Bloomberg Audio Studios, podcasts, radio news.
This is the Bloomberg Daybreak Aisia podcast. I'm Doug Prisner. You can join Brian Curtis and myself for the stories, making news and moving markets in the APAC region. You can subscribe to the show anywhere you get your podcast and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.
Joining us now is Nadia Level, senior US equity strategist at UBS Global Wealth Management.
Nadi, we heard.
There that we've got a lot of speakers this week, not only Governors Bowman, Coogler, and Cook, but then Presidents Rafield, Bostik and Austin Goolsby. How do you see the FED message evolving this week?
You know, it would be interesting to see what the message is because our sense was this fifty basis points cut was something that Paul really wanted to get through. Could not afford to see any potential for the weakness in the labor market, especially given that monetary policy acts with a lag. I mean, we saw from the updated dots that it suggests that maybe some participants wanted a
smaller cut. The medium dot didn't move up to one hundred basis points, but you had nine participants that are at seventy five basis points or less for the rest of the year. But we know that you know, self landed are hard and to navigate, and Powell wanted to get ahead of this. This is also about his legacy, and so he wanted to cut from a position of strength. Our core view has been since the week July payrolls that we would get one hundred basis points have cut
this year, and that remains our stand. We continue to think that the disinflation is happening faster than the FED was expected. We saw them reduce those numbers, and so we do think that the commentary this week probably will skew a little bit hawk is just given where the dots are and there's obviously dispersion on the committee.
Yeah, Chris Waller was saying Friday, I think in an interview with CNBC that it was the favorable inflation data, not worries about the labor market, that convinced him to support that fifty bases point rate cut. So again, good news on inflation, not so much concern about the US moving into recession. But with everything that we've been talking about, Noddy, I'm curious as to how it's affected the house strategy at UBS on putting money to work in the equity market.
You know, I think last week was somewhat of a Goldilock scenario for the markets. You got that sizeable recalibration of cut, but also the macro data was pretty decent, and it feels like the bar for cuts going forward, you know, is lower, and that boosts the probability of soft landing. So we think that that's overall supportive forwards assets.
You know, we're sort of in the environment again where market is probably back to good news is good news and bad news is good is good news, and so we think that that, along with the fact that you still have a corporate earnings environment that's brought it in out, we think that it will continue to broad it out.
That should be supportive for the equity markets.
So we think the ecre markets can reach you know, six two hundred by the middle of next year, and so we've been advising clients to continue to put money to work, particularly in high quality stocks.
Yeah, I think probably what you meant was good news is good news and bad news would be bad news.
The economy is growing.
Bad news good news as well.
You think that good news?
Okay, well, yeah, I'm sort of when I look at earnings, earnings are growing again after being stunted. The economy is growing moderately. It seems like if we judge the economy now, we can say, well, we're in a kind of soft landing position. So it does beg the question, I suppose what comes next? Do we get better from here or do we get worse from here?
I think that, you know, I think that we do continue to chug along here. Don't think that we do expect the economy to slow down from here. I mean, we're running at two point nine percent if you look at Atlanta fed GDP now for the third quarter, So we're looking for a pace to slow down to somewhere closer to two percent, closer to trend line.
Over the next six months.
But at the same time, corporate earnings is accelerated, and that's because we're having that brought it out. We know that you know, much of the late last year into the first half of this year, that a lot of the growth was driven by tech tech companies, those megacap tech companies, and now you're seeing some other parts of the economy of the S and B, the more cyclical areas are starting to see earnings grow again, and so that's going to help earns accelerate.
You know, we're.
Expecting you know, low double digit earnings growth for the next twelve months, and that would be supportive to the overall market.
So are you advising clients to take a little out of some of that megacap tech trade that you just identified there and maybe moving in into something that's a lower valuation and maybe more exposed to the economy.
So we have a balance set to outlook.
Continue to like tech for those secular tail words, particularly around AI, also like financials as well for that cyclical exposure, also the benefit of rates, and then on the defensive side, like utilities for the secular part of the story as well, particularly.
Empowering up AI. So not necessarily.
Saying that you have to sell your tap to move into the cicle careeras MAANDMA, there's a lot of cash sitting on the sidelines. We're seeing it among our own client space, so we're encouraging clients to put that move some of that cash off of the sala and into the market, particularly in those higher quality areas of the market.
Yeah, so you mentioned housing recovery. You see that as well. I'm curious if the current positioning of the of the tenure, I mean, it's it actually edged higher since the FED rate cut, whether or not if that continues.
