Bloomberg Audio Studios, Podcasts, radio News.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hortenn. 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.
So Franz withs Donald of RBC, how are you reading the tea leaves slowly?
Because there's a lot of tea leaves here.
But a couple things that jump out to me right away is the three month moving average now for non farm perils is about twenty two thousand. So if your break even raid is maybe thirty to forty thousand, then that means you're not creating enough jobs, and that's enough to lift that une unemployment rate higher. But let's just remember if you make a chart of the unemployment rate going back to the nineteen seventies or only two periods in history where the unemployment rate has been this low.
This is still a very tight labor market. So in my mind, I'm wondering why we're not using words like normalizing as we see that unemployment rate move back towards levels that we're more accustomed to. But while everybody's talking about jobs, I'm looking at the retail sales number, which is very strong. And so the biggest question for an economist right now it's not what is the direction of
the labor market, because that's sort of fuzzy. It's what are the implications of a weaker job market for the economy, And if the job market is weakening for young folks twenty to twenty four, which is what we've seen in the past, if it is less hiring and not so much firing or layoffs, and the implications for spending are less. And so my first rate on this is that, yes, we have what we expected, ongoing softness in the labor market, but it isn't creating a pullback in the broad economy.
And that's going to be a really key narrative moving into twenty twenty six, which is the.
Reason why people are bidding up esque equities and risk assets, even with potentially a worse than expected number of Michael Collins I PGM fixing cups still with us. Mike, just congratulations, you are positioned correctly ahead of this. I'm just wondering whether this was the read you were looking for. If this is just bad enough to keep the FED in play, but good enough to the point that Francis was making to keep risk us, it's potentially attractive.
Yeah, we haven't heard the Goldilocks economy phrase lately, but you know, as Francis said, you know this is actually not not bad, right. An unemployment rate, you know, ticking up slowly, job.
Growth close to zero.
She throws out that, you know, thirty to forty thousand numbers kind of the new normal, right, So don't be shocked by these really low job gains. I think they're just kind of standard given the population growth is really trending down in terms of immigration and you know, births and deaths, I mean, fertility rates in this country have plummeted, and so this is a natural state, right, and it's not bad. It keeps the FED in play, keeps rates
coming down a little bit. So this is what we call the muddle through environment, and we have like a fifty percent base case probability on this muddle through, which is, you know, growth slow, okay, inflation a little sticky, but not going up anymore, you know, maybe even coming down a little bit. The Fed cutting rates a couple more times, right, staying in a nice range here, and corporate earnings have been really the star here.
Corporations, you know.
The private sector has been the star, right, and they continue to figure out how to keep their margins up, which has really been surprisingly impressive to me, Jamien.
We do see the move in the markets kind of temper itself as people look at the details, look at the fact that the response rate wasn't great, and look at the fact that there's a lot of strength despite some of the weakness that we see in the unemployment rate.
And in August and September we saw revised down by another thirty three thousand as well. I mean, I'm just looking at the unemployment rate ticking up to four point six percent. You know, the labor force participation rate also ticked up, so that could be fueling a little bit of that as well, which is, you know, means it's not as bad as you would have otherwise thought. But yeah, I mean you had some backward divisions. Thirty three thousand
jobs lost in August and September. That's just you know, feeding the bullish bentree here, Mike, how much.
Do you look at this data, given the fact that we have gotten a response rates come down significantly, how much do you look at this data as truly better quality than some of the other data points that we've been getting versus just as noisy, just as easy to discount.
Well, there's a lot more of it, right, We have months worth of data out trickling out, and I don't know if the quality of any of it is that great, Lisa, right, So I think you all have to take all of it with a grain of salt, which probably explains the market reaction.
You know, you obvious see a.
Big knee jerk move when the numbers first come out, and then they kind of settle in and many times actually reverse right. So you know, the FED doesn't meet for almost six weeks, so they have a lot more data to come, and presumably the data they get over the next six weeks will be higher quality and again continue to paint a bigger picture of the direction of the labor market, direction of consumption director direction of inflation.
So there's a lot more to come before the FED meets.
You know, right now, as you know, the markets are pricing and basically the next cut not really until June, and a second one by December, so really two next year, but really slowly through throughout the year.
