Bloomberg Audio Studios, Podcasts, radio News.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and am Marie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.
We begin this hour wiz stocks rising after having their best day since my on solid corporate earnings and a renewed rate cut bed. Meanwhile, Jack Haffrey of JP Morgan, writing with the weakness, we have gone from a market with distinct cyclical and secular underpinning bias to a more unique setup. Jack Noud joins us.
Now, Jack, the unique.
Setup has a lot to do with AI and the fact that that seems to overwhelm all concerns is that how you see.
It, Certainly, when you look through the market continues to be dominated by the Magnificent seven and then to a lot much lesser extent the forgotten for ninety three and as we've worked our way through earning season, to some extent, your biggest and best news has been less about the earnings and more about the capital spending boosts that so many of these companies have been talking about in order to try to make the AI of the reality, and
then ultimately turning to how do we start incorporating how AI is actually improving the quality of our business? Good good That remains sort of, if you will, the trillion dollar question in the markets of how this spending will ultimately turn into higher margins, better growth rates, and ultimately returns to shareholders.
We knew this so on Friday, we knew this on Thursday. Suddenly on Monday yesterday there was a renewed sense of vigor and excitement. How much of this is coming from the expectation of rate cut bets and hopes that maybe the economic data wasn't as bad as it looked.
Well, I think ultimately, in a world of the earnings are in the future, the fact that you can start trying to come up with a scenario of lower discount rates for those future earnings makes them somewhat more valuable. Why that'll happened yesterday morning? I wish I could come up with a better answer than it was Monday. And maybe there was a merger and someone had a really good bit of earnings news for animal health early in the morning, and so their stock up thirty percent, So
we should buy AI in response. You know, day to day trying to figure out why markets moved is challenging, even after thirty plus years of trying to do this. Talk about eighteen twelve, eighteen twenty four months. I think I have a better sense of what's going to be driving things. And then I'll come back to the earning story has gotten better. Two weeks ago, I would have told you we're expecting earnings growth of five percent this year,
and now it looks like consuming closer to seven. Seven turns to twelve next year, and it's August, and I start turning not only to what you've done for me recently, but what can you do for me next year? And I think getting to this idea of trying to find their way to policy clarity becomes really important. You know, all right, we've gone from a mass of cone of uncertainty for tariffs. Now we have a much better sense
of what they look like. For major and trading partners, we have tax since clarity on what taxes look like, where can I spend, how I benefit from that? And so I think ultimately companies will do the right thing. They're really good at managing their margins over the long term, and I think that sets us up for where people are starting to look for where's the good news coming from next?
When it comes to policy, we have an outline of what the policy is, but now it's going to take effect last year this time last year, we had a teriff rate of two point five percent on average. Now it's going to be about twenty percent. How is that going to hit the earnings and the companies you're watching, especially the four ninety three, not the seven in the S and P.
Five hundred.
Well, I think let's start with the US economy is really a consumption economy, and so ultimately we have to figure out how much of that tariff boost that twenty percent is shared between the consumer companies reducing their margins, or will the exporters actually decide, you know what, I'm
going to give the US a discount. And I do think that we have ongoing academic debate on whether tariffs are won and done from an inflation perspective, the fact that, as you pointed out five minutes ago, that what we think is certainty is actually not certainty because this this hammer in the toolbox seems to be deployed frequently, and so will you have consistent impacts on inflation rates coming through the variability of policy, you know, And that's where
I think today's data should really you know, my issue is what does the ism services come back to, because again, this is this consumer led economy tariff' Ultimately, if you thought that they were designed to try to encourage reindustrial reindustrialization of the United States, policy which is both desired by Democrats and Republicans, you know, runs into we already have six hundred as an empty manufacturing jobs trying to hire. How do you actually convince people to take those jobs
without paying them more? And last time I checked, that was a potential supply shock to inflation.
You said you're looking forward to the data that comes out today. Where do you where you thinking in terms of the credibility of a data given the fact of the President last week didn't like the jobs number and then fire the head of the BLS.
You know, I think US economic data is the envy of the world in general, but we do know that there are some issues. You've been having stories for at least a year now about falling response rates, and the reality is, you know, we haven't completely used AI to get all the economic data in real time. Certainly, the one thing I have certainty end in life is economic
data will be revised. And when I sit back and think what we were hearing, you know, a week and a half ago at this probably sitting in the seat someone talking about I'm seeing real weakness in the goods producing sector of the economy. And yet then when we got the data on Friday, the weakness was actually the visions, and that weakness in the revisions was primarily in government.