We're at the three seventy four on the tenure.
Now, how high does that go where you start to get nervous because you know thirty your mortgages are generally priced off the tenure, right.
Absolutely, I mean we have expected tenures to sort of come into three point eight five by the end of the years. As you said, it is thirty year mortgages more tied in year you're seeing. So we don't expect to any of to move much higher from here.
We do expect.
Mortgage rates to sort of continue to come down as well, and that should be supported for the house and market. We know that the housing market hasn't been a demand issue. It's going to supply issue. A lot of people are locked into very low mortgage rates and so we think that that should help also some housing turnover, which should be supportive to all of those companies that are in the house and ecosystem.
So when you sit down and you listen to what some of the other strategists over at UBS are saying about the degree to which the election in the fall is going to have an impact on markets. What are they saying.
So, we we think that it's a very close call.
I mean, we give a probability of a Harris win fifty five percent and a Trump fixery forty five percent. What we've been advising clients to do is to not make any mandor changes to their asset.
Allocation or an account of the election.
But at the same time, of course, there are some clients who are concerned about a pick of involatility that we've been advising hedge and strat A, particularly clients that have exposure to stocks that might be more sensitive to the election. So think about those stocks that might be exposed to tariffs should president former president Trump wins, or some of the stocks that are financials could benefit from a Trump victory.
And then on the other side and the.
Harris sort of victory, then you have those green energy stocks that could benefit. So we've been advising clients to do things on the margins and not make any major changes.
Nadia.
If Harris wins, so will likely see changes to corporate taxes, they'll eventually be higher than now. Is it simply mathematics that that will cut into profits absolutely?
I mean Harris has proposed twenty eight percent to corporate tax rate versus twenty one percent today, and also even the buybacks, lifting the buybacks from one percent rate to four percent tax rate. And so when you think about that, that could be like a mid single digit hit to corporate profits, and so that will probably have a drag on the market as well.
So something to watch.
Nadia, thank you for joining us. Nadia level their senior US equity strategist over at UBS Global Wealth Management. Bill Adams, chief economist for a Comerica Bank, joins us now to discuss conditions underlying in the US economy. Bill, thank you for being with us. One of the trends that we've seen since the Fed made that big rate cut is a steepening of the yield curve. Does the action by the Fed almost guarantee that will continue to see this
play out over the coming weeks? And what are the implications of.
A steeper yield curve?
I think the steeper yield curve is a sign that the monetary stance in the United States is getting back
towards normal after a very restrictive period. So economists, market strategists, we've been talking at nauseum over the last couple of years about the inverted yield curve as a recession signal, and the uninversion of the ill curve often is seen as a warning sign for equities because in cycles, when the inverted yield curve is followed by a recession, you know, this is the point where the FED is cutting that uninverted the yield curve, and that's the sign that the
recession is beginning this time, knock on wood, I feel looks different.
So far.
It looks like the FED is cutting largely because inflation is coming back to the Fed's target, and that's quite good news for the economy and good news for risk acids as well as well.
So do you think the FED in cutting by fifty basis points last week was declaring victory.
I think the fifty basis point cut was in part a reaction to expectations for lower inflation over the next
couple of months. Reading so, we've seen a move lower and energy prices, and in part due to the solid supply and weak demand globally, especially Europe, and Asia, and that's going to translate into lower headline inflation in the next couple of months, and the FED doesn't want inflation adjusted interest rates to be rising at this point because the unemployment rates already a little higher, there's a marginist lack in the job market, and inflation is closer to
their target, so there's not as much of a case for tight monetary policy. So I think there's an element of moving because of the inflation outlook. I think also the big downward revisions to the jobs data released over the month of August and into the beginning of September really changed the picture about the labor market. The labor market had looked really solid when the FED last met
in July. The twelve month moving average of payrolls growth was two hundred and eighteen thousand with the data in hand on July thirty first. As of the September meeting, that twelve month average was down due I think one hundred and fifty seven thousand, So a very different picture, much cooler labor market, justifying a move away from restrictive and back towards neutral monetary policy.
But Bill, it still feels pretty good with where we're at. With the US economy.
And sometimes, you know, when you see the FED cutting interest rates into an economy that's performing pretty well, you start to, you know, get nervous about things being too good. And so as long as we're feeling nervous and feeling a little guilty, what do.
We worry about the most? So what do you worry about the most?
