Bloomberg Surveillance TV: July 29, 2024

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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

One doing the left eye, the other doing the right eye. You know, I think the FED is going to leave the door open and sound encouraging, but they certainly don't want to sound committal. You know, they're going to wait and make sure that the data kind of are reasonably consistent. But you know, it does sound as if they would like to cut in September and justify the market's views, so,

Fireworks out of it.

Boj you know, more interesting, We don't think they're going to cut, but sorry, we don't think they're going to hike. But the market only has like twelve basis points priced in for September.

So if they give enough of an indication yeah that.

We just don't want to talk about tapering and do a rate hike at the same meeting, we think the market will be comfortable with it as long as they don't low ball the papering.

So Steve, let's take Dolly yen just short of one fifty four, a wink and knots on both sides of that currency pair sufficient to keep this trend in TAC, maintain this journey back towards one fifty and maybe below, you.

Know, to really get it moving, you know, they would have to hike We don't expect that, but that's the risk I think to keep it where it is. And given that they've upped the importance of the exchange rate and you know, I think the kind of wink and nod that you know you alluded to, I think that that's going to be enough, you know, maybe to keep the end sort of slightly stronger, you know, not enormously stronger.

Sort of underscore that, Steve, are you saying that they are not going to hike rates and that will sort of feel hey for the currency market, or they're not going to hike rates and that's going to be devastating for the end and it's going to go back to where it was versus the dollars say two weeks ago.

Look to devastate the end, they would have to put September in question, and I don't think that's going to happen to to sort of you know, but given that the you know, if you look at the market pricing, yes, they have like five or six basis points priced in for this week, but they only have twelve in total for September. So I think if they if the market walks away saying, yeah, they didn't like we didn't really expect them to, but they're good for September, I think

How much it does a balance team matter.

Pantheon Macro talking about how that could placate the market if they just stop buying as many bonds, do you agree, Well.

I think they have to, given that they sort of justified doing nothing last time by promising that they're going to lay out their path, and they do have to sort of announce a significant cut if they you know, the other down or risk for yen weakening is if is if the you know, the pace of balancing reduction is so slow that the market says it's not meaningful.

For the end. I think that it's going to be consistent with market expectations.

Steve. That's bond buying in Japan. It could have some implications for the kind of buying that takes place here in the United States as the supply starts to ramp up.

Steve.

You've seen all the articles or the studies on the so called activist Treasury issuance. Steve, what's your understanding of what ATI actually is and how much weight do you put on it.

I think ATI is a modern version of, you know, what was done sixty years ago in terms of operation twists that you kind of reduced issue and set the long end, takes the pressure off the long end of the bond market. You issue at the short end, and that's you know, kind of you end up with a flatter yield curve. And you can kind of see that that's what they've been doing the last couple of years, except that they haven't been doing it the last couple

But given that they haven't been doing.

That kind of issuing this year, it's not an explanation for why, you know, ten year bond yields are four fifteen now, down from four to seventy at the end of at the end of April.

Also, I think that they overstate the.

Impact or some you know, commentary overstates the impact in the sense of talking about it being equal to one

You know, people like us have trauma. You know, people you know and asset markets worry about it.

But it's not as if economic activity seems to be visibly affected by that kind of move at the long end as long as the Fed isn't actually moving and now the market's waiting for the Fed to move.

Well, see, let's put this on his head.

What if the Treasury comes out this week and says that they're much more heavily waiting the issue is going forward.

To the long end.

How big would the reaction be in terms of yields rising on the tenure on the thirty year.

Well, you know, I think the market kind of expects, you know, to continue in the direction that they've been going.

Lately.

They I mean, if they do issue at the long end, you know, a locked I think it could matter, but I actually think it's more second order. I mean, it matters, but it's not you know, and it's going to matter in terms of you know, do yield stay where I just saw them like four fifteen, four seventeen, Probably not, but it's not going to take them to four seventy. It's going you know, ten basis points, twenty basis points maximum. Again, it matters, but it's it's a second order in terms of the economy.

That's what about four sixty eight this morning? State it's going to catch up State England and standard chartage. So here's the latest coming into this way, Donald Trump and Kamala Harris hitting the campaign trail, Harris heading to Georgia tomorrow and Trump returning to Butler, Pennsylvania on Wednesday. The latest Wall Street Journal poll showing Harrison Trump neck and neck. Jeanette larstatigue it's a bed company joined us now for more, Janet.

