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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie Hortern. 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. Toss and Slock of Apollo joins us now for more Toss and good monit, sir Brnie. We've got a few minutes to go over this one. What's your first take?
Well, very important backdrop for this is that the framework to fit users for evaluating whether they should be hiking ourcording is the tailor rule, and the tailor rule has on the right hand side two variables, name you, unemployment and inflation. And both these components name you wage, inflation and unemployment are actually pointing in a direction at least of the fifth thing on hold. Obviously, this is not enough for them to consider begin to hiking.
But at the end of the day.
The tailwinds to growth continues were very strong. We have an AI and data center boom, we have strong defense spending, we have strong tailwinds also from the chipsack the Inflation Production Act, and we also still have relatively itervated stark price on whole prizes, all things that are supporting the
US consumer. And even before we then know what Trump will do and what he announced on the tax policy yesterday, if we do get lower taxes on Social Security, on over time, on tips, other things, this will also be a tailwind to the outlook. So it's not clear at all that the fit is done, and for now I think it will be that they will be keeping them on hold, but the door is still open to hikes.
Coming to this recent communication certainly suggests they'll be on hold. Implied in their routlook still and their communication as well is ad bias to reduce interest rates. When you say there is a chance to hike, I understand from what we've heard from a lot of people on this program the bar to cut has got higher, but it's the bar to hike a whole lot higher. Just how low is that bar?
But think about it. Since the election, we have certainly seen animal spirits increase quite significantly. If you look at kapex plans from the regional fits, they have all started
to reaccelerate. In the last two months, we've seen very strong improvements in a number of sentiment indicators, all pointing towards that there is still a chance that now that may be in the business see time, particular the feeling that well, maybe we should begin to hire more, maybe we should begin to spend more in terms of capex.
So it is still true where we sit today.
The buyer is high because the expectation is that inflation will continue to come down. But inflation today is still roughly at around three percent, so we're not near the target. And the trend in the last few months on a year a year basis has been up.
So if you take.
Both inflation and the label market, and particularly on imployment rate falling and also wage growth as high as four point one on verhr eunings, those are very important indicators for the fit when they think about what they want to do.
A lot of independent indicators for wage growth don't show that same kind of heat. And as we heard from my Collins. Some of this has to do with just the hours work coming down, and when you do the multiplication, that's what ends up happening, is that you see that
kind of wage growth. I'm just wondering, are you seeing other signs of inflation pick back up other than eggs that really could be sustainable in an economy that otherwise seems increasingly concerned about disinflationary de growth impacts.
So some of the indicators that have come in again since the election is M services prices paked have really jumped higher. They also see NFIB planning to raise average selling prices have also gone higher, and the home based data, which is much higher frequency for the label market, is also looking a lot harder. So there are various indicators that certainly suggest that it's not clear that this narrative is that we are in a territory where monetary.
Policy is very restrictive.
If monetary policy was so restrictive, why is there unplanner rate going down?
The on planiner rate should be going up.
So in that sense, there's a lot of conversations around still, is it really the case that we are in restrictive turrets or in particular again with policies potitionally coming not only on turiffs, but also position coming on restrictions of immigration, and also polices potentially coming in the last few days on tailwinds to fiscal policy.
If this is.
Actually true, that the Fed could hike rate and that policy is not restrictive in any way, does it make sense to you that stocks would fall if benchmark rates stay the same or the idea the prospect of FED rate cuts later this year is taken off the table.
Well, the main reason why stocks are falling, in my view is that forty percent of the index is the top ten stocks that are really the Magnificent seven, and they have such a big weight, and they are so sensitive in the risk parity models to what interest rates do. So if rates on out a bit higher and higher for longer, then of course the Magnificent seven do tend
to train lower. So I think a very important answer to your question is that the Magnificent seven and the tech companies make up such a big share of the index. So that's why we have seen some broadening out away from them. But the difference in performance between the tech stocks and the S and P four ninety three continues to be very important.
Courson, you're talking about these tailwinds potentially from the policy in Washington, DC. But how much you think Trump is willing to expand the deficit.
Well, the Committee for Responsible Federal Budget scored what came out yesterday and found that it would increase spending by five to eleven trillion early the next decade. So in some sense, it all depends on exactly what comes through, and we will all over the next six months have a lot of budget discussions, including culminating with the dead ceiling in June. So let's see where it all goes in terms of what the ultimate fiscal impulse will be.
But it's clear that at least what came out yesterday did not point in the direction of physical console edition, but pointed in aggregate in the direction of tilwinst grows.
