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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. Julian Emmanuel have evercall.
Writing yesterday's CPI reinforced the three steps forward, two steps back volatile market environment that will be a part of the road to wes and p five hundred and sixty eight hundred a year end twenty twenty five. Julian joins us now for more. Julian, good morning, good morning. Now you wrote yesterday, it's not the nineteen seventies show, what is it?
It's twenty twenty five, And in reality is if you think about it, every asset market has been in this incredibly volatile but range bound condition since the election, right, and so we're trying to sort through the potential for stronger growth, the potential for geopolitical shift, versus the potential for some of the policies that are being considered to be increased inflation and drags on growth. And basically the net out of it is is we're in this waiting game for further development.
Can we talk about the potential for right hikes? How high is that, Bob?
Extremely high? I think there are a lot of reasons. Look, first of all, expectations are still well anchored. Okay, there's a lot of volatility around the Michigan survey. The New York Fed survey is much more stable. And the reality is is that is that when Chairman Powell thinks about his legacy, which you know he he's likely to be in a different position. Let's say next year, it is wrapped up in delivering the soft landing, and a rate hike would be the thing that disturbs the potential for
soft landing. And again, history will say if in fact, inflation proves to be sticky into twenty twenty six, and we don't believe that's the case. We think this is much more like last spring, where you had several months of sticky inflation and then the path of travel continued lower once again, is that the policies of the current White House would be the cause of the inflation if it were to remain sticky.
Which is the reason why you wrote there's literally no plausible scenario over the Fed hikes in twenty twenty five. I love that kind of conviction at a time where everyone else seems conviction list can you put into some sort of framework how much conviction you have in the three steps forward two steps back that gives you the conviction to buy of the two steps back because you have confidence that three steps forward are going to come.
Well, actually, if you think about it in first of all, look at the sentiment surveys. There's a lot of bears out there. Markets don't top when there's a lot of bears, okay, And people can say all they want about the positioning. There's still cash there. We've seen inflows and frankly the way this market trades, and yesterday is a perfect example. It looked like the sky was falling at eight thirty five,
and then basically people started reassessing. And from our point of view, what was interesting is that yesterday the things that stabilize the market. Were the things that actually should have been the worst performers, technology, long duration, high multiple assets which should have been reacting badly against yields going up and their secular earnings growers.
I want to pick up on what you said, which is sentiment is so bearish.
A lot of people disagree with you.
A lot of people say, actually positioning is pretty bullish. Rubner over Scott Rubner over at Goldman Sachs came out with this report where he said everyone is in the pool, including retail traders for one k and flows started, your allocations in corporates.
You're everybody who comes on the show. Yeah, it's going to be volatile. But at the end of the day, bye bye bye.
What makes you think that there's actually any bear sentiment out there whatsoever?
Again, the moment to moment reactions, right, people are very quick to sell. The market bounces back because of all these reasons. And the biggest reason, which we haven't talked about, is that earnings are going to grow by ten percent this year. And when you have a condition where earnings are going to grow that kind of to that kind of degree and have fed that, look are base cases. They still cut twice. They may not cut at all,
but they're not hiking. That's okay. All of that lends itself to the idea that the bull market is not over.
You think they're gonna cut twice.
I have to ask about potentially this being the part of the nineteen seventies that is reminiscent of a FED chair that maybe is getting under a little bit of political pressure.
Look, there's no question, and I think Chair Powell was wondering whether we were replaying back to twenty eighteen in some respects, and that's a lot of the market action twenty eighteen. But from our perspective, the fact is, if you think about those numbers yesterday and you think about the FED as you know, a two sided risk factor, you know in terms of uncertainty, Well, we know one thing is certain. The FED is likely not to be
relevant until June. Okay, they're just gonna wait and they're gonna ingest more data, and that takes one thing off the table. But again from our point of view, we just don't think you're going to have what we've turned an uncooperative FED, which would be a hiking.
