Bloomberg Surveillance TV: April 30, 2024

Bloomberg Audio Studios, Podcasts, radio News.

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 apps.

Out to run Temple send this.

I still see you upside for USA Cares, but we'll have to be driven by earning's growth from here. So far, the upside in the S and P has been narrow, but I expect the earnings growth to broaden out as we move through twenty twenty four with better participation from other sectors beyond the tech and communications services and the FAB five runs with us around the table.

Morning Run, Good morning.

We're not talking about MAX seven, We're talking about Fab five.

We draw well.

If you look at the year today, basically Apple and Tesla have been a drag, even including yesterday's gains from Tesla.

So really it's the five stocks.

If I look at the earnings results so far this quarter, all of the earnings growth this five stocks again, so we're back in that story that we've had for the last two and a quarter years where the rest of the S and P five hundred is really not giving us much to get excited about.

But I think that's going to change as we move through the year.

What sounds you is going to change, well, part.

Of it is I look at and say, the only way this demand for AI and technology investment can be sustained is if the customers get a return on investment. Companies aren't going to keep pouring money into these products and services unless they see some benefits. The key question to me is how quickly do we see those benefits? Do they show up in the twenty twenty four pn L.

This was a story about six months ago too, and a lot of people are talking about eventually we'd start to see things broadening out with rate cuts, and then I got pushed out three months, then another three months. Basically, are we in purgatory until we get the sense that the Fed is actually going to cut rates and if they don't, you're not going to get a broadening out from the FAB five for the foreseeable future.

Well, I guess this is where a key underlying assumption for me is I'm still optimistic on the inflation front. I fully recognized the first quarter was an ugly surprise. Right January, I thought, okay, we can look at this and maybe it's a January anomaly. We got February and February was much better, but then March was kind of

Not at twenty two percent annualized.

Steeper shoot of though, of Massujo would say, you can cherry pick what you want, you still will have you you can get to two percent.

Any which way. What would you have to see and some of.

The numbers that are coming out starting with ECI, going to adults that we get tomorrow, going to the payrolls report on Friday as well as ISM data, what would you have to see the change of view, Well.

I guess what I would want to see back to the data this week. I think the ECI is probably one of the best metrics for wage growth. It's fully comprehensive wages and benefits. It also works better in terms of adjusting for mixshift. If you look at average hourly earnings that we're going to get on Friday, that can be skewed. If you get more low paying jobs, it makes wage growth look lower, so that one is probably less valuable. So on ECI want to see basically anywhere

So it's another anecdote.

And then on Friday we'll wait and see the market is saying around two hundred and forty thousand new nonfarm payrolls. We need about one hundred and thirty to one hundred and forty thousand in a typical environment to keep pace with population growth. If we get a big upside surprise and more positive revisions. You know, that's going to make me a little more nervous that maybe this economy is reaccelerating.

To John's point earlier, so do you think Europe and China are catching up to the US exceptionalism that maybe is petering out?

That might be a little too optimistic.

I guess I look at Europe and saying going from zero to something positive is really great. But you know, I do think there will be improvement this year. And I would also note, you know, I think the case for the ECB cutting rates is a lot stronger. I mean, you basically don't have debating and we're not debating whether Europe is reaccelerating. We're basically, you know, there's it's clear that Europe's going from zero to something very low on

So right now you're saying that your base case is you're going to get inflation coming in lower and you're going to.

Get some rate cuts.

What's the playbook if you do see that reacceleration inflation and that case comes to play.

Yeah, if you get a reacceleration, then I think the FED ends up keeping rates where they are. I don't think you're going to see the Fed raising rates from here. I don't buy into that hawkish thesis at all. I think five and a quarter to five and a half on FED funds is plenty tight in real terms.

And again I appreciate the question.

But when I look at the data, there's one part where there's a lot of uncertainty, and that's really the service ex shelter.

If we look at the shelter inflation.

We know from the ZILO observed rent index, then inflation there has basically declined sharply. It still hasn't shown up in the CPI, but historically there's a one year lag between ZILO and CPI PCE.

