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Bloomberg Terminal and the Bloomberg Business app. Thinking Shadow of Deutsche Bank right in the following, it is clear from company comments that tarifs were a sizeable headwind only for some, and the hit was modest and significantly lower than previously feared, although it is likely to grow.
Think.
He joins us now for more thinking and monic. Good morning, It's good to see it. How are things going to rebalance in the months to come?
I think you know where we are.
I think a very simple way of thinking about out where the S and P. Five hundred is is that we of course had basically the very very robust twenty twenty three and twenty twenty four returns, and if you look at it, and if you will pardon me for using slightly technical expression S and P. Five hundred, you know was for those two years and really starting a little earlier, in a very very steep trend channel, we
were in around numbers twenty four percent years. That's you know, twenty four percent a year, that's two percent a month. It's a very very robust channel. Of course, Liberation Day threw us way way out of that channel, and we have now recovered basically to the bottom of that channel by the first week of July, and really for the last six or seven weeks we're crawling along the bottom. So, you know, bigger picture, if you think about it, we fell because of the tariffs. We had this big sell off,
and we've now recovered. So the question is, you know, is it justified or is it just optimism? But that long drawn out of chart that I just drew for you is just sort of focused the mind that actually what the market's saying is that, you know, we had the tariffs. We're all expected them to have, you know, pretty big negative impacts. It's not evident in the growth data,
it's not evident in the inflation data. Aggregate earnings for the S and P five hundred in the second quarter, growth actually accelerated, So it's got the wrong sign in terms of the negative impact.
So is there a less technical way of saying this, which is that in some ways profit margins are normalizing what's cut? Essant was saying to John and Memory this week that in a sense this is more normal. You might not get the twenty four percent returns every year, but you'll be able to adjust and adapt to move forward with something that's a solid game, but not necessarily.
Out of the water.
Yeah.
So again I would say, you know, in terms of the margin issue, I mean, the cost counting way of thinking about margins is you know, is fine, but it.
Doesn't really actually hold up.
I mean, for the S and P five hundred as a whole, margins actually went up and margins are at new high. So I mean, I understand the nice intuitive narrative, It's just it's not in the facts.
What the economists are saying at the moment. To sort of put that together with what you see.
In anex I think, you know, the economists position is pretty reasonable if you think about basically, you know, their calls for inflation take our house view. I mean, we see basically, you know, the direct impact of the tariffs as about two percentage points on core goods prices, and then there's the indirect impact, you know, as everything feeds on each other, and that's I would argue the larger standard error to try to estimate as an when and how much.
But if you.
Focus for a second or the direct impacts, I would argue, if you look at core goods prices, we already had half the pass through that we were looking for. So you know, if you're negative and bearish, you can wait for the second half is going to tip us over into something or the other. But on the face of it, why should it be any different than the first half, And in fact, it might be even a little bit slower.
And we think it might be a little bit slower because if you listen to companies, I mean, raising pricing is basically the last resort, so to speak.
Number one, Number two.
You know, the directly impacted companies are about seventeen percent less than twenty percent of S and P five hundred earnings. Five percentage points of that is Apple, And they did talk about tariffs, but there's lots of other things going on, they just dominated basically the impact.
So sim this is another way saying the economy is not the S and P. Five hundred fair enough.
I think a lot of people have said that again again, but I think that that's the conclusion that we have to choge.
Another reminder this morning from Binkie Chadwotoutsche Binkie's going to see you. I know you take it two weeks off your birthday too, so happy birthday, your.
Vacation, congratulations.
Nothing ever happens in August, and then things happen in August.
I know repeatedly, Eddie.
Fisherman at Columbia University, writing the following quote, even small symbolic concessions from Trump could undermine the broader campaign and fracture Allies unity, a scenario that Europe fears.
Eddie joins to surround the table. EDDI, good morning, get to see you.
Great to see you too.
I want to try the question at you that Lisha and I were discussed in just months ago. How do we sufficiently incentivize President Putin this weekend?
I think Putin needs to understand that Trump is actually serious when he says he wants peace, because I think right now. Putin believes that time is on his side, so he actually sees these negotiations now does an end to peace, but actually as a means to allow himself to continue the war without facing significant pressure. There was momentum building in Washington last week four more sanctions on Russia.