So to some extent, we knew when you've been talking about the scale of job reductions in the federal government, at some point that was going to work its way into either initial claims, it would work its way into job elimination. So you're left with we didn't know timing, but we knew that we knew that was something that was going to work its way into the system. Unfortunately, it managed to work its way into the system the same day that the actual job creation numbers on the
weaker side. I'm not sure that eliminating a job because you don't like the answer. It feels kind of very ancient Roman in terms of how you respond.
Sure, at the same time, some people are saying this actually gives a FED. Actually most people are saying this gives it FED a lot of ammunition to cut race. And you're seeing a ninety one percent chance priced into FED funds futures.
How much do you see.
This really mandating a cut in September and mandating at least two cuts this year, and that actually being a positive for equity is given the fact that the underlying weakness might not be as great is maybe the revisions might suggest.
I mean, consensus has been I think for two cuts this year. The question was really was it going to be July? Was it going to be August? By the way, Jackson Hole coming up in a few weeks tends to have add it sort of an above average policy impact ever since the global financial crisis. So I do think that we certainly have a nice big window for the FED to consider look at the data. I think, you know, coming back to this idea, of the direction is lower rates.
I think the question is that we get it quickly or not. If you look at, you know, the slope of the eel curve two tens suggests that that is more or less priced in three months, ten years, you know that curve is still inverted. So I do think you do wind up looking at the bond market is trying, if you will, to force the Fed's hand, and the FED is left with I've got two mandates I hadn't seen until Friday, the employment picture actually cracking or weakening.
And I've got inflation that's still running two eight, two, seven to nine, depending on which survey you look at, still comfortably above two you know, lives to and licensed statisticians, is that forty percent above trend or eighty basis points?
You know?
Yeah, Depending on which channel you listen to, you get a different take on it.
Jack Caffrey of David Morgan Asset Management, thank you so much for joining us staking with the FED. Lauren Goodwin of New York Life, writing this, we discourage investors from assuming a September cut would signal a series of cuts thereafter. Our FED cuts checklist still signals risks from all sides,
Lauren joins us. Now with what is increasingly out of consensus view, Lauren, how do you look at what we got on Friday and the jet labor market data as well as the lack of some sort of sustained inflationary impulse. Put that together and so we could even be talking about a right hike.
Yeah.
Well, so I think what the market is telling us after Friday is that the Fed will be leaning more towards the demand destruct and we're seeing in the labor market than inflation in September, and on balance, I agree, I think that we're likely to see a rate cut in September, pending the data that we get between now and then. Where we caution investors is assuming that a cut in September means anything about October or December or
meetings thereafter. And the reason for that is that as we look at the things that the FED cares about the labor market, we're seeing some weakness on the demand side, but we're also seeing a deterioration in labor supply. And this is something that I think the market conversation is not paying enough attention to because that deterioration in labor market supply might mean that fifteen twenty thousand jobs a
month is actually a healthy labor market. It might mean that the unemployment rate isn't going anywhere, or that wages are moving potentially even higher. That's a market reaction function that we're not used to as investors and something that I think we have to consider as we see more data between now and September.
So are you saying that we could still see one rate cut this year or maybe two? Thing more than that? Is your argument, essentially that people are overestimating any potential weakening in the labor market that could curtail the inflationary kind of overlays.
That's my view today. Now, if we think about the things that the FED cares about, We've talked a little bit about the labor market inflationary pressures. I tend to agree with the market that we're unlikely to see a major reacceleration of inflation, certainly nothing like we saw a couple of years ago. But we are probably going to be seeing prices move core PCE inflation move back above three percent over the next few months. That's a tricky situation for the FED. And if you add that financial
market conditions have been very loose. Equity valuations look great, credit spreads are tight, the availability of credit is good. Chairpal pointed to this last week. That's a balance of data that doesn't call for an enormous amount of cuts. Now, I do think that what we saw on Friday, in terms of the demand side of the labor market, that
does concern me. But that balance of data is not only tricky, but a lot of the things that are impacting the data are supply factors, things that the FED can't control when.
It comes to the demand side of the labor market and the supply side are you looking at. Potentially there's less participation because of immigration policy out of Washington or what we're seeing in terms of the Ai revolution.
