Bloomberg Surveillance TV: February 21, 2025

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie 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

Yeah, so, I think the bond market was encouraged by the mage from Secretary Bessant, which was that it's not the time to be terming out the debt which I think really makes a lot of sense. Right If you look at the yield curve, it's positively sloped. If you look at thirty or real yields, they're at the highest level in twenty years.

This is not the time to be terming out the debt, and.

So the bond market is comforted by the fact that there's somebody at the HELM that understands the supply demand dynamics and is looking to manage term premium and at least not aggravate term premium even further.

You're concerned about inflation, though, and potentially that means the FED is either on hold or might have to weigh a hike this year.

No, so the biggest risk for the bond market is inflation.

But we actually feel you're fairly comfortable with the inflation backdrop, and we do feel like with the FED they are still in an easing bias where there are essentially two decisions at every meeting, or two options at every meeting. One of them is to stay on hold, which is where they are right now now. The other is to cut rates. And I was hearing in the earlier segments

You get a strong report, the Fed does nothing.

You get a weak report, the Fed is stepping back in to support the economy.

That's generally an environment.

Where yields are range found with some risk of moving lower.

Well to that point.

Long end bonds they've fallen by about nine basis points so far this year. There's this discussion how much of it is supply what we heard from Scott Vessant yesterday and structural changes that may or may not happen to you. What is the bigger driver of that supply or is it growth concerns we're starting to see in the long end.

I think it's primarily growth concerns. I think supply is a secondary factor. And the one thing that I would highlight is while the Treasury Secretary does have control over where we issue on the curve and they're in charge of determining what the weighted average maturity of the Treasury debt is, they are not the ones ultimately responsible for determining how much.

Debt needs to be issued.

That's still a function of how much the government takes in.

So that's how much revenue they get from.

Tariffs and taxes versus how much they spend.

That's what the Congress.

Is debating right now in terms of the reconciliation bills. That hole in the end of the day, it is not something that the Treasury control, but ultimately is a function of what the Congress decides, and so what the bond market is ultimately going to be trading off of in the long end, is what that growth impulse is or is not as it relates to the fiscal trajectory. Do we get the tax cuts, the extension of tax cuts, is there room for anything else, or is it really

You explained the FED asymmetric reaction function. I want to understand how the FED would respond to the following scenario. Let's say we've got some weaker economic data lay before Stata started to soften a little bit, but they still face the prospect of real policy change further down the road. I think what we're all trying to gauge in markets is whether that asymmetric reaction function would be compromised by the prospective policy change further down the road.

I don't think so.

I think that they are aware that there's a high level uncertainty, but they don't want to hamstring themselves with the what ifs, because there's always what ifs. We never know what's coming next, and in fact, perhaps we actually know a little bit more than we did before as it relates to what the Trump administration is trying to achieve. So I think they're going to stay very focused on

Right. So, you had a week retail sales report.

The market brushed that aside because we know that the consumer is fully employed, they're going to keep spending. On the other side, we had the strong CPI report.

They also brush that aside because.

When we know that January continues to surprise to the upside no matter what the economists are trying to do to seasonally adjust, it doesn't seem to be working. And if you look at PCEE, which is the Fed's preferred measure, we're expecting that to fall to two point six percent on a year over year basis three and six month run rates around two and.

A half percent. Yeah, it's not two percent, but it's pretty close.

There's a lot of what ifs, that's for sure. Spending cuts, tax cuts, March fourth, twenty five percent, to have some Canada, Mexico middle of March twenty five percent steel aluminum eight Pril twenty five percent AU sized chips and drugs, maybe more than twenty.

Five Fromber allegedly according to the President the other night. And also April first, before the April second deadline he set. April first is when the team is supposed to come together and say, this is where the issues are on these countries, on these sectors, and this is what we need to do. And at that point I'll have Jamis in greer employees.

And towards the end of March, the Federal Reserve's got to put out some forecasts. So good luck to him. Calsei is going to see you as always, thanks for dropping by Caunsey Barrow there of JP Morgan Asset Management. You'll begin this hour stocks looking to close out a second straight week of gains. Nadia level of ups writing. We remain constructive on the medium term equity outlook, but

Well, you know, as you've been talking about doing certainty around towers, as those dates approved approaches US, we could see a pickup in volatility. It has implications for inflation. It also has implications for overall economic growth, and so I think we're all watching those days. How much of that would stick. We do think probably that twenty five percent tariffs on aluminum and steel will stick. We saw that in the first Trump one point zero to protect

Negotiation this way transatlantical time highs, the S and P five hundred record high, the DAX in Germany record high. When you speak to clients, just shine a light on those conversations for us, do they believe any of this happens?

