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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and am Marie 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. I want to
bring in Muhammad Aloud of Queen's College, Cambridge. Mhammad joins us. Now, Muammed, you've had a few minutes to go over these numbers, your initial reaction, and then we can get to the much, much bigger picture going forward from here.
So well, I agree generally that this is not as relevant as it normally is as an employment report. I do focus on zero point three percent monthly earnings growth. When people rush to predict lots of FED cuts, they forget the difference between what is necessary and what is necessary and sufficient weakness pronounced weakness in the economy is necessary for the sorts of cuts that are being priced in, but they're not sufficient. The FED needs some sort of
air cover on inflation. And most forecasts of inflation, as Jeff said, are now going to the three to three and a half percent at the PCE core level, So this is quite a move. The point three monthly earning growth that we saw in today's report is not consistent with air cover on inflation. So this is a report that suggested the Fed wait and see. And my hope is that Jeff Powell this later this morning will do
two things. He will walk back the notion that the terriff impact on inflation will be transitory and let's eliminate that word again from its vocabulary. And the second thing I hope he walks back is the ease with which he dismissed the soft data, because, as Stephanie said, expect the hard data to weaken in the months ahead.
Mohammed, are we dismissing the strength of this labor market report at our own peril? The idea that corporate America has thrived despite what the US government has occasionally done, and that there is quite a bit of robustness and people who are employed and able to absorb a greater amount of price increases that might get passed along to them.
I think, Lisa, what this reminds you is that the structure of the economy is fine. And this is important because while there is general agreement on a very bumpy few months, the significant disagreement on where this would lead to. Now those who think that the pain is worth the
gain that's coming forward. It's just a matter of time, and the structure of the economy is strong enough to take us through it is very bumpy journey, and there are others that were we that the structure of the economy is not as strong as we think it is. This number here gives you some confidence that the economy is fine if we can just avoid repeated self inflicted wounds.
If you are just joining us, welcome to the program. Moments ago, a big upside surprise on a payrolls report to twenty eight the estimate one forty. And we look at the charts in the immediate aftermath of that job's number, This market hardly blinked. You're just stilled down fifteen basis points at the front end of the curve three fifty two, and in the equity market at the moment, equally, futures
are lowered by two point eight percent. Mohammad was looking forward to chairman power at eleven twenty five and Stephanie Rothy talked about that word transitory, the t word, just like I can today.
I would imagine he won't use it again.
I guess, of course, we'll see, but I think we'll have to be a little bit more cautious about this. And I think it's also important to think out the fact that transitory one does doesn't mean the same for every person, which is the problem.
And the extent of the tariffs are so big that.
It might take a really long time for this inflation shock to work its way through the economy.
So they get hiding word, as you know, speaks to the same mistake we all remember, which was waiting too long. That's the problem with the tea word at the moment, waiting too long to do something about inflation this time around. I wander conditioned by their previous experience, do they wait too long to do something about growth and downside risk to growth, because that's the major risk for this market.
Yeah, I think that's potentially the case, and they're going to have to wait and see. And by the way, they're going to be watching inflation expectations they've anchored, especially the last time in twenty eighteen, they said inflation expectations were the main anchor to determine whether they can look through it or whether they have to act more hawkishly as a result. And if inflation expectations start to pick up, they're going to be in a tough situation for a
little while. They're gonna have to wait until things get really bad before they can act. And by the way, inflation expectations long term ones are largely driven by your most recent experience with inflation. Well, in twenty eighteen, we had no inflation in the past prior years.
This time it's very different, and inflation.
Expectations are likely to pick up a lot more given experience with inflation and the fact that these terrafs are just so.
Large, which raises a question, Jeff and I would love your thoughts on this. How the bond market responds to either a duvish message from Fedschair j Powell or.
A hawkish message.
If he does put transitory back in the bottle, does that give you more confidence frankly to go into long term bonds because eventually they might have to cut rates a whole lot more.
Yeah, you know, it's really interesting if you look at the last two days in what has transpired in terms of the bond market. So yesterday you saw a big rally in rates, but it was mostly led by the intermediate and short end. If you look at the thirty year portion of the curve, it lagged for a brief moment in time.