Let's talk about where we are right now if you are just joining us. Twelve minutes ago, the jobs report came in with a downside surprise on the headline number one forty three against an estimate of one to seventy five on non farm pay rolls, but an upside surprise on average ALI earnings month over month, coming in at zero point five percent. The estimate zero point three, unemployment
dropping back to four percent from four point one. The estimate was also four point one percent, so that unemployment scare of the summer is over, dead and buried. The Federal Reserve, of course, was a little bit nervous about that, and delivered one hundred basis points of rate cuts across a number of meetings to close out last year. Now we're firmly on pause. We'll were talking a lot about
the revisions for twenty twenty four. The average month gain has been revised to one sixty six from one eighty six, and I think there were some economists that we're looking for something a lot weaker than that, which.
Is the reason why people are looking at this and saying, wait a second, we were expecting last year to have even less strength, and actually.
It was pretty strong.
It just goes to undermine the fear that we had at the end of last year that caused those rate cuts by the Federal Reserve and raises questions, is this really a market that's so susceptible to cracks forming if there is a policy that hangs out there that creates a good deal of uncertainty.
Jeff Rosenberger Blank roc joins US Now for more, Jeff, you've had about thirteen minutes to poll river these numbers. What's your big tank, Sir.
Jonathan.
I think the big take here is January is a difficult month. There's a lot of moving parts. This is a mixed report. I think the conclusion remains the same. There's a very strong labor market. It's not going to
change the FED outlook. But probably the most interesting thing is the last thing that you said that maybe what the market is keyed on, which is then will benchmark revisions the market having expected a lot bigger validation of the story that the labor market is overstated in terms of payrolls, and the overstatement was not as overstated as people thought, and so maybe that's pushing up a little bit on the rate reaction.
But overall it's a mixed report.
H is Mike Collins and you guys highlighted you know that's probably flattered by the reduction in the work week, the unemployment rate tacking down. That's on the strong side, and the payroll headline is a little bit disappointing, especially given the seasonal expectation that that would give it a seasonal boost. Overall, you know, I think you talked about in the earlier session about the asymmetry to the FED.
It's going to take a very very strong report and unlikely to come out of the labor report, but really an inflation report to push the FED off of the cutting expectations, whereas a weakening side, the FED is going to be very quick to cut. I don't think this changes the out look. We're still on pause here well through the first half of the year, and a lot more data is going to be necessary for the FED
to accelerate their pace of cutting. Is they were very clear in highlighting in the FMC they're in no hurry to cut.
Jeff, you talk about the asymmetry and the fedce reaction function and their propensity to cut rather than hike if there is a weakening rather than some sort of boon. Is there an asymmetry and investors that needs to be rethought that people really believed that this was an economy that was starting to show weakness, which justified some of the rate cuts that we saw at the end of last year, that maybe that didn't really exist, maybe that we actually had a much stronger labor market than people
had expected. And this is a market that is more susceptible to overheating than some people gave it credence over the past few weeks.
Yeah, that's the change.
You know, we had the fear on the labor market late summerfall last year. That's been replaced by a debate you started to get into it earlier around Really are we that type given how strong these labor markets are, and maybe the FED doesn't have to move.
As far and maybe neutrals a lot.
Higher than we thought it was because of the performance, the strength of the labor markets, the strength in the economy, and the halting progress that we're making on disinflation. That's kind of the summation of the change that has really pushed us away from the FED is going to push us into recession. The big increases in interest rates much more towards what I keep saying on this program. You know, the Fed's ignoring the role of financial conditions.
An incredible wealth.
Creation coming out of that mag seven AI wealth creation, wealth effect that is leading to much looser financial conditions
than you would expect given the interest rates structure. And that's really I think the issue here is that financial conditions haven't been transmitting into the real li economy as tight of policy as the rate piece and the FED and comparisons to the tailor rule and interest rates are just missing the boat here that in a modern economy, really the post GFC economy, it's financial conditions through which monetary policy transmits, not so much the interest rate.
We're much less interest rates sensitive.
We're much more confidence in spending sensitive, and that's driven by financial conditions.
So, Jeff, all of that said, when you put it together, would you fade the rally that we've seen over the past four weeks and the ten year treasure yield?
Well, you know, it's interesting you talk about the ten year treasury yield rally and here we're talking about kind
of before FED and FED policy. And obviously there's a disconnect here between talking about the rates on the short end, what the FED is going to control, what the markets are going to react to with respect to the FED, and what's going on on the long end, and what's going on on the long end is going to be much more affected by things like term premium, inflation uncertainty and inflation risk premium and.
The fiscal policy outlook.