And that makes sense to us. And unless you get a big change in the direction of this data.
Michael, we mentioned this prior to the release manufacturing payrolls. They're now at their lowest level since March of twenty twenty two. Certainly not what the Trump administration would like to see. Talk to us a little bit about you know, your read from there.
Yeah, I mean the whole, this whole manufacturing you know, renaissance that the administration is trying to engineer is pushing on a string to some extent.
Right, There's been lots of evidence and research.
Done on the amount of manufacturing jobs and the desire for Americans to work in those manufacturing jobs, and the availability and education and skill level for Americans to work in those manufacturing jobs, right, does not bode well for this big jump in manufacturing employment. You know, we are a service economy where technology economy, We're a financial services economy.
That's where you know the jobs are.
Those are the sectors that are doing the best, not not surprisingly, So yeah, I think you really have to, you know, push back on that, the idea that we're going to have this giant manufacturing, you know, labor market renaissance in this country.
So Francis, I mean, equities are hirer on this news yields you're down. What do you think the market's focused on right here?
Well, I'm focused on the fact that you called it. The big job in the unemployment rate is coming from re entrance into the labor market, and this is the big thing. We all want this number to give us a signal up or down, but it's really the composition that matters. So what we do is we think about who is losing their job and who is actually being hired. And if people are falling into unemployment because they've started to look for a job and they haven't quite found one,
they don't represent a permanent loss of income. They're actually starting the process again. So this is kind of bullish in the sense that it's enough for the FED if they want to keep cutting. This is a green light for them, But it isn't enough to signal that there's a hockey shaped weakness in the labor market. It is enough to signal that growth is going to materially slow down, or there's any sort of nefarious economic activity under the surface.
And what have we learned from the Fed? They have a range of opinions if they want to cut. This is the data that allows them to do that. If you want to maintain a hawkish bias, there's enough under here to tell you, Hey, the economy is fine, Retail sales are up, the control group did really, really well, and there's still a lot of uncertainty around how much we should read into these numbers.
Mike Collins, Ephgion fixed income just quickly here, how much do you think this really does greenlight the potential for a rate cut given the fact that the unemployment rate might give the ammunition that this Federal Reserve is looking for.
Yeah, I really think the Fed should pause here, take a breather, get another handful of months of data before they move again. Like I said, they've moved almost two hundred basis points already, as Pala says, they're kind of getting toward the neutral or in the neutral range right now. The lack of consistency and consensus among the FOMC members
is really remarkable. How you have a bunch of people who actually think they should hike rates from here, a bunch think they should keep rates the same, and if you think they should cut once twice, I mean it is a real scatterplot of views among the committee. So it feels like the general tendency is to just pause
and wait. Like I said, the markets aren't pricing in a full cut until June, and that seems like the right path for the FED at this point, unless things change dramatically between now and then.
Michael Collins of PGM Fixed and Comment, thank you so much.
It seems like.
Markets have retraced a lot of where they were from before this release. Do you agree with that, Francis that even though there's a lot of division, it seems like this is a.
FED that may cut but probably shouldn't.
Well, it's jobs Day, so it's the doves day. They get to focus on their side of the mandate. But in two days, forty eight hours you're going to be doing inflation Day. And if consensus is right and CPI jumps to three point one percent, well that'll be fifty six months that inflation is above the two percent target, going in the wrong direction, and everybody in the mother knows that there's goods inflation still coming in the system. So on Thursday, it's going to be really easy for
the Hawks to argue their side of the mandate. And this is the problem when you have a dual mandate. You're in a stagflationary light type of environment. You have a FED that is revealing its bias towards the employment side. But it will be easy to make the case that inflation is still problematic at the end of this week, So balancing those two will be important. FED speak will be important going forward, but I'll continue to emphasize the
details matter. Four point six percent that is driven by new entrants, that has a lot of healthcare jobs, sticky healthcare jobs in it, that's a better type of weaker job number, inflation that is broad based or has services component inflation in it. On Thursday will work on the other side. So let the doves have their day, but Thursdays I think will belong.
To the Hawks.