It barely budged at all. Contrast that to today, and today what you're seeing is a very different picture from the bond market, and probably the most striking is that you're seeing not only longer term inflation expectations fall, but even some of the shorter term inflation measures. And so the steventy was.
Just talking about it.
It'll be challenging for the Fed because it depends on how you're measuring inflation expectations. So everybody's seeing the Michigan survey. The survey measures will likely be going higher in an environment where people are seeing higher prices due to terrace. You know, potentially that gets a little bit offset by what we're seeing in oil, but the impact in terms
of survey responses maybe to higher inflations. Meanwhile, in the bond market, they're really looking at the financial conditions tightening that's going on, seeing the implications for consumption. Seventy percent of the economy is driven by that side, and that's quite negative and starting to price in today much more
of a deflationary environment. So you're seeing the back end of the curve fall, you're seeing break Eban's fall, and you're even seeing short end inflation measures, which have really been this story about stagflation. When you measure the stagflation, it's short measures. Inflation in the near term is expected to go up. Now some of that stuff is starting
to get rolled over. So it's possible here the bond market may try to lead the Fed to this message of transitory by basically cutting the interest rates, both in real and nominal terms.
I can tell you this market moves not leading the President to change in his mind, just posting on through social right now saying that my policies will never change. If you're looking for someone to blink this morning, it's not the President at the moment.
He says, to the many investors coming into the United States and investing massive amounts of money, my policies will never change.
This is a great time to get.
Rich richer an ever before, which raises this question of how much the bond market and the stock market matter to him at a time where there is real concern on Wall Street that isn't being reflected.
In his commentary, Jeff mentioned crude crude is down by seven and a half percent on w Cipron is down by close to seven four percentage points, Muhammad, Quite clearly, this is a shock to the cycle. Quite clearly, we're repricing growth lower. From your perspective, how much of a shock to the system is it and how long does it take to internalize major regime changes like the one we might see.
So John, we are repricing growth outlook in a significant manner.
Interestingly, the beta for the rest of the.
World is catching up. It started out being a US phenomenon. Now it's spreading. People are realizing that if the US growth rate falls by x, it may form then by more than x outside the US, and I think that is correct. Debta is greater than one outside the US. So it's a major, major revisiting of the growth outlook. How long it depends on what other countries decide. Right now, the president's message will encourage other countries to retaliate.
You see, there's a choice out there between retaliate, the escalate, or just wait. And we all want.
The escalation, but the escalation requires both sides to play along and for there to be an amount of trust that this is not a multi round where you're going to have to renegotiate every time. If you de escalate, now it will hold. That isn't there right now, So I suspect you will see more countries move towards what China did, which is a response that involves both tariffs
and non tariffs. And where that comes in for the bond market is we're not going to start talking not just about interest rate risk, but credit risk in the bond market. Credit risk has been on until very recently, really well protected, but now we're starting to see it come under pressure, and credit investors no longer have the shield of all in the yield because.
Both components now are in play.
So the next thing to look in the bond market, John is going to be not just a government bonds, but look at credit and in particular high yield, because that is significantly vulnerable right now.
Yeah, we saw yesterday the biggest spread widening going back to the heart of the pandemic in some of those riskier instruments. We caught up with you earlier this week, Muhammad, and you said that it's about a fifty to fifty chance in your estimation that we either have some sort of Reagan and Thatcher esque reordering of the global trade system, or you go back to the seventies, you go back to Carter on steroids. Do you still think it's fifty to fifty?
I do. What has changed?
If you remember I said my own perception is fifty to fifty. The market is at eighty twenty. The market is absolutely convinced this is a wagon Thatcher moment. I think that eighty has come down in the last couple of days and for good reasons. So yes, I'm still out of fifty to fifty because there is the upside of significant innovations in tech that are there that are multi year beneficial to productivity.
So yes, I'm still fifty to fifty.
The market is replicing now closer to fifty to fifty, which is I think that that's the correct thing for the markets to do.
We can answer that, I think there's a lot of faith at a moment. Based on the conversations we've had so far this morning, Lisa, that many people still don't believe these tariffs even go on, and if they do, it won't last long. We've got these two key dates now. April fifth is tomorrow, so that's the baseline ten percent tariff. April ninth is when you hear the twenty on the EU, twenty four on Japan, thirty four on China, and the big numbers on everybody else. Everybody thinks that we can
negotiate something in between. I think they're scared of the moment that we won't. But if you go through all the research on Wall Street right now, the base case is this won't happen, and I wonder where that fight comes from.
