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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a 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. Sarah Hunt of Alpi Saxon Words writing Investors scene positioned for positive earning surprises into twenty six, but we expect higher volatility as summer gives way to four. Sarah joins Usnaff for Marcom One is Sarah, good morning, it's going to see you. What's the source of that volatility going to be?
I think the uncertainty that's coming around the timing of what's happening in tariffs, the timing. There was an announcement today that aluminum and steel in different products was going to be taxed at a different rate, and that did not include it did include goods in transit. I think all those kinds of things make for problems for potential earnings.
I think the uncertainty around what spending is going to happen, something like what's going on with home depot not such a huge thing, not a big surprise, a lot of big ticket items, not so much people bought ahead of tariffs. But I think that there is some concern about what this is going to do to margins and what it's going to do to earnings, and that's going to I think, add to.
All, Well, let's slay on this, which way do you think it breaks. Let's say we've got a company right now in America that was importing a lot of goods, a lot of pre tariff inventory of the goods they imported that were tariffed, they were absorbing that on margin. Do you believe that's going to lead to say, cost cutting, a labor market hit, or do you believe it leads to higher prices they're going to pass it on to the consumer.
I think they're going to try to do both. I think they're going to try to get their costs in line as much as they can, and I think they're going to try to push price to the extent that they can. And the question really is, as these targets have been moving all year, did we get such a backup in demand that we pulled for a lot of activity And are we therefore going to see some softness anyway, or is this going to be so gradual that it's that it doesn't have as big an impact as a
big one day slam dunk situation. And I think that's the question and how this plays into PPI and CPI because a tariff isn't really inflation itself. It's a tax, but it doesn't matter because if the price levels are moving higher, it doesn't matter to the consumer. It feels like a problem because prices are higher.
I remember a long time ago at the end of July when people said August tends to be volatile. Watch out, it tends to be the witching month. Well, we're up, you know, one point seven percent on the S and P. We've reached new high after new high. Sure we've been down for a couple of days, but down as sort of a relative statement, given that we're going nowhere, at what point are we just pushing off this volatility showing that the pain trade still is higher.
So I think that right now we've got Jackson Hole coming up this week. If you recalled last year, it was the labor numbers in August that came in that really threw things off for the FED and people started to worry about the labor market day. It is uncertain enough that right now it's like it needs a push
one way or the other. The fact that there is talks with Russia and Ukraine, whether they get to piece or not, that's probably a netpet benefit to most things, except potentially energy, which is not the worst thing in the world either, because that helps everybody else with lower energy prices. I think the question's really going to be where do we end up in terms of the consumer, and where do we end up in terms of inflation, and what happens to companies and are they laying people off?
Does that affect the labor market? All those interplays are uncertain now, and I don't know how much clarity we get in three or four weeks, but you could see some money even data right now.
A number of people are talking about trying to just get a little bit more defensive. We see that in the investment grades market, with US spreads getting to the lowest levels going back to nineteen ninety eight. And the theory here is there's going to be some weakness and potentially you could see it in a stiflationary type of feel.
Are we getting to a place where the high flyers, the tech exposed stocks will continue to perform even as the rest of the market continues to just kind of grind nowhere because of that type of dynamic of sacflation.
And because of the dynamic that there's still a lot of growth in that sector. There's still a lot of cash flow, and they're not being impacted as negatively as some of the companies that don't have the technology aspect. So as that technology throws through flows through, maybe you do get some margin expansion from that, right because that's the big argument about AI is that it's going to help us and it's going to help productivity, and that's going to help margin. So there's a little bit of
an offset whether or not we get that. The big spend right now is still in technology. So those stocks are at a premium valuation for a reason because people can see through and see forward.
At least I mentioned the investment great credit spreads. Let's find a compliment it's on that this is important, super tight tightiest level since when was it ninety eight d eight this side of this century, which is absolutely bone cause do you think that tells you more about confidence in corporate America or a lack of confidence in the treasury, in the US government and in fact for selvereigns worldwide.
