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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. The payrolls report comes
in at three hundred and three thousand. It's a big upside surprise again, two fourteen was the estimate. If you work your way through the report, the unemployment rate comes down to three point eight percent, down from three point nine. Average AULIY earnings month over month zero point three, in line with the estimate of zero point three. The equity price action looks like this. We're positive a third of one percent on the SMP. We'ret by zero point four
percent on the NASA. The bomb market price sanction, if you switch on the board, looks a little something like this. Yields up by seven basis points on a ten year getting close to the four forty again after breaking through that level earlier. On this week, the two year yield high by four or five basis points, getting very close to four seventy. And I'll give you a snapshot of foreign exchange off the back of this. I'll make it simple.
Dollars stronger against absolutely everything in G ten. You're a dollar at the moment, one away fifteen to break down and react to some of this, some place to say that joining us from black Rock is Jeff Rosenberg, and joining us alongside him is Muhammad ol Area Mohamma. You've had a bit of time to chew over this one. What's your big takeaway?
John?
It is a job report that confirm US economic exceptionalism. You're having a strong supply side, strong demand side. So if you look at the economy, the economy continues to benefit from.
The favorable supply shock.
If you look at the FED, that's not going to change much what the Fed is thinking. And believe me that the administration will be celebrating this report. So overall, a very strong report that just confirms that the US is an economic exception among the advanced economies.
Jeff Rosenberg, do you believe this labor market report is a report this Federal Reserve can fully embrace.
Well, it can fully embrace it, but you know, it is a little bit challenging around the timing issue.
I think the key thing in this report we.
Haven't talked about is labor force participation and its impact offsetting some of the wage concerns. And I think that's kind of the good news. Lisa, you asked why a little bit of a more modest reaction out of the bond market for such a headline beat, And I think that's it is that you're seeing kind of the well, it's a strong labor market, but the wage picture isn't, at least in terms of what you see in the print today, ticking up beyond expectation, so that relieves a
bit of fears. And then you look at that labor force participation rate chicking up. That's good news for the wage front.
Given all of that, though, Mohammad why cutt, I'm going to go back to what Neil Kushkari was saying. Given the fact that the US labor market seems to be doing just great, what is the onus on the federal reserve to ease policy that does seem like it's hampering this economy.
It's because policy acts with a lag. These favorable supply sharks are not going to last forever, and there are signs of weakness elsewhere. So you've got to navigate this. You know, you've heard me say this over and over again. The mistake the FED will make, if it makes a mistake, is being overly data dependent, becoming a play by play commentator, and not looking through various things.
So you've got to look forward.
Yes, we're having a wonderful supply shock has a lot to do with immigration, and that's why, as Jeff Wrighty says, the wage numbers are restrained. They're still not low enough, but they're restrained. But if you go forward six twelve months, you've got to be conscious that a lot of what has powered the US so far, including excess savings, is going away.
Jeff, what's your take on that. The argument that Neil Kashkari made yesterday, if the Minneapolis said, why cut rates if you have robust economic data and a label more mar that seems to be chugging along, especially if you do have commodities inflation that people can afford to keep paying because they are still employed.
Yeah.
I think it's about really the debate between what I call and the market calls maintenance cuts to maintain the degree of restrictedness. What Muhammad was talking about that you don't want the lag in policy to eventually become too restrictive by holding real interest rates at these high at least relative to historical levels, and the threat that that made down the road lead to more tightening than what you would otherwise want. But that's different than saying we
need to calibrate the cuts to a slowdown. And I think what Neil Kashgari is talking about is really pricing out really what already happened in the bond market. We came into the year pricing in seven cuts, we're now three, maybe pushing down somewhere between two and three.
I still think that's.
Right in the sense of you want to have that insurance, and this is a FED that is very much wedded to trying to secure the gains of the soft landing.
Jeff, how dependable do you think this economic data is. That's a subject we've revisited a few times over the last few months. How dependable do you think it is?
Well, you know, it's really interesting.
The back dropped what's going on in the movement to reprice away from seven cuts to three cuts is that you had this debate between two big sources of data, both for growth and for the labor market. On the growth side, it was the debate between GDP and GDI. GDI had been lagging the strength that was shown up in GDP that gave a lot of people in the market a lot of evidence that, hey, this economy is a lot weaker than we thought.
What did we learn.