At a certain point, there was this belief heading into this year that the Fed put was there and that the Trump put was there. To imagine that an administration would allow an economy to tank or a market to tank seems infeasible, and I think that's what a lot of people are looking at. If you put on top of that this question of where is the off ramp for the tit for tat retaliation? How do we start to estimate the damage from that, it becomes a fool's
errand try to model out. And I think a lot of people are just saying, look, we're just going to assume that's not going to happen.
Jeff, where does that fith come from in the market right now? That is so bad it just won't happen.
I think as you're pointing out that fail or as Muhammad was pointing out, I think that faith is being is being challenged day by day, and I think that's why you're seeing the market reactions. Yeah, so you know, I think the only path forward is to observe what this administration and the policies that it chooses to implement are. It's very possible to forecast, but the eighty twenty to fifty to fifty I think is right, and you see it, you know, in these in these market reactions.
Sephany, how do you model this?
So we've definitely tried to model this a number of different ways base cases, We've taken the we've done the fools that are an approach, and tried to model from a global perspective, what happens if we play all of the tariffs, what happens if everybody else retaliates in kind, and then you get some offsetting factors.
That looks the numbers are kind of comically bad.
You're looking at something like a two to three percentage point headwind on GDP if this all really plays out again. We don't think it will play out to that extent. We think it will be pretty severe, which is why we took a growth growth estimates down for this year two point five.
Percent and recession jobs.
Up to forty percent, because this is these policies are bad and it's hard for the administration to walk away away from it unless something forces them to do so, and we're not there yet.
Stephanie Raltha will three such a special thanks alongside Jeff Rosen of Blank Rog Muhammad, I just wanted to give you the final word before we go. What you'll be looking for going into the weekend and as we reset coming into next week. What's the number one thing at the top of your list.
Number one is listening to the administration.
I think there is a belief that you may have to break some things to remake the global order, but remaking the global order is the objective. And you have the very specific example of X where you had to break things to remake it at the back of people's mind. But also listen to business, and I've been on the phone NonStop with business leaders.
And they are not waiting John.
They see hit on the cost side, They're worried about demand destruction on the revenue side, and they're starting to make difficult decisions about the balance between profit margin, compression, higher prices and cutting costs.
And these discussions, believe me, are really active.
Business is not gonna wake because they're going to try to rebuild resilience because whatever people disagree on, I think most of us agree on this being a very uncertain environment.
Mohammed, I appreciate your time, sir as always, Mohammed, are in there of Queen's College, Cambridge with this around the table, micro Jesus of Morgan standing Michael komorning, good morning. This is tough for a lot of people. It's so bad it just won't happen. Is that your position on things?
Well, I think there's probably plenty of room for negotiation. We just don't know what the parameters are, right, So when we'd expect that lower terrariffs, potentially asset purchases, potentially more military spending in some of these situations might help, but really we're in this discovery process right now of what the sufficient conditions are. Unfortunately, and they don't think this will clarify anything for anyone. They're probably different conditions
for different countries. So we shouldn't go into this, at least from my perspective, thinking that any of these negotiations will go quickly or any of this terraff relief will come about quickly, and so we do need to price in at least most of the negative consequences of these choices.
What is the significance of the formula that this Trump administration use to come up with the teriff rights on each country?
Yeah, I mean, I only know what they've told us, which is effectively that it's supposed to be a representation of the trade deficit and that in a theoretical world where if tariffs are equalized, that there would be no good trade deficit. That said, you know, I don't know if the information we're supposed to take from that is that their end goal is to just get good trade deficits down to zero, or if just that they apply the methodology and they're willing to talk about it again.
I think we're in that discovery process over the next week. But either way, it doesn't seem like we're going to get relief quickly from any of this.
I was speaking with an investment manager yesterday and I said, you know, what is your methodology of taking all of the data that we're getting it and ranking it, etc. And they said, I run a lot. I run frequently. What are on earth that you're telling your clients? Yeah.
