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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg
Terminal and the Bloomberg Business app. We beginning our Solf story, another heart set that expected inflation print pushing gat rate cut bets ahead of next week's Fed decision. John Stolfus of Oppenheimer still expecting the end of free money to come to a close. Quote for those of us who began our careers when ten year treasury yields, corporate yields, and mortgage rates were at double digit levels, the phrase none of me thanks or none for me thanks comes
readily to mind. Should the Fed cut rates too early? In place to say that? John joins us. Now, John, we talked about the scentsif snackflation. Do you Smeuth the sensive snackflation.
I think it's a little too early to call that, John. I think a couple of hot numbers in terms of hotter that expected numbers in terms of inflation in the process of a fed fud's pipe cycle that has been remarkably sensitive to its effects on the economy just tells us this is part of the bumpingness to get coming out of where we have been going into a sustainable economic recovery at moderate pace with what is the equivalent of full employment three to four percent unemployment.
There is one takeaway though from some of the price action, John, and it's that all the hopes and dreams of a broadening out in the rally seem to die when we have the idea of rate hikes to laid deferred or put off indefinitely. Really, that has been the takeaway for me is that this week, when people were worried about fewer rate cuts or even no rate cuts, you saw the equal weight underperformed dramatically the S and P.
Five hundred.
Do you take away something about that in terms of how vulnerable that trade.
Is too short a period to take away you know and think that this vulnerability does not exist.
It certainly does exist. But at the same time, we're headed in the right direction from what we can tell, and you've got just extraordinary times when it comes to innovation, the resilience that's seen by business in the latest earning season for the S and P five hundred with earnings up close just under eight percent, revenue growth about four percent. Sorry, and with that, you know, four sectors double digit earnings growth.
And not all tech things are good. It's just that they're not as great as people would like to see. We're not there yet. You know, we're in the car. Are we there yet?
Not yet? Okay, So you're waiting for the there to happen. You're not waiting for the stiflation to happen. And I guess what's the line between the two, Because ultimately, what we did see yesterday, our minds have to kind of go to the ciflation point, like John was mentioning, given the fact that we saw inflation come in hotter than expected, retail sales come in lighter than expected. When do we start to get some sort of definitive read on which it is. Is it the strength or is it the slowdown?
It probably it probably comes from a combination of both. It's the combination of the resilience with the slow and because you've got the FED, I mean, in the last two years hasn't been on holiday. It's been involved, you know, bringing down the rate of inflation. But inflation is an insidious thing. The other thing I think that we're waiting to see, and it's beginning to happen in food. We've seen it in some aspects in clothing, not really yet
in rents. But is competition competition, you know, when you go into inflation. Originally, those who experience height input costs, they eat the inflation, don't pass it on. Then once everybody knows inflation is weird, its ugly head, they pass
it on to their customers. And then once the FED does what it's supposed to do and begin to have some significant success, then suddenly those that originally eat the inflation then pass it on, hold on passing it on for a bit longer so they can make up for the losses at the beginning of the cycle. And then somebody says, hey, you know what, I think I can sacrifice my unit a price and maybe make it up in volume. And that is what we're waiting to see.
And right now, I think it's a good thing that the consumer, based on those consumer set of IT indices, shows that they are beginning to think genuinely inflation will be here for longer. Indeed, it may be very well, but at the same time, the direction of the growth of inflation is on the way down, and that's where we see the op tunity remains in the equity market.
So, as Emory pointed out, look out for you mentioned a little bit later for consumer inflation expectations, John, I want to look ahead to next week a risk factor in the near term, and you could talk to me about how big a risk this is. Is it that median dot in the FED projections comes down from three to two. Is that a big deal to you, given that this market has gone from seven to three and equities are still close to all time heighs.
I don't think it's a really big deal. I think the Feds, it's not just the Fed's hard is in the right place, but the general tone of FED speak is very much aware of what is going on. It's into this idea. Well they won't say it, but it's going gently into that good night, you know, in this case, in the sense that they are very sensitive to what is the essentially the mandate of the FED, which is to produce an economy that grows at a sustainable pace
without horrible inflation, with manageable rates of inflation. And then when it comes to employment unemployment as defined by somewhere between three and four person unemployment, and it looks like they're doing the job. And I don't think Powell and his FED wanted to be have a legacy of either cutting too soon or staying staying at the high levels where we are now relative to where we were before for too much long. That said, we continue to think it's a second half of the year when we see
the rate cuts happen. We never expected the five to seven that others were. We always thought it would be likely one to two, perhaps three, which is what the FED had initially intimated towards the end of last year.
