Bloomberg Audio Studios, Podcasts, radio News.
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. Tiffany Wannaga Pimpos
is going to join us in the meantime. Tiffany, Welcome to the program. Is the store still open for a Rake Cup in September?
Yeah?
I mean, I think this CPI was completely in line with expectations how we've characterized the sort of Terra related pass through. The evidence is that it's happening, but it's happening slower than I think many people expected going back to April, when when the more dramatic TERRFF announcements were first implemented or announced. It's happening more slowly and across industries,
you know, it's it's more uneven, you know. So I think the broader story here that we're still seeing is that it's very concentrated within goods, it's happening slowly, and outside of that, you know, inflationary pressures look very manageable. So I think for a federal reserve, that is a very good sign.
You know.
In addition to that, there's I would argue, better news in terms of the so called second round effects with higher prices leading to higher wages and getting.
More into the inflationary process.
We've actually seen inflation expectations from various surveys start to moderate. The University of Michigan survey, which we'll get later this week, the longer term inflation expectation index for that one had accelerated more, but it's moderated more recently. So I think all of this points to, you know, a central bank that can get on with normalizing policy rates back to neutral.
It's definitely something we've been exploring throughund the whole of this morning, and to be fair, over the last several months. Is whether tariff delayed. That's a taroft story is delayed by the fact that we've seen fantastic infantry management from some of the retailers at the moment, and that maybe we haven't seen the full extent of this. When would you get comfortable that we've seen the limits of it all.
Yeah, I mean, I think, like you know, we expect a good portion of the pass through over the next several months. But I think the bottom line is is that companies have room. It appears that companies have room as a result of still high margins coming out of the pandemic. Companies have room to sort of more slowly
pass this on to consumers. And and so what that means is that, you know, goods inflation could be a little bit more persistent over time, but you're not necessarily going to have that bigger surge that many people expected as you get that faster price level adjustment this year. So I think for the FED, I think that's all
good news. You know. The other thing that we see when we look at you know, a range of data, you know, is that companies so far are absorbing we think the lions share of the additional costs of tariffs, and as I mentioned, they can do it. Their margins were elevated post pandemic. That has remained the case, and so they do have room here. You know, at least the largest companies have room to sort of manage this process, and we think that's what they're doing.
You know. The other thing.
Is is the tax legislation that was recently passed, the One Big Beautiful Bill, that is, you know, reducing the effective tax rates for a lot of companies, especially those companies that are capital intensive.
They invest a lot.
They're getting you know, upfront expensing tax credits and that will help offset the impact of the tariffs as well. A lot of those tax credits were retroactive for twenty twenty five. So all of that just means that companies do have a little bit of flexibility here and can manage the pass through rate.
So, Timmy, are you basically saying that because of the One Big Beautiful Bill, companies are able to eat more of the higher terifts from this administration.
Yeah, I mean, I certainly think that that's the case.
You know. Now, the you know, what we estimate in terms of the tax savings in aggregate for twenty twenty five is around you know, one hundred and fifty billion. The tariff tax collections that are happening, we annualize at about three hundred and fifty billions. So the tax legislation is not completely offsetting the additional taxes paid by tariffs,
but it certainly is in mitigating some of it. And so that's why, you know, we've argued you'll still see we think some pass through of higher tariffs on two prices, you'll get some price adjustment. But we think the risk here is just that it takes longer than many people are expecting, you know, the inflationary effects of this in the back half of this year somewhat less, you know, and again.
That just sets the federal reserve up.
To you know, to continues to restart its cutting cycle to get back ultimately to neutral policy rates.
Tiffany Wold, thank you.
David Kenny, a JP Mork and Asset Management with us around a table with David, good morning. Not going to ask you that question. I just want to ask you the following. When will you be comfortable that we've seen the limits of this? How many more months of data do you need?
We're just getting started.
I mean, what we saw today was plenty of inflation without tariff effects. We didn't have a big increase in new car prices. We never big increasing in a paro of prices. But let's look at where we did see an increase. Airline fares will come down a lot because the.
Airline industry was very weak.
