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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.
Here's the view from Wall Street this morning. Tiffany McGee of Pivotal Advisors, running markets are sensitive to any changes in energy flows or escalation risk. The recent movement equities reflects relief around geopolitics, but not a full resolution. Tiffany joins us now for more so, Tiffany, when it comes to.
The two key points going to the weekend.
We have inflation data at eight thirty and then of course these talks on Saturday. What do you think the market's going to be more focused on?
Well, I think you know a good example of this is we can look at what happened yesterday, right and so you know, yesterday looked like a strong day on the surface, but the details kind of really tell a more nuanced story.
So you had stocks.
Hire, but yields were also moving up a little over like four point three percent, and oil back to near one hundred dollars, And so this really wasn't a clean risk rally at all. It was really more markets adjusting to uncertainty and not pricing it away. So I think as we kind of go into the weekend, we still have a lot of uncertainty. So that's something that we really need to need to continue to watch.
How much of all of this this tiffany is just positioning. This is something I've been asking constantly over the past.
Week, because the market moves.
Yes on ceasefire hopes but otherwise have been odd. For example, software stocks plunged five percent over the past three days alongside energy. There's no logical reason for software to be falling in a ceasefire unless.
It's just hedge funds re upping.
On their short positions just because this allows them to go back to the bets they had before. So how much of this market is not really being priced on fundamentals, but it's just simply positioning.
Well, I think it's a combination of both, you know, and so we've got I think that we are really in an headline environment, and so that's really moving the markets.
You know.
We can look at even what's going on over the past few weeks with the price of oil, with the fact that even about you know, two weeks ago, we see we saw all this volatility market, but yet earnings expectations continue to continue to increase, and that's one thing we'll also kind of be looking at going in heading into like earning season. We are really in a fundamentals driven market right now. It's really not about hype anymore.
Big of America's Michael Hartnett is out with a note this morning saying that investors should flock into commodities for the next few years, eat things, that a surge in commodities is going to last for that a few years, and that in importance, it might even supplant popularity around equities, that this becomes a big chunk to diversify away from bonds. Do you think commodities deserve that big shiny place in a portfolio as well?
Listen, so our clients are institutional investors and so you know, a diversification is really the key for us when we think about positioning, We're really focused on our client's strategic acid allocation and making those technical moves. Commodities do have a place in a portfolio. We'd like to really invest
in real assets. We have a combination of ural assets, infrastructure, commodities, all of those things act as a diversifier to traditional dots and bonds, and so yeah, I definitely do think that they have a place in a portfolio.
What place does gold have in the portfolio? Tiffany that this should be to a political angst concern about what the FED is.
Going to do.
It seems like a good time to be piling into the precious metal, but it's been trading a lot, just like a momentum trade.
It has, so you know, when I think about how we position portfolios for our clients, again, we set that strategic acid allocation. First. Gold is always a portion of our client's portfolio, but we do so through a fun structure where we have exposure to other metals as well, So we don't have a ton of direct exposure to gold, but that's how we'd like to play it. We like to play it in a more diversification, in a more diversified position.
So if there aren't enough for as headlines today with CPI talks and negotiations, over the weekend, next week we really get into the earning season in earnest. It'll kick off with Goldman Sachs on Monday, Tiffany, what are you looking out for? What signals are you hoping to hear from the big banks in order to understand where we are in this American economy and in the financial sector.
Yeah, so I think as we head into earning season, I think the numbers really matter, but the messaging matters more. So we're watching a few things. We're definitely looking at margins. Can companies really absorb the higher energy costs or are they passing them through to their customers. We're also, you know, on the AI front, looking for that AI payoff. So you know, we know AI is driving growth, but are
we seeing real return yet? That's really important, And so we'll also be paying attention to guidance and so you know, with much uncertainty, right we're in this period of uncertainty, you know, forward guidance really matters more than the quarter to us. And also we're looking at consumer sensitivity. You know, our higher prices, our higher energy prices starting to impact demands. So it's really like a show me earning season, not a tell me earning season.
Stay with us.
Mulble Impock surveillance coming up.
Off to this.
Under surveillance this morning, all eyes on the straight of her moves. Should her mom be able to charge a toll for the straight upons they're charging some vessels to go through.
Or should they be able to?
I mean they shouldn't be able to.
They're doing it a little bit.
I don't know.
Look, the capability is a lot less than it was two weeks ago. And with every week and every day frankly guests less and less, all I can tell you is they're begging to make a deal. So let's see what happened.
Here's the latest, President Trump demanding Iran reopened the straight up for moves, warning Tehran against charging fees for passage. Joining US now is Maha Yahya, a director of the Middle East Tenter at the Carnegie Endowment for International Piece. Maha, the fact that they're meeting is that basically the success of this weekend.
In short, Yes, the fact that they're meeting but I don't think any of us are holding our breath, so to speak. It's very clear that the maximum Iran is willing to offer does not meet the minimum of what
President Trump is requiring. They're speaking at each other, not with each other, and a lot of the news that has come out over the last few days just point to that between President Trump saying he's through the ten point plan, the garbage, uh, the Iranians saying the ceasefire includes Lebanon, and you know, and we've seen a lot of confusion, strategic confusion. I would say, so we'll wait and see what happens.