Stay with us. Multpleinberg Savannah's coming up off to this.
Here's the latest lawmaker scrambling to reach a healthcare solution with enhanced subsidies set to expire on New Year's Eve.
That was preparing to vote on a slimmed.
Down health plan this week, joining us down. Terry Haynes at Pangaea Policy Terry, how much are people counting on the idea that subsidies are going to fall away and healthcare costs are going to increase when they talk about stimulus coming down the pike in twenty twenty.
Six, Well, a couple of things lie.
So one is that you know, work expands the time to fit a lot to fill, and you know they've they've got a few more days here at least or maybe in the next week. So legislatively speaking, that's a lot of time. The mishmash of everything that's that's in front of them suggests a solution of a small bump in the current subsidies, you know, bump forward into twenty twenty six, combined with a number of other things. But what markets ought on and is that this is one
this is one step and a two step game. There's almost certainly going to be a big, beautiful bill two dot oh next year. I think as early as the first quarter. Senate Budget Chair Graham's already been talking about it, and already been talking about the need to do some more on Obamacare subsidies and on Medicaid next year. So what you're going to see here is a very interim band aid solution, I think a little bit more likely than not, combined with the UH the more likely two
dot oh solution coming early next year. So there's going to be a lot of volatility in healthcare stocks as a result of that, but that can't be helped.
Kerry and yesterday's Wall Street Journal Wall Street Journal interview, Trump stated that he's, you know, he's not sure if it's handling of the economy is going to, you know, cause the Republicans to win the midterms. He's all but conceded defeat there. And I'm curious to hear your thoughts about this big, beautiful bill two point zero. What type of reforms, what type of legislation can we to find in that?
Well, A couple of things, Damien. First, you know, I would I'd suggest that the jobs report may play a role in deciding what happens in the Congress this week. If the economy looks weak going into the holidays, I think there's probably a greater desire to do something to
push back against that on healthcare, precisely for affordability reasons. Secondly, what you have here, and there's been already been some discussion on your program this morning about this, is you're going to have a lot of stimulus happening early in twenty twenty six. On top of that comes to you from the twenty twenty five bill. On top of that comes twenty twenty six, which Graham describes as a little
more of everything. A little more entitlement reform outside of Social Security other than Social Security, a little more on Medicaid, a little more on tax including expensing, a little more money for the military, probably something if Graham has his brothers on a him, I'm tariff, and I would suggest a lot more on enshuring manufacturing incentives, because that is key to speeding a more robust US defense industrial base.
Sorry, Polymarket currently assigns with the twenty seven percent probability that the Supreme Court is going to vote in favor of Trump's tariffs. This is down from high fifty three percent just a few months back. What's the timeline here for scotus, you know, to give us any color, how do you believe the market's going to react if Trump's tariffs are voted down?
Well, I think, Damien a couple of things. One is, I wouldn't rely on polymarket too much. That's if you're sitting around a roulette table, that's a bunch of people kibbets behind you, so fundamentally you know, so would you rely on them for your results or for your advice? I'm not sure? But beyond that, you know my Firstly, I always push back against the idea that the Court
presumptively rules against Trump's tariffs. I think that's based on a flawed assumption at the Court doesn't take the economic emergency seriously. So I think what happens is at the very worst for the administration. They say they can't put the tariffs in place using that AIPA authority, but there's plenty of other teriff authorities. Secondly, I think they probably give the Congress some time to fix the statute, and that's something you can do also in that two dot zero reconciliation bill.
Stay with US multlindex. Savana's coming up off to.
This, turning to market, it's Bank of America releasing It's December Global Fund Manager Survey showing macro optivism at its highest going back to twenty twenty one. Joining us now is Elis Galu of Bank of America. Elie is great to see you. Thank you so much for being with us. Let's start on the cash holding. So the idea that cash allocations fell to three point three percent the low in Bank of America's Global Fund Manager Survey. How much of a contrarian indicator do you see this as.
