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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. Rri's with us for
the aut She joins us around the table. Lorrie, good morning to you, Thanks for having fantastic to see you. I want to start with this. This came from Peachier Academy and he went through some of the big names in big tag over the last week. And he started with Nvidia two Fridays ago. So two Fridays ago, we had a ten percent move on absolutely nothing, a two trillion dollar company. Ten percent move just like that Tesla last Wednesday, and move a ten percent on a five
hundred billion dollar market cap Meta. Another move a ten percent, this time to the downside on a one trillion dollar market cap, and then we had Alphabet with a move of ten percent on Friday on a two point one trillion dollar market cap. Painter Cheer asking the asking, the big question is ten percent the new one percent for megacap tech? And what's the message you take away from that?
So I'll go back to my small cap days if I can, and I know these.
Are the far stace. It feels like, yeah, this is.
How small caps have always traded. You know, I think some of the price reactions in small cap to prints have gotten a bit worse than that, But you know, I think in small cap this is just something that was a normal, you know, sort of reaction to earnings for a long time. So it doesn't maybe throw me quite as much as it might some other folks.
What should we take away from the fact that uber cap stocks are behaving like small caps though?
Well, I think what we're seeing if we look at the earnings data and Bloomberg does some great work just forecasting where the earnings are expected to go based on bottom of consensus forecast. We've been talking about this since January, and you see a deccelerating growth rate. So coming off
around I think thirty five percent twenty twenty three. If you look at the basket as a whole for the mag seven, that's four caps to drop to about fifteen percent or so in twenty twenty five and really basically come in line with the rest of the market. And there's one thing I've learned over the course of my career is that when you have these, you know, powerful momentum stocks and growth rates to celerate, it doesn't matter
how good the growth is. Growth investors get angsty. And that's what I feel like you're seeing in the stock price reaction race is.
Big questions right now about what's being rewarded and what's being punished going and get too numbers from Apple and Amazon. We talked about the days for those two names. Amazon adets coming tomorrow, Apple coming on Thursday. Can we focus on that a little bit more? What you sense has been rewarded really well discerning season, what's getting punished.
So if you look at the Russell one thousand, and we have to look that big at this early in reporting season, the beats aren't getting rewarded. I mean they're underperforming. They're not performing as well as they typically do in kind of the one to two day post prints. So I think what I've noticed as we're going through commentary, and again it's still very early. We're reading as much as we can. We don't get through everything, you know,
they're fast reads. But what I feel like I'm seeing is just kind of an intolerance for the we need to be patient conversation. We sensed a lot of that early on. I sort of felt like there was a shift last week kind of midweek where companies who were saying, Okay, we're getting the benefit of these things now, and I'm thinking about specifically on the AI discussion. You know, we're benefiting from the ramp that's going to continue in coming years.
Investors were okay with that, but the sort of wait and see this is going to take time again. We've got to celerating earnings growth that you know, kind of twenty seven times multiples on a Media and PE and those biggest tech stocks. Investors just don't have a lot of patience for that right now.
So is there time for a pullback now?
So we've been getting a little bit of a pullback, and a lot of that has happened as we've had some volatility in these bigger names. You know, look I'm not looking for any kind of massive pullback in those names or massive pullback in the markets. We've said we thought the pullback would be worth about five to ten percent. We've had more than five. I don't think we're quite
done yet. If you look at CFTC data on positioning in either Nasdaq one hundred futures, SMP futures, or the broader market, you know, we haven't even begun the correction. If you look at AAII, we've done some damage, but we've still got, you know, probably at least a couple more weeks of damage to do there.
So if you look at the Peter tiernoon, he talks about how all these big companies are treating like little companies. Who's going to be leading If there's not a pullback right now, how do you see this rotation?
So, you know, I think the financials have come through this reporting season so far reasonably well. I personally on my team read a lot of industrials and materials. I'm not really seeing any big kind of demand problems, you know, I'm seeing companies that are talking a lot of being able to manage through headwinds. I think it's not so much a particular sector. I think it's looking for industries, for companies within the value cyclical cohort of the market,
so that could be energy and materials industrials. I think certain small caps as well.