Trump himself said that there were going to be very severe sanctions if Putin didn't agree to a ceasefire about by last Friday. That date came and went. So Putin already has kind of gotten a victory by delaying that. There's also a mentum to provide some more military assistants
in Ukraine. So I think Putin just by getting Trump in the room, by sort of convincing him that he's serious, he knows that Trump wants that Nobel Peace prize and will stay in that negotiation, and by prevent real pressure from coming down up.
I'd love to know what you think about this framing, because I hear this a lot. President Putin is driven by territorial ambition, not economic prosperity. He does not respond to economic sanctions. How do you change that?
See?
I disagree with that fundamentally, he clearly wants to achieve his maximalist objectives, which is to truly annex these four territories of Ukraine that he's formally annexed but doesn't yet control. But what happens if the Russian economy is in a massive crisis right even this year, just as we are right now, the Russian economies in stagflation. They're going to grow at probably at most by one percent this year,
and they've got inflation well above ten percent. So the question is what if you could get them into a significant recession, and if you had inflation at twenty percent, which you know we saw in the lead up to the nuclear deal with Iran, US anctions can do this if we actually are willing to go for the jugular, which in the case of Russia is its oil sales.
There's also this question of Russia's leverage, and that has to do with also a nuclear deal that I know has been in the works with the United States, and a question of what happens with their weapons and what happens on an ongoing basis. Do you think that somehow Vladimer Putin has gotten more leverage than people had expected heading into this meeting.
Yeah, I think something that can play very close attention to is that Putin and the Russian media have come into this meeting saying that it's not just about Ukraine.
They're also going to.
Talk about cooperation in the Arctic.
They may talk.
About restarting the New Start Treaty which you know Russia stopped participating in in twenty twenty three, which is this arms control treaty, And of course they've been talking about these potential economic deals. To me, something that raised my eyebrows is that Scott Besen apparently is going to be part of the delegation as well as the Russian finance minister. That's kind of unusual if you're thinking about this as
a ceasefire negotiation. And so what Putin seeks to gain there is to really kind of shift the discussion away from Ukraine and persuade Trump is that there's a bigger picture here and then he should actually normalize US Russian relations irrespective of what happens in Ukraine.
If Trump entertains this idea, how much of a wedge does that put between the United States and Europe?
A huge wedge.
And look, I just got back last night from Helsinkia. I was there for the past week meeting with various European officials, European diplomats, and they're petrified of this because they know that as soon as there's even a small sign that the US is backing off. Let's say Trump agrees to some symbolic sanctions using Putin himself is sanctioned, and actually, just a couple of days ago, Treasury had to issue a license to allow Putin to travel to Alaska.
Let's say Trump says, Okay, We're going to give you a little bit of sanctions using in exchange for some perfunctory Russian concessions. The Europeans are going to be panicked, and they're going to wonder what can we do to prevent sort of the lid from falling off of this pressure campaign that we have painstakingly built together over the last three years.
That has been some criticism of the Europeans in their approach by this administration.
Have the Europeans done enough? What have they been doing recently?
Yeah, So I'm glad you asked this because I heard Secretary Besen on the show a couple of days ago saying that the Europeans need to step up. Well, just a few weeks ago, Europeans did the most dramatic sanctions package that I have seen since the beginning of the war. They uilaterally lowered the price cap on Russian oil from sixty dollars a barrow to forty seven dollars and sixty cents. Kind of a strange number. It's fifteen percent below the
market price. They did that by themselves. This was supposed to be a G seven decision, but they went ahead and did it themselves. They also imposed secondary sanctions. These are not sanctions on Russia, but actually on Russia's trading partners.
They did two Chinese banks.
Were sanctioned by the EU, and I think most importantly, they actually sanctioned the second biggest oil refinery in India, Niara Energy. So they are already directly targeting Chinese and Russian businesses that are in bed with Russia. And that's not something that the US has been willing to do so far.
What's left what would you like to see happen?
So?
I would like to see the US join these sanctions with the EU, because ultimately, because of the dollar is still the global reserve currency. When the US is on board, the sanctions are much more powerful than if it's just
the EU. But there's more that needs to be done, I think sanctioning other Indian refineries, sanctioning Chinese refineries and more banks, and ultimately providing a clear roadmap for how these purchasers of Russian oil, like China and India can gradually bring down their purchases over time.