This is a very contrarian indicator, Liza, Look, I mean just a bit of context on the FMS cash levels which fell to a record low three point three percent today. This series is one of the most important of the
Fund Manager survey. It has been around since ninety ninety nine, so we are able to track several cycles through this series, and even at the height of the Internet bubble, at the height of the subprime bubble, and during the bomb bubble of the post GFC era, the FMS cash level did not drop to the level it did today three point three percent, which is just strictly speaking and focusing on this metric, this is a very bearish contrarian signal.
And we back tested this series since over the past twenty five years, whenever the cash level fell to three point six percent or below, the average four weekly for global equities has been minus two percent, and over eight weeks it's been global equities we're flat.
Well, as I scored with this, with the idea that people are really optimistic about twenty twenty six returns, is it consistent given the fact that we might see sort of mandering stock returns heading into year end kind of what we're seeing this morning. But next year people will see that physical stimulas come in, that monetary stimulas come in, and it will really support this sort of broader story that people seem to be leaning into.
I think if we had to define the December twenty twenty five fund manager survey, it would be the most bullish survey of this AI led bull market. And the culprit of this palpable bullishness is the expectation of run it hot policies. FMS Investors look at the FED. They know and I'm convinced that the FED under the next chairman will be much more accomodative than in the past
few years. They know that there is a big election in the US on November the third next year, and they expect the administration to push up it further in terms of fiscal policy, and they also, you know, last week's announcement from the Fed in terms of the liquidity backstop, I think has clearly emboldened FMS investors to increase allocation to risk asset because another important metrics that was extreme in this survey was the fact that liquidity conditions were
rated as the most positive since twenty twenty one, and in fact, over the past twenty years, the liquidity conditions have only been greater than today. At the peak of the COVID boom in mid twenty twenty one.
Las long mag seven and long gold had been the most crowded trades for the past three months in a row. Yet at the margin, a small handful of investors are now they now believe that being short ggbs and long global bank stocks are the most crowded trades. So I'm curious, you know, it's notable giving the impending bog ratik at the end of this week, the near universal belief that
yield curves are going to steepen across the globe. Can you provide just a bit more color on these newly referenced pain trades.
Sure.
I think if you look at in the details of the fund manager survey, the one challenge where it's actually tough to square institutional investor bullishness is on expectations for bond deals. There is this big conviction that bond deals will be higher in twelve months time. This huge conviction nets seventy five percent see an even steeper yield curve, and then investors are very bullish risk assets. So you know, at the end of the day, it's important to take
a step back and look at the big picture. And the most important question here, Damien, is can risk assets global equities US equities that are very rich in terms of valuation with stan five percent plus bond deals and I think you know, at this level of positioning, at this level of valuation, risk assets will be struggling if the thirty year treasury exceed five percent, which has been
a line in the scent for US policymakers. But for now, investors prefer to focus on AI, the productivity gains that AI adoption will deliver and in terms of EPs growth, and this is what they prefer to focus on and is also driving their the abolishness for in twenty twenty six Elis.
Despite the pro cyclical rotation into equities and commodities, allocation to the energy sector is nearly Tuesday on the deviations below the twenty year average according to your FMS. Yet with brain crude now dipping below sixty dollars this morning and most analysts calling for it to stay, there is there any benefit in fading that call.
It's one of the big contrariant trades of twenty twenty six. Really, you know one. The energy sector has been has seen a continuous underweight of FMS investors, and rightly so. Now I think it's quite interesting to see the dichotomy between an increase and increasing allocation to commodities. The net of a weight on commodities is the highest in September twenty twenty two, but at the same time a very big underweight on energy, and that dichotomy is explains is explained
by the divergence between metals and energy. I think in twenty twenty six, if growth surprises to the upside as investors expect, I think clearly there is a lot of value in the energy sectors and probably the stronger growth will push the oil price higher.
On the flip side, Elias how much do you see a potential contrarian trade in bonds, in particular long bonds, This idea that maybe people are over their skis with how much growth could increase, and something's got to give, either as stock valuations or is where bond yields are.
And maybe it's the bond yields leading to risk off modes, some.
Moves something that people are sort of not positioned for at all.