I want to talk about another big ubercamp company, Apple on Thursday. This from Bernsteain this morning, the latest note dropping from them by the fear of growding the stock to outperform. Apple is de rated significantly amid a weak iPhone fifteen cycle and fears that Apple's China business is structurally impaired. They're taking the other side of some of this lorry. I want to ask you specifically about Apple, but maybe some of the forces associated with that name
at the moment. The difficulty navigating international waters, particular China. The strength of the US dollar a factor I think as well. I was reading through your note overnight. How many times have those two things come up on earning scolles so fast?
So the FX headwinds are coming up. I'm noticing it more with the tech companies, to be honest, than others.
When we'll see, you know, we've got a lot of stuff in the other parts of the market to hear from, but so far it seems mostly to be a tech company phenomenon, I will say on the Geographic commentary, and it's maybe a little hard to say because we've had a lot of financials so far, but at least in what I read last week the Geographic commentary, so Europe China kind of trends versus the US, things seem a lot more balanced, Whereas if you look last year, it
was all China's not coming through as well as we anticipated. There's a lot of uncertainty. Things haven't bottomed yet, and I wouldn't say I'm seeing a lot of you know, jumping up and down and celebrating on China, but it just seems more balanced.
What do you think the difficulty has been in China for tech firms specifically? What is unique about China to them?
You know, I'm not sure I know the great answer to that question, to be honest. I know it's been a growth part of the business for many of these companies, and when you're encountering, you know, sort of difficulty in the post pandemic world. You know, there was so much excitement a year ago that we were sort of finally getting that recovery and that normalization, and that normalization I think just hasn't been as clean as a lot of
companies would have anticipated. I think there's just not a lot of visibility necessarily on when that was going to turn around.
When you read through these earnings reports, I think back to what Muhammed and Larian recently told us about how a lot of people missed what CEOs are saying, and they bought into this transitory inflation, but CEOs were saying, actually, we still feel inflation coming down the pipeline. What do you gather from reading all these reports about where inflation is right now for these corporates?
So, you know, it's funny. Back in the last reporting season, so kind of calendar one Q for the four Q numbers, companies were raising the red flag right like, they were really complaining about costs, margin pressures. I'm not sensing quite as much of that now. It doesn't sound good. It sounds, you know, some companies are complaining a lot about inflation. Some people are talking about moderating disinflation, deflation. It's a little more mixed, but again it is still very early.
Laurie, this was great. It's going to be fantastic to run through some of the top stories ten minute comes with Lori Cavasenior of RBC. Not a single mention of the federal reserve gone into that decision on Wednesday, which I guess is a good thing because we've actually been talking about nothing but the federal Reserve over the last
month or so. As they made event in foreign exchange, the end bouncing off its weekest eleven and thirty four years dolly yen falling to one sixty before running back on thin trading due to a local public holiday. Japan's top currency officials saying no comment for now when asked by reporters if the government intervened, Mart McCormack, a TEDI Securities joins us right now to comment officially on the situation. Mart McCormick, what happened overnight?
Yeah, I think it's pretty clear if you think of the sequence.
We had some hot inflation data come through last couple of weeks in the US. Then we basically had BOJ that was standing pat basically said we're pretty much not changing our stands. We're not doing anything. I think one of the things is the BOG is very good at telling us what they did his But I don't think you should look at the BOJ for four guidance on what they'll do in the future. So dollar yen moved
rapidly higher after those events. And essentially what you have is the BOJ and the Ministry of Finance seem to not have the same opinion about where they again should be. And it looks as if overnight that Japanese officials had intervened in the FX market to try to strengthen the end mark.
Let's get into that distinction. It's important. So we've heard complaints from the Ministry of Finance, We've heard next to nothing from the Bank of Japan. We have to deal with the big question, is it a problem or not? Do you think it is a problem.
Well, I think part of it is.
The problem is is it speculative and does it have kind of somewhat of a negative impact.
I think part of it with that fax is there's always winners and losers.
So you know, if you think about it from one perspective, the BOJ they're helping tourism, they're helping profit margins, sourcings are good. You can see the exporters are accumulating larger surpluses. But again, at the same time, if you look at the correlation to the you know, whether or not the politics and the politicians are actually doing their job properly.