You know?

I think that we are a bit surprised that we haven't seen an increase in volatility this year. We were expecting that as the new administration takes office. But what you're seeing is damp volatility at the index LEFTL has been damped, and I think people.

Are surprised by that.

But when you look onto the hood, there's rotation happening, and there's dispersion, and that's what's stamping in volatilely. So I do think that we are trying to advise our clients to be pay pick up in volatility as we enter into March and April. But I also think that what clients appreciate is that rotation that's happening, that brought in and out.

You have like nine of the eleven.

SMP sectors are now performing over fifty percent of the index ILL performance. Compare that to the last couple of years was like twenty five to thirty percent.

So I think.

Clients are starting to appreciate that rotation finally happening.

Well, part of what happens with that rotation is a mag seven that's underperformed. I think it's only up something like point zero five percent around there so far this year.

But what has.

Outperformed in tech really noticeably is what's happening in China. China Tech has been off to the races. It is on fire. Hong Kong Tech shares up another six and a half percent today after Ali Baba earnings.

Are the two related?

Is there some degree which America Tech lagging behind is because China is starting to pose a real threat.

I don't know.

We don't think that China posts a real threat, but we do think that there's an opportunity. We actually have had a call on China Internet's stock for some time, so it's nice to see you at they start to outperform. I think what Deep Seeks showed is that China still has an AI industry despite the fact that we've had chip restrictions, So we think that there's more upside to go. And then when you look at China Internet versus the

Just on that will we're talking about event risk dates away from the tariff dates February twenty six in video earnings.

How big of an event risk is that.

You know, I think historically you've seen like mix mixed trading around in the video. Sometimes you have the stock trade up in turn is and then sort of a cell of the news and it has become a macro event. I don't know how much of a macro event at this time it is around because the stock is down going into earnest, so you know, there's sort of so expectations of volatility around that.

I think people.

Are likely going to be more focused on what the administration has to say in March and April. In the video is no longer so much of a macro event as it has been over the last that would say year and a half.

So policies, though, can infect that stock when it comes to semi conductors coming out of Taiwan.

Or export controls.

How aggressive do you think the Trump administration is going to be?

You know, the fact that he that he met with in the CEO of the company, I think is quite positive. I do think as President Trump continues to say that America needs to continue to innovate, so I think he's going to be mindful in terms of not doing anything that's so aggressive that it it's it dampens that innovation. But at the same time, uh, we wanna protect American technology and not have it get in the hands of China. We want to be ahead.

Of of that.

So we think that on the margin you could see some restrictions, but I don't think it's gonna be overly aggressive and it's not necessarily gonna be against like a Taiwan.

We talked about all the risks that this market faces, and you're in the medium term, you're constructive.

At what point do.

You need to see the good stuff coming out of Washington, the tax cuts, the deregulation to get a little.

Bit more bullish.

I mean, reality is, we always thought that those tax cuts will probably be uh quite minimum and likely in the second half of the year. I think what you wanna see from the President is not tariffs that are overly aggressive. No blanketed tariffs. Right, don't wanna see tariffs of Mexico and Canada, cause.

That would be disruptive.

You are seeing progress, I think in terms of deregulation, we'll see who take the helm in terms of pri advice, share of supervision for like the the banks. Yes, this past week we see some volatility around financials, just given the headlines around the President Trump administration sticking with those stricter regulations around m and a of the Biden error. But again you know, those are guidelines and the interpretation

You'd find the weakness and the banks this week.

We would buy the weakness because there are other things at play that we think continue to support banks. Think about we have an economy that's still chugging a law, we have trading activity that's also doing well, asset and wealth management, and then there is that possibility for deregulation. Seacart.

Nadia always going to catch up, getting up down your theories. Thank you, Nannia. Level there. Jason Furman, the former chair of the Council of Economic Advisors, with some sharp words for the previous administration writing in Foreign Affairs, Biden never did the hard work of explaining to the public that enforcing further limits on trade with China imposed real costs on Americans, but the national security gain was worth the

You know, I've been pleased by the reaction I've gotten.