You've been outspoken about that, John, I just want to finish out by talking about sectors and what you like in the equity market. I know you like cyclicals over defensives. Now, traditionally defensives would include things like healthcare. Now healthcare has this GLP one element to it which makes it almost offensive. It's where a lot of money is going in this bull market at the moment, John, what is defensive to you?
The defensive would be consumer staples, the utes, a significant portion of healthcare outside the weight loss drugs, and some of the the the offsets that come to that, or rather the additional things that come with that related to perhaps what can what can be done against the heart attacks and things like that with the same drugs. But we can't help but think that you want to be you want to be in technology, consumer discretionary industrials, financials UH.
And we're gaining the addigital exposure to materials here. And it just looks like people are looking at the world and thinking China may be having real problems that it still has to address, but the rest of the world is in a process of normalization where we're in a better, better situation. We're leaving the emergency status of the world economy UH and in that process moving towards a more stable environment. Now that doesn't mean anything can happen that
would counter that. Okay, So you have to be diversified, and you have to know what you own, why you own it, and have light sized expectations you can't get too gaga over the market here. You have to be you know, that's why our target. We're only one percent away from our year end target now. And you know we people were asking us through most of the first quarter, why don't you raise your target? Well, when we started out in December, we showed we were indicating thirteen percent upside.
We just didn't relox like how fast food we're going to move?
John to that point, are you going to upgrade your forecast?
Ah, we'll have to see. At Lisa, I'm looking at all this stuff you're looking at and John's looking at and when I think of it, we've got to give a consideration. But I must say, from where we're sitting here today, it would seem like the likelihood of being forced to raise might be necessary after all these bears of suddenly gotten under the bull case. But they're talk Some of these guys are talking out of both sides of their mouth, you know, stagflation. Other people within their
groups saying, oh, it's going to go higher. I don't know. I try to avoid the noise, to separate the signal from the noise.
H John, appreciate your time. I think there was a diplomatic way of dancing around that question and answering yes, maybe perhaps at some point in the next couple of days, Sarah Hunt of Outpine Saxon words right in this there is a tension between the idea that not cutting rates means financial conditions will passively tighten if inflation continues to wend its way lower, and concerns that when there's enough liquidity, the conditions are still too loose. Sarah and place to
say it joins us. Now, Sarah, what do you think of that data? PPI upside surprise, CPI upside surprise. How does it change next week's FED mating?
It's going to be interesting because I agree with the guests that you've had on earlier in which you guys have been talking about the FED wants to cut right. They're looking for an excuse to cut because they don't want to get to the point where they're passively tightening as opposed to you know, they don't want that to happen. But I think that this data was not does not give them any help in that the odd I mean, they could just sort of ignore it and say, well, yes,
we're looking at other things. To your point, memory that you know, we're going to look for the PC. We're not using this, but I think that it makes it a little bit tougher for them to do it on the timeframe that they were looking at. If this had been a more benign number, I think you would have seen that may call come back, and I think, I mean, I don't think anyone was looking for anything in March, so they may just not say a whole lot about it.
But we'll see.
I mean, it's going to be interesting to see what they say.
Should jompless claims make them comfortable or should retail sales make them uncomfortable? Yes, yes too, yes to both.
I mean, and that's the problem, right, because we keep getting these different pieces. The labor market has stayed stronger. You know, in December when they pivoted, one of the things that they that char Pal said was we now see the risks as being balanced between inflation and a labor market, whereas before that everybody like they're going to try to kill the labor market. So I think that the fact that we are seeing still good labor, they really don't want to put the country into a bad
labor market. They don't want to do that, So that's going to be helpful, but it's just the other data was just not that great.
It strikes me in some of my conversations that just hypothetically, some people might be very bored with the muddle because it's been muddle for quite a while. What does a board trader do given the fact that we've got a lot of them, Well.
They probably take out too many leverage bets that come back to bite them.
