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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie 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.
Krishna Guha, Evercore ISI, Vice Chair and head of Central Bank Strategy, joins us now for more. Krishna, thanks so much for joining us this morning. Do you have an understanding of how the court will define for cause in this case?
So I'm not an attorney, I'm an economist, and so I certainly don't want to mislead your viewers by offering legal expertise here that I don't have. What I will say, of course, is that the four course protection and the idea that this establishes a high standard before a president can consider removing a FED official, is central to our understanding of how Central bank independence operates in the US, so there's a lot at stake in this litigation.
Christna, you're head of central bank strategy at Evercore, I say, as well as vice chairman. And then I wonder what you think about inflation. We're looking for pc to come in at two point nine percent. We had Core CPI at three point one percent. We had Core PPI at three point seven percent. Yet Chris Waller says it's close enough to two. Do you agree.
I think what's important here is that the inflation that we really care about is the second round inflation. It's the risk of inflation persistence, and no on as a matter of theory or practice, thinks that the central bank should be directly responding to the first round effect of tariffs like attacks mechanically on prices. The issue is what pressure does that, if any, in part to underlying inflation dynamics. That's the second round question, and so I'm less focused
on the individual month's inflation passed through from tariffs. That's the first round mechanical stuff that I am trying to assess what the risks are of inflation persistence and balancing those against the risks to the labor market. I actually think the conditions likely have been met for an initial
cautious step down towards a more neutral rate. But I also think that the FED should be very careful about signaling what follows from here and making it clear that it'll take the time it needs to assess the incoming data and judge whether, for instance, by December, the case for another cut has or hasn't been met.
Well, what if the FED didn't Krishna take the time and needs What if the FED wasn't as thorough? What if the FED was stacked with Trump appointees who just wanted to do the President's bidding? Would you buy then ten year treasuries? I mean, does four to twenty make sense to you?
So I am concerned about the outlook for central bank independence, and I'm concerned about the Cook affair in that context. Obviously, if the President is able to push Governor Cook out, then that accelerates the timeframe over which his nominees may acquire a majority on the FED board. And that's as you know. That then raises questions as to whether we might see an unprecedented effort to deny certain Reserve Bank
presidents renewal again without cause. But also that the move against Cook, based on allegations that have not yet been charged or proven in court or established by any kind of quasi judicial process, essentially weakens the protections that future FED governors, by the way, including the people who present trumpets in place, will have in the event that they have to make decisions in the future that this or
a future president doesn't like. So this does absolutely all bear then on how you think about the outlook for
policy and what may happen to bond yields. I personally feel that the market is likely underpriced for the risk that we could see a more more of a break in FED institutional practice and potentially the conduct of monetary policy over the next year or so, as the FED Board transitions and as the administration attempts to acquire more authority over who gets to determine when for course conditions have been mere.
Bill Dudley and Layel Brainer agree with you. We spoke to both of them this week. In terms of the market reaction, what kind of I guess yield should we see, say on the ten year, if the market was really taking into account that this could be more of an erosion of FED independence.
So I think what you see at the moment is that the bond market is not really quite sure how to interpret, first of all, the actions relating to Cook, and secondly that the market is wary of shortening bonds aggressively in an environment in which, per Governor Walla yesterday, we could discover soon that last three payroll months were negative right once all the revisions are in. These are not necessarily the microeconomic conditions in which you would want
to ramp yield. But I would say that if and we're still dealing in a probabilistic and uncertain environment, that if we were to get further confirmation over time that the FED is losing independence, and if this resulted, as historically generally it has in a central bank becoming more structurally dubvish, that I do think at some point you would likely see a substantial response in the bond market. The issue, of course, is when and under what circumstances
would that happen. I think it's hard to predict and certainly hard to say with any confidence that that adverse bond market reaction would come immediately.
Stay with us.
More bloomber of surveillance coming up after this, We're going to turn to Tech Now. Heath Terry, head of technology and Communications at City Research, says, quote first AI analyst on Wall Street believes AI revenue will serve eighty billion dollars in twenty thirty from forty three billion dollars this year. Heath joins us now for more, Heath, that's a massive jump. And if you think that's where it's going to go, is this market underpriced?
Look, that's that's the way we look at it.
I mean, you know, we are in the very early stages of this AI cycle, and really we think sort of posed for an inflection ahead of us. A lot of things that sort of matter to driving growth are
about to clear in in gross favor. The bottlenecks that we've seen in capacity constraint, the model development advances that we're seeing particularly around agentic AI, and then of course you know the biggest of those being what we think could be called AI squared, the idea that AI on its own can start programming AI.