So I think that we've gotten to a level of term premium that is normalized part way. You've gotten a lot better in terms of the term premium, and that's raised the attractiveness in terms of the ten year relative to the two year. I think that fading it is not really the outlook right here. I think what you're going to be looking for is the debate around the next policy. You know a lot of focus on trade
and tariffs. We're going to turn that focus into taxes and fiscal and that's going to weigh a lot on where that ten year and that term premium settles.
And that's how you down around a points at question. Jeff Rosenbo Flank CROWK, Jeffer Frecid. It's a thank you very much. Following the Pairoster port about twenty minutes ago, down Sun surprise on the headline's number, but a much helter that expected white Print to tack the latest standings from Amazon, delivering bets unexpected earnings but giving disappointed guidance for the current quarter. The CEO Anti Jasse warning growth
will be lumpy due to hardware delays and power constraints. Schwetzer, Cjuria of Wolf Research right in the stock and perform with the two seventy price target Swetzer Joints. Now for more, Welcome to the program. First question, what we just heard from Amazon. How much of that was in line with what we'd heard from other players, the likes of Microsoft, for instance.
Well, thanks for having me.
I would say the parts that were similar from at Amazon, from Andy Jase to Microsoft and Google and Meta was around Gapex and Cloud.
So what we heard from Andy Jasse were two things.
One is that these Gapex investments where they guided to over one hundred billion dollars in Gapex for twenty twenty five, they're leaning into what they believe there is demand for and they would not be spending this money if they did not know that there was demand coming, because you procure all these infrastructure and data centers only if there is demand, and we have heard that time and time again from Google Cloud, from Sundar as well as at Microsoft. That was part one.
Two was his.
Comment around and his reaction to what happened with deep Seek and there are one model and the commonality here is basically the same thing that we heard from Zuckerberg at Meta as well as Sundar at Google around if costs of training and inference go down. The intuition is
that the demand for AI will likely expand. It will expand the TAM because there will be so many more uses that will be attractive around applications to drive AAI compute, and against that, all these companies are leaning into gap expend TATA.
So many analysts after these earnings came out pointed out time and again, this is still a bihemoth.
They're going to do very well.
We don't understand why people are punishing them. And yet four out of six of the magnificent seven that have reported so far have been meeted with a really disappointing response in markets. How much do you think that ultimately this is investors saying we are worried about valuations and we're not going to extend things further period, even though there is still that same promise of cloud computing.
I think it is more of that. I mean, if we look at valuations now, all the AI levered names have done so well over the past two years, we're very limited upside for multiples in Meta or in Google given that they also have the search overhang, or even Amazon, of the megacap names that we cover. I think that Amazon has the best valuation on a growth adjusted basis,
but it is more of that against the fundamentals. I think that there's a common belief that AI demand and AI is going nowhere, but given where the multiples are, perhaps you would have to see greater upward revisions on earnings before they get more credit on the share price.
Just to sort of underscore this point, Schwudda, do you think that this is more an issue of just simply people generate about valuations and maybe even the flow of money due to other considerations, and less about deep seek and a feeling that you really can do it with less.
I think so.
I think that the knee jerk reaction with deep Seek and our one model was that this is negative for the megagap names, at least with an Internet. I'm going to refrain myself from talking about the impact on Nvidio, but for the megacaps within our coverage. But as more commentary came out from all the CEOs, it is becoming increasingly clear that perhaps there is demand that is more to come, and all these companies are looking at our one model under a microscope and will figure out a
way to lower costs. So I think that is established that costs will likely come down for training and for inference, and against that there will be demand. I guess the question is we now need to seek accelerated back to returns on these investments. And until we see that, estimates like you won't go up, and until then he may not get full credit swet.
To appreciate it. It's going to catch up with you, Schwerder Cojuri there will for research.
Thank you.
The Treasury Secretary skill best and making the case for passing President Trump's tax bill and making the twenty seventeen tax counts permanent. Terry Haynes of Pangaea writing, should the tax bill go to plan, it lightly convinces markets to fuel US economic exceptionalism for longer and with more fervor. Terry, John, just now for more Terry, Welcome to the program, buddy.
It's going to see you as always. We caught up with Kim Wallace a twenty two V research about an hour ago actually, who made the case that he'd be surprised to see a tax bill pass before December and this might become a twenty twenty sixth story. Are you on the same timeline.