You've done an amazing job in your latest book and just generally through your research in understanding how much the global relationships are changing depending on what happens in this meeting. How much does I indicate who is against who, whether this is a multipolar world while.
This is or whether this is everyone go it alone.
Look, I think that there's also maybe a third option here where Trump may be reorienting US relationships toward our historical adversaries. We saw just last week Trump agree to allow Nvidia and AMD to sell semiconductors to China as long as they pay fifteen percent to the US government. That's a giant concession to China, and it's a huge sort of example of how we are warming our relationship
with China on this key area of technology competition. If we also start seeing some easing of sanctions on Russia, which I want to be clear it's not my base case scenario, but it's still possible that it happens today. Then you could start saying that Trump actually is kind of pivoting toward Russia and China and the Europeans are out left in the court.
Eddie, I appreciate your take and your opinion.
Thank you, sir, Eddie Fishman, there of Columbia University and author of choke Points narrowing his choice is to replace fed schare J. Powe to three or four names, saying he'll announce his nominee a little earlier than initially expected. Joining us now is the former economic advisor to President George W.
Bush, Mark Summlin.
Mark.
Of course, your name has been in the mix as well over the past week or so. Welcome to the program. Let's just start with the base case, the case for ray reductions. Mark, what do you think the strongest case is right now?
Great?
I think the strongest First off, thank you very much for having me. I think the strongest case is we just have to mark to market to the new data that we have. The data was revised very strongly to the downside on the jobs, and that's the most important data that we have. And so it's you know, jobs for May and June only came in at thirty three thousand combined for those two months, and so had we gotten those in real time, it's likely that the SAID
would have cut probably in June and July. And we know that the economy barely grew over one percent in the first half of the year, and so a four point three three percent SAID funds rate is just too high for the economy, the economy that we have right now.
Mak, can we stay on that payroll data, because there's been this great debate on Wall Stream, and I have to say it's very divided at the moment. Do you think that's stepped down in payroll's growth, and clearly you do.
You think it.
Speaks to a cyclical turn and not a structural shift. But can you tell us why you believe that's the case? What do you distance between one versus the other?
Absolutely? I do. I do think it's sickle.
I mean, I think if you step back, like very big picture of macro, we have fiscal tightening this year from the tariffs. Next year we're going to have some fiscal loosening from the tax bill, and behind all of that, we have the AI productivity gains starting to take hold for the first time, and so the pretty mixed the confusing macro picture, but you got to kind of write
it out in real time. And so we just know, like before the data revision there was a disconnect between jobs and GDP, and then after the revision there was no disconnect. Jobs got revised down to reflect what was going on elsewhere in the economy. And it's really important to mark to market to where we are and not just to say, oh, well, whatever we had.
Before is still fine for the FED funds.
Right, So let's do some scenario analysis. Let's say you become the next FED share congratulations, And let's say in September you cut by fifty basis points on the heels of some of this jobs data, and then you see tenure yields shoot higher kin to what we saw last year when the FED cut significantly.
What do you do?
Yeah, then I mean, then you stop. And so one of the reasons that I support the fifty basis point cut right now is that you have the inversion in the front end of the curve that's something like sixty basis points last time I looked, And so you know that you can cut by that amount without really upsetting things.
But the weakest part of the market or the economy right now is housing, and so you can't have the long end go up, and that's your constream right now, and so the long end starts to go up on you, you have to stop cutting.
You know, it's that simple.
You can make the argument that if the market, if sort of this collective decision making body truly believe that the economy was significantly weakening, the tenure would be significantly lower. Doesn't that sort of indicate that there is enough strength to continue at this sort of pace with these rates? I mean, isn't that some sort of signal in and of itself?
I mean, I think we go back to January, a lot of people, a lot of the best bond traders on the planet, thought the tenure was going to be at five or over, and so the fact that we're at four twenty nine and set of five is a reflection of the weaker economy in my mind.
So, you know, these things are always judgment calls.
But I think right now you have the scope to cut by fifty basis points, and then after there that you'd have to look at the data and you'd have to look at the markets, and you have to look at what's going on in the real economy and put it all together.
Mark, I'd love to know if you can share with us what your approach would be if you had the honor of taking over the top job at the Federal Reserve. We heard from the Treasury Secretary was sitting around the table with It's just a few days ago on this program, and he talked about the need for foundational change of the institution.