I think what we said coming into the year is that we did think that higher tariffs were going to be a fixture of the US policy posture. We thought it was going to be mostly aligned with China and kind of rest of world would be a lighter touch. That's still generally true, but the China tariffs happened faster
than we thought. We did think they'd get to sixty percent, but we thought that was kind of an early twenty twenty six event, and rest of world would sort of be product by product in a lighter touch.
So the new thing we have to bake.
In here is rest of world tariffs are higher. There's at least that ten percent minimum, and then there's higher levels on top of that, maybe some of that and it gets negotiated back. But that means there is a weaker growth outlook than we would have anticipated. So now we have to price in weaker growth, higher recession probability, and unfortunately, we think most risk markets just aren't priced for that reality.
Yet.
Some of the stuff becomes positive catalysts once you've price that in, but we're not quite there yet.
Do you entertain the theory that this was about getting the band stuff out the way, getting rights down, getting bond yachts below four percent down towards three before they come out with a massive tax plan.
Do you entertain any of that?
You know?
I tend to look at this more as it was a sequencing of what was available to them politically and
sort of legislatively going into this. Right So, because you could sort of make a theory that, hey, why don't we just do the tax cuts first and create space to operate and incur some of the pain around tariffs and the effort of kind of this grand remaking it, that's what people hopedful, right, But I think practically speaking, the ability to actually extend tax cuts and or do more wasn't going to be on offer early because you
had to work through the budget reconciliation process really slim majority, So you work with the things that are executive controlled, which is terroriffts, because that's that's open to you, and the legislative stuff was just always going to take longer. So I don't know there's a lot of rhyme or reason to it other than the administration's doing what they can do with the tools they have available in service of their medium term goals, and this just happens to be the sequencing of it.
The challenge at the moment for a lot of us is to kind of put markets to one side and think about where we'll be twelve months out. Yeah, in twelve months time, when you've got your hands around the more complete policy platform, not just trying but taxes as well, what's the mix going to look like?
Well, listen, there's two ways to think about this, as like, are you better off twelve months from now than you would have been if these choices haven't been made. That's an open question, And now I think answering that question isn't necessarily relevant in the sense of the real question is can we price in the kind of negative effects of making these policy attempts? And once you've done that, can the policy choices you make to kind of ease
that get it better. So if we were to kind of fully price in higher recession probabilities, weaker growth outlook, and then some of these negotiations on tariffs workout, and then maybe we get a bigger tax cut, then we anticipate because right now we think it's going to be mostly an extension of the TCJA.
Those things can.
Be positives on top of pricing in negative outcomes. So I think we to go through the praising and the negative outcomes first.
Yesterday there were a lot of historic kinds of comments, a lot of catastrophic rhetoric see changed the loss of US exceptionalism. Did you take comfort in the fact that treasuries rallied and John mentioned this earlier that even though people were talking about boycotting US goods or boycotting the US dollar, you did see yields go lower as a have in trade.
I mean, it was obviously incredibly large in liquid market, and it makes sense that in times of uncertainty, where growth expectations are weaker, that you'd be buying more treasuries. I think that to us was sort of never in question. I know there are sort of hypothetical longer term concerns. But that's why we've had this preference for fixed income over equities coming into the year and then throughout all of this and think that's still the way to be positioned right now.
That's the silver lining for me, And I wasn't your base case, but I'd be extremely worried if we woke up one morning and you had all those people that were running around saying we're going to see an exodus of money from the United States. People are going to dump dollar denominated assets. They're dumping equities because that's associated
with growth. I don't think it's a sign here that they're dumping dollar denominated assets because of the policy volatility, because that would show up in treasuries too, and that is what would really concern me. And that's the silver lining I think from the cross asset price section of the past twenty four hours or so, then at least.
The United States is not acting like an emerging market in this respect, because that's exactly.
The dollar weakness.
But the dollar weakness accompanied with a bond market sell off would be getting my attention in a much more negative way, and I think it would get the federal reserves as well.
We're a far way away from that, and the United States still is the dominant market, which goes to this idea of how do you get perspective at a time of a lot of superlatives.
Let's hope we never see that. Let's be very clear about that. Michael, thank you. So it's good to see Michael sees are there of Morgan Stanley. This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, antient 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.
Mm hmm