There's certainly some people that have been very negative and very critical. I've heard from a lot of Democrats who were happy that I wrote it and think we need to figure out, you know, a different way for policy going forward. And you know, I've also heard from people as generate ideas.

But the one feedback I haven't liked.

Is there's been people from the Trump administration who have leaked all over it without realizing it. It is also a description of many of the problems, in some cases more severe of their own policies.

What do you think is the most severe problem in your mind of what the Trump administration is offering right now.

In terms of the economy, Tariffs, especially if we actually go ahead with anything on Canada and Mexico, which are just so inextricably linked with the way in which America makes things. I thought it was refreshing that the Shrogury Secretary was effectively admitting that it will actually raise prices. I would warn him against using the word transitory for inflation.

Jason isn't going to be hard for the Democratic Party though, to throw stones at this administration when it comes to tariffs. When we had such high inflation and the Biden administration refused to remove tariffs on places like China.

Yeah, I wish the Biden administration had removed a lot of those tariffs. I wish the Biden's US trade representative hadn't said. The idea that tariffs raised prices has been debunked. But you know, I don't think what about itism helps your economy, And I don't think that you know, if tariffs raise inflation by half a point and we end up with two point nine percent inflation, and.

Maybe the Americans aren't really.

Noticing it quite as much as they did a couple of years ago, but the Fed will certainly be noticing it. The Fed's not cutting rates in a world with inflation like that, and in fact, it might even be raising them.

Jason, to that point, what happens if a similar mistake is made this time around, and by similar mistake, I mean this idea that you point out that John started us with, that tariffs are being put on and they're not necessarily described as something that you need to grit through for national security and what's more, something that raises revenue and brings down taxes when the reality might end up being different on the ground.

Yeah, I mean, it's a terrible way to raise tax revenue. It's highly distortionary. In some cases, it is a national security tool. And for example, sanctions on Russia. No one ever said America is going to get rich by putting

That's basically what tariffs are.

Like, and where you especially don't want to do them is where they're on intermediate in pots that are needed for American manufacturing, When they're on things that consumers want, when then there are things that are made by our allies, when they are things where you could cause trade diversion from another country, just lots and lots of the ones that they've talked about are just very poorly designed.

In this scenario though, Jason, we saw last time around terrors were something that specifically hurt growth, which is the bigger concern this time around. Is it some sort of inflationary impulse or is it weakened growth and we can demand.

In the medium and the long run. It's definitely growth.

When I teach tariffs in class, we don't focus on the inflation aspect of them. We focus on what it means for both consumers having you know, worse options to buy things and producers who it's effectively putting attacks on as well having a harder time I'm selling things in the current conjunction. Though we have underlying inflation and around and a half percent. If it falls by a few tents, we're in great shape. The Fed can resume rate cuts if it rises by a few tents. The Fed has

Jason got forty seconds left. I wanted to squeeze this in. Do we have any experience of threats this large, lingering for this long with regards to tariffs? Do we start to behave as if tariffs aren't just going up?

Yeah, our record amounts of uncertainty that businesses are facing right now, just even threatening tariffs and unthreatening them has been studied by economists and it has an effect, and that effect is a minus. So it's not something we should be playing five dimensional chests with. We should be clear, transparent, and ideally limited.

Jason, I appreciate your time and a publication enjoyed the piece. Thank you, sir, Jason. And at the Harvard Kennedy School has sent back to the economy Fed official signal the rates will remain high for longer with government policies bringing inflationary risks. Tiffany Wilding of PIMCO writing, all of these policies and negotiations are likely to coincide with some economic disruption and market volatility in the near term. How much

Yeah, so, you.

Know, I think there's a lot, clearly a lot of uncertainty here because I definitely think inflation, as you mentioned in market volatility, will be a constraint to what the you know, what the administration honest uh eventually does you know. But nevertheless, what they are saying they're trying to do is they want to rectify decades of you know, trade and balances you know that have you know, treated the United States, in particular, the manufacturing sector in the United States unfairly.

You know. In order to rectify those.

