Bloomberg Surveillance TV: April 9, 2024

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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

Good morning John.

Let's get into that line from mister Bullard. He's left the FMC. You can speak a little bit more openly as you can as well. Your base case is still too. When do we start to see another bump in the road together with all the other bumps in the road no longer be called bumps in the road on the FMC.

I think it's going to tag time.

I think Chair Parlers media rig clear that he's willing to look through these bumps to use his phrase, the inflation story hasn't changed, so they will need overwhelming evidence that it is more than a bump in order for them to change their views.

You think that's too sensitive to recent data and maybe not being strategic enough.

What do you mean by that? So I think if you look forward, and you talked about in the last hour about business confidence, if you look forward, there's reasons to believe this economy may slow. So if you're setting policy not according to what has happened, but according to the lags with which the policy operate, you would be more doubvish than you would be otherwise. If, however, you focus exclusively on the data, you'll end up being too hawkish.

You talk about small business optimism, let's go there. It came in at the lowest levels since December of twenty twelve. Sometimes it's hard to know how to read some of these gauges, especially because we get people on all the time saying they're all broken. How important is this in contrast with all of the bollishness and the momo and the fomo and the world that we keep hearing, this is really important.

The big mistake that was made in twenty twenty one when people embrace the transitory narrative was they didn't listen to the companies, and the companies were clearly saying, we have inflationary pressures in the pipeline, we have pricing power, We're going to pass on that important inflation.

I feel like that was coming.

In this time around. Listen to the earnings call, and they are worried about the outlook for the rest of the year. So I do think you need to listen to them because often the aggregate data doesn't capture what businesses are feeling on the ground.

When you say businesses, though, we're going to hear from JP Morgan, and my guess is that Jamie Diamond was raising some concerns more generally in sort of a broad macro level when he talks about his own bank. My suspicion is that he's doing quite well and that the bank is probably issuing another record quarter in one way

It matters because they're also employees. Everybody should read Jamie's letter.

Okay, I've read it.

I've gone through the sixty one pages. There's so much content there. You should read it. And he has this situation whereby he's worried about the world. He says, looking forward, all the things I'm worried about, sticky inflation, slowing economy, a completely change in global economy. But his bank is extremely well positioned to take advantage of this world. Why because they've got a very solid balance sheet and they

You believe that the third should cut rates even if you're not seeing necessarily a commensurates slow down. Do you think that the risk of a reacceleration inflation is overstated by.

Some So I don't know how often I've said it here and elsewhere. Inflation will be sticky. Inflation will be absolutely sticky. We're going to get stuck around two and a half to three percent, And I do think that that actually warrants over the long term. The FED rethinking is inflation target. It won't do it now, but it may well tolerate it. And you've heard what's going on. Service inflation hasn't come down quickly enough, and guess what good deflation is going to stop.

So, yes, inflation will be.

Sticky, but that shouldn't stop the FED because the two percent inflation target is too tight for any global economy going through major rewiring, and that again is well discussed in Jamie Diamond's letter about this rewiring that's going happening in this global economy.

We're at risk of this conversation becoming very circular. But let's run with it. If they begin to show signs of tolerating higher inflation, and you've basically told us that you believe that maybe we're starting to see that shift based on the news conference we had with Sham and Powell only a few weeks ago. If we believe to see signs of that higher tolerance, doesn't that make it even harder to get inflation down? Doesn't inflation become even stickier?

So there's a difference between inflation expectations adjusting to two and a half to three percent and already if you look at the ten year break even, we're two point four, so we're not that far already, and inflation expectation being denchored. There's a fundamental defence between the two. I do believe that you can do it with that de anchoring inflation expectations.

Whatever happens, this equity market's rallying. That seems to be the case at the moment. So we've had bank failures, high rates, geopological problems that we've had two hot wars, you've got sticky inflation, got people talking about changing inflation targets, and your equity markets are still absolutely ripid. Why do you think and what do you think underpins our ability to brush aside issue after issue in this stock market.