Most recently, GDI rose to GDP and validated the stronger story. Similarly, on the labor market, you had the gap between the household and the establishment survey and a lot of people saying, oh, the establishment survey, the headlines is overstated, look at the household weakness.
Well, now what we're.
Seeing, and that's the latest theme is no, it's the immigration that's not being captured.
The labor market is much stronger.
So in both cases, with respect to alternative data, you had a debate. That debate is pushing more on the settle of the side of no, this is actually a stronger economy than we thought, and that's what's validating this kind of move to push back from seven cuts to three or less cuts.
It's the supply side story. I think we all struggle with Mohammed when you restart to think about it. What the Federal Reserve is telling you is that basically, don't worry about strong data like payrolls growth of three hundred and three thousand, because it's not coming along with stronger weight growth off the back of that. Because we're embracing
this big supply side phenomenon. At the same time, ihmbit, they're also pointing to the labor market as evidence they are sufficiently restrictive, and I struggle to reconcile the two things. Can you reconcile the two things? How can you use something as evidence of being sufficiently restrictive but also acknowledge the majority of it is supply driven.
Because they're trying to have maximum optionality John, and that's what they want. It's the same thing that led Chair Pale at Stanford to say, on the one hand, the inflation story has not changed after the harder than expected prints in January February, But on the other hand, we need better, we need more evidence that actually the inflation story is what the inflation story, what we think the inflation story is. Look, I would be doing the same thing.
They are trying to maintain optionality, and they are having competing claims. Also, don't forget that the positive domestic supply side story is countered by a very negative international supply side story, so they've also got a balance these to things out.
Mohammed, I obstruck by what you said a while back, where you were saying that this is going to be a federal reserve that ultimately will probably accept a two
points something inflation rate. If you take a look at the preliminary bond market action after this report, and understanding that the first reaction is always the right one, this bigger cell office in the long end, this is basically a kind of confirmation that this market believes that the Fed will make good on its promises, actually that it will cut rates at some point this year, will allowing inflation and growth to continue to run at a somewhat
hard speed. At what point does that become concerning to you, Muhammad?
It only becomes concerning Lisa if it the anchors inflation expectations. I think there is a slow but show migration in markets, even among policy observers and certainly among quite a few economists to the view that yes, we're not going to get to two percent, We're going to get to above two, closer to three, and that's going to be stable. And the policy mistake would be to go after two percent
inflation too quickly. You heard Bill Dudley yesterday and I agree with him saying, you know, think more about a two and a half percent inflation weight on average. You've heard about how asymmetrical defeat is to when it misses on one side or the other side on inflation. Look, we're going to settle into an inflation world that's higher than two percent, and I suspect that that is stable.
The risk is to try to force it down when the economy can sustain a slightly higher one, because you're then undermine economic well.
Being, Which raises this question, Jeff, about at what point the bond market will adequately price in a higher inflation future. John was talking about the BEMO survey and how there essentially is an inherent bias among bond investors to buy duration, to buy longer term bonds on selloffs, just simply because they believe the FED will achieve their goal and will
continue to set rates at a lower rate. How much can you get behind that and how much do you push back and say, no, there is something else afoot in the long end of the treasury curve that makes you not like them.
Yeah, I really think that with rates at this level, that we're going to shift away from that view that the long end is the best place for the hedge. You know, it used to be a long time ago that flight to quality meant that the curve would steepen, that the best performance in terms of yield change would be in the short end.
And I think that's the environment that we're in.
If you go back a year ago during SVB, it was exactly what you saw happen in the curve. The best performance in terms of yield change for your hedges, you know, granted that you need to have the right notional amount to make this a fair comparison, happened in the front end. The strongest negative stockbond correlation by bond maturity was in the two year, the weakest was in the thirty year. And I think that's the environment that we're in, and as we start to see more evidence.
Of that, that's going to help.
If you will to bring back in some term premium because part of the flattening of the term premium was the pinning of zero interest rates in the front end, which meant that a flight to quality had to be in the back end because you didn't have the room
to run in the front end. With a level of front end inversion that we have today, you go back to that earlier kind of textbook that flight to quality is in the front end and a steepener, and that I think is going to help to bring back a higher level of term premium, more consistent with the inflation narrative we just heard from Muhammad.
Interest In Jeff, before you go, I want to talk about Stokes with you sell. Just to put a bow on it, is this a stock market front of the Job's report this morning?
You know?
I think it's it's okay.
I think when you look at the stock market, what we've seen this year is a lot less.
Dependence on the denominator. Right.
