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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie Hortern. 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 to discuss EDGYR Denny of Yard Denny Research joins us now for more and welcome to the program Sir. Can this market, as we've been discussed in have its cake and eat it too?
It's doing it right now. For sure. We've had a very strong ballmarket really since October of twenty twenty two, and really it hasn't stopped. We had a correction at the beginning of the year related to uncertainty about Trump's employment policies for the government with DOGE, and uncertainty about tariffs, and so naturally, if you're an employer, you're going to
hold off on hiring and not necessarily fire anybody. And so I think a lot of the soft patch, which is I think what it's been is related to uncertainty. And I think the markets are starting to conclude that, you know what, uncertainty is going to be with us here for a while, let's move on with our businesses. And I think the economy is in.
Good shape at the Enthusiasm is starting to spread. Its starting to spread beyond the big text story. Two days of really decent days of gains for small caps. Now at whenever this market market participants get a sniff of out performance on a small caps the excitement starts to build again. Is this another headfake called the real deal?
Well, you know, we've had lots of headshakes in that regard really since twenty eighteen. Roughly around then, we did see that midcaps consistently underperformed the large caps. The S and P five hundred, I'm looking at the S and P four hundred mid caps, S and P six hundred small caps. They just kept underperforming. Every now and then you'd get a head fake. And I won't be surprised if this is another head fake. I'm not telling anybody
that it's not tradable. I think clearly it is tradable, as previous head fakes have been, but they don't last very long. And the reason is that earnings of this small cap MidCap companies just continue to be in a coma. They've been flatlining since twenty eighteen, and I think they're doing that because the good ones keep getting bought out by the large caps. So you never really get a situation where you can buy a small cap and have it turned into a Microsoft.
If the FED were to cup by fifty basis points next month, would you change your view? Would you see this as something other than a headfake?
Well, I think then I would just say we're in a melt up I mean, it feels like a melt up already. We've seen the correction at the early at the beginning of the year. We've seen multiples go from twenty two forward pe for the S and P five hundred at the beginning of the year down to eighteen. We didn't get down to fifteen. We didn't get down to ten. The market figured out and kind of agreed with me that the economy was resilient and we're not
going to have a recession. And when it did that suddenly boom, we went right back up to twenty two, and so the market ain't cheap. And the reality is if the FED cuts when there's still, as you said, a lot of ambiguity about whether it really needs a cut, it doesn't really need a fifty basis point cutlet a twenty five basis point cut. The administration needs interest rates to come down because they'd like to see the interest
costs of the debt come down. But the economy I think is going to surprise everybody in the next few months, especially the consumer as you also indicated, and show some resilience of the consumer part, and capital spend a lot of this technology related that's going to continue to go. So I think, you know, as the drums beat for more rate cuts here, and we're probably now going to get one in September, and then there'll be expectations for another one after that before the end of the year.
I think we're in a melt up situation. So you know, right now, I'm still kind of sticking to a sixty six hundred and the s and P five hundred by year end because I think there's still a couple of indicators here that might suggest that maybe the FED shouldn't be lowering rates, but absent that, we could go right back to sixty nine hundred and seven thousand by the end of the year in a melt up situation. And the problem with melt ups is they're followed by meltdowns.
Well, that's where I wanted to go at. This is something that you talked about a couple of months ago, that you're worried if the FED cuts rates too much, you could end up with a bubble, and that you could end up with late nineteen nineties type scenario that leads to the meltdown that you are referring to. How close are we to that if we do get the series rate cuts that the mark is currently pricing in.
Well, before we go there, let's also point out. Let me also point out that at the end of last year, I also felt that there was no need for the Fed to lower interest rates, and I said that if the Fed did lower interest rates, bondiles would go up. Little did I know that the Fed would do one hundred basis points all told at the end of last year.
And guess what the Bondi'll went up one hundred basis points and frustrated all those people who want to see mortgage rates come down and corporate corporate rates come down. So the Fed ease, but the bond vigilantes tightened, and we have that possibility again now. So just because the
Fed eases, let's watch what the bond market does. It may not be very happy with the Fed moving to lower interest rates when the Fed's been telling us for a long time that they need to get their inflation rate down to two percent, and right now it's closer to three percent than two percent. But yeah, I mean,
a nineteen ninety style scenario is a possibility. I mean, right now, AI looks like it's a much firmer footings with earnings than we saw back in the tech wreck that occurred in the late nineteen nineties early two thousands. But you know, in this market, you never know. I mean, deep Seek came out of nowhere in January and created a pretty nasty correction.