I think it boils down to three things, one top down, one bottom up, and one behavioral. Top down is that economic activity has surprised around the world, has been better, including in Europe. Europe didn't fall into a deep recession. Do you economic exceptionalism continues day after day. Two on the top down is policy people truly believe. And you heard it again this morning on your show, in the first hour. You heard it on your show, not the second,

I won't ask you to translate world work either. I will ask you to respond to this quote from Chris Harvey as well as FARG you touched on this issue that we're discussing right now, and your piece in the FT early this week. Very is Harvey's put out this quote. The bill market, AI secular growth story and index concentration of shifted investors' attention away from traditional valuation measures. Are we saying that valuation metrics don't matter in a market driven by themes like this one?

Yeah, I think they've been suspended for a while, and we've seen it before. It happened in tech, it happened for Amazon, where people basically suspend their conventional wisdom about this. I think what's what I was trying to say in my piece is look longer term, and you've got a factor in that the world is changing in a way that the markets right now not even looking at You know, we used to have three really important tenants. One at the domestic level, this is these are economies that will

Tools.

So fundamentally, if you'd look at three to five years, this is changing. But right now, the short term factors are so strong that people should maintain this. And you had earlier on the show someone releasing a momentum vehicle, and what does that do? We overshoot on the way up, and we overshoot on the way down.

MOMO stands for more momentum. Just briefly, just before before we move on. I do want to get a sense. Are you concerned about the auctions at all? Do you watch the auctions?

Do you care about them? Do you think that they.

Actually could potentially influence markets?

I do, and I do, and I do because your discussion about gold earlier is not just about inflation. It's also about central banks around the world looking for alternatives to the dollar. So yes, we are going to have in October. The discussion was who was going to buy this massive issuance that's happening. And I think you've got to keep an eye on all three auctions this week.

Of course we got time we can talk about this. You went there gold. You believe that underpinning of the old time highs is maybe central bank's trying to diversify away from dollar denominative assets. Is that what you think is going on?

You have the data's out central bank buying is very active China in particular, has been adding month after month after month. Look, if you are outside the US and you've witnessed the weaponization of the dollar, you will ask yourself what can I do at the margin. You can't do anything major, but you can start doing things at the margin. And I think central bank's buying of gold is indicativele okay.

Is that because of the State Department or the treasury? Is that because of issuance or sanctions? Which one is it?

It's mainly because of sanctions, but also issuance plays a role.

Do you think that now that almost this cat is out of the bag, what the United is willing to do? This means long term de dollarisation.

So digitization is a very strong term because you cannot replace the dollar with something else. But the image should have is people building little pipes around the dollar. And we've seen it not only in how they hold their reserves, but also in trade. People have been shocked how Russia has been able to trade as much as it has while being out of swift. How has it done that? It has built a very clunky, inefficient system, but that it works that involves four currencies and never anywhere near

Is this next week's f take on them?

Just figuring that.

No, now you have to ask how to find it.

All.

The standing set company joins us now to talk about a few of these things, and Seth, it's going to say you, sir, I want to begin with immigration into the United States because the numbers are absolutely stunning. Could you frame how big those biz and the kind of forces there having on the US economy?

Yeah? Thanks, Jonathan.

I think even before we get there, I will say I'm I'm a window seat guy, so if you still think about swifting themes, stay with me in the window seat. That's sort of where I fight you for, Seth, sleep first, sleep primarily exactly.

No.

But on immigration, the numbers, the numbers are really big, and here big shout out to our US economics team led by Ellen Setner. We spent a lot of time with folks in Washington at the government agencies looking at these numbers, coming up with our own take on the new information that's available, and I think the takeaway really is huge increase.

In the number of workers in the economy.

If you thought that the break even level of job creation each month had been about one hundred thousand per month, it's at least twice that, And I really do mean that's a big change. And so as a result, you hear comments like char Powell saying it's a bigger economy, it's bigger labor market, not a tighter labor market.