At this moment, it's more related to immigration policy. So we're seeing, and this was confirmed in the numbers on Friday, fewer people participating in the labor force. Frankly, just less labor supply, less labor availability. We're also seeing that companies are hesitant on hiring, and that has more to do with trade policy and let's call it general uncertainty. And so that balance of factors is one where there's not a lot of new jobs created that's not the end
of the world. But where I think it's tricky for the FED is when you have not a whole lot of new jobs created while still having an unemployment rate that isn't going anywhere. That makes the again the reaction function for the market looking at a weaker payrolls payrolls gain as something that actually isn't negative.
When you say that, in the next few months you see inflation ticking up, is it all tariff induced?
It's mostly tariff induced, So we see some stickiness in the housing market related to rates. Other than that, services disinflation has been pretty well pronounced, and it's one of the reasons why we do think that the FED will be able to look through some of the goods related inflation we're seeing and move towards a cut in September.
But the challenge is that we've only just started to see that goods related inflation hasn't included things like holiday bar buying that are just starting now, and so we do anticipate that prices are going to be moving in the wrong direction later this year.
It's hard to figure out what's going on. It's even harder when you've got accusations of political interference. You've got questions about just how accurate the data to collection is given the low response rates. You have a really interesting take on this, Lauren. The political interference with the FED or the Bureau of Labor Statistics will push long rates higher, not lower. Why is the market not coming to that conclusion right now?
My read on this, and I've thought a lot about this over the weekend, but my read on this is that the market isn't seeing evidence of actual interference.
Yet.
We don't know whose take is stepping into FED or BLS seats. We don't have really in any indication that there is interference with these important independent functions. I think that calculus would change if the market does see that evidence, does see that data or FED decision making is being tampered with. And the reason that we think that's important is that, especially in monetary policy making, credibility is one
of the most important policy tools. And though there are an increasing amount of evidence that the FED could be cutting rates slowly, stably over the next let's call it six to twelve months, some of the conversations I have with investors are, Oh, if we have a new FED share and we get two hundred basis points of cuts. You know right away that type of activity, though I
think incredibly unlikely, is going to derail inflation expectations. In anticipation that there were even let's call it modest political interference, I think would mean that market interest rates like the ten year yield would be moving higher even if the policy rate removing lower.
One thing that a number of analysts have said is private data points cannot replace the gold standard, cannot replace the Bureau of Labor Statistics, and even some of the peripheral surveys don't really don't really serve as a counterpoint for the labor market report, given the potential for the market to not being tracking, not to not be tracking the actual economy in real time. The way that they thought, are there certain gauges that you're watching for a better sense?
Is im service? Is that much more important? Is CPI? What sort of the gold standard? Increasingly for you.
I have to say that the labor market statistics have had trouble now for more than a year, more than actually more than a couple of years, as response rates have declined in response to the pandemic. The BLS is still the gold standard. Of course, there's this mattering of data and evidence that we look at regardless of what phase of the cycle that we're in. But when it comes to the labor market, it is about the BLS statistics. Now, what do we do to acknowledge that revisions are becoming larger,
more likely, etc. Goes back to essentially economic fundamentals. One data point does not make a trend. I think what was really important about Friday's data point is that it showed that some of the early signs of cracks in the labor market actually did make a trend with the revisions that we saw.
Lauren Goodwin, thank you so much for being here. Lauren Goodwin of New York Life. Amanda linam a Blackrock joins this now. Amanda, wonderful to see you. Thank you for being here. How much are we looking at the FED rescuing markets from weakness before the weakness happens?
Good morning, Thank you for having me. I think that's exactly the point. The reason for the rate cuts, in my view, is more important than the timing. So our expectation is that the rate cut is most likely in the fourth quarter. Yes, the risks are skewed till September, but why are they cutting. Are they cutting because the growth backdrop is deteriorating, or are they cutting because inflation is cooperating. It's looking more and more like they would
be cutting because the growth backdrop is deteriorating. I'm not sure that's a great outcome for risk assets. It does feel like the market is preempting this a bit. In our world of corporate credits, spreads are still resilient. There's some differentiation under the surface. But I actually think the market is looking through this a bit. And the reason I say that is you've had folks like Beth Hammock last week talking about how we're not that far from neutral.
So leaving aside the timing of the cutting, and if we focus on the reason and actually the scope for the depth of the rate cutting cycle, I'm not sure that there's that much relief in train absent a sharp downturn and growth.
Why did people shrug off the labor market report on Friday and there revisions that were incredibly negative and caused the firing of the BLS chief.