Yeah, what do you think needs to change?
Yeah, I mean, first of all, I think that the staff is all set up wrong. We you know, to do the job correctly, you have to understand three things. There's the data, and there's the economic modeling side, and all of the staff basically that's what they do. And then you have financial markets. You need to understand what's going on in high yield spreads, what's going on in
oil markets, what's going on in bond markets. And then you have what's happening in companies, and especially right now at a time of so much change, you really need to understand what's going on with AI and productivity gains in companies. And so I would like to have the staff completely change where you know, a third of it is doing economic modeling type of stuff and then a
third of it is real sectral experts. I mean, the FED chairman should have someone who is an expert in autos, an expert in retail sales, an expert in every single thing in the house, so that you really have the pace and the field of the economy going on, as well as more market people there that understand, okay, high yields, spreads are blowing out, and this is why we need to worry, why we don't need to worry. And so for me, it's less of a you know.
I don't have a problem with the size of the staff because I think, you know, the FED is so mission critical to the whole world.
I just think they are doing there's just so much redundancy and right now it basically functions as like a university research department, and I don't know why that's the case.
Mark.
This actually raises a point that John's been talking about significantly, which is how much does that mean a more active FED when it comes to balance sheet management? And it's not just quantitative easing, but also just the denominations of where you buy I mean, if you treat this more like a market's operations and a university, how much more active does that balance sheet become?
Yeah, you know, that's a good question. And I look, I think that the balance sheet is an important tool when you need it, you know, so definitely in crisis. You you know, it's something that's in the toolbox, and it works. I don't think it works that well or needs to be continued after after the crisis is over.
And so you know, if we were.
Coming out of the pandemic or something, I would have definitely ended the QI sooner rather than later. But they're you know, they're important questions right now when we have very high mortgage spreads about why are we still selling off nbs when we have you know, one hundred and fifty basis points spreads that are you know, that are.
Hitting the housing market right now.
So I think you have to, I mean, you just have to look at it very objectively about what is it what's the impact of the balance sheet in the real time. And you know, there's some people who would love to go back to the old days when there was no balance sheet, and I think that's a fine argument. If we could rewind time back to nineteen ninety five. It's just very hard to go from where we are now to that type of that type of operation.
Mark, this was a very thoughtful conversation and hopefully we can continue it over the next few months.
Thank you, sir Mark.
Someone in there the former economic advice at A President, George W.
Bush.
Veronica Clark of City writing, we expect limited signs of persistent inflation and a weakening labor market. Will have fed officials cutting by twenty five basis points in September at each meeting after to get to three percent.
Veronica joins us. Now for more.
Veronica and Mornick, good morning. It's good to see you. That kind of echoes what we heard from Secretary Bess. And let's get down one fifty. What is it about the inflation data that you think won't derail this effort?
Yeah, I mean the July inflation data was interesting. We finally got some firmer data, not downside surprises, and when you dug into the details, yeah, it wasn't actually in goods prices, which obviously people were looking for the signs of that teariff pass through. It was in services, which sounds concerning, but then you dig at a level deeper, and in both CPI and PPI it's just one off services that are particularly strong dental services and CPI PPI yesterday was portfolio management fees.
We know that moves with asset.
So I don't think there is any sign yet of the broad based kind of concerning inflation for them the.
Kid with yet yet. Why wuldn't that change in the months to come?
Yeah, I think the biggest test of the tariff pass through dynamics is really going to be August and September data. You know, based on what we know about when teriff raid started to rise, based on you know, there was in the import price data some producers maybe lowered their prices temporarily. We see that in goods like apparel. That's kind of ended though, as people draw down inventories. Maybe it's August September is that timeframe when okay, maybe you
do have to start raising prices. You've held off as long as you can. We know that's when some prices for things like clothing start to rise for a new season. If we still don't see it in those months, if it is more limited, I wonder if that tells us that the consumer really just can't handle these big price increases right now, That is not the persistent inflation.
I have Steve Rashudo I from Mizuho in my mind, stop taking this out and this out to create the number of that you actually want, because ultimately, if it comes in hot, if it barks like a dog, it acts like a dog at wags, it's tail like a dog as a dog. So how much can you really say portfolio management costs ignore that as the prices don't matter when the wealth effect is real, when you've got
retail sales that are expected to come in hot. I mean, how long can you keep being cute about the components?