We're very much in line with that view.

So it's non inflationary in the labor market. Is it inflationary more broadly in the economy. Set the additional demand, the additional competition for housing, how does that play out beyond just the labor market.

I think there's no doubt that there's both an demand component to this and a supply component to it. But what we have to remember is on the inflationary side of things. This is all playing out against a backdrop where consumer goods inflation and level terms have been boosted so much because of supply chains and the ships we saw during COVID, and those levels are coming back into place. And then we saw rent inflation that had jumped up

So that I'm struck by how much fiscal policy, just more broadly and frankly, federal policy has driven so much of the story. It will continue to in a way that makes it very difficult to predict. I think about not just the immigration story, but also the fiscal deficits that have been incurred as the government has given all

I think it's impossible to ignore.

It's clearly going to be a critical question that everyone's going to see what happens in November. Who wins the White House, who wins the Senate, who wins the House of Representatives, and what policies are being pushed the House you now and Morgan Stanley from our public policy team is Democrats' biggest priority of time has been.

Infrastructure and green energy.

The IRA is in place and so a big extra boost for spend probably isn't there. And for the Republicans, the Tax Cutting Jobs Act biggest priority that was already put in place, so probably not another huge change there. And so we are thinking the Democrats, you get a bit more in terms of spending, you get a bit more though in terms of tax increases under Democrats, whereas for Republicans, if it's a sweep, you get some tax

But we cannot cannot rule.

Out the very likely possibility that we get the White House controlled by one party and Congress either split or controlled by the other party, which just adds another layer of complexity.

But even if the white House is controlled, say by a Republican, and there's a split within Congress, potentially we're going to get higher tariffs. Trump two point zero can do that pretty much in a latterly and restrictive immigration. What does that mean for inflation?

Great question, and I think it is exactly the sort of scenario everyone, every investor has to be thinking about right now. I think tariff's no question on the table. Former President Trump has referred to it explicitly, and there I think we have to balance what we know has happened in the past, which is to say, a bit extra cost for importers, some of which gets translated.

To final prices.

However, we also know that last time it was a massive hit to the US manufacturing sector, and so as a result you'll get an adverse hit to growth, and so that goes in the opposite direction for inflation. When it comes to immigration, that's the tricky part. If we look at some of the projections, we look at the CBO's projection, already some reversion back to pre COVID rates of immigration, and so I think the real question is

Less of that aggregate demand.

But it's coming at a time, say in late twenty twenty five, early twenty twenty six, after a new administrations in place and policies have time to take effect, where we already have most of the inflation rung out of the system by the Federal Reserve under our forecast and under the Federal reserves forecasts.

So seth that's sort of the longer term view that any of these policies wouldn't necessarily filter into true economic data for a while. But do you see some of these proposals as spurring a market reaction that could materially shift the economic projection? For example, if you did get the scenario that Amrie was talking about with higher tariffs, lower immigration, could yield spike to a level that could be really problematic.

For the economy unquestionably, And I will say one of the most common sets of questions that we have from clients are exactly along these lines. Would that scenario, the Republican scenario, be very inflationary? Would it cause a further sell off and rates? Lots of people are angling now and trying to see if they need to position for that.

How do you then plan for what the FED is going to do in twenty twenty five.

I think the FED right now is at a place where they are taking it one meeting at a time and one data print at a time. You reference at the beginning Jim Bullard's comments about taking the Fed's baseline path at face value. We actually have in our base case for rate cuts from the FED this year because we're looking for inflation to keep coming down, so we're

In immigration has been.

That I think the Fed themselves don't really put much stock whatsoever in they're own forecast for policy for next year.

Seth, Are you still sticking with that mid ninety story?