I think it probably has to do more with the confidence in the companies themselves and the balancees of the company themselves. I think there's a little bit of that on the sovereign side, because as debt levels rise globally, there is concern on the sovereign side that we hadn't seen prior to those massive increases in debt posts to financial crisis.
But if you look at the way.
That public companies at least have been managing their cash flows and balance sheets, there's a reason those spreads are so tight when it was a yield chasing operation. And the other one is they're in pretty good financial shape. There isn't a lot of credit weakness on a lot of the publicly traded stuff, so the IG and those spreads are very very narrow because there isn't a lot of daylight between that.
Right now, there's another way of asking what John asked, which is, even with spreads at the narrowest since nineteen ninety eight, is there still value because there is any spread above benchmark government rates, given that their credit worthiness on some level might be better in some respects than the US government.
I think that's one of the reasons that you saw some of those corporates be able to borrow at ridiculously low rates right because people looked at them and said, those stabilities of cash flow are way better than some governments that I've seen. I think in the end, there's always a place for fixed income when it has finally a yield, which it does if you're matching portfolios, if you're matching exposure, or if you're just looking for safety
and preservation of capital. There's always a space for that. And I think that right now it's not a bad place to be if you know that you need that money in a short period of time. Longer term, do we think that rates maybe go higher on the long end, they could, it's unusual to stay this low for this long.
A Corporate bonds a better hedge right now, a better safety play than government bonds, given the facts that they also have these strong balance sheets behind them.
I think that the volatility in governments is much more policy driven than it would be for corporate so to the extent that you might see more volatility in the government market, and we have over the last year, which is more the last couple of years, it's more surprising to see that much volatility in government spreads, so to the extent that there's less vow in the IG market, I think that's not a wrong thought.
Sarah, good to see you. Thanks for dropping by, Folful staff. Sarah Hanna of VAMPI Saxson Wood joining us not to build on the conversation. Retired Lieutenant General Robert Welsh of Academy Securities. Lieutenant General, Welcome back to the program, sir. We've been tracking the diplomatic effort in the United States in Alaska than down in Washington. Can you tell us what the realities are of this conflict on the ground.
Yeah, thank you, John. You know, this is war's been going on obviously for a long time, and when we talk about a stalemate, Russia has been making slow progress on the ground. There's no question about that. It's a much larger country, it has a lot more military power, but it's been very slow progress. And the real challenge for Russia is that in today's modern warfare, the defense is more to an advantage than the offense, and Russia is running into that against the Ukraine belts of defense.
And what we see clearly here is they're getting closer to the Ukrainian main defensive belts or their fortified belts. Is that's the area of the Dunesk region that Russia really would like to get their hands on for a number of reasons. It's part of the industrialized area of Dunesque, It's got a lot of key minerals that are in that area. But from a military standpoint, and that's where
Putin is really focused. From a military standpoint, it has the key defensive areas around four major cities, and urban conflict, as military members know, is the toughest warfare to go through, and that's where Russia or Ukraine has their forces entrenched in this defensive belt.
Lieutenant General, how much of a win, then, is it for Vladimir Putin to not have a ceasefire as some of the details of this potential trilateral meeting take place.
That's a great question, Lisa. I think both the US and the Europeans did want to cease fire. In the situation is the Europeans and Ukraine, certainly in the US would like to end the war more than Vladimir Putin would like to end the war. So a sea fire helps end the war, stop the fighting right now, and stop the killing. As Donald Trump has put out, in the case of Putin, he would like to just continue. So these talks he continues to kind of slowly drag
out because he wants these battlefield gains. The more gains he gets on the battlefield, the more leverage he has, and the possibility of a breakthrough that could happen, and he could even gain more gains and threaten more of the heart or the interior of Ukraine.
