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Bloomberg Terminal and the Bloomberg Business app. Ad Mills of Raymond James joins us now for more, and let's continue the conversation we started with here the big tariffs on steel and aluminum and whether there will be any carve outs. What's your base case on that one?
I think the base cases know. I think that the base cases that they go up from here, John, and I think you are one hundred percent right saying that there's all these expectations out there that they're not coming.
They're coming.
And I think it's really instructive to look exactly what happened with the announcements on Canada, Mexico and China. The Chinese tariffs are in and then we move away from the kind of Mexico and Canada tariffs, and then we put on a tariff on what is the largest imports from Canada and Mexico on steel, And this is something
the Biden administration was doing. One of the things that we're concerned about is the Mexico back door, the fact that a lot of Chinese steel goes to Mexico or Canada and then gets imported into the United.
States without a tariff.
So my expectation is that this is happening and it only escalates from here.
So if this happens a knee stick twenty five percent on aluminum and twenty five percent on steel by March twelfth, what are we supposed to expect when it comes to reciprocal tariffs that Trump says we're going to get in the next day or two.
I think that what we're going to see is that what you've seen the administration talk about is that what are the average tariffs? So on the UK, there's an average tariff of four and a half percent for US goods. We'll probably put that on the UK. For India it's eighteen percent. When I've talked to folks within the administration.
When I've talked to folks who are the trade experts who work for him previously, what they always tell me is that as long as the other country is willing to drop their tariffs to match our tariffs, then they don't go into effect.
But that's a kind of a push.
Here to make sure that what we get tariffed versus what they pay is exactly the same.
Memory.
So, ed, who do you think's lining up to try and drop their terror first?
I don't know if we get that kind of immediately. It does seem like India is top of the list kind of within the focus of the Trump administration. I am certainly looking to see if kind of Europe is willing to do this. I do think when I've talked to other strategists and other folks who are informing foreign governments, one of the big concerns that I hear from them is that maybe they offer up something and then Trump embarrasses them, which is absolutely part of the negotiating strategy.
You look back to twenty eight eighteen, we put steel and aluminum tariffs on in the first Trump administration. Over the next couple of years, Trump worked out deals to remove those tariffs. Look at a deal with Australia. Those now are kind of blown up. If a country makes a deal, can they actually see Trump follow through at this or does he come on top and do something different, Which makes it hard to want to be the first one that lines up and tries to do something to stop this ed.
The market has been pretty sanguine right now. Stocks aren't really responding in a significant kind of way. Julian Emanuel have ever core ISSI. So this will only actually encourage the president to go further and be more aggressive with tariffs.
Do you agree that's what we saw on the first term, Lisa. We saw that whenever he was aggressive in the market was okay with that.
He doubled down, he tripled down. It was only when the.
Market sold off ten to fifteen percent where we would get kind of a tweet out there or a state that there was progress being made.
That would be my expectation.
Again, we've entered into a new Trump put on the market, which is, let's look at what's going on within the bond market. If we see yields kind of on the long end of the curve really start to blow out, that would be a binding constraint from him, but certainly to the extent that there is not a negative reaction,
he feels emboldened. And this is one of the problems with the market right now is that they live through Trump one point zero and therefore have this expectation that if it gets bad, he reversus course, and so we're kind of stuck in this feedback loop of no one wants to be the first person to sell because there's going to be a reversal, and therefore people are kind of sticking with this a lot longer than they normally would. But that threat doesn't mean it's gone away.
So you think that when people realize that these tariffs are for real, that there actually will be a whole host of pressure that maybe we're not seeing right now because people aren't taking things seriously.
Is that right?
I think that is right, but I would layer in, let's see what else is happening. So in the first term, there was a massive push for deregulation, or that was one of the stories, and that didn't get realized. We've already seen this week a takeover of the CFPB. We have an aggressive action to try to shut that down. That's greater than any regulatory action that was taken in his first term, and we're already only in the first month.
