Bloomberg Audio Studios, Podcasts, radio News.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg
Terminal and the Bloomberg Business app. We begin this hour with Stock's inchin Kaya, following a three day to client, Brian Leavett oven Vesco, writing the story is far from fully written. We expect leadership to rotate as the market differentiates actual earnings leverage from all the hype.
Brian joined us now for more. Bran, good morning, Good to see you see.
What was the last twenty four hours about compared to the previous two days.
I would say that this is a market that's been letting off some steam, certainly in the hotter parts of the market, and primarily I think you got to look if you look at the broad index level, these markets are not down all that much. I mean, Na's deck down five percent over the last five days, is in great SMP a couple of percent. It's really the carnage being hit in the software stocks and some of the more speculative parts of the market. You see it in
things like what happened with silver prices and bitcoin. But the reality is, when you look at all the investment that's likely to take place, we can parse whether the big companies at the top of the S and P five hundred are right to do so. But if you look at industrials, if you look at energy, if you look at the semiconductors, it's all held up fairly nicely. And it's all part of that rotation story that we're
talking about. Less about who's going to win in that space, because that's going to be a big investment to win in that space, versus who's going to help support this build out.
That story continues to play.
That's certainly found real up until yesterday, and then the real economy scat kind of clicked in just a little bit.
I don't want to overdo it, just a little bit.
A couple of data points poking holes in a billcase for the ubst economy. That's something we need to talk about. Because people were piling into small caps that were comfortable in the equal weight close to all time highs. Should they still be comfortable with those traits?
Yeah? I think so.
Let's remember we started the week with one of the great leading indicators of the economy, the Institute for Supply Management Purchasing Managers Index, which surged and climbed to fifty two. That's an expansion territory. We had not been there in quite a while. The New Order's component particularly strong within it, and prices paid relatively flat. So that's a good leading indicator of the economy. Now, when you think about the
jobs market, yeah, jobless claims rose yesterday. Two hundred and fifty thousand is not a blowout jobless claim number, and it's also a little bit of a heads you win, tails you win type of scenario because the weakness in the economy suggests what I've always believed is lower interest rates on the shore end of the curve, which should continue to benefit lower capitalization stocks, more.
Value oriented stocks.
So I'm not ready to say that this is a economy that's rolling over. Credit spreads continue to remain tight, leading indicators are picking up, inflation expectations relatively containing. I think the FED is going to be bringing rates down towards three percent.
It might not be an economy that's rolling over, but it's a really confusing economy. And Amazon exemplifies it in a perfect way. On one hand, they were behind a significant portion of some of those job cut announcements that we got from Challenger Gray and Christmas yesterday. On the same level, they're going to be spending two hundred billion
dollars so far this year. How important is it for us to understand exactly what they are spending this money on to be able to infer what kind of growth and benefit to the underlying economy that actually will look like.
Yeah, it's important, But if you take each component of economic activity, you take the consumer, we have to remember that, yeah, things may be weakening a little bit. Household net worth is at an all time high, unemployments relatively load, the business investment we know is going to be big, as you mentioned, and the government spend is going to be reasonable this year, not only in the United States but many parts of the world. So in aggregate, that's a
good economic backdrop. Now when you think of this investment that's going to take place, There's a lot of parts of the economy that should benefit from in and again, industrials rallying.
Energy has been rallying. Semiconductors were up fifteen.
Percent year to date before this week, So I think that that story persists. Would I be diving back into software companies this morning after the self, No, I'd be mindful of that, But I think the real economic story continues, and.
This is arguably the main reason for the broadening out trade. Real question right now is do you go into the hyperscalers given the fact that their business model seems to be changing from asset light to basically glorified utilities and real estate managers.
Yeah, I mean I would go case by case.
It's certainly not a monolith.
Big story last year was that only two of the seven mag seven perform the market, and you're right, these stories have changed significantly. I mean, the things that we loved about some of these businesses with that they were near monopolistic, they did not have significant investment needs, and that all changes. So you've got to go company by company, be far more selective and can't say I'm just going to own the.
Whole lot of them. There will be winners, there will be losers. Those business models have changed.
Right you say, you're not going to wake up this morning and just go dive in and pick up some software company stock.