As we hear more about security guarantees, it's some sort of agreement between the US and Europe to guarantee is some sort of support to Ukraine. Do you feel more encouraged or less encouraged? Do you still kind of feel like the jury's out.
Now? I think very encouraged after what's happened over the last few weeks. There's no question that the meeting yesterday at the White House was historic. I don't think we've ever seen that many national leaders along with the leader from the EU and the NATO secretary, we haven't seen anything like that the White House. That really shows is the power, the unity, the strength that NATO is bringing and the ability to kind of call less power for
collective security. And that's a key thing here that Vladimir Putin, throughout this conflict has tried to break the NATO alliance, tried to break the US from NATO. And if anything with this showed around that table yesterday is those leaders, as Ali had said, have really kind of come around the table to show Putin that there is a lot of strength here. And it's not only military strength that's here.
We know Russia has continued their wartime economy to build their military, but the economic strength that you see from the group that goes around the table it is much larger than Russia is, and Putin knows that.
Lieutenant General. Just a final question, you mentioned NATO the details of this security agreement. In your opinion, why does it need to live outside of NATO, Why is that so important and what does that tell you about really the nature and strength of that overall agreement in the future.
Now, John's great question. I think the key thing is is if you look at Putin's objective from the very beginning, is to rebuild the former Soviet Union and break NATO. That's his goal, that's an objective and a red line for him from the very very beginning was Ukrainie and not joining NATO. And from the beginning President Trump as he came into office, laid that down that he knew that would be a red line and took that off
the table, and the Europeans supported that. And so now when you get to some type of security measures, it is so important to have security measures that when the fighting stops that there were security guarantees, and that is going to be the devil in the details as we go forward, and Putin will not want to have an
Article five type security arrangement. And what that means is that we would be supporting Ukraine through the European countries, those that are in NATO with the same type of support that they would get as if Ukraine was in NATO. It was a very interesting approach that Trump took and pulled that out of his hat, and Vladimir Putin listened to that and initially said he would take a hard look at that. So I think that is going to
be the key thing. And Zelenski is going to push you very very hard to get those type of disservances from the large militaries.
Of the bright. True, and we all wanted to say, Lieutenant General, we appreciate its time. Kit jokes of self gen writing. The more prices rise in the data, the worse it will be for the economy, and the feed should focus more on the labor market as a result. If they do that, the dollar will be vulnerable. Kit joined us now for more, Kit, welcome to the program. So let's talk about this FX market driven in the
first half of this year by perceived capital flows. Do you believe that in the second half of this year it will be driven by rate differentials? And why.
Rate differentials up to appoint expectations about growth which are which are often the same thing. But but yes, I think.
But people are genuinely uncertain and sense of at the moment they're uncertain, but aware of the fact that the world is very long dollars because we've all put so much money into the US equity market, because money is gone to the US treasury market, because the US has been out performing for so long, and that if the economy slows, rates need to come down significantly, then then some of those some of the returns people have enjoyed
are pretty vulnerable. I think the market's confused about the short term rate story, but confident that the bit the answer is is the US economy slowing a little or is it in more danger of a more significant significant slowdown? And that means we're overreacting to every single piece of macroeconomic data, with the exception perhaps of the really sort of minded data we saw yesterday, but we're lining up to overreact to each piece we get going into September.
Taking a step back kid Earlier this year, it seemed like a one way freight train of cell dollars sell the United States. That was the trade, and pretty much everyone lined up behind it.
Is it over?
We've kind of plateaued and kind of shifted around this level for a couple of months. Now, are we seeing sort of the end of the cell the America trade and going back to this sort of nuance to overreacting to every data point, type of landscape.