The FED doesn't want to hike. I think we're not the same. We can fill that when the communication we get from Fed officials Bank for America indicating that if you don't want to hike, don't count where the cunt's coming from. For you and a team what delivers them.
It's again this idea that the stickiness of inflation that we have right now is not permanent the same way we saw it again continuous travel lower after several months of stickiness last year.
And how much more complicated does that picture get though, when you have tariffs coming down the pipeline potentially today, reciprocal tariffs line by line.
It gets a lot more complicated. And the offset to that is gee. I wonder if there's a bit of coincidence that the meeting between Putin and Trump that's likely to happen is happening in Saudi Arabia, you know, ground central for setting the price of oil. And when you think about why Donald Trump was elected is because the US population has been incredibly frustrated and stressed by inflation, and he set it himself prior to the election, is that, you know, the easiest lever to pull is not the
price of bacon and eggs or coffee. It is oil, and so that's the calculus.
The three biggest energy producers on the planet in the same place, having talks coming very.
Soon, potentially very soon, and the President just set it out there.
I have been talking to a lot of people.
There's been preliminary discussions about this meeting potentially in Saudi Arabia, but.
The President just sort of put it out there for the world.
Also, next week he is going to Saudi Arabia's Sovereign Wealth Funds conference being handled in Miami. So there's a lot of overtures and olive branches between RIOD and the United States, and potentially RIOD could be that place between the Washington and Moscow.
Brun creage right now negative one percent, seventy four thirty three. It's joining us now to discuss Nadia, mountsin Wigan is seiling capital. NATI. Welcome to the program. Let's talk about the developments of the past twenty four hours. What does it change for this energy market?
Well, right now it's brought to the forefront that discussions are underway and that the Munich meeting from the fourteenth to sixteenth of February. The pressure is on Europe to get its act together. What we see on the market side is that equity markets are already pricing in peace in Ukraine, but when we look at the commodities markets,
they are not exhibiting that same type of pressure. And you can say that oil is a bit under pressure, but if we actually had the real semblance of peace, we would be trading in the low seventies, at least the bottom of the range that we've been experiencing. We'd have much lower natural gas prices. So so far, the markets, in terms of the commodity traders, they don't believe it. Red crude is still highly backwardated.
Do they not believe there'll be a peace agreement or they not believe that Russian energy will flow as it once did.
Well both sides.
So the first part is whether there will be a peace agreement and how quickly it's impossible for Europe to agree on how they will handle this peace agreement before the German elections that's in ten days. Then they can sit and work together and try to figure out what a peace agreement would look like, most importantly in terms of enforcement. And this is part of what the Munich Security Council has to agree because in their own notes
and preparatory detail. They say they have to come up with an ironclad security guarantee that Donald Trump has said and Pete Heads have said does not include the US on the front line. So they have to agree together. In terms of the energy side, that's what the German election is really considering as well.
We have the political party.
The AfD, that is much more pro putin than the other parties. They are willing to step away.
From NATO and they would like to have that.
Energy flowing again to make German industry more competitive. Then on the flip side, you have other parties that don't trust the Russians and believe we have to build Europe going forward, and the five percent gd Fennig that can really work on the industrial engine of Europe building these arms. But right now it's a very fragmented market. Germany creates things, Norway creates things. Norway's not even part of the EU. The UK is not part of the EU. So they
really have to pull themselves together. And when we see Trump's tactics, he's being very tough on his allies and asking ben to step up versus his actual adversaries.
He's consistent, he's.
Putting the pressure on Europe and going along listening to what Putin wants. He's being very tough on Canada in terms of tariffs compared to how he's been on China, when we know his ultimate goal is to be tougher on China. And he doesn't like that relationship between Russia in Germany being so close together. He made that very clear in Trump one point oh that he did not like this energy dependency. And Scott Besant is in Ukraine
now showing that the US is open for business. They will sell oil and gas to Europe and they will take they will take in exchange as a lone rare earth minerals from Ukraine. He's a transactional president and it makes.