But if you look at the recent data on people going through TSA checkpoints, it's firmed up, and so domestic airline travel is now back on a positive year over year basis. We've got a lot of fiscal stimuls going to kick into the economy early next year, but.
Also in the tariffs.
Even in July we saw a lot of money collected, but it still equates to about a tariff rate of about eight percent. We think this whole tariff rate is going to go up to about fourteen and a half percent measured by that later. So we've got most of this tariff increase still ahead of us in terms of just affecting the data. And then you know, people say, oh, the retailer is going to eat it.
No they're not. They just wrote the check. So so of course, of course it.
Looks like they're eating at Walmart writes a check, but eventually they're going to pass it on, and yes, they've got good margins, but how do they manage to sustain these margins because they're great at figuring it out and figuring out how to stiff consumers, and that's what they'll do. And so this thing will feed through. It's just a
matter of a number of number of months. And you know, inflation is going up, but it's going up very steadily, and it will be above we think about three and a half percent in CPI by the end of the year.
You've made some important points here. One is that you believe that goods prices will continue to affirm through the year ahead, and that you're not going to see an offset from services. Is that right?
That's correct, because what's going to happen is the economy is going to be slower in the second half of this year as these this goods inflation feeds through. But the big kicker here that people are not talking about is a huge rush of income tax refunds that's going to kick in and the start of the next year. It's going to be like an extra stimulus check.
And that you know, we've seen what happens.
You give him as a cookie, he's going to want a glass of milk. You give an American consumer a stimulus check, they will spend it and You're going to have a surge of spending in the first half of next year with limited supply because of all these terriff
and supply chain disruptions. You are going to get a second round of inflation, which is going to sustain inflation well above three percent, which begs the question of why again is a FED cutting Well that if infation's heading the wrong way slowly.
That was going my next question to you, what does the FED do with this kind of data?
They should stay on hold.
There is I think there's very little argument that in favor of the FED cutting rates. Rates are not abnormally high. I don't know why they think three percent is a neutral rate in the long run, It doesn't equate to history before the pandemic. I think something four four and a half percent is more of a neutral rate anyway, But there is no urgency about cutting rates, and now I think they will cut rates for political reasons, which
is very unfortunate. But I don't think they should based on these data.
As you're talking, traders are actually adding to betts of September fed raate cup because this basically came in in line when it comes to inflation. Why for political reasons when actually we saw a trend three months of not so great unemployment numbers.
Well yeah, but if you look at the overall mosaic of employment, it's still growing. And remember we've got to labor supply problem too. And one of the things that Jay Powell pointed out is he's not looking at payroll growth, he's looking at the unemployment range. If you've got fewer jobs being created, but we've got fewer workers, then you still got a certain amount of inflationary pressure. You just said that the growth potentially of the economy has gone down. Well,
they can't do anything about that. So if you're not this economy is not going to spark a huge surge in unemployment. And I think the basic point is by the end of the year, we think maybe four and a half percent unemployment, we think over three percent in inflation. They're missing their inflation target by more than unemployment. Therefore they shouldn't be come just.
Tanning this up, though, but you believe they will be cuttack. So you've got a federal Reserve cutting interest rates at a time when inflation is picking up. And the key phrase you used with second round effects, you don't believe this is a one off. You're actually going to see second round effects in the first half of twenty six. What's your market for you on something?
Well, so I think it's the Markt view is not too bad because I think, for again, for political reasons, I think unfortunately feder will cut twice this year, maybe three times next year. They'll get going and cutting. It's not going to really change the economy that much. But if you bring long term bring short rates down enough, it does push extra liquidity into the equity market. So
you could just maintain these bubbly acid markets. What we've got is a tortoise of an economy and a hair of a market, and we're just giving more sugar.
To the hair.
That's the stock story. What about a fixed income story for bonds? Because we've had guest staff. The guests come on this program and site get ready for speryeld curve. The guy aggressive at the front end, you're going to see yields LOWA. At the long end, you're going to say a questionable development.
Well, you know it's again it's hard for a tortoise psych economy to generate a really steep yield curve. So but I think you could see rates move up a bit, I wouldn't be I wouldn't be long duration here because I don't think this economy is going to go in for a session.