What I think it is is that Chair Pal almost went out of his way in the press conference to talk about how he's emphasizing the unemployment rate over the number of payrolls gained in any month, because, as he noted, the break even rate of payrolls growth is slowing because immigration is coming down. So if you look at we are at four point one percent as of the July FMC, we're now four point two, edging up on four point three. Chair Pale characterized that four point one as being close
to maximum employment. So, yes, the revisions were very large, not unprecedented, but large. But actually, if you look at the unemployment rate with inflation still above target, I still think there's actually some tension in that dual mandate. And so it's not for me a base case or very clear cut that they will cut in September, because I think if you look back to the July FMC, Chair Palm made a point to emphasize that unemployment rate, and
I think that's part of that undercurrent. When the market had a bit of time to digest it, focusing on that, I think you could come up with a different path. But I think, to be clear, the direction of travel is very clear. Rates are coming down. It's almost a moot point. Is it September or October? Not sure it quite matters.
Well, the market's pricing a ninety percent chance, and now of September, what would it take you to say it is September.
I think if you started to see some cooperation and inflation, I think that could get you there. That actually that tension on that price stability side of the mandate could ease up a bit. And then, of course we do have some more data between now and then, so if you start to see some real continued weakening in the labor market, We've already seen weakening, but if that is persistent, I think that could really push them. There's a lot of.
Politics surrounding right now, the data and the FED, and the President is going to have a chance to now he's going to put a new name in for the BLS commissioner, which he fired, and Adriana Kugler, the FED governors, will step down in January. She resigned early. Are you concerned that all this is getting politicized and there's no independent credibility.
Our conversations with investors are very much focused on the fundamentals, so I think there is a lot of noise in the background, but actually top of mind in our conversation is how are companies navigating this and what are the levers that companies can going forward if the growth inflation
mix becomes more challenging as we expect. What I find striking is that second quarter earnings have given us some data points that companies in some instances are lowering their estimated impact of tariffs relative to what they communicated in
the first quarter. Certainly not every company. There's a lot of dispersion, but if you look at the myriad of operational levers that are available to companies to navigate this, that could include things like changing product mix, accelerating cost cutting in other areas, there's actually a fair amount of levers. It kind of reminds me of twenty twenty two, when there was a swift rate hiking cycle. There were imminent
expectations for a recession. It didn't materialize. I'm wondering if the several quarters of above trend growth from twenty twenty three and twenty twenty four actually built up some cushions in the corporate sector and there's resilience there.
There's also the one big beautiful Bill, and we haven't talked about it as much as maybe we should have in terms of the ramification for companies. But the Wall Street Journal put out a story just highlighting the free cash fload. How much its increased on the heels of this particular piece of legislation. How much is that buffering a lot of companies in ways that might have been underestimated going into this.
It's a great point. You noted a company earlier this morning that I think raise their guidance on be on. Related to that, we also saw earlier in this earning season a telecom company do the same, So I think it's a great point. The two sided risks are very real. It's not just about the downside risks to growth and
the tariffs, but it's also about the deregulation. Actually, M and A strategic North American m and A is running at the highest pace since twenty twenty one year today, which and we know twenty twenty one was a banner year for strategic deal making. So I can't help but think that under the surface, and to the noise point you mentioned, Henry, there is a fair amount of corporate confidence that is coming through, and I think that is why we are very mindful of two sided risks.
At the same time, it's priced in right and you're looking at various tight spreads this is all kind of priced perfection. A number of people have mentioned, where do you still see value given that, Yes, there is a lot of positivity, but it's also something a lot of people have recognized riight.
I would say, if I had to pick one area, it would be selectively moving down in credit quality within corporate credit. So if an investor is confined to IG, we like that triple B pocket of the cohort. If there's a more flexible mandate, we like moving into the high end of high yield. You make a great point, there's not a lot of scope for absolute spread tightening at current levels. Episodes of widening are short lived. The
dips get bought, so to speak. But similarly, I think the bar for sustained selloff in widening in credit spreads is actually quite high. And of course, as you know, the yield based demand is a very real technical So we're pretty constructive on corporate credit risk. That said, not everything is participating. Triple c's are still lagging. I think that's appropriate. I think that reflects discipline in the market.
Yeah, maybe actually a market and not necessarily something that's bad that's propped up by a particular policy of mandeli of Blackrock. Thank you so much for being with us.
This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, an gie politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe the podcast on Apple, Spotify or anywhere else you listen, and, as always, on the Bloomberg Terminal and the Bloomberg Business app.
Mm hmm