Sure, I mean what you saw this month, Lisa is a very big rotation out of bonds and also a big end of way when it comes to to bonds, the biggest underweight since October twenty twenty two, when the move index was above one sixty IE rates volatility was
a lot higher than it is today. Look what is happening at you know, in this in this morning in the US there is a big macro news, the November you know, job jobs report, and if that report surprises on the down side with a very weak payroll or even in a negative payroll, I think, you know, that's the pain trade of the day. It's going to see BoNT yield's sharpillarwer and what I think is the biggest pain trade of macro investors a flattening of the yield curve.
Stay with us more Blindberg surveillance coming up after this.
Lucy Baldwin City Global head of Research is bullish heading into the new year, writing further upside is expected in twenty twenty six. Is earnings growth broadens but elevated valuations increase downside at risk, Lucy joins us.
Now, Lucy, this seems like kind of.
Threading a needle, and thank you so much for being with us. And we keep hearing that, and it's sort of diversified.
Be nimble.
We're a little worried that everyone else is bullish, but we're bullish too. I mean, how do you sort of just frame your sentiment heading into next year being bullish when you know how consensus that is.
Yeah, good morning, Thanks for having me absolutely look after a couple of amazing years, for the stock market to be expecting another good year for US equities in particular does feel like it's a high bar. But ultimately what we feel is that the earnings backdrop for the S and P five hundred looks incredibly strong.
We, like many others, expect to.
See the FED cutting a couple more times in the new year and we think that is really quite bullish really to be cutting into that recovery. We think you're going to see the economy do pretty well in the first half of next year, again fueled by that fiscal expansion, the one big beautiful bill coming through really helping to.
See growth move forward.
So it is a pretty good Goldielocks type scenario we think for the equities market. Our view is you probably got about ten to twelve percent of upside for the US S and P, which is pretty good. And I think interestingly, we feel the tech leadership will continue to dominate. But alongside that, we believe you can see that broadening both in terms of the US market itself, but also around the globe as well. We think you can have another good year for some of the other stock markets around the world.
As well as for the US lucie.
Just because the Fed is cutting, do the policy rates ease?
Right? Do monetary conditions ease? And I ask this because even though.
We have had one hundred and seventy five basis points of rate cuts by the Federal Reserve, you've seen ten year yields actually rise by more than fifty basis points in that period of time. You've seen thirty year yelds rise but almost a hundred basis points.
So at a certain point.
Are we seeing tighter financial conditions in the margin the more than some of these central bayings ease, kind of creating a little bit of.
A fly in the ointment here.
Well, at some stage, you're right, there is a risk that, for example, the fiscal situation, if you've got lots of questions around FED independence. Again, coming back on the radar nextually you could see that bear steepening start to be problematic for risk assets. But we think they're kind of like threading the needle at the moment really in the sense that you've got this sort of goldilocks back drop of good growth, inflation that's largely under control. Basically you've
got you know, that right mix of drivers. I mean, clearly everybody's going to be watching certain things incredibly closely in terms of risks for next year. But I think if you can see that growth continue to be strong, corporate earnings continue to power on, it's really that ideal scenario where you're able to actually.
Cut into a boom.
Now it is obviously a bit of a jobless boom, which I guess is the big question mark, right, and it's the job side of the equation that is ultimately allowing the.
FED to be easing into what we think.
Is actually possibly going to be this reaccelerating growth picture in the first half of next year, which of course is really rather unusual. And of course let's not forget this year's been pretty unusual too. It's been the everything boom to have had things like the US equity market up strongly, credit go up strongly, but then also you've seen ultimately things like gold have a phenomenal year, up
sixty percent. So it's been an unusual year this year, and we do think it's going to be a delicate path, but one way you can see that continued risk on momentum, certainly into the beginning part of twenty twenty six.
You know, Lucy, I'd love to talk about gold with you and precious metals because I know you recently had Max Layton, City's global head of commodity research on your podcast, and you know he was talking about the firm's out of consensus view on gold in twenty twenty six. Ie, he's a bit more barrassed than the street. I was listening to you and you didn't seem quite so convinced.
I'm curious the structural drivers that are underpinning the gold bull try, and I'm talking central bank buying, et cetera. Do you expect that to continue or do you see their room for downside and gold in the year head.
Yeah, Look, I think you know Max and the team, I've got some great calls going into next year.
Right on one of.