So if there is those deregulatory tail winds, if the Trump tax cuts get made permanent, if they add to those Trump tax cuts, if the dollar remains strong, if exports kind of are rebounding because of these trade kind of restrictions, then the market can hold in there. But if it is tariffs and only terriffs, and we have inflationary pressures in the ten year blows.
Out the FED is thinking.
About raising rates, that's when we have the negative market reaction.
Ed.
I appreciate you time, sir, going to say at most that of Raymond Chang Stefal County of UBS writing we look for longer term bull state with two FED cuts in the second half of twenty twenty five, less they joined us. Now for more, Leslie, it's good to see you. Last time we caught up towards the end of last year. You were looking for I think four in twenty twenty five. What's changed things the data or the prospect the policy might change too well.
We were looking for for prior to the December FED meeting and then we actually cut it back to that too. And obviously growth is well, what was much, you know, greater than we expected. Inflation turned out to be a little bit more sticky. But we are still looking for two cuts. And you know, we do think that this disinflation trend, while it might be stalled, it's not completely drilled.
So we are looking for inflation to continue to come down and more than likely the FED cuts in the second half of the year.
Is it because of policy though, back to John's question, or is it because just there is more momentum in the underlying economy than a lot of people expected before December of last year.
Well, and there's definitely more momentum if you look at some of these GDP growth numbers, if you look at consumer spending in the fourth quarter, even the first quarter of Lanta, FED now is at like two point eight percent, so and the labor market remains strong. So there is obviously growth has been this much stronger than anticipated. But I think when people say the FED is on hold,
that's prisoning of the marketplace. I mean the market. The market this morning is only pricing in about thirty thirty five basis points of cuts for twenty twenty five, So I think that you hold for longer is there. We just think the market's getting a little bit too hawkish right now, so we're still looking for two in the second half.
When you talk about a bull steepener, it kind of goes against what we're seeing right now in the market. To your point, and you say that the market's a little bit incorrect with its pricing in of policy staying where it is. There is this belief that in the short term and two year and five year types of timeframes, you're going to see inflation move up because of tariffs, because of policy, but over the longer term you'll see inflation come back down and you'll see the sense of
slower growth. Do you reject that narrative, that scenario.
I don't.
I think the market's doing it exactly what we expected to do. I mean, the bull steeper won't come until the Fed actually cuts. Having this flatter right now is what you would anticipate, given you know, the tariffs that we're saying, the fact that you mentioned earlier inflation expectations, you know in the break evens, which is exactly the floor plan that we saw from Trump one point zero. So what happens is you have these inflation expectations rise.
You know, they take the cuts out two year goes up, the curve flattens. But the latter part, when you actually see some of the growth impact, the FED cuts and you bull steep it. So I think the path is exactly what we would expect.
Well, what if you do see material inflation with all these tariff concerns, but then also a tighter labor market potentially because of what Trump is doing on the immigration front. Is that what could up end your thesis for two cuts in the back half of the year.
Yeah, I mean we're not looking for a stagflation scenario. I mean I think that you know, the FED is going to look at that long term inflation sterario, which has been fairly anchored. You know, we don't think that inflation is going to stay as sticky as what people think. We do think this is one time price increases that
the FED does look through. So we're not thinking right now from what we've seen, unless it's organic, grown, fundamentally consumer driven inflation kind of reacceleration, we don't think it's going to alter the Fed's path.
What are you hoping to hear from Powell today.
I don't think we're going to hear very much. I think it's going to be a question about inflation, there's no question. But remember, I mean even in the December meeting they pushed their target of two percent from twenty six to twenty seven, So they've pushed that out right. And I think he's explained enough in terms of the recent commentary, which I mean the last FED meeting was very.
Boring.
In my opinion, He's going to wait for the data. He's going to see what happens in terms of inflation. But I don't think that he's really going to alter his rhetoric that what we saw in the last FED meeting.
