if April never happened and
looking at where markets are price at the moment, it
looks like April never happened. Does anything changed for you fundamentally?
Speaker 9 (20:30):
Yeah, well yes, what has happened is that the kind
of fragility that exists is greater today. So we thought
we'd be growing at two percent coming into this year
without the April news, then you can kind of absorb
a punch, whether it was oil prices, geopolitical. Now we're
thinking one percent growth, so that at one percent, any shock,
(20:52):
a disruption to a auction for example, that can now
push you into recession. So that tail risk has increased
for us, So recession risk twenty percent coming into the
year thirty five percent now still not base case, but
enough to say what gets tipped over into default in
that environment. It's those triple C weeker credits. So if
(21:14):
they survive, we avoid recession, they're going to do fine.
Speaker 7 (21:17):
But if we have that little.
Speaker 9 (21:19):
Hiccup, that's where you want to be a little bit better,
higher in quality, a little higher in liquidity, to give
your room to be able to adjust to those weaker conditions.
Speaker 2 (21:27):
It's got it, Tony, a free siat It as always
Tony Rodriguez, there a new vein on fixed income. Let's
how to get the Deutsche Bank is with this around of
table macamonic, it's going to see you, sir. Let's talk
about whether it's too early to see that kind of
(21:49):
inflation we impanc from the terrace tomorrow or not?
Speaker 8 (21:52):
Is it so?
Speaker 10 (21:52):
I think from a broad based perspective, it likely is.
I think if you look back to the to the
previous CPI, you began to see it's showing up in
some of the data points, but that's been offset by
some of the discretionary services item.
Speaker 8 (22:02):
Whereas we've seen weakness such as airfares.
Speaker 10 (22:04):
You saw it in the PPI data last month, and
it typically takes a few months for that really to
begin to show up into the CPI, And so our
baseline expectation is you get a little bit more evidence
of it in tomorrow's print, but really it takes the June,
July and then August day to get to get stronger
evidence of TAFT pass through.
Speaker 2 (22:20):
What would you need to see to say, you know what?
I think this would be sustained, This could be sticky.
It's not a one off shock.
Speaker 8 (22:26):
So I think it's going to be hard in this environment.
Speaker 10 (22:29):
I think typically what you know if you go back
to what we saw the post code environment. Initially, there
was this view that it might be transitory or temporary,
and that view was dominated by the fact that it
was narrow on a few items used cars, other core
goods at that.
Speaker 8 (22:43):
Point in time.
Speaker 10 (22:44):
I think to think about it being stickier, you want
to see it broadening out across the basket. So probably
not just in core goods items that you can readily
identify for tarff effects, but other items. So, for example,
as you get vehicle tariffs, you're likely to see car
repair pick up with some lag. Carncent insurance inflation is
going to pick up alongside of that. I think those
are the effects that you'd want to see to get
(23:04):
some sense that it's a little bit stickier than anticipated.
Speaker 5 (23:07):
There was an expectation that in this ninety day pause
with China that you'd see a lot of shipments come in,
that people would front run in and make the data messy, etc.
We haven't really seen that. There hasn't been a lot
of action in the ports. Is this still an economy
and suspended animation and when does that change?
Speaker 1 (23:21):
If so?
Speaker 10 (23:22):
I think for a lot of ways it is now
now a lot of this halting or stalling out is
just give back for surgeon imports that we had head
in Q one, and so particularly in the trade data,
you've had this massive volatility where net exports where very
weak in Q one, are going to be very strong
in Q two, lifting the GDP data. But I think
the market kind of understands that. I think, but we're
now in an environment of where's the pass through to
(23:44):
the other components of especially what the Fed cares about
the labor market. Are we seeing layffs take place and
hiring dip so far?
Speaker 8 (23:50):
I think the answer is not.
Speaker 3 (23:51):
Yes.
Speaker 10 (23:52):
Last week's jobs report was mixed, but resilient enough I
think for the market. And then second secondarily when we
begin to see it in the inflation data again, I
think we've seen in the PPI data so far, still
waiting to see it for the CPI. We're not surprised
that you haven't seen it yet. Our baseline expectation, if
you go back to twenty teen twenty nineteen, is that
it was always going to take until the June, July,
and August data to see the effect.
Speaker 5 (24:11):
I just want to flag some of the language you
used when you asked, has there been weakness in the
labor market? You said not, yes, you didn't say no.
Are there pockets of weakness that you're looking at that
you're concerned might bubble up into something more concerning?
Speaker 10 (24:23):
I think you still have this labor market which has
been identified by a low hiring and firing environments. You know,
if you look at the JOLTS data last week, the
hiring rate remains low, but layoffs remain extraordinarily low as well.