Based on ZILO, we know.

Inflation from rent has gone from sixteen percent two years ago to less than three point six percent for the last nine consecutive months. CPI is still printing six so we know that part of inflation is coming down. We know core goods prices are still going to be soft because we can watch the Manheim Used car price Index. So when I piece it together for basically sixty nine percent of core CPI, I know inflation is staying lower, going lower. So I guess I have a hard time

Two phraces.

I want to one pack with you plenty tight, plenty progress, plenty tye. What evidence is there that with plenty tie and on the plenty progress, how much evidence is there that that's just a supply side story, not a demand one driven by the FED, which you say is plenty tight.

I'm really glad you went there because I think one of the other things that's happened is we look at growth expectations in the US. The consensus for twenty twenty four, sorry ECFC on your Bloomberg termine a new way you would got is two.

Point four percent.

You want to make sure I'm fresh two point four percent for this year. If you go back to October, it was fifty basis points. So there's a lot of optimism around economic growth in the US, but there are signs of cracks. If you look in the consumer mortgage and credit card delinquencies are up forty You're on year now again from a very low base autodelinquencies up twenty percent.

The show answer is Way Run Temple of Last Run, Thank You, Sir, Love, a real time conversation supported by Blomberg.

At its terminal we love that. Thanks for around of time.

But a city's rough, cell kids cities rough, selk can joins us. Now looking ahead to the federal self tomorrow and the data on Friday, let's talk about the data that we just got.

How much does that change things tomorrow?

You know, this is a challenging print for the Fed. It's not quite a nightmare, but it's something akin maybe to a really bad dream.

You know, coming in a one.

To two is just evidence that the inflation data, the wage growth data, is moving in the wrong direction to be consistent with their target. And you already got a lot of hints of that with the Q one inflation data. And you know, a saving grace may have been if wage growth showed continue signs of cooling on a quarterly basis.

This one point two percent increase in the employment cost index for the quarter was the biggest advance of a year. We're looking at a reacceleration at a time or even city group. You believe that there is going to be a rapid deceleration and still a significant number of rate cuts later this year. Does this make the rethink that.

I think it's very challenging, because you know, our base case has been based on a market slowing in the economy as you get later in the year, and that on its own would give the Fed more confidence than inflation would continue to cool.

But you've seen the start of this year.

You know, GDP growth came in a bit softer than expected, but domestic demand was running near three percent, So I would call that a pretty strong economy. Labor market indicators are cooling but still at pretty solid levels, and as I mentioned, the wage growth data just not cooling enough for them that they can have confidence that the inflation moved back to target. I think really the data, both on the activity side and the inflation side are kind of moving against that.

There's also a challenge in this the thesis that some of the employment numbers that have been really robust have been entirely driven by immigration, which has been disinflationary. You know, we've gotten full employment without inflation. Do you think that these data that actually strip out some of the wage adjustments that we're seeing in some of the overarching payrolls numbers really presents a significant problem for that thesis.

Yeah, you know, then this is really key.

You know, we get a lot of data throughout the quarter on the labor market, on wages, it's really when you get to the employment cost index that that's sort of supposed to be the be all, end all for wage growth. That is by far the best measure and indicator of wage pressures in the economy because, as you said, it controls for composition, a variety of other factors.

Now, it's not perfect.

Maybe we are seeing some distortions in the first quarter due to bigger price gains and wage gains that are hard to seasonally edge.

Just or control for.

But this is supposed to be the one that the Fed hangs has had on to tell really where wages are going. So I do think this is this is pretty difficult news for them.

If wages are too high and companies are keeping up with these higher costs, could this spell then maybe layoffs?

Well, you know, right now, what we're seeing is labor market has been fairly strong terms of hiring wage growth has been somewhat elevated, inflation's falling, so real rages have been pretty have been pretty good, and that's fueling ongoing strength and consumer spending, which in turn is fueling more strength in the labor market.

And so and right now we're.