Sense, Nadia.
One adversary though Trump has been tough on is the Iranians and the crew they ship to China.
When you're looking at the oil.
Market, how are you starting to factor in maximum pressure that we are going to see under this administration.
This is where we've really seen that playing out more on the shipping side. And Trump had a success in Trump one point one on being tough on the Iranians.
So that's where the.
Crude markets believe the most in the Iranian maximum pressure scenario. When we look at Russia, they are such a huge producer that Russian oil has always tended to get out somehow, even though it's in a tougher way. So on that side, we are looking at potentially a loss of one million
barrels per day of production. But Trump also wants the Saudis to step in and produce more oil in that place, and the Saudis have this memory of Trump one point oh when he granted a six month grace period for countries that were taking Iranian oil, and then the Saudis, the Russians, and the American companies brought back two and a half million barrels per day of oil in anticipation of this outage of Iranian oil and crude prices collapse. So it's a much tougher negotiating tool this time to
push the Saudis. Also, the Saudis have been very protective of the Russians up to now, so that relationship very important. And it's not by accident that a meaning between Trump and Putin will probably start in Saudi Arabia.
Now, do you just quick here or what are the chances in your view that we could get a normalization and relationship enough with European Union nations with Russia to allow Russian liquefied natural gas to flow once again through Ukraine into the European Union.
Well, right now, from a European perspective, what has been laid out in terms of peace sounds much more like a surrender for Ukraine. So there has to be an understanding that there will actually be a Ukraine and that it will be.
I think we've lost the connection there. That was not the amount of work in there as fun and capital. Now, Steve Roshuta of Missia, do you want to guess around the table? Steve, let's have that conversation. Now, let's talk about the headlines we've just seen from the President. This is what we were expecting, reciprocal tarifs, and it comes to an interesting time. It comes at a time where we just had hats of that expected CPI. So let's
start with CPI. What was concerning about that print for you?
Well, the continuous period of the extended period at which the core CPI numbers are running on the hotter side on a year over year basis, you know, and everyone's always looking for a base effect to roll off or everyone looks in an excuse for an individual component of the.
Report to drive the report.
The reality is this is an index for a reason because it has to include lots of components. And when you look at a lot of the line item components, they can't even be seasonally adjusted. So we have to aggregate them in order to seasonally adjust it because they are very, very volatile, and ignoring something because it's volatile is just an inappropriate way to deal with monetary policy, to inappropriate way to deal with economics, to be honest with you.
So Step one, let's accept the data. You're accepting the data for what it is. Step two, let's incorporate something into the outlook, a change in policy. Terrorists. What's the contribution of these terrists going to be in a months to come?
You know, again, this is this is a difficult component because the dollar is firm and the global economy is particularly weak. You look at the response of China to the terrorists that Donald Trump has imposed again the ten percent tiers. It's a very very muted response back, and I think it reflects the fact that there is a global excess supply of tradable goods and as a result, of COVID, We've diversified supply chains, we have more excess supply of tradable goods than we've ever had before, So
there is offsetting pressures. So I don't think you can say, well, we bumped this component up, therefore we're going to bump this up in the inflation component. If to look the fact that margins are going to be squeezed when it.
Comes to these tariffs, do you think they will be passed on to the consumer at least a one off head.
It's possible, It's not definite, and it really depends on how tight the labor market is, whether the consumer matters or it bothers the consumer. Understand what really took Joe Biden down in my assessment, is not inflation. It was the level of prices. Moreover, it was the level of price in the fact that real disposable income was squeezed
under the bodied administration. So if you're in an environment where prices are going up but your income is going up and purchasing power has actually expanded, do you mind The answer is probably not. And that's the end game that I think this administration is going for.
Take it one step for the Bank of America came out and said the dollar may not like taris after all, even though the dollar's been on a tear because of these tarror threats, because of full retaliation, the dollar could weaken.