I think by the time that the tariffs really.
Hit going to be on the verge of physical stimulus because of this income tax refund thing, and that will keep this keep this economy moving forward. And if the economy is moving forward, you got inflation printing at three, you shouldn't really have a long bond lower than four two.
What do you think inflation is going to pay cat in the next twelve months.
I think CPI is going to peek out about three and a half percent and then hang there between three three and a half percent through about June of next year, and then find it's going to come down again because this is sugar you know, these income tax refunds.
It's a sugar rush. It's not proteine. It will wear her off.
And then by the end of next year, then I think the economy is finding cuding it unless, of course, you get some more stimulus. And that's really the problem, because if the Fed keeps on cutting rates whenever, whenever, you know, the other side of Washington asks them to then it enables more and more rounds of fiscal stimulus to always keep this economy a little bit too hot.
So it's not it's not you know, it's called inflammation. Doctors don't like it.
David.
It's got a hair from you.
It's the nicest This morning, Chinese authorities urging local companies to avoid using a Video's eight twenty chip. So its just telling us here at Bloomberger the firms are being discouraged from using the chips, especially for government related purposes. Joining US snout to discuss as John Leber, if you raise a group, John malcome to the program, sir. I just wonder what the endgame has here for the Chinese and what ultimately they're trying to achieve.
I think the end games that the Chinese want to have their own chip and they don't want to be dependent on the US tech stack. And that's one of the reasons that Trump allowed these H twenty exports was because he bought into the argument that if the US dominates chip technology, and if the Chinese learned to rely on that in their own technology stacks, then it brings them.
It gives the US more power, not less here and if the Chinese recognized that argument, it's somewhat valid, and so what they want to do is encourage people not to use the American tech. And they know also how vulnerable they are to things like the foreign direct Product rule and the other rules that the US has used to weaponize their own technology supply chain over the past several years. And now that's the long term game here. I think the H twenty is just one part of that.
But technological development is going to determine what happens here, not necessarily export controls.
John when it comes to Nvidia and AMD selling these chips, getting these export licenses to go back into China.
What kind of pushback have.
You heard in Washington from both individuals who are questioning whether the fifteen percent revenue cash back to the United States is legal and the China Hawks as well in the Trump administration.
Yeah, I mean the fifteen percent revenue take makes it look like to certain people, and I think this is a valid argument that national security is now for sale. I'm sure a lot of companies will be very happy if they had the opportunity to buy their way out of US regulations that otherwise ban them from doing business. You know, in a way, this is a version of a carbon tax, where you're selling you're purchasing the right
to pollute. Here, you're purchasing the right to undermine America's national security by selling these chips to the Chinese, which a lot of China Hawks in Washington are not happy about because they believe that this is a needabling Chinese technological development. This is a contrary to the policy of the Biden administration and up until last week, the policy of the Trump administration, which was of course to deny the Chinese access to these chips. This is a very
controversial move. It's never been done before as far as we're aware, and you know there's Trump's getting a lot of pushback, both from the security hawks and also people who argue this is an illegal export tax, which I'm pretty confident they'll find their way around. But this is something new we've never seen before.
Do you think this is a one off or we're going to see more policy.
Like this, that's a good question. I think we don't know yet. I don't think there's a lot of areas where this type of thing is doable, where you know you've got an export ban that somebody wants to that they're offering the chance to raise some revenue off of So I'm not sure where else we could see it,
but we still have. You Know, one of the things that's really surprising to me to remember all the time is there's still three and a half years left in this administration, and we know Trump loves to do these types of deals. So it wouldn't surprise me to see this show up in other areas. It's just hard to predict which ones yet.
Well, John, let's talk about what we learned from the first term under President Trump. In Trump Volume one, there was a coherent ideology governing trade policy. Whether you liked it or not, I happened to be sympathetic to the concerns they had about reciprocity in a country like China who had put barriers to entry up all over the place. John, Now I'm struggling with what the framework is exactly this time around.
How you explaining this to people at the moment.