I don't know.
I mean, this is the problem of having the non directional you were asking earlier on the FX trade, like we're looking for someone's looking for a big directional trade. We have these little incremental moves where the moves are incremental, but the zeitgeist swings from oh my god, we're going into recession to oh, the economy is so great, we don't have to cut rates. Mean, there's been a lot of moving back and forth, but it's the same from the same two places, and that does tend to get people.
You know, you can't quite figure out what's going on. If people are not worried about rate cuts being pushed out because the economy is good, well that's great for the market that they're getting pushed out because.
Inflation is bad. That's bad for the people are so spoiled. The fact that people are bored. We've just had an all time high in Japan, haven't seen one since nineteen eighty nine. I've had records in Europe. Record state side, we've got two huge bull markets taking place, one in Ai another in GLP. Once I understand that they want more. We always want more. But seriously, some of the levels we've here in the last few months have been pretty incredible.
Yeah, but they haven't been a street shot up. It's been basically and it hasn't been with any.
Convintions feby alone. Yes, we had two if the biggest single day market cap gains on single names in the history of this stock market.
But has it been because people are just plowing in and just so excited and looking for their upside surprise or is it because basically it's just been the story that keeps on giving. You've won by not shifting around your portfolio at all, which is hard to do.
That's why they're bored, because they're waiting for the rotation that hasn't developed in the way they wish it was. I mean, we caught up with Seaburn Mandy Zoo earlier this week, and she said they're positioning upside by US, upside by some way light on WALP smow caps right that board. Because the same things keep winning, should they start to get used to the same things winning all the time or is that going to change sometime soon?
Well there's also the issue of you know, the same things are winning, but that then echoes a lot of other market bubbles and people start worrying about a market bubble too, So there's that problem as well. I think to the extent that the AI stocks are winning, there is a they're really making money. There's actual cash flow there. This isn't a group of stocks that is running on a promise, right, It's running on some actual results.
So there's that So I.
Think that that is say sticky.
But on the other.
Side, there is some concern that you're seeing these big run ups in things like the glpeople there's but there's real money there. But then what happens to the rest of the market. And there's a lot of parts of the market that haven't been participating.
Including energy to some degree. And I know that you are bullets and energy, and then you pulled back a bit we're seeing this rally though that's pretty persistent. We're seeing oil prices at the highest levels going back to November, and this idea that maybe supply can't keep up finally with demand after a pretty strong have you shifted your view on a not j well?
Still to your point also earlier, there is still excess supply out there right because they're still being oil held off the market. The question is it's moved up, and it's moved up in a quiet way, so the stocks haven't really caught up, so there's value in that trade right now. The question becomes, does this problem that's going
on with transportation, because it's still a problem. They're still seeing that issue going through does that change because if it doesn't change, then you can see tighter markets and you're seeing them right now. And that move up hasn't been a convulsive move up. It's been like that incremental you know, it's if it's a spider move up.
So it's kind of crazy that we're all excited potentially about a Breton crude move in the eighties and there is literally a hot war in the Middle East and you have Husi's still striking vessels. They're the red seat in the Gulf of Aden. I mean, how high could you see oil prices actually go?
Though, Well, I think so right now you've seen the problem that that's causing, which is higher transportation costs in longer transportation times. But it hasn't hit production. It hasn't hit something like right now. That's staying within a frame work that is not problematic for the fields themselves. It's problematic for transportation. If that changes, I think you could see bigger moves because then you don't know where you're
where the supply is going to come from. Right now, supply is not so much the issue.
So we've got these two risk events on the calendar, the Federal Reserve in June because that's when this rate cut is going to happen. Now most people agree, And then you've got this election in November, and people just sort of look at it the calendar and say, it's out there somewhere. I don't need to think about it right now. Do they need to think about it right now?
I think the difficult thing is that there is such a long period of time and that there's this expectation that any number of things could happen, and so that it's hard for anyone to pin it down, and that any changes either on the global stage or other places could shift things one way or the other. So deciding today what you think the outcome is going to be
in acting on that is quite difficult, I think. With the FED, you know, there is that expectation that we're going to get some rate cuts, but as those dialed back, it's not the same as saying, you know, we were going to be down two hundred basis points right now, was going to change everything. And that's okay, and that's great for tech stocks and it's great for fall sorts of things.
