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Terminal and the Bloomberg Business App. Peter Ropenheimer of Goldman Sachs writing, it's possible the terriffs could hurt equity prices even if the US agrees on deals with key training partners. Peter joins us now for more. Peter, Welcome to the program, sir. Before we talk about the risk, let's talk about the price. The rally we've seen on both sides of the Atlantic, on the S and P and the eurostocks fifty of close to something like nine percent. Peter, when you break
things down, let's just talk about breath. Compare and contrast the story in the States to the story you're witnessing in Europe.
Well, very different story. At one level, it looks very similar. As you said, both markets are rising, but they're rising in different ways. The contributions are quite different. In the US, very much driven again by the power of the biggest
tech stocks, which are really leading the market. As you say, smps are an all time high, the median stock is around twelve percent below it's fifty two week high, so very very concentrated, whereas in Europe, actually there's significant breadth, unusual breadth actually in the market, and you're seeing much much less concentration, although of course you are seeing and have seen stocks that are disappointing being very heavily punished, and that's happened on both sides of the Atlantic.
So let's just pick up on the US TEK story and the narrow breadth that I've heard so much of that I'm sure you have as well. Whether it is necessarily unhealthy. If I think about the dominant risks of the moment, they're largely cyclical, they're related to trade, and in many ways some people might look at the US DOT market and say that's a source of stability, not necessarily downside risk. How would you counter that look?
I think it's right that, you know, if we step back and think about economies which are still growing, albeit at a slower pace, certainly in the US, but interest rates coming down, that's broadly a supportive environment for risk assets. And the fact that in the US the tech heavy largest companies have been dominating the rally is a function of their very very powerful, continued profit growth. It's not been about speculation. It's really been about very very strong fundamentals,
and there's nothing wrong with that. The only problem, of course, is that after you get an increasingly concentrated market, it becomes harder to diversify risks, at least domestically, and that's one of the reasons why we've been arguing that investors should take a more open mind mind a view of diversification geographically to improve risk adjusted returns.
Well, Peter, where is the opportunities in Europe? Because I'm looking at the Bank of America fund manager survey out of Europe and they say European investors thirty five percent expect stronger European growth over the coming twelve months. But it was forty four percent last month. So isn't that European story actually starting to dwindle a little bit.
Yeah, and we've seen that to some extent in the relative performance. Very much the first part of the year, Europe outperforming both in terms of underlying assets but also on a dollar adjusted basis. As the dollar weakened and that differences moderated to some extent. But I think it is right to say that from a very low base,
European growth is improving somewhat. An important driver of that is the expansion of fiscal policy coming from Germany, and we do also have a couple of other themes that are encouraging intro particularly increased defense spending which is powering ahead, more infrastructure spending across Europe, and also some of the value areas of the market which are doing really very well, banks being a perfect example. And I would say that
is another difference between Europe and the US. The US is still being driven by growth dominated themes, particularly related to technology, whereas in Europe and some other markets, value is actually outperforming.
The risk of tariffs, though still exist, and the team at Goldman Sachs had a no doubt about how the impact has yet to hit consumer prices. When it comes to tariffs, that hit is just getting started, what can this mean for Europe and some European corporate names.
Well, I think that it does complicate the picture because we haven't yet seen the full effect of tariffs on either side of the Atlantic, and it is likely to weigh on consumer confidence to some extent and the ability for consumers to continue to drive economic growth, and we're already seeing some evidence of that slowing, particularly in the US, and alongside it some weakness in the labor market. The offset, I think is that you will see lower rates, at
least in the US. We think for the ECB they're done for now. They've already cut rates more aggressively, and I think there's less room for that to continue given that we're going to see some effect of tariff still yet to come through.
You mentioned the rally we've seen in US tag validated by the earnings. The earnings have been really powerful. I believe you said the same thing for the banks and the run up we've seen in Europe. This rally of more than forty percent for European banks so far year today, has it been justified also by the earnings we've seen so far and the outlook coming from the c suite.
Yeah, very much so, and we have to emphasize that this is a huge turnaround from the trend that we saw really for a decade after the financial crisis, where banks came under huge pressure, particularly in Europe. They had to delever, raise capital, cut dividends, and although they were cheap in terms of multiple they kept on underperforming. But we've seen a dramatic change in circumstances. Now they have
strong balance sheets. You mentioned earlier that the credit cycle is benign, and more confidence in the economy means less risk of loan losses and credit losses and provisionings for the banks. And we have steeper yield curves which are very supportive of their profits. So in Europe, the very powerful returns that we've been seeing in banks is justified by very strong fundamentals, just as the technology companies have been supported by fundamentals in the US.