When it comes to taris, I think a lot of economists would agree with you. A lot of economists on Wall Street to the Federal Reserve would choose to look through any price level impact and see it as a one off. What would constrain that is an important question, though in Deutsche Bank said the following their a bitter seat to do so could be constrained if inflation expectations begin to rise and all the labor market re emerges
as an additional source of inflationary pressure. Have we had any evidence of that, seen any evidence of that in the days we got on Friday on you Mitch and in the jobs report, was in.
The way to say that we got on Friday was actually stronger than expected. And I think when you think about the policies as a whole, we don't know the impact of say immigration with them we'd have in the labor market or inflation. We don't know what some of these policy impacts.
Are going to be.
But we're still looking for in our opinion, labor markets to stay strong and growth to stay above trend. We just don't think it's going to force them to completely, you know, stay on the sidelines. And we especially don't think they're going to force a hike in the near term.
Constraining the bus to waize versus forcing a hiker two separate things. I think constraining the bustu weize, I think would be sufficient to spook investors, Which is why I think this price sanction that we got on Friday was some material off the back of what we saw in you metch together with the wage report, the hotter than expected wages with inflation expectations in chin Kaya or be it not confirmed by the New York Feds release yesterday. It's enough, it's sufficient just to keep people on.
Edge because there's no reason for the FED to move right now. There has been no data that would really push the FED off the shelf where they're very happy to remain out of the fray, out of the political and just saying pretty much nothing and being really boring. And so I think ultimately what you're going to get, and I think that your point is a salient one, which is the removal of the option of cutting or the potential for cutting, is.
Enough to spook this market.
How much more would have to get priced in? Or is that the fully price scenario at this point?
Even speaker if you think growth is slowing and no Dunta Runmack does Neil right in this. And I repeated this a little bit earlier, so I'll share it with you again in case you missed it. He thinks growth is slowing. He's worried about that. It was written his note that he put out yesterday, and he thinks growth is slowing while the FED is playing a game of chicken with a Trump administration. That's problematic. If you believe that's the case, you can.
Tell a different story depending on what sector you look at. He's looking at the housing sector. But you listened to what McDonald said yesterday. They actually had an okay outlook. You saw a rally because they outperformed based on non US sales. But they said low income consumers in the US are still under pressure, and they said the overall market is pretty muted. The low income segment really is still feeling it, and that is a significant portion of
their customer base. So that type of commentary is enough to keep certain people an.
That's choiceful translated. That's some real detail. I hate the word choice it too. That's the detail that I think we need to hear from these companies. So let's it's good to see you as always. Thanks for being here, Leslie Falconio. There of ups most times. To Sarah Malic of moving. Sarah joins us now for more on financial market. Sarah, welcome to the program. I want to talk to you about Chairman Powell. A little bit later on, we heard from an economist just there that we could be talking
about rate hikes later this year. Would you expect to be having that conversation.
Well, I wouldn't take rate hikes off the table. But right now we are expecting for about one to two rate cuts this year. I mean what markets are hoping is for the dust to settle on tech and also terriffs. So if we're starting with technology, the concern of you're over tech earnings is the amount of spending that companies are doing on artificial intelligence and the impact that we've seen from deep c and the lower costs there, and
I think markets are nervous. Are US tech means overspending on artificial intelligence and will we get the return on investment from that.
On teriffs, the questions are around is this.
A negotiation tactic? Are we going to have retaliation? And who's going to bear the burden of the higher cost of tariffs. I don't think it's just a negotiation tactic. I think we are going to see some retaliation and I think producers and consumers will bear the cost of higher tariffs. And the question of course around that is what does that mean for inflation? If you look at history, terriffs tend to cause a one time bump in inflation.
Whether or not the federal look through that is yet for us to find out.
So we've gone over a lot of things, whether it's the tech world, and we're talking about the tariffs and how it.
All goes together.
What's your framework for how you filter out some of the news that you get every day to understand how to prioritize either the proposals from the White House, the earnings that we're getting, or the economic data.