Deep hoop, and then we bounced back pretty quickly, didn't we had. That's a stock market. I want to tease out what you just said about the bond market. Do you see then a similar backdrop this time around to what we saw take place back in September.
Unfortunately, I do. I think that the bond market is not going to like the FED kind of caving into a political pressure and easing I mean, you know, I think a lot of FED officials are probably on the fence, but they're getting pushed over to the easing side by the political pressure. And that being the case, I think the bond vigilantes, I mean, that's what the bond vigilantis are supposed to do. They're supposed to maintain law and order in the credit markets and in the financial markets
and the economy. If the sheriff decides to go out of the saloon.
Not saying much lower order right now at appreciate your time, any reset, The former senior US intelligence official Norman Rule joins us now for more No when welcome back to the program, Sir. Is the president in a position to negotiate on behalf of the Ukrainians?
Good morning. He is not in position to negotiate on behalf the Ukrainians. The Ukrainian President has made that clear, and the Europeans have done everything they can to send a unified message that Ukrainian territory is not something the president can offer in his talks and in fairness, the President has stated that he is not going to offer Ukrainian territory to the Russians, and indeed, we'll be doing what he can to acquire Ukrainian territory that Russia is
occupied to return back to Ukrainian self. The question is how exactly does he do this, And indeed, in terms of the severe consequences that he would apply to Russia, that in itself requires some caution because to do that requires secondary sanctions on China and India, and as Secretary Bessent has stated, that would require European cooperation, and Europe has not been very enthusiastic about cooperation in that regard in the past.
Norman, there's a lot to unpack there. I want to get into the ceasefire agreement the President Trump has talked about as a threshold to cross in this meeting tomorrow. What would that look like? Given the previous ceasefire agreements that already have been made and broken.
A ceasefire agreement is unlikely. President Putin has violated most of those agreements, and right now we're watching each side do what they can to demonstrate strength. The Russia are conducting a series of ground operations that are allowing them to make short, sharp advances in the Donbas. The Ukrainians are conducting drone attacks on Russian energy facilities, which are important given that they Russia's economy is contracting further per the IMF will have only zero point nine percent GDP
growth this year. So we're unlikely to see a cease fire take place unless each side is convinced that a piece steel is likely, and again we have no evidence for this in the near term. This said, the President is going to be doing his best to achieve that, and we're likely to see one in one meetings with President Putin and President Trump. The Europeans will be concerned
about that. They have demonstrated that concern, and the President has demonstrated in the past that his relationship with Putin is very personal, and he sees that personal relationship is where his strength lies in achieving an agreement.
There's a question, Norman, about whether the president really has as much leverage as he could if he's going into this without the Europeans agreeing to helping to enforce the secondary sanctions. Do you think that this is premature? Do you think that this is a good timing on the part of President Trump to go at this alone, given the lack of cooperation on some of the more punitive parts.
Well, to be clear, I'm not sure that Europeans are ever going to be enthusiastic about supporting secondary sanctions on China and India, and at the same time Russia's sanction continue. Russia's economy continues to contract. It has contracted. The IMF has reduced its projections for GDP from one point five percent too point nine percent for this year and next year. Forty percent of Russia's economy is now devoted to military spending.
It's likely to remain that way for the future, and Russia is losing a vast amount of personnel every day. The presidents I would expect that his private intelligence and economic briefings show a dire picture for the Russian economy, and he probably sees this as his lever over Vladimir Putin. So I though Putin will come in playing a stronghand trying to show battlefield gains, trying to show that he's
going to win this war. I think the President's position is going to be, Look, you're a big country, an aging population, You've got great resources, you could be doing great things in the world. But you're driving your country into the ground, and the best way for you to save your country's future is to end this conflict. I think that's probably going to be the tactic the President may consider.
No do you think that tactic will work?
I doubt it. I think Vladimir Putin is a map changer. He is committed to changing the rule of Russia, to restoring the Russian Empire, the Soviet Empire. He doesn't believe Ukraine should exist as the country. I think he's committed to the maximalist gains. He may offer some sort of territorial concessions to restrain sanctions. He may try to delay
further sanctions. We also have arms talks that the Vladimir Putin may hold out, and nuclear talks are something that we no longer raise in our discussions, but are too tremendously important, And I think Vladimir Putin may hold out arms, nuclear talks and Arctic cooperation as some way to continue
engagement with the US. That may complicate the relationship. And again you don't hear nuclear talks and Arctic cooperation is something of great importance for Europe, but they are of importance to the United States for our national security.