Can we just touch on the rates back drub for Europe? For a long long time they complained about negative interest rates. We got away from that. Now it feels like rates are started to come back down again, Peter. And maybe they don't stop at two, perhaps they don't stop at one. How important is the rate outlook? For the long story on bags.
I think the most critical factor is going to be growth. If we avoid recession, that would be our central view, then the risk of a provisioning cycle that could be damaging for earnings is moderated. Of course, what's been very helpful for the banks, and this has been true in many regions, particularly in Europe, is that yel coves have steepened.
We've seen already a lot of progress on short rate cutting by the UCB, but long rates have been edging up, partly driven by growing deficits and spending, particularly in Germany, and that spread has been very helpful for banks. It may moderate a little bit moving forwards, but I think if we continue to get economic growth, the outlook is still reasonably benign for the banking sector in Europe.
Peter Rockenheimer of Goma SAX Peter, I appreciate your time joining us Now is the former Boston Fed president Eric Rosengrant. Welcome back to the program, Sir, some healthy debate at the feder Reserve. Let's call it what it is. It is healthy. Do you think September is too early to settle the debate?
I think it depends on how the data comes in we have two CPI reports, one PCE report, and one employment report. Data can be pretty noisy, so I think we need to see what things look like as we get into September. But I agree that if the CPI and PCE are reasonably well restrained and the labor market looks sweet, then it would be appropriate to ease rates. However, it's also quite possible that we'll see a slowly increasing
inflation rate. I'm expecting the CPI will probably be the core cpi'll be above three percent when it comes out tomorrow, and if we start seeing numbers that look higher than the market's expecting, sentiment can change pretty quickly. So I
think it's a little too soon to call September. I think the Fed was acting appropriately when it wanted to wait and see, because right now, while the payroll employment was week, the unemployment rate was four point two percent, and the labor market has had a labor supply shock, So you probably want to focus a little bit more on the unemployment rate than the payroll employment numbers.
Eric, as you look at the dual mandate at the moment, and this really speaks to the divide of the Federal Reserve, there are some individuals who want to focus on the employment side of the mandate, others who still want to focus on the price stability side of the mandate. Can you share with us your experience. Did you prioritize one side over the other? Are they created equally.
So everybody can vote? And way I mean it's you're not given the waiting function, so each person can kind of choose for themselves what they think is most important at the time. But the framework document actually talks about what you should do when both elements of the mandate are not where you want it. And in that document it argues that you should look at how far away you are from where you want to be and how
long it'll take to get there. So on inflation, if you look at the core PCE, we're at two point eight percent, and most people think it's going to take quite some time for us to get back to two percent. If you look at the unemployment rate, we're right at four point two percent. So despite the weak labor supply that's been happening, the labor market doesn't look to be in that much trouble. You don't see initial claims rising rapidly. So while I know a number of participants at the
FMC are talking about concern about the employment mandate. It actually is exactly where they forecast they want it to be, which is at full employment.
Basically, what you outline there says that the Fed shouldn't be cutting just yet. So is there a bias to a weakening labor market?
So it depends on a forecast, and I would say private sector economists do not see a rapidly rising unemployment rate and do not see an elevated risk of seeing a risk session. So I would think the rhetoric around the labor market would be more consistent if the private sector was seeing more evidence in the data that the unemployment rate looked like it was going to rise, that
initial claims was going to rise. So I think at this case, at this time, it's a little bit odd to overweight the employment part of the dual mandate.
Eric, Can we just sit on the data and I want to avoid the politics. Don't worry about that not going to include you in any of that whatsoever. We're always dependent on the data, and there's been a question for a long long time about how dependable the data actually is, particularly the labor market data prone to very large revisions. We saw that last year, We've seen it many times in the past as well. Eric, how did
you manage that situation? Were you less sensitive to incoming monthly reads and knowing that at some point in the future they would be revised, How did you approach it?
So if you focus on a forecast month to month, doesn't matter nearly as much as where you expect things to go over time. And as you point out, the labor market data, particularly the payroll numbers, can be pretty jumpy. And the reason for that is not because anybody's manipulating it.