Yeah, I mean a huge difference between this term and last term is you don't have the strong personality of Robert Leitheiser directing a lot of Trump's trade policies. What you have instead is the strong personality of Donald Trump directing these policies, and Trump is going every which way, and you know, it's obvious that in some cases he's
motivated to get a deal. We saw that with all these countries pre August first, and in other cases you see personal relationships starting to sour and take over the ability for the US to cut deals, like what's happening with the US and India.
Now.
I think at the core of it, though Trump remains a very transactional guy. He's somebody that wants to see higher tariffs, and he's somebody that wants to do deals in order to keep those in order to get those tariffs. With China, you know, they've been able to leverage their use of rare earths and critical minerals to great effect.
The US national security community is in a panic about its ability to build weapons in the United States because of the Chow points that China has been using to deny the US those critical minerals and Trump himself, and that's driving a lot of the China policy right now. So I don't think there's a consistent strain that you can pull through here, but it is worth pointing out that Trump ran on a campaign of higher tariffs, and now the US is getting them with an average effective
rate somewhere in the mid to high teens. And that's a huge shift that reflects Trump's own personality and his own policy parpers.
Well, let's just sit on that transactional nature. Nothing new, quite well understood. Where people struggle, is what defines whether it's a good transaction or a bad transaction, and what kind of feedback loops is the president's sensitive too.
Well, Clearly he's sensitive to feedback from the private sector. I mean, the reason that the Liberation Day tariffs were paused in the first place was because of what he called the yippiness in the bond market. So that's one type of feedback. Another type of feedback he's clearly sensitive to is direct feedback from the business community. His meeting with Jensen Wong directly led to the selling of these
H twenty chips into China. And I also think that he's sensitive to the positive feedback he's getting from the deals that are happening where his US trading partners aren't putting up any real resistance here, nobody's retaliating. I think that's an important point, is that he's faced virtually zero retaliation, and that's allowed him to get away with these higher tariffs.
And I think going forward, the feedback that might cause him the reverse course would be economic weakness, major complaints from the US business community, big businesses who are going to have the ear of the president, and I think that that means that probably small businesses are getting left out of this because he's not necessarily hearing their voices.
John, when it comes to the trade agreement, we have core have the punting of the negotiations. When it comes to China and the United States, you mentioned the victory really of Beijing using those rare earth magnets in lieu of making sure they can loosen up export controls. Would you say Beijing has the leverage going into November, Not necessarily.
I mean, I think you have to be mindful of the fact that China is going to face higher tariffs. They're just comfortable their system is prepared for a level of higher tariffs and they can deal with tariffs in the thirty percent range, which is where we think tariffs on China are going to end up here. However, you know, I don't want to play down the fact that they have been able to play this critical mineral game very very well in the US is obviously very serious sensitive
to it. But this is not necessarily a positive story from the Chinese economy either.
When it comes to what the United States wants to see out of China. They're dealing with export controls, They're dealing with rare eergs. The President the other day was truthing about soybeans. What else is on the list before potentially she and Trump can meet and get to this grand bargain of a deal.
Yeah, I mean, we don't see a grand bargain. I think we don't think a grand bargain is necessarily the right way to describe this. We're thinking about this as a very transactional deal. So the US is going to raise its tariff levels on Chinese goods. China will make some purchase commitments about market access. They're not going to fundamentally reform their economy, which was of course the goal in Trump won and the goal of some of the
Chinahawks in this administration. But what they're going to do is make enough promises to buy enough time that they can live with these thirty percent tariffs and then hope to fight that out in the next presidential term. I'm not at all convinced these tariffs are going down even after President Trump's term is over. None of the China tariffs went down after his first term, and these things have a way of being enduring.
John, I appreciate the update, the reaction from you, sir as always, thank you, John labor there if you write your group and listen with the economy of the Hoover Institution and the former senior advisor for China and the Commis Department under President Biden. Elizabeth, welcome back to the program.
It's going to hear from you.
I want to lead on your expertise here and your experience and something I know you're thinking about the moment. Are we blurring the lines between national security and trade?