I think what we can see is there's a very strong correlation with the disapproval rating and the diet versus the movement in dollar yen.
So this is a big pain point for consumers.
Also, if you look at oil based in yen prices, we're back to where we were in two thousand and seven, two thousand and eight, So there is a massive consumer shock here that's going on from the weakness in the end. So I think the Ministry of Finance is more focused on the broad based movement and whether or not it's kind of dislodged it tell from fundamentals, and the boj is essentially just kind of sticking to their party a line that this is not something that they want to control.
They basically control interest.
Rates and monetary policy, and the FX is basically a function for the Ministry of Finance.
This currency's been bullied all month, Missila describing it as a dog chasing an airborne frisbee, which made me laugh at least this morning. Mark. Looking at the direction to travel over the last month or so, I want to know whether you believe we've actually put a sustainable ceiling
now in this currency pair on Dolly yen. And I want your opinion on this from Kit Chooks of Silkgen, who said, basically, what we need to achieve that is more aggressive policy action from both the Ministry of Finance and from the BOJ. Then the BOJ would need to signal a willingness to normalize policy even further, which so far, Mark, as you know, they've been reluctant to do so. So do you think we've established a pretty durable, solid, resilient ceiling on dollien around one sixty?
I think we have in part on the fact that what intervention does is it doesn't change the trend, it changes a psychology. So you know, typically what we can see is at least two weeks of this intervention working. I would say what we need on the other side is we do need to see the trajectory of the dollar change. We do need to see the fundamentals in
US change. I don't think that's going to change in favor of a stronger again in the short term, but as you mentioned, the BOJ does have an impact, and you know, I think part of what if we go back to like every major central bank when they started normalizing policy over the last couple of years, everyone chronically underestimated what the terminal rate was.
And I think this was a part of it. It's price discovery.
Where in the new world central banks are are essentially their forward guidance and their forecasts themselves have not been able to articulate exactly where they think the terminal rate should be either.
So it's bad.
Basically, you know, the market has basically been forced to kind of go through this process of figuring it out for trial and error. And I think basically what we should think about is that the BOJ and the japan policy rate, the natural policy rate is.
Much higher than what's being priced in the markets.
If you look at one year one year Japanese basis price swap from basically around fifty basis points, I would argue it's much higher than that.
It's probably above one.
So I think at some point, whether or not it's because of the currency, or whether or not just because you know the level what's pricing the market and where inflation is a bit more sticky in Japan. You know, if you look at some of the stuff that's dropped out of the inflation basket in Tokyo, and some of the other indicators you track in Japan, they're more temporary, they're related to fiscal stimulus is come through if they've come through on subsidies. So but the level of inflation
in Japan is generally pretty higher. So I would argue here that the BOJ is going to be forced to tighten more aggressively at what price in the market that.
Will help stabilize the end.
But for the process to turn lower, you just need a much more dubbish FED, which looks increasingly unlikely at least for the remainder of this year.
Well, Mark Gouffo, I want to ask, if short term the US dollar is not going anywhere, won't the BOJ, the financial chiefs in the currency chiefs in Japan just be dealing with this episode again.
Well, I think a big component here is if you think about what drives dollar yet, I think there's two factors right now that we could kind of see in some of the models in data we track. It's hedge funds because there's a trade in it, and it's Japanese institutional investors.
So I think a big piece of it is the market wants.
To see institutional investors kind of front run movements in the policy, and I would argue that they are lagging indicators. So if you think about pension funds, insurance companies, even corporations, you know, essentially these are probably some of the institutions.
That are caught on the wrong side of this trade.
I think a lot of these places we're probably thinking between that's top and dollar yen, So a lot of these institutions were probably essentially short dollars long en and basically the move to one sixty just was too much, too fast.
So that's where you start to see the shoulder taps.
But I think in terms of the movements in dollar yen over the longer term, the pension fund rebalancing, the insurance companies, all these these institutions that are really running low, unheaged levels in dollar yen, these are the ones that'll
start to repatriate that capital. Yes, you need some movements coming from the FED and from the US curve, but essentially at the same time, you also if you have BOJ tightening policy a little bit more aggressively than what markets are pricing, we will see the repatrion of those flows over time, which is.