But on the other.
Hand, the fact that you're getting interested on cash is a good thing too. So where the FED goes ultimately is going to be a big deal. And that keeps shifting around too. We keep hearing now north of three and a half, maybe it's four percent. There's a lot of change that's been going on with both of those things. So it's hard to say, yes, let's make a plan, and let's make a plan on the basis of this X going this way.
Michael Sharper was just talking about how either way, whoever wins, there is going to be this emphasis on trying to protect the US security, to protect US workers from some of the international competition. Does that feature in what you decide to buy, what you think might be susceptible to national security claims and real kind of interference on that level.
I think that really shifted from the beginning of the pandemic even to now, because the move was for whatever reasons you want to call it was either home shoring or onshoing or friendshoring, or however you want to whatever terminology you want to use, that says, I need to make sure that I have a decent line of sight into my supply chain where is because we've had transportation issues before, we're now seeing this issue in the Red Sea.
There's all sorts of things on the international stage, and or somebody who was an ally could become less of an ally and then all of a sudden they're going to threaten not to give me the things that I need. So I think that that was already happening, and I don't think that either side of the aisle right now is pushing in the opposite direction. So I think that directionally that's going to continue.
Has it happened because a lot of people say that it actually hasn't happened, and the whole near shoring and front shoring was sort of a lot of lip service that didn't really come to fruition. Do you buy this story that were in the process that is going to be naturally inflationary, that's going to build in redundant seas, that's going to have legs.
I think that it's not happening for a variety of reasons. There's a number of stories about the Chipsack about why that money isn't going places, and there's too many regulations and restrictions on that. But I think from a standpoint of I'm a corporate CEO, I want to make sure I know where my things are coming from. Is it going to be a chip plant in the US at
some point? Probably, But in the scheme of things, I'm going to be much more attuned to that than I was before, regardless who ends up in the way.
Now, how does the US talk about friendshoring when they want to block a deal from a friendly ally?
That is a difficult question to answer it and I did not block back deal, so I cannot answer it.
How do you prepare for that? It's almost inflexible. It's such a good question, Sarah Hunt vampired saxon words. We're seeing this repeatedly. We're dressing things up in language that might be palatable for our allies, but ultimately, look at the action, don't listen to the words. This is the difference between former president talks about America. First, starts talking about America first, Everyone's like, whoa America? First? What's this
about tariffs on China? How dare he? And then here we are, same policies, same policies, dressed up in very different language, but ultimately same thing.
National Security in the Wall Street Journal editorial view this morning calls it self destruction and they say, regardless of Trump or Biden, it's going to be a nasty election, but there's going to be policy damage because of it.
It's the lacest this morning. Treasury selling graft after a hotter than expected inflation print, reinforcing beds that the Fed is in no rush to kind of interest rates, while lower than expected retail cells, leaving in Lincoln of Bemos saying this the pace of retail cells during Q one hints if the specter of snagflation, although it's only a couple of prints and insufficient to draw any broad based conclusion.
Ian Lincoln joins us, Now for more, and let's get into this, is that what we're starting to smell the sense of stagflation this year.
I think that there's a non zero probability that we find ourselves in a environment where demand continues to slow more and more certain aspects of inflation proves stickier than the FED wants to see. And then the big question is how does a Fed respond to that?
What do they do?
I think they've done a very good job of laying the groundwork to cut, not ease, and we're far enough into the cycle that they can justify that.
So if the dual mandate goes into conflict, you think they can still kind of interest rights later this year precisely. Okay, So here's the question for the markets. The market believes now that this Federal Reserve has established a more asymmetric approach to monetary policy, that if strong growth comes through, they don't have to hike, but if growth weakens they can cut. Does it temper their ability to respond to adverse shocks of inflation remains sticky? You're saying they can
still cut. I want to understand by how much are we talking about one or two versus say five plus.
You know, it's interesting because I think it really comes down to the composition of inflation and where the stickiness comes in. If it ends up being on the supercore measure, which is highly correlated with wages, that's a problem for the FED.
If it's housing, if it's all we.