So, you know, I wonder Heath your take on what happens in China, because in Nvidia first didn't give us a forecast for the third quarter. They had nothing in the second quarter, and then the CFO came out and said maybe two to five billion, but she's not really sure about the president's deal to get a fifteen percent take of everything they sell there.
And to me, it just seems.
Like the Chinese Communist Party is willing to do a whole lot to make sure it's companies don't buy our chips anyway. So what's your take on that whole story.
Look, I think you're seeing that kind of mindset from every country China, certainly the countries in the Middle East,
you know, major countries in Europe and the US. Of course, everyone feels like AI is an important enough technology that you cannot just suc seceed it to sort of the global winners, which in other cycles have always been American And I think you know, the mistakes of the Internet era for a lot of companies on a country basis, or a lot of countries on a company basis, of allowing the US companies to come in and sort of be their own local champions is something that no one
really wants to make in AI. Now, that's a really hard thing to actually enforce for most countries. China can obviously do it. They actually did it very successfully in the Internet era. I mean, there are no bigger internet companies outside of the US than those that are in China, and I think they want to make sure that they do the same thing when it comes to when it comes to AI.
I noticed also yesterday that an analyst from E Marketer said, we have to see returns on these investments and soon. And the threat is that these big hyperscalers who are spending forty percent of Invidia's revenue and forgive me that I'm heavy on in video, but they just came out with earning. So it's occupying my mind that these big hyperscalers may pull back on the margin in terms of capex if they don't start to see return soon on
the applications, on the AI applications that they're powering. What do you think about that?
Look, I don't think there's any chance of that, right. I mean, we go back a year ago and you had the CEOs of Alphabet, Meta, Microsoft all get on their earnings calls and say some version of the risk of overinvest investing is far less than the risk of underinvesting in this space. And then we fast forward a year later and they've all said, you know what, even though we believe that we actually underinvested and capacity constraints are still there. Microsoft in particular called that out on
their most recent earnings. And so you don't see that kind of demand outstripping supply if the returns aren't there. And there have been a range of studies and MIT had theirs which I think most people sort of misunderstood or didn't get past the headline. IDC has had one that said that you know, cfo or CIOs are getting three point seven x for every dollar they put into to AI. So there's a lot of work being done
around this. We obviously did a lot of work around this in the one hundred and paid twenty page report that we published earlier this week, and the returns and admittedly their early returns at the early return show that this stuff is working at the enterprise level.
He's something that Jonathan has been bringing up a lot when it comes to the AI story. I'd love to get your take on is do we have the power the electricity needed to run this industry and especially given the outlook you have in your research.
Yeah, Look, this is something we cover a lot the team at City that covers the industrial space and the energy space that spent a lot of time on this, and look, they're going to be bottlenecks. But here's the for lack of a better time, kind of the sad reality of this is that when there are shortages, when they are bottlenecks, capacity and supply moves to the highest value usage, they move to the highest bidder, for lack of a better term, and that's going to be AI.
And so, yeah, they're going to be shortages, they're going to be bottlenecks. But if you're in AI and you're building a twenty billion dollars data center, you're far more likely to get the equipment you need, the power you need than the person who's next further down that down that line on that list. And so there will be bottlenecks, but I don't think you're going to see them in AI, and I don't think that they're going to be the things that sort of slow development here. Stay with us.
More Bloomberg surveillance coming up after this. We're going to stick with retail investors digesting a slew of earnings from the sector and their signals about the economy. Data Telsea of the CEO of Telsey Advisory Group, saying the tariff impacts on EPs and margins are being managed and price increases have not been fully passed on to customers. The bulk are expected to be visible in the third and fourth quarter, and Dana joins us, now, good morning, good morning,
very busy earning season. When will we see the full impact of the tariffs.
I don't think you're going to see the full impact of tariffs until heading into the fourth quarter, and it's on a select group of merchandise. And frankly, when you think of the newness that's coming in, particularly on the apparel side, perhaps you'll see more of the price increases on the newer products, which you may not even know because they never were issued before. So that's some of the bulk of it. What we've seen, is we've gone through earning season, is you haven't heard that it's been
the full impact. And keep in mind, we've had a price tracker on eighty items since April, and what we've seen on iconic items, whether Levi's five oh one, Barbie dolls, we haven't seen big increases across the board. It's very selective with those price increases, you know.
I'm the administration has long argued that this is just like a sales tax, and it's only just a one time price hike. But the thing is, these tariffs trickle in over months and months and months, and the manufacturers try and hold back price increases when they can, so they take some into margins, they pass some to suppliers. I feel like we're going to see a step up of prices over time.