Our expectations, but that's not going to be the short term trade.
That is a process of how they look at an investment, which those rebalancings usually come quarterly or even annually.
If you want just joining us big moves overnight in the FX market, allow me to run through them for you. We brought through one sixty late last night. Dolli en. This mark has just been bullying the Japanese yen, pushing it ever higher over the last month or so. Some big numbers taken out, numbers we haven't seen since the early nineteen nineties that range this morning one sixty seventeen at the high than the low, one fifty four, fifty four.
Japanese yen kicking in some strength big time in the last few hours or so, and a lot of suspicion that the Ministry of Finance has intervened in this market. The official comment from them so far is no comment. This from Dow Jones that financial authorities have intervened in the FX market. Mark I want to wrap things up more broadly in foreign exchange. This came from Mary Robinson
of Stanchart. He said this for EM the combination of weaker currencies and stronger commodity prices you alluded to them, is creating a major dilemma that could put rate cuts on hold indefinitely. Mark, how do you think this story at the moment? Pair what's happening with the US dollar with what's happening with commodities. How does it shape central bank decisions worldwide?
Yeah, it's absolutely critical. It's a very strong point the two.
There's a way to think about it, right, If you have strong growth, and strong growth is leading to central bank changes.
That has one way of thinking the FX market.
If it's strong growth and generally contained disinflation, that is bearish for the dollar, and that's where the commodity store kicks in.
You get a terms of trade shock.
That's good for em especially in the context that they have really high level of interest rates in terms of carry. What we've seen recently though, this is how it changes the market. These are policy shocks, and the policy shocks driven by inflation is what causes rate differentials to matter a lot. So I think you could see this last
week Bank of Indonesia surprise markets by hiking rates. No one was expecting that we are now dealing with the policy trade off for G ten and emerging market central banks that if the FED is basically priced to the point where they can cut once or cut not cut at all, or even depending on who wins the election, whether or not they actually have to hike next year. What we're seeing is these policy shocks are usually risk off,
good for the dollar. I think in the context of the commodities there's some cushion for the.
Commodity exporters like Brazil and some of the.
Other countries around the world, but it's very small and it's going to be marginal in terms of the context of whether or not these policy shocks driven by US inflation, which is starting to accelerate relative to other currencies that we track and is more bullish for the dollar, that's going to force central banks that will have the ability to cut to change their perspective.
In that changing of perspective.
Is what titans financial conditions, and it's what changes the growth outlook for the next six to twelve months, which can be mutually reinforcing and negative for risk and strong for the dollar and mark.
This is great, just fantastic, gay fe' so no'll design Franklin Sampletson expecting cuts the stock in September at the earliest and rights in this I believe this will be a short and shallow right cutting cycle and expect that tenure notes will jump around in a full twenty five to four seventy five range. After the shallow right cut cycle is done, we're likely to see long gen yields moving kaigh due.
To fiscal pressures.
So now let's start the journey with Wednesday if we can, and great to catch up with you as always. What are you looking for from chair and Pow in that press conference?
So?
I think it's going to be the usual.
I think unfortunately Chairman Powell has a very difficult time sticking with a hawkish tone during the Q and A, so I wouldn't be surprised if in the Q and A, you know, he turned a little bit dubbish left to open some roads for rate cuts sooner than I think the Fed probably will cut. But you know, this is
a pretty robust economy. We're looking at a strong labor market, we're looking at decent wage growth, we're looking at decent productivity gains, and the underlying underlying GDP data last week was pretty darn strong and inflation sticky. There's very little room for the Fed to be particularly dubbish or quick in terms of rate cuts.
Are the save yes, and I as you know, they thought they were on a journey directly towards two percent and maybe cutting interest rates, and the market certainly thought it was going to be set up to cut interest rates, maybe as soon as March. And ultimately we start to get these bumps and they refer to them as bumps in the road. Do you think they are just bumps in the road or if they change course.
I'll just say that if they're bumps on the road, it's a pretty bumpy road, and it's a pretty long one, you know. I don't think that these are just bumps in the road. I think what you're seeing is genuine stickiness and inflation, and it's coming from a lot of misreading.