It's because they do a survey and if people don't fill out their survey forms on time, then in the revision they pick up the additional surveys and so depending on what the response rate is, and the response rate has been going down on many US government surveys, it becomes less accurate and the revisions can be larger as they get additional data. So you never should put too much weight on any one data point. You're really looking
for a trend you're not actually looking for. While Wall Street focuses on beating expectations and having a number, comparing the current number to what they expected, the central bankers should really be worried more about long term trends. So long term trends don't get affected as much by a single data point, so you should smooth through most of that data, and that's what most forecasts end up doing.
Do you think there's concern though, that now the US data is no longer considered the gold standard given the fact that the President ousted the commissioner of the BLS.
Well, it depends on who he gets who replaces at the BLS, but it would be very disturbing if you didn't have reliance on the data, and the US not just the BLS data, but the GDP data, the inflation data. All that data is critical to making good policy choices. And if that data is manipulated in some way so that you can't rely on it, it becomes very problematic
for policy. And while the initial changes are probably not going to be that noticeable, over time it can create havoc and I think you see examples of that or the Wall Street Journal did an article on what happened in Argentina when they started manipulating the data. China has been famous for dropping series that didn't work in the
way they were hoping so. For example, youth unemployment is not reported anymore on a consistent basis, but you see young people coming to the United States because they can't get jobs in China. So you can conceal to some extent data and for months to month you can get slightly better numbers, but over time, if you're manipulating, the data becomes obvious to the public.
Eric the President's nomination to fill Governor Coogler seat Stephen Myron, is an individual that is already working with him as one of his economists the head of the CEA. Less than a year ago, Myron was against cuts at the FED. Does he look purely political now, potentially to his new colleagues at the FOMC.
I think there is a consistency problem. He has traditionally been somebody very concerned about the inflation part of the mandate, and so his newfound interest in the labor market and the ne to lower interest rates looks somewhat out of character from what he was concerned about. Over time, he's written about being concerned that there's too much politics of
the FED. He obviously has been a strong proponent of this administration's policies and seems to be a proponent of lowering interest rates, which has been advocated by the administration. So if what you're looking for is an independent FED, he probably is not the perfect choice to ratify an independent FED.
Eric I appreciate your opinion. Thank you, sir, the former Poston FED president Eric Riisenkrant Henry to try to fight a pound it joined us. Now for more, Henrietta, can you think of another example of something like this plank out in your lifetime?
Certainly not at BIS.
Wendy points it out exactly, there's not another example like this. I think the most interesting way to look at this is to see the President sort of expanding out beyond something that was a very real concern for him on Friday, if you followed his truth social posts, it was very much about these court cases that are pending around the
AEPA tariffs. So if the President is going to be stripped of his authority to impose taris via EPA, is he giving himself some sort of additional leverage point with export controls and selling them to effectively the basic way of just getting trade flowing and having some sort of card to play with China.
I think that's an interesting angle to think about.
I think the AIPA court case story is the most critical here, and the President obviously was focused on that on Friday, and then this announcement makes sense in that context.
Henrieta, If you're in a C suite of a massive American company and you see what's playing out right now with Nvidia and AMD, is this a new risk that you need to contend with that potentially if you want to export your products to outside of the United States, you might have to pay the US government.
I think it's completely stands to reason, and every single one of these trade deals has some sort of pay mint component. And what happens is we get these original announcements and then they get materially walked back. So this one's pretty cut and dry fifteen percent in the event that that's where it lands. But think about the Japan deal, for example, the White House set that's five hundred and fifty billion dollars worth of investment that's going to flow to the United States.
We get ninety percent of.
The returns, But the reality is that only eleven billion dollars of that five hundred billion that Japan committed to is going to come from the Japan bank. Everything else is going to come from private sector that you have no control over. So there are these big numbers floated and then they're almost always revised. Another example, to give you another one down would be the gold tariffs that
are happening right now. This sort of rampant confusion before there's an ultimate clarity is really the prevailing theme of this administration.
Okay, but when you're talking about pay components, when it comes to other trade negotiators, it's about investing in the United States. That means money and jobs, jobs for Americans coming into the United States. This is purely about just paying some of your profit streams for chips that at one point you are already sending to China to the US government. How is this in line what the Trump administration and the campaign ran on.
Well, it's definitely not consistent at all.
Either there was a national security threat exposed to these chip sales, which is something that we've been dealing with for at least a decade, or you can just pay your way around it and it's no longer a national security threat. They are two mutually exclusive developments. And I think again it goes back to the president needing more chips in the China negotiations, because, for example, the export of US soy and agriculture.
Goods is down fifteen fifty percent.