That's what's expected. The expectation is it will step up, and you're right, it's a third to third. A third, a third look to diversify their sourcing, a third look to share the cost with manufacturers, and then a third of the headwind is passing the prices onto the consumer, which we not have fully seen yet.
What do you think about? Jonathan Levin wrote a column for Bloomberg Opinion yesterday pointing out that we have higher pes on some of these retailers than we do on Nvidia. If you look at the forward pe for cost Co, it's fifty two times earnings and in Vidia is only forty. Why are investors willing to ascribe such a value to these retailers?
Frankly, for something like a Costco, you have annuity from continued membership. You don't have a lot of people not renewing their membership. The fact that you still have the opportunity to grow your unit base globally, that it encaptures such a wide customer. So I've got great value on prices, I've got a sticky customer base that's only growing, and I still have the ability to open more units. And don't forget Kirklands. They've got private label that's of value that can expand to many more.
Category fantastic products when it go.
Always impressed by Kirkland products.
Are you a big costco shopper?
Yeah, I love it.
Do you have a costco membership?
Of course, I have the executive membership.
Wow, you're definitely a different person than I remember you a few years ago. So who's doing well in this environment? It's the costcos, It's the walmarts because they're big and they're able to really mitigate these tariff concerns.
What about off price? Look what you just saw at Burlington a five percent same store sales increase. Look at Alta Beauty very strong, that whole beauty category. There's newness and beauty and it's driving demand. What about the category of Denham and we've seen Denham be look at Levi's they talked about Denham on the category side. I mean Gap did well with denhim both at Old Navy and
the Gap brand. And you're seeing in some of the intimates areas the rebound of Victoria's Secret in the turnaround with the inflection point and intimates give consumers something that's new and different, they'll open their wallet.
No denim intimates.
I hope there's no denim in.
Yeah. When it comes to Matt Tmi, you've got to have good genes, right, This is the whole American eagle debate, is there or do you see a push in retailers of trying to go to this cultural Americana?
You know what? I think it is cultural? What's part of the conversation. So you look at the Catside group that basically has the better denin campaign for Gap. It's driving up tremendous number of views. You take a look, look what was just signed by Abercrombie, whether it is the NFL Partnerships, whether it's the Dallas Cowboys. How do your remain relevant and expand your.
Audio that Brittany Mahomes is now going to be the face of Averercrombie, Travis Kelcey and I think this came out in the day they announced their engagement is.
Doing American Eagle.
Partnership with American Eagle, you do have to have a celebrity endorsement tied to your brand.
It's working. I mean you look at Beyonce and Levi's and the effectiveness of being able to capture the number of their audience and their clubs. You're part of their club now.
By the way, I was shocked the other day when I looked at the tj Max stock chart over five years, they absolutely crushed it. And I'm guessing that like a Burlington and a Ross stores and these discounters are all doing very well. What do you like the best? Like if you could own a couple of retailers, only a couple of retailers, which would they do When you.
Think of best in class in my world you talked about Costco. Look at TJX. They are best in class. They have category strength. It's very impressive what they've done. You take a look, frankly, what Alta Beauty is doing and the Beauty Unleashed plan with the new CEO. Well, she's promoted CEO. But it's working and they're capturing a wider customer base. It's compelling. You look at brand leaders and brand leaders like a tapestry, like a Ralph Lauren Levi's.
They're effective because they capture the consumer and you think about what can be what can be enhanced. Take a look at Bathroom Bodyworks, watching that very carefully for the speed which they're transforming their.
Business Bottles and bodyworks. Is that just like soap bombs or it's.
Soaps and sanitizers, But what about forty million loyalty members, forty million loyalty members who are going there on a regular basis that matters and today capturing that customer's key.
Here's the key.
That sounds like the consumer has too much money?
Well not yet.
Well it depends some people like you know, special bath bombs and things like that.
And also there's a trade doown.
Here's the true Here's the big question though, in the luxury market, especially makeup, would you buy do you think consumers will buy one hundred and sixty dollars lipstick.
Very expensive, more expensive than the Emez eighty dollars lipstick or Chanelle fifty dollars lipstick. Yes, there will be people who buy it because it's the entryway too. Instead of getting the two or three thousand dollars naval full bag, you're going to get one hundred and sixty dollars lipstick and you'll get a case that says LV Wow.
You really think that people are gonna buy this?
You can't surpass what a brand can generate with a lifestyle offering.
And for Matt, if you don't know this is Vaton stay with us. More Bloomberg surveillance coming up after this. Now we're going to get a reaction from Ryan Wang, the US economist at HSBC. So what do you make of this?