Well, first we focus on fundamentals and looking at fourth quarter earnings. We're wrapping up earning season and they're going twelve percent year of year, so the US economy does remain straw.
But then you have to look at valuations.
And here's an interesting tidbit for this year that I think most investors didn't expect. European markets are out performing US markets. So why is that when we know European markets are cheaper. But that's because of the tech trade. Europe has much less disposure to tech and tech has struggled this year, so you're seeing EU outperform the US.
And that's also due to US valuations.
So we need to be conscious of the fact that US markets are trading at a twenty percent premium. You might say that's deservedly so because the strength of our economy. But going forward, of course, we have to think about this sticky inflation. What does that mean for the FED? Can the economy continue to chug along with higher tariffs? Also thinking about two other factors from the administration, taxes and deregulation, which are pro growth for the US.
So areas that we're looking at that we like are small caps. Small caps in the US.
I think they'll perform better with tax cuts that are more positive for the US economy, and deregulation should open up the m and a market that's good for small caps. So looking at those areas of the world where there's valuation support and fundamental.
Support, I think that's going to be increasingly important this year.
That's a pretty controversial call, Sarah. We've had a lot of people come on the show and say that they really don't like small caps because they have a narrow pathway to really be successful.
How do you push back.
Again, set at a time when a lot of people think it's a very real possibility that this sedule reserve isn't going to cut rates and that you're not going to necessarily get the tax cuts and other pro growth policies quickly enough to really give that boost to the sector.
Well, oftentimes you make the most money when you go against consensus, So I'm often pleased to hear that other.
People don't like that call.
I think it's important not to just focus on valuations, because valuations can say cheap or expensive for a long time unless you have a catalyst. And that's the key with small caps here they're cheap, but finally they have that catalyst, and that is some of these policies from Trump that we expect tax cuts should help boost the US economy, help the consumer continue to spend, and create
some operating leverage for the economy. We saw manufacturing data start to pick up last week, so that's also strong for operating leverage for the economy. Small caps that are more domestically oriented, don't forget about the strong dollar negative for multinationals, positive for domestic companies like small cap And of course, finally deregulation. I think that does help open up m and a positive for small companies that larger
companies tend to look to buy. So those are the catalysts there to help finally close that valuation gap between smaller and larger companies.
But are all catalysts created equal. We have tariffs today, tax cuts that's going to take months, especially when every congressman and congresswoman is king or Queen of the Hill and having tons of demands on what gets put in this reconciliation package.
I agree.
I mean, we have talk about tariffs today, but it's still a I think there's still a lot of negotiation left.
We have to see what the retaliation looks like. And again, who's going to.
Bear the burden of those tariffs? Is it going to be consumers or producers? But I do think tariffs are the wildcard this year. It is what everybody is talking about. It could be a serious issue for the economy, and how the Fed reacts to that could be important. Though our view is still though if it will get CPI and PPI data later this week, inflation is moderating. I think Defense still has the room to cut one or two times this year, as long as inflation doesn't reaccelerate.
We mentioned when it comes to Europe and the tariffs, Ursula Vunderlin's QUI statement this morning about how it's unjustified and will not go unanswered will trigger firm and proportionate countermeasures. You started this chat talking about how the EU market beat the United States. Do you still think that's possible for the rest of the year. Given this potential tit for chap between Washington and Brussels, I.
Think an acceleration of retaliation in tariffs could be ahead round for EU. The offset for that, of course, will be what goes on with the technology sector with deep seek lower cost access to artificial intelligence, and whether US companies will be able to able to monetize their investments at their rate and degree that investors are hoping for. If the tech sort of negativity continues, I think that is positive for European markets, and they do, of course
have about a forty percent discount versus US markets. They do have valuation sport there Now a couple of the things that we haven't really talked about on this also that's happening this year is first of all, the return of the retail investor. Last Tuesday was the third biggest trading volume for retail investors in the past three years.