I think the data will decide that. I think the question then is whether the US economy is slowing significantly. You know, a currency can't go down as fast as the dollar did, or go up as fast as currencies like the euro did for very long. An inflation targeting central bank reacts to fast currency moves, and economy reacts to fast currency moves. So the move we had in euro dollar from one o two up to one eighteen
was too fast. We have to take time out. Whether that takes us to one twenty five or we get stuck here depends on how much or how little the US economy slows in the next three months. I would have said, and if we got a repeat of last month's payroll numbers, if we've got something genuinely soft, then I think we're going to head off into the middle of the one twenties for eur dollar. We've got another five to ten percent weakness in the dollar in this
cycle to come. But you know, I wouldn't want to overinterpret some of the data that we've had in the summer and extrapolate it out blindly as saying that is what's definitely going to happen again. If the inflation hit from tariffs isn't too big, the economy is not going to slow too much, and are very gentle easing in US growth doesn't justify much dollar weakness at all.
So let's build on that. Right now, we're looking at one sixteen eighty eight on the euro dollar cross. You're saying it could go into the mid one twenties if you do see some sort of significant weakening in the US economy heading.
Into the fall.
What are the key data prints that you're looking at. What would constitute that type of weekakness that would really cause that type of depreciation in the dollar.
So we would set ourselves on that route if we saw weakness that suggested not recession or anything, but that the Fed's got significant rate cuts to make that we're going to get yields down, that the things that have made people pour them poor their money into US assets need to be questioned, at least temporarily. So if we saw, you know, if we saw a player le number in the United States that was I don't know, say only up one hundred thousand or weaker than that at the
beginning of September, I think that would concern people. If you saw weakness in the housing market beyond a small correction, if you saw softness in real personal spending as consumers scale back in the face of higher prices, then I think you'd be sort of forming that that kind of backdrop. The advantage for the consumer who's critical in this is if the inflation data continues to be held back by
lower energy prices. So if low energy prices offset tariff increases, or if tariff increases aren't fed through to US consumers, it all softens the economic blow and the downside of the dollar is reduced.
We're all still wrestling with this, and I imagine many on the committee that Federal Reserve are wrestling with the very same thing, which begs the question going into Jackson Hole, just how much can we expect NEIL data. Renmack, don't expect a strong signal at Jackson Hole. Jonathan Pinglely ubs if you're looking for ray cuts, he says, quote, I don't think he's going to lock it in.
Kit.
Do you think he's going to lock it in in a few days time.
I'd be surprised if he locks it in. But the topic, the topic of the symposium is the labor market. The labor market is going to be the thing that tells us what's happened to the economy. So we should hear a really interesting set of discussions about how they feel about the labor market and how they feel about labor market tightness relative to softness and employment gains. And if I get any hints from that, will I will jump on them to provide me with a clue to what
they'll do. But you know, I think that again, if the job's numbers are week at the beginning of September after what we saw last month, frankly, the game's up. So that'll tell us what happens, But it'll be it'll be a very interesting supposion on the labor market.
Okay, just before you go, what's more likely over the next twelve months or so that we get three four five rate cuts from the Federal serve or Arsenal win the league.
Three four five. I think Arsenal I've got a decent chance of winning the league. Probably, it's probably I'm slightly more optimistic about that than about anything in the US economy, which is all up for graps.
Okay, thank you, sir, kit Chu's there a sebchen Okay, thank you very much. On the FX market and a little bit of Premier League football, pre amisserer of JP Morgan writing the dual mandate is intention but we think a September twenty five basis point rate cut is likely and a sign or for more cuts to come as the feder removes the level of restriction in monetary policy. For more pre adjoints round a table, pray, good morning, it's going to see RBC has talked about this. A
lot of people are focused on. It is the long end becoming unanchored from the front end, not just domestically but worldwide when you look at the bond market at the moment.