And no on what I hear from you is this doesn't end without compromising the integrity of Ukrainian territory. Now, I just wonder, with that in mind, nom how you think this does end or will it end? And if this can just continue for years on end?
This ends when the Ukrainians did it ends. That's not a decision the American American government can make. This ends when the Russians decided. Ends. Again, that's not a decision the Americans can necessarily make. But at a certain point each that any deal that does come about in the
end is probably going to leave each side unhappy. And the US government has communicated on a number of occasions that if there are going to be territorial decisions made in the end as part of a peace agreement, it probably and would involve concessions on each side that will leave each side unhappy. That's a tough thing to say, and obviously Ukrainians who have given blood are going to be unhappy to hear that. But that has been a
previously stated US position. But again, that's a Ukrainian decision to make, and it's not a decision they're going to make. It present, and it's a decision they won't make unless they're at the table.
No, thank you, sir. I appreciate your thoughts. The former senior US Intelligence official Norman Role with some sobering words there on the future of that role joining US natural discussed as the former Well Bank president David Malfast. David, my good friend. Welcome back to the program, sir. Let's talk about the leader of the Federal Reserve and the next FED share. What are the characteristics that we're looking for here, David in the next FED Share?
Hi, John and Lisa. I think what is needed is a lot of change at the FED. So their characteristics are someone that will bring change and really confront the PhD economists that have been riding the FED. You heard some of that in your previous guests talking about the bond market vigilantes and the parent we all need, and so I think that getting the FED out of the way of the market and creating the rationale for a much lower interest rate curve along the curve, I think
that's what's critical. I was very happy to see Secretary Bess yesterday talk about two things. One is the fifty basis point cut possibilities and also the need for foundational change at the FED. That to me means more loans for small businesses. So that's going to be one of the opportunities for the US as we change the supply chain.
You said in some of your previous comments that the FED is using old models that are wrong on economics. Which models in particular do you think are incorrect?
There's a long list. How long do you have? The Fillips curve doesn't work, The idea of ample reserves doesn't work. The idea of inflation targeting using backward looking data doesn't work. There's a big opportunity there. If you use forward looking price based data, you could get lower interest rates and the market would welcome it. That's what we saw yesterday. I think when the Secretary said foundational change, there are better ways to do this than what the FED has
been doing. They lean against growth, Lisa, and that's been part of the problem that when the economy gets going, they say, oh, that's overheating, when actually that's what we want. That's the goal of economic policy to have non inflationary growth, David.
A lot of people would say that when they don't tamp down on inflation. It's been acid price inflation. It's really run away, and that that has led to a number of pretty significant crashes.
What are you.
Pointing to in particular in terms of practical consequences that point to some of those policies. I mean, would what do you think the growth rate should be in the United States right now? If the Fed were using the models that you would.
Like to use, I think the growth rate can be comfortably three percent real GDP growth, maybe four percent. The Fed has a potential GDP speed limit they just published on June eighteenth, the idea that it should be one point eight five percent per year. So that's that just doesn't make sense given the possibilities of regulatory change, the
recent tax stabilization. So they took the tax cut that excuse me, the tax increased that Biden was planning and Biden Harris were planning, and took it off the table. So that's that allows businesses to begin investing for the future. Lisa, You know, the FED has perpetuated this idea ever since Paul Volker that high rates are the way to bring down inflation. The reality is more production is the way to bring down inflation, and Trump's doing that with all the changes going on in the economy.
David, I'm happy for people to make the accusation that perhaps this FED share has been reckless with monetary policy, but I'm far more sympathetic to the idea that he's been recklessly dubvish. This is an individual that letter FED that let inflation absolutely rip. This is an individual that saw markets doing okay, equally still close to all time highs and interest rates one hundred basis points. David, Can we really make the argument they've been recklessly hawkish?
Yes, they're hawkey is right now, and look at the difference in the environment they were cutting into. It was politicized in twenty twenty four, there were heavy regulation stopping business, there was no investment going on, and yet they were cutting thinking that inflation was transitory. What we have now is a big change going on in the economy, and I think the opportunity for capital to flow into the US. As you make the economy stronger, you're going to get
support for the dollar. And again we have to look at how the markets reacted yesterday favorably, whereas when the FED was cutting during twenty twenty four, markets reacted unfavorably. So there's a huge look at.
The difference between the market right now though, and what the federal Reserve is ultimately projecting. David, I don't think there's too much dayline. This is a market in a federal reserve that seems to be on course. Toccount interest rates somewhere between one hundred and one hundred and fifty basis points. What we heard from the Secretary of the Treasury yesterday was they need to come from one fifty
to one seventy five. David, understand there should be a healthy debate, but is there really that much controversy between what the administration would like to see and what's ultimately being projected by both markets and a federal reserve alike over the next eighteen months.