Why not? Why isn't this a bibedit moment?
Because for a lot of them, we still need to understand what does this really mean for the business model?
And we knew all along AI.
Is going to be quite disruptive for a lot of businesses. The question that investors should ask themselves over the next few years is it disruptive to more businesses than it is beneficial or is it beneficial to more businesses than it is disruptive.
And I'm still in the ladder camp.
There is a lot of companies that are going to benefit significantly from the AI build. You're already seeing profits high with employment, you know, profits to employment not significantly elevated. So we're in about right now where we're looking about. We're looking at the disruption, which always happens when there's technological advances, but history suggests that there's always far more beneficiaries than there are.
Businesses are different.
For you, though, A self described fomo guy who's not willing to lean into where the pain is right now, is it fair to say a bit of a change, a bit of a change.
But I'm always looking for opportunities, so I have a fear of missing out, you know, across the broad market. And so it doesn't mean that I need to always be buying into dips or into you know, falling knives, just looking for where the opportunities lie. And you know again that that fomo is good. That phomo doesn't always exist, Jonathan, most of the time, and it exists when leading indicators of the economy are improving and the FED wants to ease.
I'm definitely a fact at times this has found like a falling chainsaw and not a falling knife. Stay with us more Bloomberg Surveillance coming up after this, So can wait.
The labor market.
This is what Stephanie Rotherwolf Research has got to say to that, Well, the data was disappointing. We wouldn't read too much into the latest prints, nor are we changing un view that the labor markets should improve from here. Stephanie joins us now for more. Stephanie, good morning. Why should we ignore challenger jobless claims and jelts okay.
For claims, they were two hundred and thirty thousand. Historically speaking, that's not such a bad reading. There was a lot of weather disruption that week. When we're talking about Challenger, a lot of what was driven by UPS, which had a similar announcement last year, and the Challenger set itself that it's going to be driven by attrition and voluntary separations are the big part of it.
Another reason for.
Challenger was Amazon, So the bulk of the news was coming from either Tier three data or data that's not necessarily indicative of market that's actually detraating from here, We'll have to see what payroll shows, and our sense is that next week we'll learn that payrolls for January were fairly decent, and then of course there will be those download visions.
Historically, I'm totally with you and I got the Challenger jobs cuts. We are all looking at the idea that this was really concentrated in three companies that have already announced a lot of these job cuts. Then the jobless claims come out, Yeah, it's a an eight week high, but ultimately still at a pretty low level. Then Joelts comes out and you look at it and it's saying, look, we're looking at the lowest job opening is going back
to twenty twenty eight. How many of these can you explain off before you start to get a little self conscious. Wait a second, maybe something else is going on here.
I think you have to take a step back and reassess your view. But our sense is one the consumer path is pretty good. We're gonna also have fiscal simulus that it's starting to hit the momentum.
It seems to be improving.
If you look rewind just a couple of days ago, we were looking at the ism and we're starting to get questions of is this early cycle? So how can it be both early cycle and late cycle at the same time. Our sense is that we are starting to improve cyclically. There were some negative news from some of these data sources that's probably not indicative of the trend.
This happens very frequently, especially in the month of January, where you get some prints, especially associated with layoff news, which tends to be.
A January phenomenon.
Well, maybe it's early cycle for fiber optic cables, but it's late cycle for humans that are actually trying to enter the workforce. I mean, how much do you glean that some of this weakness truly is coming from less human intensive jobs that really result from some of the capital expenditures that are supporting economic growth.
There might be an element of that.
So we were in some estimates looking at the rising unemployment rate since CHACHINGBT.
Launched, and we found out about half of the rise the.
Unemployment rate was tied to AI, and then the other half was more cyclical in nature. So the extent to which sure, there is half of it that is structural that will probably continue to rise, but the portion of it that is cyclical might actually reverse this year. If we actually do get a cyclical improvement in the economy.
You do think that you could see about one to.
Two tenths of downward pressure and the unemployment rate this year just because of economic uncertainty fading given last year was true peak peak tariff uncertainty UH a modest improvement in the consumer in which case you could see some modest hiring across the global industries.
Chechiat is launched in twenty twenty two and they're taking fifty percent of the jobs right now.