But I just I.
Don't see these talks at least leading somewhere. It's positive. It gives everyone a breather for now, and we have to wait and see where this goes.
Do you think it's a breather to more escalation.
It could be, it could be. I mean it's very clear that uh, the you know, the the IRG see the demands of the Iranian regime control over the Straits of almost as your reporters said, their nuclear capacity, negotiating over their partners and proxies across the region. I mean, these are non starters for the United States, let alone Israel, which is a major player in this, in this UH and the maybe between the US and Iran, that's where these are the to negotiating parties, at least upfront. But
the real partner in this is Israel. And already we've seen rumbles of discontent because from what we understand, President Trump announced the ceasefire without really consultation with his partner, Benjamin san Yahoo. So it is a breather. We may see escalation again, but it is a breather for now.
And just just on that note, Maha, one of the big areas, if not the biggest area of concern with this ceasefire on the side of the Iranians was Israel continuing to attack Lebanon. We learned yesterday that they're going to be holding direct talks. Wall Street Journal reporting this morning that their preparatory talks. It's happening at the ambassador level. How big of a factor is this going to be heading into the weekend and as a separate thing, that could derail any hopes of a ceasefire.
Look, the talks themselves, I think are important in the sense they really break a decades all taboo in the past When Israel and Lebanon have negotiated, they've always negotiated via third parties, never face to face. So this is the first time that you have direct talks between a Lebanese representative and an Israeli representative. Will these lead anywhere? Not at the moment, No, it's a It's very difficult
to negotiate with someone that's bombing you on that. On one hand, the Lebanese government itself is trapped between the rock and a heart place because the decision to stop any kind of military activity rests elsewhere, not with the government. You have to bring Iran into the game. And frankly, for Benjamin Latagil, he has no interest in stopping the conflicts in Lebanon. It's it's a war that is popular with his own base uh and with the broad Dan.
According to the polls we're seeing, the war is quite popular politically. He promised residents in the north that he is not it's not about stopping the attacks. He wants to completely destroy in dismantle Hezbola, something he promised in Gaza and hasn't been able to do with Hamas. So it's very difficult to see how they're going to again uh, they will not go for a ceasefire, and Hesbella saying we will not, uh, you know, we want to complete cease fire. Iran is saying the same thing. So it
puts everybody in a very murky situation. What we might see is again another breather in the sense that the conflict is ongoing in the South. The bombings has not has not, has not stopped in the South at all. But we may see Lebanon spare another black Wednesday. What we saw two days ago of an entire complete blitz, one hundred air strikes in the space of ten minutes.
It was absolutely terrifying. To this moment, you know, it's more than three hundred people killed, thousands injured, and to this moment, it just doesn't make any rhymemen reason or reason beyond terrorizing the country.
Stay with us multile IMPERG surveillance coming up after this.
Matt Lazetti is joining us around the table now of Deutsche Bank.
Matt, just what's your reaction for the CPI.
Yeah, I think, as Mike highlighted, you want to kind of disentangle some of the stickier items from the volatile items, and I think for this print, it is important that rent to know we.
Are we're stronger.
That does tell you either a little bit higher than we expected. Maybe on a four looking basis, those things tend to be a little bit more persistent. Used car pricesly materially weaker than I think we were anticipating.
You had the decline that Mike had noted.
I think over the next seven months, THO should be picking up given what we see from wholesale prices.
You did see airfares rose pretty strongly.
Maybe that's reflecting a little bit of the rising jet fuel prices as we look ahead, but.
Overall very strong.
Headline print, core print weaker than expected, but we'll have to see over the next seven months, probably get a pick up.
But this isn't the worst case scenario, is it.
No.
I think for the FED, you can look through a particular month, particularly driven by by gas prices. I think more important for the FED would be yesterday's print, which was core PC that is running at three percent year every year. It's a percentage point above their own target. Now they think that fifty to seventy five basis points of that is from tariffs.
But the starting point is just not good.
When you're overlaying another energy price shock on top of that.
So you have those two in hand the market, and Marie was just pointing this out to me that you do have markets starting to price in more bets of a cut or something around twenty percent. Odds we get one by the end of this year, given what you were just saying, is this a setup where you can get cuts?
So our baseline is that we will get a cut in the back half of the year, but kind of confidence in that has waned, I think, and the story and narrative to get there, I think has changed. So coming into the year, we thought that we would see some meaningful disinflation over the back half of the year, core PC falling below two and a half percent, and with that the FED being able to cut rates, you know, potentially as you get a more dubbish reaction function under
a Kevin wash led FED. We're not there yet, obviously, but I think that story has changed. Inflation is now too high. I think the probability that we get enough disinflation this year where the FED cuts on an inflation story alone is less likely, and you likely need to see some weakness in the labor market to get the FED to cut later this year. As we saw the last Friday's jobs report, we don't see that weakness. You
have a labor market that looks very resilient. The unteployment rate is actually declining a little bit, payroll gains are picking up, and so I do think the market, yes, we're pressing a little bit of a cut, but the probably is pretty low at this point.