Well, it's our jobs to worry right So in terms of the things I worry about right now, top of mind is the global energy supply with wars in the Mid East, war in Ukraine. If we saw an interruption energy supply see WTI jump to one hundred and fifty two hundred dollars a barrel, that would be a major
blow to the US economy. I think the other downside risk to the US economy that we've been talking about over the course of the year, you know, some of them are these sort of long bubbling issues like the commercial real estate in large big city downtowns, think you know, San Francisco, Manhattan, Chicago, the but you know, that issue also seems like it's it's getting better understood. And also with interest rates moving down faster than had seemed likely
to be the case, a couple of months ago. I think that is a bit of going to be a bit of a cushion for real estate. So a lot of the interest rates sensitive downside risk to the US economy look less concerning now given the change in the Fed's outlook.
So, as you know, last week, Powell was talking about recalibrating FED policy to a more neutral level. Do you have a sense of where neutral is? What's the neutral rate? In your work?
Neutral is lower than where we are today.
Yeah, okay, so it's it's.
Not four and three quarters. It's probably not four. It's probably not three and a half. Maybe it's three, maybe it's two and a half. Maybe it could be somewhere in there. I have penciled in lightly a neutral rate of, you know, between two and a half and three percent in my forecast. But it's a very academic discussion right now because it doesn't look like interest rates are headed back to neutral in the near term. It's not a twenty twenty five story.
Now.
If this soft landing dynamic turns into a more serious economic downturn, then the Fed could be cutting more aggressively, and would they cut down to quote unquote neutral very quickly? Would they go past neutral into expansionary territory. I think that that's a possibility. It's not my base case, but.
I think the.
You know, the question of where is neutral, you know, it's not an issue that we have to be able to answer right away.
Well, even if we can't pinpoint it, it seems reasonable to say that it's higher than it was before. You're talking about, you know, maybe tune out to three percent, even maybe a little above three percent. So it does mag the question, let's have that academic discussion, why are we operating at a higher level. Why is the economy on a stronger footing now than it has traditionally been over the past many years.
I think about the neutral interest rate in the context of the overall economic policy mix, meaning you have monetary policy on the one hand and fiscal policy on the other hand. We had type fiscal policy for the many years after the Great Recession. Fiscal policy became more expansionary towards the end of the long expansion of the twenty tens, but still not like we have today. Right now, the US, we have a fiscal deficit of about six percent of GDP,
and we also have pretty expansionary fiscal policy. At the state and local government level. State and local governments have been pulling in a lot of tax revenue because of higher property prices, so higher property tax revenues, and there is still that like the long lag of all of the money that got to state in local governments during
the pandemic. So there's a lot of fiscal support, and that means that there's less need or less of an argument for monetary policy to be supporting the expansion.
We talked so oh, sorry, go.
Ahead, No, no, I was just we talked about the PC. Other data that we're expecting this week includes personal spending and income. What's your sense of the American consumer right now and the reaction function that consumers may have to lower interest rates this last rate cut.
I think the average of what drives consumer spending in the United States is in pretty good shape. American consumers are supported by big increases in household wealth. Many Americans locked in low mortgage rates in the kind of pre twenty twenty two years, and that's supported a lot of consumer spending. You also have half of bachelor's degree workers have some remote work, so they spend less on commuting, etc.
So that is I think the big buffer for consumer spending. Now, the typical American think the median is not as well off as the average, and so there's more of a drag from the cost of living. From the big increase in rents, you have more people affected by the expense of buying a new home with higher mortgage rates, higher prices, and that's I think why you've seen the signs of consumer stress like higher credit card delinquency rates and the Fed's data in the last couple of quarters.
Bill, thank you for being with us. Bill Adams, chief economist at Comerica Bank. We welcome Chuck Kumelo, President and chief executive Officer at Essex Financial. Chuck, us, doocs look pretty good here with the S and P five hundred up around fifty seven hundred. If you look at the two hundred day moving average, it's just below fifty two hundred. In other words, you could get a big pullback. The uptrend would still be in place, but people would be feeling a little nervous.
How do you feel about current evaluation levels?
Well, thank you so much for having me listen. I think the market valuations certainly are a little bit elevated in some cases. To put it mildly, but you know, we're anticipating an awful lot of volatility as we enter and get closer to this election that essentially I think nobody's looking forward to. But listen, we're overall, we are bullets on the market. Interest rates coming down tends to be a good thing, although that can be a wildcard, which we can go into a little bit if you'd like,
as well as earnings are pretty well. Economy and the entire reason that made the move that they did is around employment, and employment has been slowing. It's still good, it's not as good as it was, so you know, again they got themselves a little bit ahead of it.