Yeah, Well, as Michael said, the numbers are broadly in line with expectations. I still do think it's important that we're seeing that step up in the core PC inflation rate up to two point nine percent. The Fed has been projecting that it will reach at least a little bit above three percent at the end of this year,
and that's very key. I mean, if we know that inflation is going to go up, and then we're hoping that inflation eventually begins to cool off after the full effect of tariffs comes through, it's still important to track these numbers every month.
How uncomfortable is it to actually see on your screen two point nine percent for core PCEE yet at the same time pretty much knowing the FED is going to cut interest rates next month.
Well, that's that's really the tricky part. I mean, inflation admittedly is much slower than it was just a few years ago. We're not getting those types of price increases. But at the end of the day, three percent is still not the fedes two percent. And this is why, although we do have some kind of consistency amongst the FED policy makers, FED shared drone pal saying that yes, okay, tariffs are going to be a one time effect, even if that one time effect takes a year or multiple
quarters that fully pass through. But still we need to track the data. And I do think you know, if the FED does cut rates by twenty five base points in September, it's still not going to necessarily mean a sequence of rate cuts. And that's largely because of these inflation numbers.
Chris Waller called underlying inflation close to two percent. I don't know if he's a statistician, but do you agree.
Well, I just think.
It's very tricky to get into this idea of just excluding the tariff effect and trying to look at inflation on that basis. So no, I mean, if we were talking about core inflation that was below two and a half percent, Okay, now we're talking about arrange, that's sort of within a few tents. But when you see an inflation rate that's closer to three percent, and really it's
the mix of inflation that's coming through. Some of it has been, you know, incremental increases in goods prices that are clearly related to tariffs, but some of it has been on the services side, and that's more structural. Of course, services inflation tends to run above goods inflation, and although we've seen some deceleration in rental inflation, the overall numbers are still adding up to to what we see two point nine.
By the way, we were talking about this with Dana Telsea just a moment ago. The administration has argued that these tariffs are just going to be a one time price increase, But I keep wondering, because the tariff structure is so dragged out, doesn't that lead to incremental price increases over time?
Well, I think we're definitely going to see a mix. If you really talk to businesses they're adopting different strategies. Some businesses passed the tariff straight through right away, but that wasn't the majority. The majority adopted other strategies front loading of inventory, selling down the pre tariff inventory, and some have passed along a portion of those price increases, but not all of it. So I do think we're going to see an extended period where some products are
affected by tariffs. Now, is that going to be enough to push the overall inflation number, let's say, to three and a half percent to four percent? I don't necessarily think we're going to get that high. I think more likely we're going to see this kind of sticky inflation close to three percent. We're looking for actually cor inflation to still be above two and a half percent at
the end of next year. And so again there's this idea of a one time effect, but that doesn't mean that one time is a short time.
They also wanted to average two percent, right, and considering how high we've been and even how high we are now, we need to go far below two percent and hold there for years, if not decades, to average two percent, wouldn't we.
Well that's very interesting because the part that was somewhat under the radar at Chairpal's latest comments at the Jacksonhalls symposium is actually that the FED is backing away from that average inflation targeting idea, but they won't say.
That, not explicit about it. It feels like they're targeting a range, but they won't actually say they're targeting range.
Well, I think this idea that Okay, you know, you have a two percent target, and we want to pay a lot of attention to that number. But still there is some there's some allowance of course for data noise.
I think that is there.
But I think we're back in a situation where buy guns are by guns. We're not really trying to undershoot after the elevated inflation a few years ago, but we still do want to get back to two percent.
Governor Waller yesterday basically said he's all in on seventy five basis points, except his view could change depending on the employment report. This time next week. We'll be looking at that job's report. What are you and the team expecting.
Yeah, so you know we're looking for a number that's around seventy thousand, right, So that would be pretty close to the July outcome. But it would be a little bit higher than the three month average of thirty five thousand, which has attracted a lot of attention. Of course, we remember last month those massive downward revisions to really the May and the June data, right. So the tricky thing here is that we know that a slowdown in net immigration has played a huge role in why these numbers
are lower. We know it's a combination of lower labor supply and lower labor demand. Both are playing a role, but we're not really sure which is the bigger factor. I mean, you could explain this slowdown just from slower population growth. Lower population growth probably has taken at least a point off of growth in the past year, both from a job side and also from a GDP perspective.
Ran when you look at the curve, when you look at the ten year holding at four twenty, and then here so many important intelligent people talk about the dangers of attacking FED independence.
How do you reconcile those two things? Well, I do think clearly this is a story that has evolved even in the last few weeks and months, and it is something that is very likely contributing to the steepness of the yield curve right. So on the one hand, it's the FED that has not really acted at all up until this point, and on the other hand, it's these concerns incrementally about what FED policy will look like, you know, not just for the rest of this year, but into next year.
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