The nineties were great, right, So that was when I became a real economists. Graduated from college in ninety two, got my PhD in ninety seven, so that's where I became an economist. Look, I don't think any two cycles are exactly alike, and you can't take one cycle and use it as the template for the next. However, lots went on in the nineties. We were still seeing the rise in labor force participation, so there's a bit of that apply side to the story. There was an overall

A chase value A president for the unprecedented. Enjoyed the note over the weekend. Seth, thank you, sir, Seth Carpenter there of Morgan Stanley Silly Stuart Kuys have writ in this CPI should prolong a solid macro setup that allowed a low volatility six month equity rally. We remained positive on US equity risk reward after very strong labor data, and we're encouraged by markets rallying from early quarter wobbles. Stuart, I'm pleased to say it's with a surround the table,

I mean, I think what you've learned is just when the economic data is doing what is doing, the markets are going to sort of behave accordingly.

You know.

I know there's a lot of concern out there valuations high, volatilities low, and that means we need to sell off. But I think the fact is you've had very strong growth, inflation's easy, not as fast as you might like, and equity markets are responding by low realized volatility, and that's kind of the situation we're in right now.

Can Smorrows like to change that story?

It could.

I think you would need a pretty significantly high print. I mean, it's going to have to round a point four at least, or you're going to have to have internals to the inflation data that are particularly kind of troublesome if you print down a consensus number. I think a census is twenty nine basis points. City us econ is thirty three basis points. I think if you print a number like that, equities are going to respond modestly positive.

Compelling, given the fact that this seems like could be another bump in the road that leads to this question of whether we're not getting it right. How far could momentum go if this is an inline print. We're just talking about Chris Harvey upgrading his forecast to fifty five hundred plus. We were talking earlier about the ideal with Chris Faron of sixty one hundred. Are you getting on that train?

I don't know if I'm on the sixty one hundred traink way yet. But look, I think coming into the year, we basically said, if you avoid a recession and the FED starts doing insurance cuts, you know, the top end of your outlook has to be quite high. And I think if in that type of situation, yeah you're talking high five thousands to low six thousands, must say we're going to get there. But that is where the sort

This question that Mohammed was talking about, which is that momentum feeds on itself. We talk about new vehicles being created to funnel more money into momentum trades, and that things that overshoot on the way up overshoot on the way down. Do we have a sense of where we are in that is that sort of are we halfway through the overshoot? Are we just beginning it?

I mean, I don't know if we're ever shoot at me. I think in my view the stuff that is momentum leadership should be momentum leadership. These were the stocks last year that were the small group of companies that were generating ernies growth, so they outperformed and that kind of becomes momentum. The momentum trade right now is a little bit tricky just because the long end of it is very tech heavy. The short end of momentum most people trade that long short is utilities in real estate and

So staying on momentum, there's suddenly a lot more interest on commodities and the sort of price increases we're seeing significant and broadening. How does that feed into inflation storing, particularly both the first round and second round effects.

Look, it's very important, Mohammed, I would say, you know, we would like kind of categorize in three spots. You have the copper part. You know, copper is very growth sensitive. As you know, I think equity markets would read high copper prices probably isn't positive because it suggests a growth impulse.

Gold. I'm not going to get too much into gold. Bugs have a lot of reason that they want to own gold.

There's a big central bank story there, so it's a little hard to dissect what's exactly going on in the gold market. And then you've got oil, and oil is I think the one that if it continues to rally, it's the most troublesome from an equity perspective. There's obviously a big geopolitical aspect to that as well. I think most investors in the US said, unless oil starts to move, I'm going to kind of ignore what's going on in

Can we just sit on there for a bit longer? Does the crude move just sort of address itself, hits growth crude rolls over? Is that the way you would view things as a policy maker, just from the outside looking in.

Oil's been a tricky trade the last twelve or eighteen months. I mean, if you told me you were going to have, you know, Russia Ukraine war, You're gonna have war in the Middle East, You're gonna have OPEC cutting production. I think most folks would have expected oil to be able to maintain in a higher price for a more significant period of time. The fact is the US is producing a ton of oil. There's probably a lot of discounted oil being bled out of Russia to other markets, so

I think 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 Amp.