How vulnerable do you think the US is to retaliation?
I think the global global economy, being as weak as it is, reduces the ability of people to respond back. Again, we are the buyer of last resort, and so therefore there is a certain amount of power that is imposed or implied by that. And the administration is pushing that envelope, There's no doubt about that. How long can they push it, how far can they push it? They're going to attempt to find out. But we have to understand the Federal
Reserve is pushing the envelope as well. The Chairman continuously talks about the fact that he believes monetary policy is restrictive. Yet he began cutting rates when the economy was running above trend. He began cutting rates when inflation was running well above the Fed's target.
So was policy really restrictive?
And now we're in a situation where policy's actually more accommodative.
Julian Emmanuel was on the show about fifteen minutes ago, and he had written, there is literally no plausible scenario where the Fed hikes in twenty twenty five.
Do you agree there is a plausible scenario? There isn't necessarily statistically viable scenario. Okay, what I think you need to get the Fed to hike rates in twenty twenty five is the unemployment rate to move significantly below four. Put three point eight ad because once you get back to three point eight, you've basically taken all of the uptick in the unemployment rate that they responded to in cutting rates out of the equation. So therefore they don't
have that argument anymore. Then you take the ten you note and see if the ten you note pushes above five, then guess what their argument that inflation expectations are anchored goes away. Then you have a reason. So you have a necessary condition the unemployment rate. You have a sufficient condition the ten note. You're not going to get the
ten year note unless you get the unemployment rate. That's the key thing to what if the unemployment rate starts to move down and significantly below four, the markets will jump the gun and price it it.
You know, an inflation expectations bottomed in the last twelve months. Middle of September. What happened in the middle of September feedsnat kind of interest rates?
You know what fedher? J Powell said yesterday. He said that the reason why is not because of inflation expectations.
He actually said that the.
Increase in yields was due to other concerns, which I thought was very interesting, sort of discounting the argument that was implicit and what you just said.
What do you make of that?
Is he giving a nod to politics? Will be thinking about that in the middle of September.
He's saying, it's not my fault. Don't look at me.
Adam Posen at the Pediston Institute joined us in about sixty minutes. I think you might have a different view on things. Steve A shuddo, Steve, it's going to see us. It's always thank you. Andrew Homhols of City. Andrew, you've had in the books for a while that you expect the Federal Reserve will reduce interest rates this year. I believe you think it's going to happen now sometime later
on in the spring, around May time. How does this CPI number of yesterday and PPI this morning help your case.
Yeah, this definitely still is all in the column of the Fed is not in a hurry to reduce interest rates.
That's what we've heard from Cha Powell.
That's what we saw the January FMC meeting and in congressional testimony. So they're going to need to see some more evidence that inflation is cooling. I think they will get some of that in the PCEE reading. Now, you want to be careful here. We have CPI, we have pce we have year on year, we have three months. You can look at all these different metrics on inflation.
When you dig down into the details, the fact that shelter inflation is slowing down, I think that is going to give Fed officials confidence that we're getting some slowing in terms of what this.
PPI number means.
I think part of the reason the market is reluctant to react is you really have to look at these detailed categories and how they're going to play into that PCEE reading that I think is going to be softer than the CPI reading we saw yesterday.
Well, Andrea trustand the details. Then, when you think about the sources of inflation, energy, labor, goods, services, what do you think the source of disinflation will be through the next year or so.
I think the single biggest factor that is causing me to be confident and I think will cause beneficials to be confident that inflation is slowing is a slowdown in shelter prices. Again, even though we saw it stronger overall reading for CPI inflation, we saw shelter prices that were slower yesterday, And if you look at what was strong in the CPI reading, it was really things like motor
vehicle insurance used car prices. These are more volatile categories and categories that don't get in some cases as high a weight in the PCE reading. So I think we'll see some volatility in CPI, but that through line, as Chicago Fed President Gulesby would say, is still lower in inflation.