So I'm glad you bring up the global side because I think that's absolutely important. Global term premiums are correlated the fact that we have fiscal expansion globally, the fact that there isn't that much demand for long duration is the reason why UK, German, Japanese long end yields arising, and that's raising US rates as well. But I mean, talking about the long end getting unanchored Sell America or
the deficit, that's like very April. I mean, I know it was only a few months ago, only a few months ago, but you look at the tariff revenues they are coming in, they're actually offsetting the trip will be the one big beautiful bill. I think it's going to largely offset it. You look at the Cell America trade, we're not seeing evidence that foreign investors have stayed away. Now there is a longer term question how much should treasury And I love your question to Secretary Vesson, how
much should you issue in the long end? I think all Treasury departments have to think about that and maybe not issue as much in the long end. And that might be happening issue where the demand is the demand, and you see it in the credit market, the mortgage market, the treasury market demands on the bellue of the curve five to ten, and that's where they can issue. So yes, it's a little unanchored. You can trade the curve on that front. But I don't think we're looking at a
scenario that bears steepener. Which is a nightmare scenario for risk assets as well, is when all rates rise led by the long end. We're not seeing that. I think the curve is steepening for different reasons.
Now, are we going to see the opposite? You said that Cell America is so April, Okay, are we actually outright into buy America again? As we see the dollar firm up in a couple of different pockets, and the long end, Yes, yields have been rising, but not necessarily unmoored in the way a lot of people were worried about exactly.
So, I do think that US exceptionalism, Remember we talked about it just a few months ago. Is that over look at the economic data. We're pricing it. Look at financial markets, you know, I know the financial market is not the economy, but it is pricing in. I think markets across the board are pricing in a soft landing and what government Waller called good news rate cuts that maybe the Fed can reduce accommodation, those rates can fall a little bit, allowing the broadening out of the recovery.
I mean, we have the structural AI tech capex in there, but maybe this can broaden up. That's what the market's pricing. And so to your question, is the rest of the world buying US assets? They are, They're buying credit, they're buying equities, they're buying treasuries, fixed income because they are seeing that the US is still growing the best.
Are you going a long duration? Is this a time to buy even at a time or potentially there is inflationary pressure coming down the pike.
So we are long duration. We've looked for any opportunity. If we've been in this three seventy five four and a half fair value in our mind, that's the soft landing fair value. There's an asymmetry though, if things slow down. We have a lot of policy shocks that have hit the economy. If things slow down, we can absolutely rally more. But if we stay in the soft landing. By rally more I mean lower rates. But if we see in the soft landing four p thirty on tens is cheap,
you're near the upper end of the range. So absolutely we've been buying some duration. Are we max long?
Know?
You know there's to your point the treasure amount. Interest rates are driven by this fear of inflation, fear of growth. There are shades of stagflation in the data right now. I don't think Chepool is going to commit to a rate cut. I think it's going to just signal the easing bias. So we might hang around here. But what happens if this I think the labor market's on edge, and if things actually slow down, as companies say, we can't absorb all of this in margins, We're going to
have to cut costs. That's a fear. That's what keeps me up at night, and at that point, duration's your only friend.
Do you think it's for disappointment on Friday?
I think we get a lot on Friday, so becaus I always think of the economic outlook in the reaction function. If you're looking for chap Owel to signal imminent rate cuts or a dubbish reaction function, I don't think we're going to get that. I think it's going to depend on So where the disappointment might come in is we didn't commit to September. We still left the door open because we have another payroll report revisions. Now, I think the market might make pay more attention to revisions along
with that number. Something that's frustrated me for years that you get both sets of data and the market always looks at the headline. Maybe we will look at both. You have another CPI report, So I think where the disappointment will come in is no commitment. But I'm going to be watching that framework review. That's going to sound maybe a little bit hawkish. They're going to talk about
symmetry to the unemployment rates, symmetry to inflation. That might sound a little hawkish, but I'm watching the economic outlook. How nervous is he that consumer spending has slown? That PDFP the private domestic finance sales, That number is slowing without the rise that much rise in inflation. So why is the consumer pulling back if companies are not passing on costs? This there's some under maybe some underlying sloaning.
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