Really not seeing much appetite for layoffs. So I think more likely is you could get an environment where the economy stays resilient, but inflation just stays much stickier than expect Mamma kay.

We wanted to bring it back into the conversation on the lip of market. Can we talk about some of the numbers we're expecting to get out in the next few days tomorrow, IDP and Jolts Thursday claims Friday Pairos, what are even the same fun is done?

Well?

I think the Fed and therefore me are most focused on Friday's excuse me, payrolls, because that'll tell us something about how tight the labor market is and whether this wage pressure will continue. If we continue to get the same kind of job creation, it doesn't suggest any relief on the wage side unless there's a big addition to the labor force. So it is something the FED is going to be watching Jolts was important less important now

Mike, I get a drink.

It's going to catch up with the key there breaking down the economics day to get into the Federal Reserve tomorrow. Payrolls in our survey, the estimate two hundred and forty thousand, you've got no tid two hudred ky on Friday. We's that coming from? And why do you expect downside risk from here? What's guiding that view? I know it's a house few of a city, Andrew tannisis every time it comes on, where's that house few coming from?

Yeah?

Absolutely, And we are expecting the labor market to still hold up well, as you said in this report, and the idea of the economy slowing is that we are starting to see in some areas a few cracks. In particular, if I was highlight on the labor market side. If you look at some of the small business indicators that we track, those are looking kind of worrying, especially in the survey data within the NFIB that would argue that slow that hiring is likely to slow A fair amount.

That being said has noted.

You know, the data have been kind of going against it in the first quarter, and we've seen upside surprises and payrolls throughout the first quarter and over two hundred thousand in aprils a fairly in a is fairly strong number, So you.

Know, that's kind of the basis for it. But right now I think the labor markets holding up fairly well.

There's been an ongoing debate through the show this morning about whether or not FED chair of J. Powell is going to be interesting at all, but also whether he's going to answer the question about whether a rate hike could potentially be on the table for any reason.

You don't think it would be.

You think that we're sufficiently restrictive, but do you think that this is a federal reserve that has to indicate some level of sort of I don't know, retracement from the pivot last year, just simply because you need an economy to run cooler with a market that really.

Does sell off. And this is a key point.

And I think for the FED, and you've heard Pal say something along these lines, they do feel they're restrictive. They would rather just hang out at these levels for longer than have to raise rates. Again, I don't think it's completely off the table. I think it would take something like an acceleration in inflation from where we are and a continued acceleration through the year to really get that conversation on the table of raising race.

So I don't think you'll lean into it.

I think you'll still say that they feel they're restrictive, but that they could hang out here for longer if they need to.

Do you think he's going to be boring or do you think he's going to come out and try to make people feel a little bit more bearish.

I think he's going to be a little bit a little bit boring.

I would expect him to come in and say that, you know, not to say the fetcher is ever boring, but uh, they'll come back colistically and basically say that exactly we're seeing that they're not. They don't have enough confidence yet. They had that the economy remains resilient. They do think inflation will move back down to target, but the data are kind of moving against them.

Would you like us to do a shout tomorrow when we don't have to you know, we don't.

Have to turn up a him were you loving?

Just you know, for the people who make the promos, who are in the news room, if you want to put that promo on.

Yeattle bit later.

Just tight the three guests we've had this morning, that just site's going to be boring and suggesting Sham and Poushi and Aim spake. Robisk assists. Rob's going to say it.

Thank you, sir.

A gross amandalinam right in this policy normalization in response to improved inflation is a supportive backdrop for credit, and extended delay beyond twenty twenty four for rate cuts because of economic strength would likely be more easily digested by credit versus a postponement of rate cuts because of a sustained reacceleration of inflation. Mana joins us, now for more, Amanda, this is brilliant. Not all rate cuts are created equally, not all delays are either.

Is this a healthy delay?