No, and we don't want to pick and choose.
And of course portfolio management fees were weaker earlier in the year when we had equities falling, But I mean, I think it is it does speak to we're not seeing the big, broad based kind of price pressures yet, and I think this is just a very different fundamental demand backdrop than the kind of inflation we saw a couple of years ago. So yeah, it's not the ideal number, of course, but there's nothing really blaring red that would stay persistent in this data.
Do you expect any.
Kind of messaging at Jackson Hole that could really indicate how the FED is going to deal with both the political pressure but also this data that is open to interpretation.
Yeah, I think we've heard still enough division among Fed officials. There are still even this week, some officials who are describing the labor market as solid, you know, worried about some of these more persistent inflation risks. So I think Powell does kind of have to walk a line here. You can't be so dubvish that we've heard from officials like Waller and whatnot.
But I think it's they have enough information.
If they had had those revisions, you know, to the July, with the July employment report ahead of the July meeting, I think they probably would have been cutting at that meeting. So he'll probably feel a little bit more comfortable guiding towards Yeah, we are still expecting cuts and that could be on the table for the fall.
Is there sufficient two way risk?
And the upcoming information CPI early next month payrolls the first week is September.
Yeah, Yeah, we'll learn a lot more.
Is that August inflation print that we're going to get before the September meeting. I wonder if we could see more inflation impact there. It is I think the August employment report that matters the most, though.
The team seem to be putting a lot of emphasis on employment, and that's signed that your mandates.
So let's sit on this topic a little bit more.
We had Bank for America sat in you'll see yesterday and then making the case that ultimately what you're seeing right now, it's not a cyclical turn. It's a structural shift, and you can have a step down in payrolls without an increase in slack. You and a team, it's taking completely the other side of the debate, So please explain to sow much.
Yeah, yeah, I think the main debate among everyone watching the labor market data right now is is this, you know, some weakening demand underlying this or is this just an immigration story. We've had a slowing in population growth and that break even pace of payroll job growth is lower. I'm sure, but I think in the details of the data there are a lot of worrying things that this is more than just immigration. This is a weak demand story, and I would look to you know, a lot of the decline and.
Participation has been discouraged.
Workers you give up looking for work because you're not finding a job, that's probably not immigration. A big increase in unemployment has come from college educated workers. Those are probably people not being crowded out by recent immigrants. And then in July the big increase in unemployment, which you know it stayed at that four point two percent, but it was new labor market entrants. That's probably not new immigrants. Now, that's probably students looking for work and not finding jobs.
So there are enough signs that regardless of immigration, there is weakening happening.
You know, I'm just trying to wrap my head around the idea of pegging some sort of FED move to data that has been undermined in terms of the integrity of it by the US government, where the head of the BLS has just been fired, and there have been such massive revisions that you have a growing number of economists saying that if those numbers had come out in June and July, this FED would have already been cutting rates.
How do you sort of square that circle?
Yeah, I mean, there is of course a lot of attention and rightfully so, on the official data, but the revisions I think made a lot of sense to a lot of people, me included. We had seen a lot of evidence of weakening labor market before those revisions, and it was payrolls. It was the outlier. So it does make you know, some sense. I think I do trust the official data, of course, just as much as I did a couple months ago, which admittedly is maybe a
bit less than six years ago. I think the pandemic is still just skewing a lot of this, you know, the data of the seasonal adjustment, some of the collections. It was just a weird data event that happened, and it's going to be weird for a WHI but I do trust the official data that we're getting. But you do have to take all the data and form your view on all the data that we have available to So let's get to the data.
That we're going to get ninety minutes time.
How where do you place retail sales?
Yeah, it is an important one.
We've seen this dynamic this year in good spending where maybe there was some front loading that was boosting sales temporarily. Services spending in the quarterly data and the monthly data have been much softer. Retail sales, I think a couple important things to note. You know, if it is a soft demand story that is limiting the ability of companies to raise prices, maybe we see that in softer spending.
But retail sales are nominal also, so it's important to keep in mind as we're getting into the fall, we could have some bigger price increases and that could make nominal retail sales when they come out look stronger. But what we really care about, of course, is real spending. I think this number today will be fine, a healthy enough number.
It's good to see you as always, thanks for dropping back. Thank you very much for a a clock there of city. This is the Bloomberg Seventans 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.