It's last year was all about inflation, inflation expectations, the five year, five year driving headline equities. You've seen a lot less of that. So I think it's less of an issue because so much more of what we've seen in stock market domination is really coming out of the numerators, coming out of the earnings. The power of secular growers really overwhelming the much smaller concerns in terms of the degree of change that we're seeing in terms of the denominator.
Jeff, this was great. I know you've got to run because you're at work today. We're not all in Lake Como. Jeff Rosenberg of Blackrock has got to run. Mohamma's going to stick with us in place to say if you aren't just joining, I guess We've got the brilliant Mohamad eleven of Queen's College, Cambridge alongside it is to break down this job's report, Mohamed, let's get into a piece you wrote earlier this week on American exceptionalism for Bloomberg Opinion.
You've mentioned that a few times, Well, it didn't mention was something you pointed to in the pace and really really highlighted, and it was a difference between what's happening in Germany versus what's happening in the US bond market. How important is that spread between the two of the moment.
It's important, and it's the reason why you seeing the dollar strength, then look, John, it's gone up to about two hundred basis points. If you look at the last three years, the low was ninety seven basis points.
And it reflects two things.
One is that US economic growth has and will continue to outpace Germany's and the rest of Europe. And the second thing is that inflation will come down in Europe faster than will in the US. And you may well end up with more ECB cuts than the FED, even though the ECB didn't hike as much as the FED. And I think these the markets are starting to incorporate these two things, and that single differential captures really well these different factors.
Yeah, I'm struck by the idea that the US immigration story is so different from other areas around the world that are facing real demographic problems, like the euroregion. From that point of view, when does the euro become a problem in terms of a weakness and an important inflation issue or is that almost a welcome development so that the European region can compete against American exceptionalism.
It would be at the margin welcome. That I think more concerning is what's been happening to oil prices, and that's something we don't talk enough about. But when you see Brent in the nineties that is going to have a stackflationary impact on Europe. You know it's good to
come and visit and participate in these European conferences. And the one here at Umbrosoti is excellent because you hear a completely different narrative about the economy, about what's happening to the supply side, and you realize how exceptional the US is right now, and this divergence is not just going to stay, It's going to increase over time. And that's something important when people want to rush to fade the US in terms of equity allocations elsewhere, just look at the underlying stories.
They are very, very different.
Lisa, Well, just to put together some of the things that you said, Given the fact that we are seeing oil prices rally, are you saying that that could be a staideflationary shock for the European region and that frankly could only widen the divide between Europe and the US. It also stands to benefit on the other side from higher oil prices.
Yes, I mean I wouldn't say shock as much as I would say is techfilationary headwind? And it makes a transition that Europe needs to make, which is the US is making from an old, exhausted growth model that depended on exports to China, that depended on all sorts of things that are no longer happening, to a new growth model that stresses things like genitive AI, life sciences, sustainable energy.
It makes that transition for Europe even harder. So yes, it is an important factor to keep in mind because Europe doesn't need additional headwinds right now.
Mohammed, we'd love a final thought on what we got this morning and what it makes the FED policy. This from Torson Slock of Apollow. He said, the source of this strength is easy financial conditions. We are sticking to our view that the FED will not cut interest rates this year. Mohammed, what's your reaction to that? And do you agree?
So I understand where he's coming from. Me even had a non voting member of the FOMC as today role market by a statement. I think that if this FED is continuously overly data dependent, then maybe we don't get cuts. But I'm hoping that they will see through the backward looking data and look forward, and I think we will end up with two cuts this year. It may not start as early as a lot of people thought initially, but I do think we will get two cuts.
Muhammad, this was great. Thanks for making time for us today. We appreciate it, as you often do. On pay Ross Friday, Mouhammad, Aaron of Queen's College, Camper's working through another upside surprise Lisa on the job's report Stolenberg, NATO Secretary General joins us. Now, mister Secretary General, want for to catch up with you against I just wanted to stand with some comments from the French President Emanuel Macron, a series of comments over
the last month. I'd love your response to He hasn't ruled out eventual boots on the ground in Ukraine. He recently suggested sending personnel there, including the possibility of training troops in the country. I just wondered have you spoken to him directly about some of these proposals.
I'm a regular contact with the French President and all.
The leaders in the NATO alliance, and what is clear is that NATO has all plans of deploying combat troops into Ukraine, but we will step up our military support to Ukraine with ammunition, equipment, weapons, so Ukraine can liberate more territory and Kraveilia and as a sovereign independent nation in Europe, because that match for Ukraine, but it also matters for all NATO allies.