I think that's useful. The markets are are looking at what's going on in the economy and realizing that there can be a lower interest rate environment for the United States across the whole yield curve. I think that's important and that adds to growth. Look, the goal here is a virtuous circle where capital flows in, where growth goes up and production goes up, and that brings down prices, so then you can keep doing interest rate cuts. You
get a virtuous circle. I think that's possible. It's going to be really important for the FED and PhD economists to get to realize that their models haven't been working over the years. We've had these wide swings and inflation and deflation and interest rates because the Fed's looking backwards. So we need new models, sweeping change in the models. That's been what I've pointed out, and it will benefit small businesses.
That's the key, David, looking forward and using your models. What do you think the neutral rate is?
I think the neutral rate is lower and the lower than where we are now. You know, the FED keeps saying that the interest rates are appropriate right now at four point four percent. How do they know that they're the ones setting that rate and paying banks a lot of them international banks. Forty percent of the money payout by the FED is going to internet actual banks, and they've paid one point three trillion dollars since they started
paying interest to banks. So they're affecting the markets and they don't know what the neutral rate or what the bearable rate is.
They do that it's taking a step at it. They think the longer term rates something close to three. So what do you think it is close to three, is like one fifty cent of where we are at the moment. What do you think it is? How much lower than that could it be?
I think the strength of the US economy justifies lower rates across the curve, substantially lower, and the market is looking at that and already beginning to price that in, and it's part of the favorable environment being created.
I think we've lost the connection with David Malpass. I was quite enjoying that, and I've done David. It was too a spirited conversation with the former World Bank President David Moultpass. If we're just surround the table, Nata Richardson of IDP, just a breakdown where we are on the economy, Nata, let's start with not just the data this morning, but the setup at the moment. As you look across your dashboard, what do you see.
Well, what we're seeing is an economy that continues to chuggle on hiring. A momentum is slowed. I think that's clear. There's been some stasis in the labor market. But overall, when you look at the things that I look at, like, are companies cutting hours? No, our wages plummeting? No, Actually they're staying pretty well formed and really really steady. And so even though we're seeing a slowdown in the momentum, the underpinning of the labor market continues to be solid
enough to support consumer spending. Now we'll get retail sales out in a bet, we'll get some confidence data out in the bet. This inflation surprises something that should be considered with a whole bunch of other data that was leading up to this point showing no smoking gun when it came to tariffs and inflation. So the big picture is it's an economy that continues to perform. It's just not as dynamic as we're used to seeing.
Ira Jersey of Bloomberg Intelligence is just working through the details of that PPI report. I'm going to cross over to him in just the moment, just to come to you just quickly on what we're seeing with inflation. Is it too early to draw conclusions here based on the data we've had so far, and will it be too early at Jackson Holle too early at the next fan matic.
Some conclusions are going to have to be drawn because decisions have to be made. But it's really going to be a matter of perspective So those components, as Lisa mentioned, of the PPI, are going to be so important because when we look at the CPI, the inflation triggers were all in the services. It wasn't like the goods sector was screaming inflation. Those final goods aren't showing it yet at least yet, those intermediate goods, the wholeso of goods,
that's where a terrifle could bite. And the you know, as the goods are being built and informed, and we might see that in the wholesale prices and the producer price is an increase. So maybe this is the first time, maybe it's just a one off.
We won't know.
But we have to look at the complete complexion of the economy, at least some people do, in order to make those rate decisions.
Which trying next month. We trying to do that right now. We can do that with our Jersey of Bloomberg Intelligence. Ara, You've been looking through the details. So what stands out to you. What's behind this big upside surprise this morning.
Yeah, so's it's not necessarily goods sector that's driving a lot of this. So you saw a big increase in the services PPI here with a one point one percent increase month on month that was negative a little bit last month, So you had this big shift toward towards services increasing in particular trade. So some of that could be from you know, import prices. If you think about the pass through from from you know, shipping and things like that, that are going to be goods that are
going to be tariffed. So maybe this is suggesting that there might be a little bit of margin contraction. And like you mentioned, not a huge move in the front end of the bond market, but it's still five basis points from where we were right before the right before we receive the number. I think retail sales tomorrow will wind up probably being even a little bit more important
to the bond market than this particular number. But certainly, you know, fifty bases point move in September might be taken off the table with worries about inflation taking up a little bit.