How does the FED deal with that?
It's I it's a tough backdrop.
I think they have to be thinking about the productivity, and it's kind of a call about whether this is product a productivity cycle, there's no harm in waiting at least through the middle part of the year, which is probably what the Fed's gonna ultimately end up doing, and then in the.
Back part of the year they could probably caught a couple more.
Times, and Warsh is gonna gonna guide them towards that because that will be an environment where inflation is also starting to fade. You when in productivity cycles you don't have inflation problems.
At the same time the growth is strong.
So if we start to see that inflation cools down, then it's an environment where they can still cut a couple more times.
What will be the main driver of disinflation?
Tours out a note today and he was talking about, actually you could see inflation creepier with things like the one big beautiful bill coming out for you, what is just inflationary.
So in the first part of the year, I think that's the right We're going to probably see inflation move a little bit higher, in which case that's why we don't think that the FED is going to be cutting under Powell anymore. However, in the back part of the year, it's going to be driven by the typical disinflationary forces that is tied to productivity, which is lower wage inflation than would otherwise be the case.
So first part of the year, I agree, we're.
Going to likely see some pretty hot inflation prints, especially in Q one, that will probably start to fade, and then the narrative will shift in the back part of the year because that's when you'll start to see inflation cooling, and then labor costs also fairly modest.
I don't expect a precise number from you, but just how much of GDP growth this year is going to come from the tech capex, not just the full companies but everybody else as well.
Yeah, I think you'll it'll probably be fifty or so basis points on GDP.
That's pretty impressive stuff. This is why it's interesting for the fener Reserve. They could be cunning interest rates potentially responding to a languor market the same time GDP's close to three you ever seen that before.
It's a very unique environment and that's why they certainly will have a tough time cutting in the first.
Part of the year.
When you see growth actually accelerating. So the news this week I think is perhaps a bit of a one off, and we'll shift to data prints that are starting to surprise to the upside. Consumer data starting to pick up, sentiment improve, companies want to invest again because the economic backdrop is a bit better than where it's been, in which case, the fears about economy really decelerating a link market craft.
It's basically what they did do at the end of last year. They were basically cunting interest rates with GDP three four percentage points high because of what we saw from tech campex, even though payroas growth is totally stilled.
Look, they've been looking through this.
They've actually been acknowledging that a productivity boom could come at the behest of an employment market that is sluggish. The one challenge to this, and the one thing that I've not heard people fully explore, is how do four companies spend six hundred and fifty billion dollars in one year without causing inflation? Because ultimately, what they're buying, yes, it's raw materials, it's land, it's housing, it's all of these different aspects.
It's a lot of money.
So how do we get that kind of spending without any kind of price distortion on the other.
Side, definite.
How does it show up in GDP? Does it come up through imports, investment? How does it show up?
So the way that.
We've been tracking it in GDP is looking at only the domestic portion of it, because it gets funky with the imports, because imports end up being a negative on GDP just based on GDP math. So we look at it based on the tech portion of capex, the construction, and what we find is that tech related domestic portion of AI capex is but in terms of size is about one and a half percent of GDP. So that compares to say, housing, which is about three and a half percent of GDP.
So it is large. It is growing.
If Jensen's forecasts are right, it'll grow it to a five percent of GDP by the end of the decade. I'm not sure I would bet on it being quite that high, but it's an important part of GDP, but perhaps not as big as some of the other major.
Why is it not inflationary at anyway?
I mean, I think it is modestly inflationary, certainly offsetting some of the disinflationary forces that are playing out otherwise, And when you think about these typical productivity type of booms, it ends up being modestly inflationary in the near term, and then in the medium to longer term it becomes disinflationary as you actually see the productivity gained. As a result, we haven't really seen much of that productivity gain yet.
I think it's coming.
So for the first part of the year, you know, you'll probably see those inflationary forces because there's a lot of positive demand shocks in the first couple of months, which is why I would emphasize the data that we got this week flagging that the labor market is starting to soft. It is probably not the right takeaway for the next couple of months.
Watch your guests for next wait just quickly on Perils of.
Eighty five thousand with some substantial download visions to the prior months.