In just the last six months, dropped from like eleven and a half billion dollars worth of sales to five and a half. The president needs more ammunition, and if he can somehow create a reliance, which is what we've heard from the Nvidia CEO on US chip sales, then that gives some additional leverage perhaps down the line, but it's definitely mutually exclusive to the national security argument.
How much leverage do they have right now Handwritter, I think that's worth exploring. If you look at the Chinese export numbers, they seem to be doing okay. The export numbers are up, the exports to just go into other places. Is this important to them in the same way it was maybe six months ago, maybe several years ago, four or five years ago.
Yeah.
Absolutely, And this is what you always have heard from China very consistently.
The United States is a bully, come do business with us.
We're seeing it operate in Africa right now and the EU and other nations in the Southeast Asian region.
And one of the things to.
Be mindful of as we get into this is that the president has threatened one hundred and forty five percent tires eighty percent would be the rate that goes into effect on August twelfth, that they don't reach a detant. But China plainly has the president in a corner around magnets and rare earths that debilitate the automate and defense.
Sectors win one fell swoop.
So the reason that the ninety day pause is the base case on the street is because the president threatened too much and he's not going to get it.
We don't have the capacity for that.
Goldman's coming out with you sixty seven percent inflation hike to the US consumer and prime prices being passed on.
We do not have that ability right now.
It's the same reason not to go to too many places, the same reason you're not saying the Russia sanctions go into effect. You cannot mess with oil and gas prices when we have this risk of inflation coming.
What would be helpful is if the Europeans another trade pound has gone on side with the United States to put the pressure on China's for the pressure on another trade pond. And do you see those pieces coming together anytime soon, I.
Don't, And think about what we have pending.
You've got Section two thirty two, pharmaceutical tires, automobiles, automobile parts, semiconductor chips, all those outstanding components. And the EU is not at all thrilled with the deal that was reached a couple weeks back with the United States.
So that block is fractured to.
The point where we don't even have legally binding texts, and we might not for months now. I don't see that coming around. We don't have Canada even, you know, so I think we're quite a ways away.
What kind of way does the US have when it goes to Brussels and say, really put the screws to China, given the fact that now the United States is saying, well, actually we'll send some chips that we thought were national security concerned, but you just have to give us some of the profit.
You know, this is really the underlining issue that all of our trading partners has had. Who is the ultimate decider? Where is the line in the sand?
What are we even negotiating?
And that's been a consistent theme that we've seen from Japan and Korea and the EU is what is it that we can offer, What can we commit to and write into legally binding text on our end that we can then go and operate with around the world. And that's not something that they have any ability to even get in the room in a timely manner to have that conversation. And there are so many outstanding issues, and I would just say one more time here, the market is not a the inflation is not a one and
done situation. We're still going to get lumber TIFFs on Canada on top of the ones that the President put into effect on Friday. We still have outstanding sectoral tire risks with all of these major trading partners from Switzerland to Ireland. There's no certainty here and I don't have any reason to think that that would end in the next three years.
Just briefly, how much money is coming in in the meantime, Henritta, Just how much we take it in month on month of the moment.
I think last I saw it was twenty seven billion dollars a month. So ultimately, this is a two point seven trillion dollar revenue raiser that the United States consumer pays for, and the inflation numbers are going to get compounded, because again this is not a one and done event.
Tariffs have increased at least a dozen times just in the last six months, and there are at nine on the horizon just in the sectoral tires, without even getting into three oh ones on Brazil or the AEPA tariffs and whether or not those can be maintained, and then we're going to throw export control restrictions on top.
There's a long way.
To god Trice if I'd have found us, henretta thank you and place to side. The man himself joins us. Now for more, Ryan, welcome to the program sir. Just describe if you can, the activity that you've seen over the past few months, the rush to secure air freight, all kinds of things. Ryan, what are you seeing?
Yeah, thanks for having me on.
Well, it's been crazy volatile ever since the Liberation Day tariffs were announced. You had immediately after that, you had a sixty percent decline in ocean freight bookings from China to the US that lasted about five weeks, so just a massive decline of freight coming out of China.
You then had, once.
The terrorists were relaxed, the surge to eighty percent above the pre tariff level of volumes. That's what I was describing in that tweet, And now now this I think that was from a couple of weeks ago, because things have been settling in and now we're seeing the real
effective terariffs, which is people shipping left stuff. Prices devotion freight are coming way down back to you know, we're probably over the next few weeks going to see prices back to levels that we saw we haven't seen since after the pandemic in like twenty twenty three, when prices
were quite low. So I don't know if you call that normalizing or just like doing what you would predict, which is tariff should lead to less freight, which should lead to lower prices, and it's not great for companies involved in the business.