And this is where, and Lisa's talked about this a lot, where scenario analysis becomes kind of the only thing you can do considering how big the left tail is. We're talking to Bob McNally wrap it in earlier, who was saying one of his scenario is not his base case, but one scenario is where you get a huge hit to growth because of higher energy prices and you need to start talking about recession. For you, what is the level where that can come into the picture.
Yeah.
I think the way that we think about oil prices is there is this strong historical parallel between oil price shocks and recessions. I think nine out of the eleven recessions that we had after World War Two were coincided with a meaningful.
Oil price shock.
But the structure of the economy has changed materially over the past ten years. We're now a net energy exporter record production that we're seeing. Households still take a hit, but households are buffered given the.
Tax cuts that we see.
So the price level that we are kind of worried about would be about one hundred and fifty dollars per barrel for oil. That would eliminate the benefits that households have from the Trump tax cuts. We're not there, and obviously we've moved away from those levels over the past week.
I just want to bring in Mike McKee another mo home. I always been digging into the data. Mike, what else are you seeing.
Well, we've got some interesting surprises and some not so surprising news. You look at airline fares, they were up two point seven percent. Of course, the airlines raising prices to keep up with the fuel problem that they have, but it's also the season where they start to raise prices going forward for summer vacations. But some areas did not rise, and that is a bit of a surprise. Medical care services we're pretty much flat down two tenths
on the month after a series of big increases. We also see motor vehicle insurance flat on the month that had been going down. So some offsetting moves in things that actually will show up in the PCE when we get to that later in the month. But overall, kind of as Matt said, expected in terms of inflation, and we get the usual volatility in various individual categories. The question is how strong is underlying and going forward that's the Fed's job to figure out.
Right, So there are some really negative pockets, but Mike is pointing even Matt to some decent improvement when it comes to inflation in some scenarios. I guess the FED could breathe somewhat of us sigh relief because they knew the gas lean shock was going to be there.
Yeah, you knew the gas line shock was going to be there.
You got some weakness in medical care, commodities, use car prices. I think the one thing is as you look ahead, the fact that rent and oer are stronger is important. Those are very persistent components. They are much larger share of CPI than the RFPC. But nonetheless is if those pick up, you building a little bit more inflation as you look ahead. And then again some of the weakness and use car prices where we have pretty high confidence that over the next several months those are going to
bounce back given what we see from wholesale prices. The key question remains how much passed through do you have from this oil and energy price shock to core components. The FEDS modeling on that reaches different conclusions. The FED staff's model suggests that you have very little pass through to core inflation.
They had some other modeling that.
They did after the twenty twenty two oil price shock which suggests that you get a more persistent past there.
So I think that's the key question for the FED.
I still just go back and you're great on this, just the setup that the setup wasn't great for this then PCE. We saw this rise come before and the sticky inflation. If we couldn't get inflation down to target for the past sixty months, even before the outbreak of war in another energy shock, how do we even get there at this point?
Yeah, And I think that's the real issue for the FED, right because even before this shock, the core PC inflation was still a percentage point above their target. We are now five six years into the initial inflation shock that we saw after COVID. Yes, there are reasons why this time inflation is higher than it should be, and tariffs the culprit at this point. But I think what you've seen is just more FED officials growing kind of frustrated with the progress or lack of progress that they've seen
on the inflation front. So even if you were to exclude another energy price shock and the fact that that could lift inflation on a four looking basis, you still are left with very little inflation progress over the past eighteen months and a labor market that looks very close to the Fed's targets.
In that environment, I.
Think the Fed it would be leaning towards keeping rates steady, and even in a normal environment, could be thinking about that they are not restrictive enough to bring inflation down and the potential for rate hikes. Now, we don't think that that's a baseline, but I think it's a normal environment where growth is solid, the labor market is resilient and close to target, and inflation is a percentage point above target.
We just had the Vice president depart for these talks in Islamabad.
What are you looking forward to this weekend?
Yeah, I think the market has taken this view that both sides have just shown their hand and wanting to de escalate right now. The path between here and a full reopening of the straight orform moves seems to be very unclear, and we've.
Had very little progress on that front so far.
But I think as long as the market sees continued progress or movements in that direction, then we will see oil prices that I think remain somewhat more subdued. The markets can remain more buoyant, and the market will be a little bit less worried about rate hikes.
You know. Speaking with clients, I.
Think that they have really meaningfully taken down the view of.
The risk scenarios around us.
I think they think that the peak market impact of this event is behind us. So there could be some complacency on that front, and so you do worry a little bit about that that we just because we have had these headlines, we believe that the escalation is going to be in place, and that we're a little bit too complacent around escalations.
The market is really holding on to the idea that this ceasefire can last.
This is the Bloomberg's Events podcast, bringing you the best in markets, economics, an gio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.