Here, it's not just that, Ira, and I'm glad that you broke it down and understood to see that it's coming from services kind of mimics what we saw in the CPI.
It's also the.
Initial javas claims coming in at the some two hundred and twenty four thousand, even continuing claims came in a touch. These are the people who keep receiving unemployment benefits. Where is the impetus for the Federal Reserve to need some sort of emergency rate cut given the fact that this doesn't seem to point to any kind of massive dislocation the labor market.
Yeah, keep in mind, the claims numbers have been relatively steady for years now, and so remember that's only one side of the equation, right, that's the firing side. So it's really how many new people are entering the workforce and are going to be then hired by firms too, because at this kind of pace, you'd wind up with, you know, pretty massive layoffs actually if there's not someone hired on the other side of those of those initial jobless claims. So and you have seen a slowing in that.
So it has to be the job market, right the FED to cut, certainly, to cut more than twenty five basis points in September would require a really disastrous kind of nonfarm payroll number, I think now that being said, just the slowdown in the hiring process without consumer prices taking up quite a lot, you know, that could mean that, hey, the Fed could ease just a little bit to kind of placate the market, make sure that the job market
doesn't completely fall out of bed. And I suspect that that's the thinking of those members like you know, Governor Wallers and Bowman, who have seen this slowing in the job market and are concerned that it could get worse. So let's be a little bit proactive here. Now that being said, do they have to do that? I don't think so. Like we had already always had penciled in based on our forecast and October as the first rate cut, but realistically September versus October, it's not going to matter
that much to you know, ten year treasury yields. Quite frankly, just.
Before you go, I've just got a brief question, and it's to build on what Least and I were talking about the front end of the curve. Why is this market looking through firmer services inflation both in CPI and PPI this morning. Why we only out by a basis point of two. If you told me these numbers earlier on this morning, I might have guessed, you know, what might be up double figures, double figure basis points off this maybe up ten basis points eleven, I don't know, but not a single basis point.
Yeah.
Well, I think that the CPI report wasn't wasn't nearly as bad as I think the market thought. And the market is certainly pricing in for a you know, modest easing of monetary policy over the next couple of over the next couple of quarters, and you know, and again like as long as you wind up having a slow down in the economy, that the FED is going to try to right size things. And there is this idea that within the market, and I've talked to a lot
of market participants about this, where is neutral right? I actually think we're pretty close to the neutral rate, But a lot of people disagree with me and believe that the neutral rate is closer to two or two and a half, which is where headline inflation more or less is right now on a CPI basis. So people do
think that rates are still restrictive. Again, I'm not as convinced of that, but that's where the market is, and that's why the market thinks that the FED is going to be cutting rates in the very near future.
Don't fight the market, so always the lesson A thank you, sir Rich Jersey there of Bloomberg Intelligence breaking this down Laser services again again FIRMA.
This isn't necessarily a good thing for the Federal Reserve because typically services is something that's more discretionary and tends to be more fungible. It raises this question about where
the weakness coming from. Neila, I have to say the ADP report's taken on a lot more important recently, especially with some of the questions around the BLS, and I just wonder what kind of hiring you see in services and wage increases to edify the sense that that's an area that's actually been benefiting of late.
You know, I think the issue with the labor market is that the structural and the cyclical are kind of colliding in this moment because we are still in a labor market that's being impacted by the pandemic. We are being impacted by an aging workforce. We're still being impacted by the great resignation, which means the turnover that dynamism is missing in today's labor market. So when you look
at something like services, what are you seeing? Well, first of all, you're seeing certain pockets of services slow down tremendously. We saw a dip over the summer. It's rebounded according to our data in the last month. It's new entrance into this market is very so if you talk to any parent of a college a student, it is my student is still looking for a job even though they just graduated. If you look at ADP data, if you don't like the anecdotal, you want to look at the
hard data. We pay over twenty five million workers in the United States, and what we're seeing is that new highre pet hasn't budge from eighteen dollars an hour for the media in more than thirteen months. So there is a stagnant part of this labor market when it comes to bringing onboarding new people. That's going to be reflected in productivity numbers, and it really is going to impact
services more than goods. Good sector that talent tends to be more specialized, fewer new hires, less affected by the people dynamics that underpin the later labor market.
Can I ask you a provocative question, is the new BLS chief good for business? Which I think is what Lisa was trying to losk, Is the new BLS chief good for business? Over IDP.
Is well. Until they're confirmed, we won't know. But what I can tell you what's good for business is good data.
Lady Richardson of ABP very different ABOUTIC.
Thank you.
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 app.