I think what went on in the post COVID period where everyone assumed that, you know, the economy had fallen over and gone to sleep for an extended period, and it hadn't, and there was so much a fiscal expansion during that period, and we continue to see the impact even today. I think it's going to be a long time before we start seeing in fishion going all the way back to to certainly not this year, sonya Ja Pulowski.
Here, we were talking earlier before we went live about why one should own bonds or buy bonds, and we're not. We're very underweight treasuries here at TPW Advisory. You talked about strong growth. That's the reason why we're very underweight. Strong growth is not really constructive for treasuries. So I'm curious what would be the case if you could make the case for buying bonds here at these levels or where What level would you suggest people should get long?
But I think it's I think it's very fair. What you're saying is definitely a fair point. On the other hand, you would say, I would say that most institutional investors retail investors are massively underweight bonds. I'm not suggesting going massively long here. We were short and we did go neutral over the last several months, and we're slightly long
right now. But I would say that that range that I'm talking about in anticipation of a rate cutting cycle orbit shallow, and I don't anticipate that this is going to be the rally to end all rallies. I see some point in actually diversifying fixed income ideally plays a diversification role in portfolios, and I think that's really the
case to be made to whole treasure. So when I talk about it being shallow, the reason is I think over the longer term, it is inevitable almost that we see treasuries moving systematically higher for a while, so we might see them come down. And I don't expect them to rally all the way down to two percent. I don't expect the FED cuts to take us to two percent, and certainly treasure aren't going to rally anywhere close to
what we've seen in the last fifteen years. But then we will start seeing the sell off which comes from the fiscal pressures, which is going to go on for several years, I would anticipate, So it's a period, it's a short cutting cycle.
I think that's really important.
To think about. Yeah, and I would agree with that completely, Sonia, what about credit versus treasuries? And then could you just touch on that fiscal pressure, because you're absolutely correct, people have very much underestimated the power of the physical side of things because we've been so used to monetary policy driving everything since a great financial crisis, So help me understand the view between credit in the US or globally
versus treasuries. And then this idea of fiscal how much of a window do we have between a rally in bonds before that fiscal pressure really manifests.
So I'd say that the first bit on credit, the reality is all in credit yields will still give you if you're talking about high yield seven and a half percent, and so you can find pockets of value there. The all in yield is somewhat attractive, and I can see that in spread terms, we're looking at pretty tight spreads. Again, the case can be made reasonably and I'm sure you would make this one that we're looking at corporates which
are in better financial health than they happen historically. So I accept all that, and I think that credit definitely has a space in portfolios, despite how tight it is. From an all in perspective, there is room for some
credit in portfolios. I'd say the second point that you were making, which is when does the fiscal ax for we have begun to see it, and we periodically see it when the market focuses on the fact that we're looking at six percent plus six percent of GDP plus deficits in a forward looking way, and this is probably conservative in the event that we have a split Congress at the end of the next set of elections, in the sense that it doesn't matter who wins, right, as
long as you have a split Congress, you are unlikely to see much fiscal consolidation. That I think is an important factor. I don't think it happens or certainly not this year. You know, we're going to see a lot of fiscal spending, that's a given this year, but I think you would continue to see that. When does that
really drop that ax. I think we're going to need to see more of a buyers strike, and as we see long end yels move higher and higher, I think the US will be forced to do a certain amount of fiscal consolidation. But until we see until we see that, I don't see that consolidation happening. And treasury yields absolutely can go higher than five percent in that scenario.
Do you think that's a challenge to treasuries as a diversifier. So now, if you think about where the deficit is now, that's going to gap out if we go into an economic downturn, and typically that's when you would by treasuries.
Is that going to be a.
Challenge to that. I think there is a challenge to that. I think right now the growth of the economy is something that we all have to be really grateful for because right now there aren't that many silver bullets, certainly not on fiscal and very few on the monetary side. So it's the fact that the economy continues to grow is the one somewhat saving grace here though the fact that it continues to grow also indicates very clearly that neither fiscal or monetary policy are particularly tight.
Yep, So no, thank you.
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