So in terms of further easing, how much are you expecting between let's say now in the end of the year.
Probably at least one, maybe two. I mean, I think the FED has been quite quite repetitive and quite on the record with them being data dependent, and we're going to have as you just mentioned in the update, we're going to have the PCE coming out later this week. We'll have another employment report or two before these next two FED meetings in November and December. So certainly I think probably one, possibly two, depending upon how employment looks and obviously inflation.
So when you look at the high pe companies, the biggest tech stock, so they generally perform well when rates come down because there are long duration assets and it's just a better environment. And that's kind of on a technical level, but on a real level, for the other four to ninety three in the s and P five hundred, they benefit from having their costs come down. They don't have huge profits and they don't have huge profit margins,
so when rates come down, it's good. Right, So in that sense, things are looking pretty solid.
Well that's the thing you think about how some of those high valuation tech stocks did in a rising interest rate environment. Yeah, so you know that, but you're one hundred percent right the other four hundred and ninety three companies, especially for small caps and obviously a lot of different sectors outside of technology, lower interest rates are booing across across everywhere from cost inputs to just their cost of doing business. And then again driving the economy is the
US consumer, which drives two thirds of it. So the lower interest rate environment is always a better environment than when the FIT is hiking rates to slow the economy. But you know, these the technology companies, and again they have seated leadership, right, I mean they certainly The only stock that in the Magnificent seven that has hit a new fifty two week high is Meta, Apple, Microsoft, Nvidia, Google, Amazon, Tesla.
Haven't S and P five hundred has the S and P equal weight has as a matter of fact, over the past you know, I think it's past ninety days give or take the you know, the RSP equal weight is up over the past is up eight point two one percent, and S and P five hundred up only four point four to six percent. So you are starting
to see this market broaden. And again I think that speaks to the point you just that the point that you just mentioned around the overall economic environment is more conducive to a wider range of companies.
Chuck, imagine a world where Kamala Harris is the next US president and the corporate tax rate goes up to twenty eight percent.
What do you do then?
Yeah, So that's uh, that's the obvious. While Cardon Wise said before, we're we're looking for a lot of volatility now, I think part of that is is blocked to tad bit. If you get a democratic president and you get a Republican Senate. That's why from all the things that we see and listen to and read from a lot of really smart people, you know, a democratic suite, I think for the markets would be challenging. To put it mildly, but listen, I mean, companies have managed around higher tax
rates in the past. They can in the future. It certainly is another headwind to it. But again, US companies, the US economy has proven itself extremely resilient in the past. I have no doubt it will do so in the future. But obviously that would certainly be a bigger headwind and would certainly cause some things into question.
So I want to put a question to you, which is kind of extrapolating from point A to point B. We've kind of made the case that you're seeing a nice spreading out of the market in the United States. In the same way, should we see a spreading out of investment buying into emerging markets, into the you know, the less developed markets. Does that Does that look good going forward into the end of this year?
Well, you know, it's always good for US to investor to be diversified in other markets other than the US. That the challenge has been is in the past, you'd have this rotation with the US markets who do really, really well, and they would sort of suffer a little bit and then international markets would come roaring back. You just haven't seen that, and the returns have been so compelling.
Like roughly over the past three years, the S and P five hundred is up about thirty two thirty three percent, and they you know, if index is up eleven point four, emerging markets is negative eight point six ' nine. So it's it's a tough sell, but I think that's where you have to find the right manager as well. Whether it's an active ETF or whether it's a mutual fund
or pick an individual stocks. There's such a wide variety, but it's a it's a tough sell getting the average US consumer to investor excuse me, to put money into a emerging market. It's given the opportunities right here at home, but they can certainly provide some outside returns if you get it right.
Chuck, very quickly, Tember October can be rough months for the equity market. Looks like we'll get through September perhaps unscathed. Is there a risk of a lot more downside in October?
Very quickly, I think there is. I mean September, remember how we started with August. You know that was a tough start to the month. We finished strong. September looks like it's going to be pretty good. But we're trying to tee our clients up for you know, expect volatility. It's going to provide opportunity for investors as well, but you know, we try to get ahead of it so that when it does happen, people don't you know, completely freak out and get this tube.
Okay, thank you, Chuck out of time, but we appreciated Chuck Camello, President, chief executive Officer at Essex Financial.
This has been the Bloomberg Daybreak Asia podcast, bringing you the stories making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.