Balances, they have to really get at some structural issues within the global economy, within these economies that you know run surpluses, you know, like China, Japan, South Korea, in Germany, you know, And so these are not going to be things that are easily negotiated, you know, and if if they are changed, if the trumpetministration is trying to force changes,

And when we look at market pricing.

You know, it does look like, you know, a lot of you know, a lot of there's a lot of sanguine kind of pricing when we look around, you know, the markets don't seem to be you know, really reacting.

You know, to the potential for this type of disruption.

It's diffinity. Do you think the FED will react when they meet in March. They've got to put out some new forecasts, and we know that we've got certain tariff proposals on the table for March, including twenty five percent on Canada and Mexico, twenty five percent on steel and aluminum, and then in the following month that we go into April, there's the reciprocal tariffs that people are looking for as well. How do you expect the forecast the change of at all at the Federal Reserve?

Yeah, I mean, I think this puts the FED in a really tricky position, you know, because these types of policies, they will result in a or likely will result in a delay of the Fed meeting its two percent inflation goal. That will result in one time kind of price level adjustments as these tariffs are passed on to consumers. But at the same time they could also result in some economic disruption.

Growth can can have a bit of a drag from this.

You know, other policies that the Trump administration are implementing, you know, like more aggressive immigration policy, these, you know, some of the government's potential government spending cuts that are being discussed within these reconciliation bills. All of that will put downward pressure on growth, and so that's not you know, that kind of goes against the dual mandate.

You have conflicting issues.

I think in terms of the FED, basically what they've signaled is that the economy is coming into this period relatively strong position. You know, inflation has been stickier than expected, that last mile has been more difficult, and with all of this uncertainty, they're kind of happy to sit and watch for now at least, and to kind of see how this plays out.

Tiffany, could that lead to something that looks like a policy mistake if history has told us that one of the impacts of tariffs is weaker growth.

And you have a FED that's still squarely.

Focused on inflation, perhaps with recency bias, that they might not move or might not cut as much as they should when we know what some of the impacts of tariffs are and as you say, it's not great for the economy.

Yeah, I mean I certainly think that's possible.

You know, I still think that the FED or Reserve is is squarely focused on the labor market. You know, as we saw in the you know, the latter half of last year, with you know, an unexpected weakness in the labor market, you know, really kicking off about one hundred basis points of cuts and adjustment lower in the FED funds rate. You know, we really do think they are focused on that. You know, so ultimately maybe they're

But Tiffany, what about the inflation side. We're going to get University of Michigan. We've already seen these surveys come out, and people are concerned about potentially higher prices, even if it's a one hit because of teriffs. How is the FED going to react to that?

Yeah?

Yeah, I mean ultimately, I we we agree it's a tricky position for the Fed. I think ultimately, for now, you know, the Fed is is going to stay on hold and is going to watch how this plays out.

You know, inflation movement, higher in inflation.

Expectations would be something that the Fed would would be you know, very much focused on and ultimately, could you know, delay or or mute the extent to which you know, they they cut the policy rate even amid you know, a growth scare or some deceleration you know on the activity side. You know, so I think this is something again that they're they're going to continue to watch and it sets up for a very tricky position for them.

It's definitely, what is our experience of taro threats lingering for this long? If this just persists through the year, do you have an experience of that, What happens? How does the consumer behave, how the companies behave?

Yeah, well, you know here again, you know, I think it's a there's a little bit of you know, I hate to be a two handed economist, but you know, you do have expectations that impact behavior and that can go in in both ways in terms of growth and inflation.

You know.

So you certainly have evidence from the first you know, the first Trump administration that increases in just policy uncertain see economic or trade policy uncertainty, you know, does hold back hiring, does hold back investment, you know, as as as businesses or more unsure.

Of what the rules of the game.

Are.

At the same time, though, you also see some you know call it front loading behavior, and we think we are absolutely seeing consumers do that now. So we've seen an increase in goods purchases that drove the acceleration and consumption in the second half of last year. You know, we calculate it contribute about two percentage points to the roughly four percentage point growth that we had in real consumption.

Here Tiffany, Can I just finish by saying, God, bless you to the you and the team at PIMCO for waking up so early on the West coast. It's amazing what you and the team do. Tiffany Wanting of Pimco. Five thirty Eastern Time, Western Time, rather on a West coast in Newport Beach, California. 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