So retail investors coming back in.
I think that is good for small caps, so that's important there and that also could be another.
Driver for the markets. And then finally, you every want is talking about.
Inflation and worried about it, but look at the tenure settling now down around the four and a half percent level ten years, also telling you bond markets are a little bit less concerned about equation.
Bonyos have been pretty contained, that's for sure. Cera manic that of moving. Let's get to the market conversation, joining us around the table, Sanain cold and grant of b and why she ain't good to see you good to see too?
John?
Is this a problem for the market because at at the moment equities are doing okay? Taking this in a stride, The dacks in Frankfurt, Germany is up by something like ten percent, So father Shear, is this a problem?
Well, there are a couple of things that I think we need to focus on here. The first is and RBU, who has always been China would be first came to tariffs, and we've seen that the discussion on tariffs at the EU in particular, think about autos. Not all European autos are actually manufactured in the EU. A lot of them
are manufactured here. It is a very big pain point when you consider what's actually happened, for example, the German car industry, where they've seen such an influx of vehicles from China, they didn't have any tariffs in place, and the industry has well, let's not say decimated, but it's been very badly hurt as a result. But look, there's been a lot of talk. We had tariffs for maybe a couple of hours on Mexico and Canada, and then
they were lifted. There were more negotiations. We need to wait and see exactly what the details are here.
Are you basically saying that you would count all tariffs that are threatened against trading partners other than China as more smoke and mirrors than actuality. Is that that seems to be how the market's treating it for now.
I think that is the appropriate response because the details really matter here. Right, they'll have sector impacts, they'll have individual name in but we also want to think through to what it means for inflation potentially and how big of an impact could that be, because as we've seen and are seeing the last mile of inflation, getting back down to that two percent is really hard.
How would you know if this is just a one time hit or it's more pervasive when it comes to inflation. Because a lot of the criticism for people who say tariffs don't work and it means longer inflation. We'll look back at Trump one point zero and say, well, the Fed took it on the chin as just a one time hit.
It's complicated. So there are a couple of things that can temper the impact. The first is last time round, we actually saw individual companies decide to take the impact of tariffs in their profit margin. So that's one way it can be dampened. We've got a pretty strong dollar that immediately mutes the impact. And then lastly, if consumers start to buy more domestically produced goods and you see that substitution effect, then the impact of tariffs is lessened.
We've covered a lot of ground in the last few minutes, or so Cham and Pow absent from the conversation for the last fifteen minutes. What are you expecting from him on day one and then again on day two? Is this a big event for you?
Look, we always listen to what Powell says, because sometimes it's not what he says, it's what he doesn't say. The thing that we're really interested in is any commentary around how they're thinking about the timing of cuts, because look, they still do have an easing bias. They're going to be more data dependent, and tomorrow's CPI print is going to be really important because look, a lot of companies just raise prices in January.
True, in some ways, maybe tomorrow is more interesting once we get that CPI report and then we hear from him in front of the House.
How he characterizes it and exactly what the metrics are, what the benchmark is for them to feel confident enough to cut rates. Does he essentially indicate that ray cuts are becoming a more remote possibility in.
Twenty twenty five.
The criticize everyone in the House, but sometimes the questions in the House are of a different caliber to the questions that take place in the Senate.
So we've been to cham and there's a large All I know is that we've insulted the French leader, the German leader, but then the house at different caliber, different cabs.
Well, it's look, German French child is going to take issue with us tomorrow.
No, he's a good friend of mine, and I've got a lot of time for the Chairman of the House financial Services medic I'm just talking about the pet project, other individuals in the House that have pet projects.
Exactly, And so you start asking him about you know one program in this town.
They want to make a YouTube video.
Right, Yeah, we all agree.
It'll get much.
Worse as we get closer to the midterm election, so.
This might be a good one. We'll see, Schnick. Appreciate your time. Thank you. This is the Bloomberg Surveillance 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