Geographically, Ryan, what ports are dealing with really soft demand.
I assume that it's pretty evenly distributed across all the ports. I don't think there's a trend by poor It's actually one thing that has happened here is the airports because when the tariffs are announced with such short deadlines, you see this huge rush to ship air freight in and that sort of ended last a couple of days ago. At the end of last week when the new tariffs took effect, but in the prior two or three weeks to that, there was this huge switch between from ocean
freight to air freight. So because I met one customer said they saved two million dollars by switching four containers from ocean freight to air freight, just by beating the tariffs, we seem.
This administry should really try to go after transhipment. How is that affecting the supply chains and what you're tracking.
Yeah, this new transhipment rule is quite interesting. So like basically what they've said is that if you have a one duty rate, which is around twenty percent or goods from for example, Vietnam, but if the goods are determined to be transshipped from another country through Vietnam, then the duty rate is much higher. This is a very strange policy because historically an all precedent of country of origin rules, then the Vietnam has nothing to do with the duty rate.
If they're tranship for Vietnam, the duty rate is still China. China's duty rate is not Vietnam. So it's quite a confusing rule from those in the industry. What we're basically saying, is, hey, in addition to going to jail for committing customs fraud, you're also going to have to pay a higher duty rates. I mean, I guess it's effective, but it's very strange policy.
But have you actually seen it work when you're tracking all of this cargo?
No, it's not, I mean, because it's a sort of a nonsense. It's basically saying, hey, if you're committing fraud and then you have to pay a higher duty rate, well, I mean the fraud the penalties were already much worse for committing fraud than a higher duty rates. So now we haven't seen anything like change because of it.
Right, How creative are people getting? What kind of mitigation strategies? How are they introducing? What are you suggesting? What are you advocating for?
Yeah, I mean, first I'm advocating is don't do anything illegal. And there's a lot of incentive to break the rules now because you know and you do see people who are who are breaking the rules now. For example, if you import goods from China and the Chinese company serves as the importer, and all you do is the American company that used to import them, and now you're just saying, hey, I buy them in America. The Chinese company imported them
and they happened to cheat on the customs duties. That's not my fault. Well, guess what customs will hold you liable. That's not a loophole that you can get out of so easily as that's what's legal. And what we're vising people to do is look very closely at three things. One is the valuation of the goods, two is the country of origin, and three is the classification. Now all of these seem like black and white, but they're not.
This is the law, this is regulation, and therefore there's a lot of room for expertise to come in and identify what is the gray area and what is the legal grayer. How do you say on the right side of that legal area, And some of it's not grey, it's just like sophisticated so on valuation. If you provided capex assistance to your factory, or there's other rules that you can say, how that lowered the value of the goods,
you would pay less triff. You got to do it legally, though, make sure you have an expert on the country of origin. Similar things, how do you classify this, How do you qualify this as being the country of origin that has the lower duty rate. There's a lot of sophistication in that as well, saying hey, did you apply enough new value added either materials or labor in that other country to change the country of origin? Legal not committing fraud?
And the third ist classification. It's illegal to change the classification of your goods in order to achieve a lower duty rate. But if the correct classification of your goods happens to have a lower duty rate, you win. So there's again a lot of work that needs to be done by sophisticated people who understand these rules that can help you out. Plus Forard as a team that does this, as too many other companies.
Run, are you finding them more work just means more time? Is this slimming things down?
Yeah, it's definitely increasing costs for everybody in myriad ways. I mean, even just if you want to bring goods to another country, transform them change their country of origin and lower their duty rate. I mean there's a lot of extra work, a lot of extra shipping time, labor processing. You've increased the cost plus the duties. So yeah, certainly this is not making trade more seamless, that's for sure.
Ryan, Based on what you're seeing, is there anyone that thinks that the US and China won't extend this deadline of their agreement their truths that's up tomorrow.
Yeah, I mean, I'm sure lots of people think they won't extend it, and some think they will. I haven't looked at what the prediction markets are saying on this, and this administration is sort of inscrutable from my perspective, I don't really make a lot of predictions on that.
So well, are people floading and rushing before tomorrow from China or no?
I mean at this point too late, so they were people were moving stuff in, but no, I didn't see a lot of frontloading on the China one. Yeah, fair enough. From the behavior of the actual actors in the market, it seems like they think you don't get extended run.
I appreciate your time and you're insights super valuable. As always, Thank you, Ryan Peterson. There the flex for CEO. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, and 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 Amp.