Stay with US multile Impex. Savannah's coming up off to this. Do you want to guess now? To continue the conversation to netline Hostatigus Janet. If Republican senators, in Tyler's words, are calling this waste of time, how much more time are they going to waste?
Yeah, it's a great question.
I mean, I think that, as Tyler pointed out, this is literally something that the Republican senators are now thinking, we need to get this investigation concluded. We need to kind of clear Powell, which is something that Tom Tillis is looking for because they do need his vote to move Kevin Walsh through the Senate Banking Committee and they would like Kevin Worsh to be confirmed before Jump Powell's
term ends on May fifteenth. So I do you think you'll probably start to see some movement there to get this done, which I think, especially what we've seen coming from various senators yesterday was really important to see that they really do also want to get this moving somewhere a little bit more quickly, because this is an important distraction potentially for getting Kevin Warsh ultimately on the FED.
Movement from who is it the DOJ to wrap it up or for FED to actually also comply and send information that the DOJ is asking about in terms of the re innovations.
Yes, I mean, I think that's a little bit to be determined, right, So it could be that maybe the FED it just hasn't responded to the questions yet. Maybe they just need to respond to the questions, and then the DOJ will kind of finalize the investigation and say
that there's no wrongdoing here. Maybe it's some other form that that needs to take, but there probably is a way that this could be handled relatively quickly so that we can actually move on from this and then actually the Senate Banking Committee can bring in Kevin Worsh and actually have his confirmation.
Hearing you sound hopeful of a quick timeline.
If we don't do, just expect Powell to be chair until how long?
Yeah, I mean, this is a really important question, and obviously there is discussions about what happens if you know, there is no one confirmed to be the FED chair when Powell's term ends, what happens does it become the vice chair? If there's no vice chairs, there are possibility that the vice chair could resign, you know, those are all things, and then ultimately the board could reappoint Powell. The other big question obviously is does Powell stay after
his term spires. I think this is a really important question for what Kevin Worsh would like.
To do with the FED.
Obviously, whether or not the President can get another appointee onto the board of governors. They do want to engage in financial deregulation. A Vice chair Bowman has a proposal that she may announced as quickly as this month, so they do need to actually move forward on that. That's going to be key to Worsh's trying to reduce the size of the FED balance sheet. But they also need a majority of the FED board members to vote for the most aggressive plan.
They could have right now.
If Powell remains on the FED, that could limit the ability for them to actually get to that majority. So his staying on or not is going to be a key question moving forward as to how things actually proceed and also what might happen if there is no FED share confirmed before his term expires.
While we wait for the next edition of Bachelor and Purgatory, Jenet, I am curious going forward. It is a midterm election year and we are going to expect a number of proposals to try to cater to how people feel, which isn't great and has to do with affordability issues. We saw yesterday President Trump coming out with Trump RX trying to lower costs for prescription drugs. What else do you think is in the works for this year? As the mental elections get closer.
Yeah, So, I mean, I do think this is going to be a key focus for the midterm elections. You thought be a key focus for the November twenty twenty five elections to focus on this issue of affordability, and Trump has definitely picked up the mantle of this quite a bit more in the past few weeks. So obviously we had the prescription drug price proposal come out yesterday. We do think they're going to try to do things
on housing. Some of that would be related to again whether or not, you know, not even necessarily trying to do legislation or anything of that nature, but maybe what happens with the Fed and what happens with the Treasury. Those can be important pieces for the housing market. The other big thing, obviously is there are these large tax refunds that are going to come out. Tax refunds just started last week. We'll definitely start to see more of
those come out. That will be very beneficial for consumers. Will it be enough before the election, They probably don't think so. They'll probably try to come up with some other ideas. Presidents tend to be more populist in the second term of their presidency because voters are a little bit sour on the how things are going, so we could definitely see more announcements. We'll be looking to the State of the Union to see if stuff comes out there, but I don't think there's a lot more that is
actually going to get enacted. We don't think that there are going to be tariff refunds that are going to come out because you would need Congress to do that. But you might see them try to move things like permitting reform and things of that nature. But I think the President will continue to talk about it, but we don't see a lot of movement from more proposals to come forward.
This is the Bloomberg Survendons podcast, bringing you the best in markets, economics, an gio 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.