What would you have to see, Andrew to change your view that maybe this is something that's a bit stickier.
Yeah, So what.
Would be concerning is if you saw just a lot of visual strength in wages and in services prices. Now, we still have somewhat elevated wage growth, but it looks to be cooling.
We know the labor market has softened. Maybe it's kind of.
Stabilized more recently, but softened before stabilizing.
That should all mean that we get a glide down.
In wages, we get a glide down in services price pressure. If we're wrong about that and you were to see wage growth that was actually picking up again, that's where I.
Would get concerned.
That's where I think FED officials would get concerned.
That's the reason why that was the number that people looked at in the jobs report, the payrolls report.
That we got last Friday, Although.
It was explained away by the hours worked going down. I am curious about which aspects people are hoding in on that are not necessarily inflationary when you have fairly broad based inflationary pressure. People had theorized that you would get this disinflation in services that was enough to offset a reinflation in goods. It doesn't seem like that's happening to the same degree people previously expected.
Why do you dismiss that?
Well, I think shelter services are on track. The non shelter services that is where we should be concerned. And again it's this whole issue of wage pressure labor markets and does that bubble up into services prices.
We saw that again in the January reading.
This what we call residual seasonality, where people increase prices at the beginning of the year and they increase prices by more at the beginning of the year, and we get these really strong January readings. So I'm really looking to see not just in the January inflation number, but what do we see in February, what do we see in March. I think those services prices are going to cool again in February and March.
They were cooler in November and December.
So if you put together, you know, five out of six months that's cooler there, and you have wages that are slowing.
That's a pretty good picture for the Fed. We have to watch these next couple of reports, Andrew.
Today's the big one, apparently reciprocal tariffs. We've had this conversation about inflation with that so much about trade now, Andrew, you've got as a baseline interest rate reductions for twenty twenty five. How do you think about tariffs and the potential feed through into higher prices. We've got ten percent on China, we could have more still to count.
Yeah, so the details are what are really going to matter here. And we don't know the details. I do expect we're going to get some kind of broad based tariff. That's been pre core to the Trump administration messaging to their economic policy. They need that both for incentive to produce in the US as well as to raise revenue. The question is are there any carveouts to those tariffs?
Are we including Canada and Mexico. That's almost thirty percent of trade if you include or exclude Canada and Mexico, so that makes a big difference. Also, are there carveouts for certain products That can make a big difference because some products you would expect those tariffs to be almost
fully passed through into consumer prices. Most tariffs, most products you would expect those tariffs would not be fully passed through, so the inflationary effect will be less the more you get carve outs and the more you focus on those products where.
You get less passed through.
If the inflationary impetus is not too great, then I think FED officials can say it's a one time price level increase, it's not an inflationary pressure issue. The challenge for the FED is going to be if inflation is not otherwise slowing, can you say that, So I think you need inflation to be slowing down just by basic macro economic dynamics, then you need these tariffs to not be too great an extent, then you will get a limited FED reaction.
Andrew, that sounds a lot like transitory and that argument's not a good one these days, even if they think it's the right one. You saw back in the middle of September, the inflation expectations bottomed. At least market perception of inflation expectations, Andrew, the FED share is least appointed out chair and Power kind of pushed back at the idea that they contributed to higher inflation expectations with one hundred basis points of rate reductions. Andrew, can I get
your thoughts on that? Just to wrap up, do you think they did contribute to high inflation expectations.
I think it wasn't so much the FED rate cuts. I think it's more the expectation of teriffs. We see that in the consumer surveys where people say they're worried that prices on durable goods are going to go up. So I would see that as more terraff related, and it's the short term expectations. One of your expectations, not the long term expectations that FED officials.
Would worry about more.
Andrew, I appreciate it. Thank you, Sir, Andrew hanhost, Then a City. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, ANNGIO 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 app.