Well, good morning, Thank you for having me so far, it seems like a healthy delay because it's supported by resilient growth. I think the concern that we have is that the longer that these rate cuts are postponed, the more credence we get to the possibility of rate hikes, and that uncertainty around monetary policy is just not a great backdrop for credit. It's not a great backdrop for M and A or deal making. It's clarity on the macro that we need, not necessarily a favorable macro in

So that's why we're focused on what we've had so far this year has been a pretty resilient credit market in the face of a repricing of interest rates higher. What's behind that resilience if you could go through the list for US, so.

A couple of things. One is resilient growth, and I think that's been particularly important for speculative grade issuers that are more growth sensitive, so IG issuers have more of a cushion they can handle a downturn in growth. High yield and leverage loan issuers not the same defensiveness there, So growth is number one.

Two is the yield backdrop.

We've talked about this before. Spreads are tight, but yields.

Are really attractive in the context of the post financial crisis era. So if you're an insurance company, a pension and endowment, you're looking for yield.

It's been an.

Attractive area to deploy credit, deploy capital into credit, but it's not been resilient across the board. I heard your earlier segment where you were talking about kind of triple c's. It is true that Triple c's outperformed on a total return basis, but that's largely been driven by rates because Triple c's are less duration sensitive than say Double b's

And that also expresses some concern about a lack of clarity around what the path of rates is going to be and how punitive that's going to potentially be for companies. Earlier this morning, we had Julian Emmanuel who was talking about popping in the question, and he was talking about how someone maybe Michael McKee is going to ask the Fed, well, under what circumstances could you imagine ever hiking rates or

Right, So two things I'm watching for tomorrow. One is is there an acknowledgment that we are at peak policy rates? It seems to me like maybe the chair wants to step back from overstating that emphasis like he has in the past, So that's one. Two is how patient will they be to get down to their policy objective? So how many more months of this kind of middle ground of not sustained reacceleration but also not declining inflation. Can they tolerate? So that's what I'm watching for tomorrow as

Four, has been repeat to faulters.

So these are companies that have previously filed and they're filing again, or they've previously completed a distressed exchange and they're doing another one. Why do I mention that, It's because a lot of these companies that are under stressed

Well, especially because Dan Greenhouse Solicilia was saying that basically this isn't my mother's high yield market. That this has changed, right, and then essentially we're looking at something that's grown up and become much better quality. Does that mean that the risk has migrated to private credit where you have a higher degree of less tested companies.

Actually, I don't think that the risk has migrated to private credit. I think in syndicated high yield, syndicated leverage loans, and private credit, you can find vulnerable companies anywhere. And in fact, what we're actually seeing is an overlapping of the addressable market between public credit and private credit, where companies are demonstrated access to both. I just I really think what it is is that say, take triple c's in the US higheld market. This is using Bloomberg data,

Could you give us some perspective on the all in yield opportunity right now?

Great is it? How big is it? So?

On a percentile basis using the post financial crisis period, it ranks around the eightieth to ninetieth percentile, depending upon the region and the race that you're seeing. So what is that saying. It's saying that actually eighty or ninety percent of the time yields have been lower than where we are now. On the spread perspective, it's the exact opposite, where we're kind of hovering around the ten percent percent tile. So basically spreads have been wider than this year.

Help made?

Is it?

Good opportunity? This is a great opportunity.

This is so maybe this is a little too nerdy for early morning TV. So yes, it's a great opportunity to deploy in an all end yield basis, but we acknowledge that the opportunity for material spread tightening is pretty limited, just given that we're at two ninety nine the post financial crisis average for high yielders around.

Four to six days.

You see an equity investors migrate into your world. Because we had a guest Lisa mentioned Dan Solis earlier, Dan Greenhouse of Solace earlier on the program, and he was talking about very specifically about energy. He thought, relatively speaking, the opportunity was better in equity than it was in credit. Could you describe maybe a similar dynamic.

I would say on the margin, we actually kind of see the opposite where we see equity investors on and I would say this is very on the margin, take some chips off the table after some pretty strong performance and deploy into credit to lock in some yields. But I would say the conversation can go either way. It really depends on what the risk tolerance is, where the sector focus is.

Appreciate the depths, Amanda, thank you, thank you so much for Madam Lning there. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angio 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