Those calls, as you say, is this view that actually the debasement trade is largely played out at these levels. And yes, you've got the structural central bank buying story, but ultimately there's probably going to be more upside in some of the base metal things like copper that's the sort of perfect clean cyclical play if you like, or aluminium, which is ultimately competing alongside the data centers for power, so you're going to probably see some positive price momentum there.
So we just think there's more upside in those base metals rather than precious metals, and gold is obviously in that equation. So for us, that debasement story has obviously seen a lot of momentum this year, but we think our core view is ultimately that the Central Bank remains independent and very data dependent. So even if you have a more dubbish backdrop for the FED next year, we don't think that debasement trade runs on materially more.
I think you will see that sort.
Of slow, steady rediversification continuing for central banks. But I don't think it's necessarily enough to give gold from here significant legs as we go into the first half of next year. So I would be with maxim the team in terms of looking for other metals to really drive.
Some momentum in the first past of the new year.
Lucy, you and the team at City have been a proponent of the carry trade, the FX carry trade for a while now. I think you're still an advocate of it. Talk to us a little bit about buying the high yielding currencies versus the litw yelders. I mean, I think nine out of eleven months this year the carry trade has worked out and worked out well. You know, can
this continue? I mean, talk to us about redifferentials, Talk to us about you know, currency investing and what funding currencies stand out to you in the current environment.
Yeah, Look, I think this is this is a big question after such a strong year, as you say, for sort OFFX and the carry trade. I think the conundrum we're all trying to grapple with is the dollar.
Right.
We've had lots of debates on It's Dan Tobin, who's our FX strategist at City Research. He's got a really out of consensus call for the dollar, right, So that's quite interesting. He's much more bullish the dollar than pretty much the rest of the street. And it's quite interesting when our US chief eclomist Andrew holmand.
Horst has still got two cuts for the FED.
So, you know, what I think is quite a useful way of framing this is looking at what our macro
strategy team says. So Adam Pickett Willer, they talk about the dollar possibly going into next year almost having a year of three thirds, right, So some risk that you get some weakness in the early part of the year as you're going into those continued cuts that we think you're going to get out of the FED two more cuts, and then they think, you know, in that middle part of the year you're going to see the dollar strength
come back. And then maybe to your earlier question, you get some risks later on in the year on the back of some of the steepening risk in terms of the back end of the US curve.
So what does that then mean for EMFX.
Well, I think, as we all know, right, it's very difficult for emerging market currencies to do well when the dollar is incredibly strong. So we're looking for those moments of opportunity really around that dollar backdrop. I think when you're considering all the different options for different emerging markets.
We see just quickly here at what's your black swan event that you're sort of geeming out is an outlier case but could potentially be incredibly counter to consensus.
Well, I think the big events that we're all watching for is around the AI boom.
There's the debate is it a boom is it a bubble?
Look, we're in the category that we think even if you categorize it as a bubble, because of the moves we've seen so far, you still want to own it.
It's still got legs.
If you look at the valuations of the leaders of this boom, we don't think they look stretched.
Right.
The earnings upgrades we've seen have been significant. You know.
If anything, people have underestimated the earnings power of these companies, and I think even up until very very recently, it's all largely been funded out of operating cash flow from the big hyperscalers. I know we've sort of entered a new paradigm in terms of potential risk because we've shifted from the fiscal boom post COVID into more of a credit expansion, and everybody's watching to see where the leverage
is building in the system. But we still feel this has got legs to run for sure, and a lot of growth. We obviously also think long term, structurally huge, huge productivity games that can be unleashed by AI as well. So we're bullish about it, but we're cautious and we know that obviously there is risk as other areas of that ecosystem take on leverage and take on risks, some of the smaller names that don't have the operating cashflows
of the big hyperscalers. So that's obviously an area where we're watching for risks to emerge, very very carefully and very closely. But generally I think, you know, we're pretty
constructive next year. The other big macro risks, of course, we're watching for, are around fiscal you know, we've just written a piece looking at the US debt position and updated piece on the sustainability of that, because again, you know, that's something that's going to be very important for markets as we go through twenty twenty six.
This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, antient politics. 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 out
Mm hmm