Yeah, I mean I think that is a question that was clearly raised over the past week or two with the President's President Trump's decision to reverse his administration's earlier decision April decision to put the export controls on in Vidia's H twenty chit. You know, typically you put an export control on technology that you believe could contribute to you know, a country or companies in that country developing military capabilities.
That will undermine your national security.
So that was the.
Decision that the administration made just in April, and then we saw, you know, just earlier this month, that the President reversed that decision without any explanation as to why that decision was being reversed. And I think it points to a larger challenge with its administration and that they
have not yet articulated a real China strategy. We don't know whether this president considers China to continue to be the greatest long term strategic threat, which is something that his first administration did put out there as part of a China strategy that helps an administration set priorities, you know, understand the trade offs that you're.
Going to make or not make.
But without that kind of overarching framework, we don't know, you know, where this president is coming.
From, where he's going, whether everything is up for negotiation moving.
Forward, Elizabeth, given your work in the Commerce Department, have you ever seen anything like this, some corporation able to get their hands on a license because they're willing to give some of the revenue back to the US government.
No, I mean, that was certainly a new twist, but even taking one step back from that, it's a new twist to have the head of the Bureau of Industry and Security, Jeffick Kessler, go to London to be part of the trade negotiations with China. You know, in the Bide administration and frankly, in all previous administrations, you would never consider linking export controls with trade negotiations. Export controls deal with broad issues of foreign policy and national security.
You know, tying them in some way to trade really makes no sense. But that's what this administration has opened, the sort of the door to So I think it's a it's a bigger problem, even more than just this one off decision.
Is just this new, you know world that we found ourselves in.
And as far as the fifteen percent revenue, you know, the sort of you know, Nvidian A and D having to give fifteen percent of their China the revenues from the sale of these chips back to the US government.
Of course, that only sort of amplifieser reinforces the sense that somehow our national security is up for sale, because you know, does that mean that all chips moving forward, or even other goods that the United States you know, sells to China, can all that be subject to some kind of new tax of some sort, and the revenues will have to come back to the US government.
It really is fundamentally.
Changing the nature of the inter relationship between national security and trade, and frankly just trade generally.
There's a number of issues brewing between these two economies. Fentanyl, China continuously buying Russian and Iranian crude, disagreements about US business operations in China when they sit down. What do you think is the US's main goal out of this relationship.
I mean, I would have said in the first Trump administration that there was an emphasis placed first on, of course, securing these big purchase agreements that again President Trump seems to place as a top priority. He mentioned just yesterday or the day before, having China quadruple its purchases of soybeans.
Of course, China's already diversified away from the US.
It gets seventy percent or more of its soy beans for Brazil now because of the tariffs that the president began, the tariff war that he started when he first came into power.
But I think number one, yes, getting more purchases from the Chinese.
But I think also the US wants to secure and stable supply of rare earth elements from China, which are of course essential for both our national security and technology industries. And we saw what happened when China put the squeeze on those, you know earlier, just a month or two ago. You know, companies in the United States really began to feel the pinch. So I think that's probably the second priority.
And then all of the trade adjacent issues that you just mentioned, fentanyl, you know, China's economic support for Russia in its war of aggression against Ukraine, you know, TikTok is still standing out there. But I think those fundamental issues around the Chinese economy, things like China's export of its overcapacity in many areas of core technologies, I think those are going to be very difficult for the Trump
administration to make progress on. I don't think they have the leverage that they need, or maybe that they even think they have to get China to sort of fundamentally change the way that it does business.
We're up against the clock, heare. But in the forty five seconds we have left, Elizabeth, why has it been so difficult to convince the Chinese they need to rebalance their economy when so many economists agree that it might be good for them.
I mean, I think she Jinping has a vision of how the Chinese economy should work in which is reliant on exports and have the investment investment now into core technologies, and he believes it is working for the Chinese economy and is willing to suppress Chinese consumer demand and Chinese incomes to achieve what he believes will be will put China in a stronger long term putting moving forward.
Elizabeth Economy of the Hoover Institution, Elizabeth, thank you appreciate it. As always, 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 lists, and as always on the Bloomberg Terminal and the Bloomberg Business out Mm hmm