That's always been a fragile equilibrium. Now nothing has broken.
That equilibrium has persist persisted, But there was worries, at
least initially that the Tarft shock, the uncertainty that's come
(24:44):
along with it, if financial conditions were tightening, that could
lead to the layoffs that could kind of break that
fraguile equilibrium with the labor market weakening more materially. We
didn't see that last week, but I think that's still
a risk as you look ahead.
Speaker 2 (24:56):
You mentioned something in a recent note about interest rates
maybe stabilized around four to four point five percent. Can
we sell on that story? Just remind us sure. I
thought it was a fascinating note. Do you think we've
adapted fully adapted to an interest rate with something close
to four percent, And what does that tell you about
how much this Fed might cut if we see some
weakness down the road.
Speaker 10 (25:14):
Yeah, so I think the main chart of that piece
was showing if you look at where the FED funds
rate has been, we've been at four point three percent
since December. If you look at headline PC inflation at least,
it's at two point one percent, basically within spinning distance
of the Fed's target. And you look at the unemployment rate,
we've been stuck at four point two percent for several months.
Speaker 8 (25:31):
At this point, that four point.
Speaker 10 (25:32):
Two percent is exactly aligned with what the FED thinks
the long run unemployment rate is.
Speaker 8 (25:36):
And so if you look at that chart, it looks like.
Speaker 10 (25:38):
You've settled into what you know, economists would call a
steady state for the economy. It actually looks like you've
simulated the economy through a model where you're at kind
of equilibrium and everything is working its way out. Now,
we've been in the high ur star camp for a while.
We've we pegged at the nominal nurturate between three and
a half and three and three quarters, So we've always
expected this cutting cycle to be shallower, But we're just
(25:59):
proposing the possibility that there's not much evidence that we're
very far away from neutral at the moment.
Speaker 2 (26:03):
This conversation was kicked to the sidelines because of the
Tower of story over the last few months. I get
all that, but it's the FED moving towards you. Do
you see the FED moving closer towards you in the
come in meetings?
Speaker 10 (26:14):
I think so, and we'll get maybe some evidence of
that next week. We'll get the dot plot next week,
where I think there's broader expectations that the FED will
signal on more hawkish stance. We'll be looking at the
long run dot. Does that continue to migrate higher? My
guess is that it does so. They've been at three
percent for the long run nominal neutral that probably continues
to move higher. I think the balance of estimates that
we look at are kind of closer to three.
Speaker 8 (26:35):
And a half percent.
Speaker 10 (26:36):
But I think to really fully embrace the idea that
neutral is materially higher, you have to get beyond the
tariff concerns that the uncertainty shock that we've had and
have a labor.
Speaker 8 (26:44):
Market that still looks resilient three to four months at.
Speaker 2 (26:46):
Essentially took us the next Wednesday. Let's sit on next Wednesday.
How useful is the rest of the SCP from the
Federal Reserve.
Speaker 10 (26:52):
I think it's an environment where you know, the Chair
Pale likes to, I think, downplay the signal from the
SCP when it's kind of convenient. This will be environment
where it's probably very convenient. I think the market will
you know, if they only show one cut next week,
which I think is broadly anticipated, the market will move
to what a next year's forecast show. Does inflation rise
a little bit? Are they showing some stickiness there? Are
(27:14):
they showing less cuts through next year? I think that
that could signal kind of a more hawker stance. But
I would also anticipate that chairpal kind of tries to
walk that back in the press conference.
Speaker 8 (27:24):
I think they don't know.
Speaker 10 (27:25):
You don't have huge confidence about what policy is going
to do this year because they're still terre related to uncertainty,
fiscal policy uncertainty. A view towards next year about policy
is going to.
Speaker 2 (27:35):
Be it's not going to be there very much at
twenty twenty six. Does that complicate signal? I think the
top of the.
Speaker 10 (27:40):
Federals f I think for now there are kind of
more focused on the near term, and so there's sending
a strong signal that they're in a wait and see mode,
that they're well positioned to respond to risks. And I
think that signal will continue, you know, certainly over the
summer months, as perhaps you get some evidence of who
President Trump may.
Speaker 8 (27:57):
Appoint to the board.
Speaker 10 (27:58):
I would expect that in replaceman of Governor Coogler in
January that that could be the next potential FED chair.
Speaker 8 (28:04):
Certainly the market focus will will shift to that.
Speaker 2 (28:06):
Malaseli if Bank Matt appreciate the time. This is the
Bloomberg Surveillance podcast, bringing you the best in markets, economics,
a gior 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
(28:26):
the Bloomberg Business opp
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