Are, If it's rent, that's a residual from what happened a year and a half ago, and if that ends up being the case, then they can easily justify moving back closer to neutral if the situation warrants it, and what warrants it It certainly isn't a flat GDP print. It would have to be well into negative territory.
Which raises this question what is neutral? And I keep going to El Selinos and this idea that she was saying maybe neutral in their view is actually north to four percent. And that's what we're looking at. The sort of rolling ball of cash that's shifting into different areas and causing inflation to surge in different places that will keep inflationary pressure is higher than they have been traditionally. Can you get on board with that?
I'm very much on board with the notion that neutral policy rates are a moving target and it's not a single number that will hold indefinitely over time.
I think that the FED would probably.
Agree that, because of a lot of the dislocations that occurred during the pandemic, that our star was higher over the course of the last couple of years. The bigger question becomes, what is it like at the moment? Are we truly in restrictive territory? The combination of the balance sheet rundown and the fact that as year over year core inflation numbers start to decline, real policy rates will increase really puts the FED in a unique situation and one that I certainly don't envy.
Well, what do you think, I mean, do you think that it's restrictive based on the evidence that inflation isn't really getting tamped down as much as people expect? And sure we got one weaker as an expected retail sales number, but you look at the earnings and companies are still doing all right.
So I would say that it was clearly restrictive during the second half of last year, which is why we saw the progress made on the inflation front. But the equity market doesn't believe that it's restrictive, and that's actually really problematic for the FED, since overall financial conditions are much easier than power would want them to be. And that feedback loop to a large extent, is why I believe that there is some stickiness in the inflation complex at the moment.
I got two questions. You've kind of alluded to the fact that you think he cares about equity markets, but bat he talks about financial conditions when we raise the fact that equity is a cloister all time highs and credit spreads a super tih get people come on this program and site. That's not that important to cham and Pound anymore. Why do you think it is impultant.
I think that he's very strategic in the way that he chooses to emphasize the relevance of financial conditions when they were tighter at the end of last year. It was very important because it was consistent with the messaging that he was putting forward, which is we're nearing the point where we're going to start cutting rates. If the FED starts to reintroduce the conversation about financial conditions, that's
hawkish in this environment. It's not dubvish, and that would suggest that while the market seems content to price in a June rate cut at this moment, maybe the real departure point for normalization is July or.
Later twenty twenty dollars co for you now trys to remark it, what do I do with the longend? You've teld me what you think is going to happen with a federal serf to some extent, well, that could make for the front end of the curve. What do I do with a ten year What does that look like? In the world that was starting to sense is development in twenty twenty four.
So I would say that we are in a period where we might see upward pressure continue to develop in the longer end of the curve, but ten year yields aren't going back to five percent, And eventually we will find ourselves in a situation where inflation does start to moderate, and that means break evens will compress, and that means that ten year yields above let's call it four thirty five or four fifty start to look attractive.
But we're not there yet, which is really the reason why I was going to El Selinos's call, and people might say our star neutral rate, my eyes glaze over, I don't care. But the idea here is that if the overnight rate is more than four percent, it doesn't make sense for ten year treasures to be trading at four point two seven percent. Currently they would be trading at a much higher rate. So at what point does this market sniff that out? Since right now there is none of that being priced in.
I would say that logic holds very well for the two year sector, and the operative issue is whether or not the Fed ever chooses to review the two percent inflation target, because even if our star is higher, if the Fed is going to get us back to two percent, that just means they have to risk greater demand destruction to get us there. And so, like I said, I'm very very on board with Barish in the front end
of the curve. Really hard to justify a ten year yields at five percent even if our star is one hundred basis points higher to put.
A ball on it. Are you basically saying the biggest risk case for next week is for FED chair by j Pal to come out and say I care about equities.
I would say the biggest risk for next week is that we all look at the twenty twenty four and it says fifty, not seventy five business points worth of rate cuts, and that's what triggers a more dramatic beer steepening.
Andrew Harnenholser said he just published on that. He said, seventy five basis points. The medium dot will still imply seventy five basis points. Can we have your base case? Is it fifty or seventy five? Next week?
This cases fifteen, this case is seventy five, but there is a real risk of fifty.
Interesting, Thank you, sir, really thoughtful stuff in link and thet of BIMO. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, angiot politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the bloom Blog terminal and the Bloomberg Business app.