No, not at all, John, and Good morning to everybody, not at all, because what they've got to do is they've got to pass this thing in the first calendar year. They know that I've got the tax bill at eighty percent likely to happen. The reason why is you've got Congress that knows it needs a signature accomplishment, and you've got a president that wants things. Look what you'll hear from Washington tax boffins now is all is all process related and kind of third level stuff. But best will
give you the clue here. What they want to do is preserve the United States economic exceptionalism in the markets absolutely for as long as possible. They need a tax built for geopolitics, to keep America strong. They need a strong economic policy to buoy the domestic economy and to make America strong abroad. All that stuff. And by the way, they've got to get rid of a world where debt service is the biggest expenditure, so because that imperils all
of the stuff that I just mentioned. Yeah, and you've got a president that's interested in doing big things. This is a time for big things. This isn't a time for small ball.
So is this a time for one big bill or two. Sorry it is in my newshe of Washington. But I think it does matter because this is going to be incredibly hard one or two bills to make sure that this Republican Congress signs off on it, given terry how slim their majority is.
Well, it matters some memory. Sure, I'm not going to say to the process doesn't matter at all. Of course it matters some. What I am suggesting, though, is that you shouldn't be diverted. No one should be diverted by process as if it's the main thing, and one bill to bill they get this thing done. You might recall back in twenty seventeen the Congress faft around with doing healthcare for the first four months of the year, and that only switched relatively late into the tax bill. That's
not going to happen this year. They're all about economy, economy, economy. But what I would suggest is that anything the answer to the process question is, anything that helps achieve those big goals that I just mentioned, is what the process is going to end up being. Beyond that, though it's minimal. You know, the people that are in favor of one big bill, by and large are people who are afraid
to cross Trump. But if what ends up happening is that two bills provide a quicker start to all this, then he's going to be for that too.
And he said, so, Terry, the President has talked about a lot of policies, tax policies he would like to see. Yesterday we got carrot interest loophole added to the list, which took everyone by surprise. You and I both know that for decades Washington has been trying to close this loophole and they failed. Why is all of a sudden it's a Trump policy.
Well, you know, I thought you, I thought you all summarized this very well the other in the last hour. It's by and large political. It's certainly not a revenue raiser. I mean, there's one source that I've seen recently that estimated it raising something like twelve billion over ten years. So you know, it's a rounding error in the bigger picture. But you're absolutely that it puts him on a kind
of a populist political path. And if it doesn't happen in the end, well it doesn't happen in the end, but that's not a frontline issue here.
In the meantime, we got the review from the Committee for a Responsible Federal Budget. For the potential bill, it isn't great. It isn't great for that wonderful ten year yield that Scott Bessant looks at. They said that it would boost interest costs by about one point three trillion dollars over the next decade, exceeding two hundred and fifty
billion dollars per year by twenty thirty five. Terry, how feasible is it that this Congress has the capacity to pass this bill and not just totally upend the bond market.
Well, here's here's a perfect example of what I mean by process, Lisa. Everybody's kind of focusing on the existing rules. Assuming this is exactly like twenty seventeen. It's not at all like twenty seventeen, in part for the reason you mentioned. You know, there's a much less tolerance for extending debt and deficit than there was in twenty seventeen. Had a relatively weak president and a relatively strong institutionalized Senate back
in twenty seventeen. You know, the biggest debate that's happening right now isn't popping up in Washington conversations to markets very much at all, which is whether you'll use current policy as the baseline or current law is the baseline. Use current law as the baseline, then you're into what my Beginning's group talks about there. But if you change
into current policy, then you become then you were. Then you become much freer to actually make the tax cuts a whole lot bigger and actually free up a lot more on what your pay fors are and your spending are. I think I know which way this is going, and it's not going It's not going back with the small ball the way it used to be.
It's going to.
Going to the new baseline, which Terry.
Raises a question of whether it will it be allowed by this Congress. And some people point to the fact that you've actually seen quite a bit of unity when it comes to confirming some of the nominees, a surprising degree to some people. Do you think that that is just playing nice ahead of the hardball that's expected around the budget, or do you think this is setting a precedent for what's to come that there will be that unity.
I think there's still there's still going to be a good deal of unity, and I think the Senate particularly has done a very good job of defending itself against Trump demands. You'll remember back in November, you know, Trump was blustering on about how he wanted his nominees confirmed immediately, and you know, well, guess what, We're still confirming nominees.
You know that a lot of this stuff is being done fairly quietly, but you know, at root, people that are talking about maintaining the current institutional rules around around the tax bill in particular, are essentially saying that the Senate Parliamentarian is going to be more powerful than the President of the United States and a majority of senators and the will of loss and lots of the American
people and probably markets. So I think I got unfortunately for the Senate Parliamentari, and I think I'm taking the other side.
Terry, appreciate it well framed, Terry Haynes. There of Pangaeer policy. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, and geopolitics. 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,