So could I be more specific sending person out there to train troops? How risky is the training option in your view?
Well, again, as we are providing.
Training, NATO alas are providing taining for tens of thousands of Ukrainian troops, have done that for many years, but that space now outside Ukraine. So our support is to provide training, it's to provide amnition weapons, but not to have combat operations inside Ukraine.
I want to also ask you about the fact of the former president coming back that's looming large on some of these partners within NATO, especially when it comes to the Ukrainian Defense Contact Group, which is run by the United States. Is there a chance you bring that in house so that NATO controls that and pretty much safeguards it no matter who runs the US.
Well, we are we agree that the NATO Forum and is still admitting this week to start planning for a stronger native role in providing and coordinating support to Ukraine. The US said contact for Ukraine has played and contains to pay a very important role. But I think that NATO can ensure that we have even more robust and more predictable framework for our support to Ukraine. That's needed because Ukrainians need to know that we are there for
the long haul. So that's what we're starting to do at NATO, and I expect the decision before the NATO seventeen Washington in July.
Other other areas you're trying to shore up NATO control because you are concerned about political instability.
Well, my proposals on a stronger NATO role is based on the situation on the battlefield in Ukraine, the urgent need they have to have more reliable, more predictable support, the need we have within NATO to ensure more fair burden sharing among allies. Nineteen nine percent of the military support comes from NATO, and we how to be sure
that bern is shared equally among allies. And then of course we also need to send a message to Moscow that we are there for long hauld because now Preston Puttin believes that he can wait us out, he has to understand that he will not win on the battlefield.
He cannot wait out Ukraine and NATO allies and therefore stronger institutionalized NATO framework will send that message and then force him to sit down and negotiate an agreement where Ukraine pervades as a severn independent nation in Europe.
Secretary General, we talk almost every morning about the potential for Ukraine funding in the US to be passed, and how it's gotten hung up by politics again and again and again.
How difficult does.
It make it for you to wrangle support to get to one hundred billion dollar fund that you plan for the next five years for Ukraine.
Of course, it matters that the United States has delayed its decision to provide support to Ukraine. That's one of the reasons why the Ukrainians now how to ration the number of sho their forces can use, and why Ukraine is outgunned by the Russian forces. At the same time, we have to remember that European Aals and Canada are providing roughly fifty percent half of the military support to Ukraine.
So it's not only the United States, it's also ordnate to allies, but of course the United States being by far the individual ally which is providing the most.
It matters and.
Therefore, I really hope that the US Congress can make a decision as soon as possible. This is important for Ukraine, but it's also in the security interest of the United States to prevent President Putin from winning, and that will send a message to him, but also to President g in China that when they use military force, when they invade another country, when they'reviolet international law, they achieve their aims. That will reduce the threshold and the future use of force.
What happens in Ukraine today can happening how long tomorrow. So therefore it is in the national security interest of the United States to provide the military support to Ukraine.
Secretary General Henry was talking about former President Trump coming back to power and how that's looming large, and I wonder how much those criticisms are also looming large that are not just isolated to Donald Trump, but others as well, saying that frankly, a lot of NATO members have not contributed enough to the spending and to the financing of some.
Of these efforts.
How much reluctance are you hearing from some of the NEEDO members that haven't traditionally contributed as much to really helping fund or disproportionately fund that one hundred billion dollars.
So I strongly believe that it has been a valid point from the United States that European allies have not invested enough in NATO in the events, but that has really changed. We made a pledge in twenty fourteen Whenson Obama was person to the United States to ensure that all allies spent two percent of GDP on defense. At that time, in twenty fourteen, only three allies spent.
Two percent of GDP on defense.
This year we expect around twenty allies two thirds of the allies to spend two percent. That's a huge difference. It's a significant improvement. And when it comes to the extremony for Ukraine, one of the reasons why I want a stronger NATO framework, institutionalized framework around the support is that that's a way to ensure fair burden sharing, to actually agree some kind of cost shares or to agree a way to finance.
And by doing it.
We can ensure fair burden sharing and that and that makes it easier to get all ours on board also the United States.
Secondly, general, we appreciate the ongoing conversation. Thanks for joining US this morning's in Stalldenberg there of NATO. This is the Bloomberg's Events podcast, bringing you the best in market, economics, a geopolitics. 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.