Well, I think the biggest thing that we've seen in this race is you know that there was this absolutely lack of momentum or enthusiasm from most Americans about the two candidates they have, and so Biden getting out of the race, we were really starting to see his numbers go down since the debate. He was really starting to go impact down ballot races across the country and that's

Back to where it was pre debates.

You have state it's like Pennsylvania, Wisconsin, and Michigan all within the.

Margin of error.

You have an enthusiasm, a gap closing, which you saw that in a poll over the weekend, and you're starting to really see people just engage all of the calls that happened over the past few days of people really getting engaged back into the campaign and the Democratic side. That's what's really changed. Obviously, it's just been one week, so we still have a lot more to see what actually happens. How does this messaging start to play out.

Here, Jeannette. With Biden at the top of the ticket, we were talking almost exclusively as one path, one path towards victory potentially, and that path was narrowing and it was a russ bout and you just alluded to it. Politico reporting over the weekend that maybe, and I think you might agree with this, we've reopened the conversation about some bout states. Would you agree with that?

I would you know, we did see there was an Emerson poll that came out last week that showed Harris really closing the gap, particularly in Georgia.

So that's important.

So I think that's one of the states that she's really going to be looking to. We haven't seen a lot of polling coming out of North Carolina yet, but I know that that's another state that she would like to target.

The Democrats.

I've been targeting that for quite some time a couple of cycles, trying to see if they could flip that state from red to blue. So she does actually open up the map, she has more options if she were to win or sorry, if she were to lose one of the Blue Wall states, she could potentially win one of the Sun Belt states and that could actually still help her get over the finish line.

Jenett, how important will be her running mate to determine how much she can really gain in the Sunbelts, especially given that we now have a shortlist of about three Arizona Senator Mark Kelly, Pennsylvania Governor Josh Shapiro, and Minnesota Governor Tim Waltz, Right, So, I.

Mean, I think one of the things that's interesting is that general vice presidential canon does not do a lot for the presidential ticket. They can only usually but they can also subtract, but they don't usually add very much. In the past, it's been easier for a vice presidential candidate to actually win their state. That's been less true and more recent cycles. But I think Harris has some options here. She's has been looking at more of the moderate candidates along the lines of.

Mark Kelly or Josh Shapiro.

Tim Walls would be a little bit more progressive than the other two, so that would be a potential change if she's going to now have more of a progressive ticket than a progressive moderate ticket. But Arizona is one of the states where she's not doing particularly well based on current polling, so Mark Kelly can certainly help her with that.

He also provides this.

National security, this defense component that she may be lacking, which can be very helpful to her. Jos Shapiro, I think can help her deliver Pennsylvania, so she's worried at all about getting that. That is a key attribute of him, and he can also help her in the other blue Wall states like Michigan and Wisconsin. But I think that they're also thinking that Tim Walls is going to be a really good bulldog on this stage. That is something that you generally do look for and a vice president.

Jenna Libby Cantrell of PIMCO came on here and said we should all just have cocktails, go away for August, to come back in September and take a look at the polls, so then we can actually discuss who is in the front seat to really be the front leader heading into the election. Michael Visus of Mark and Stanley over the weekend, the business cycle is likely to matter mortar markets in the election cycle the next few months.

Yeah, so, I mean, I think this is really important that for one thing, that this race, now that we have Harris at the top of the ticket, it's moved from less of a referendum on Biden and his acuity to its choice about policy and so over the you know, we have less than one hundred days to go, and Harris still kind of needs to figure out some of her policy positions. Is she going to continue the policies that she had as twenty nineteen twenty twenty candidate? Is

That's what investors are really focused on.

What does Trump versus Harris mean for trade, what do they mean for tax policy, and what do they mean for regulation? And I think that's where we really have to be kind of focused over the next couple of months, and you do start to see the elections start to price in. You know, we do have a metric that shows that the market can actually predict some about eighty percent of the time whether or not the incumbent party is going to win or the party out of power is going to win.

And that starts around August fifth.

We should do this every time, just one hundred days, just a sprint to the finish, Jeanette low as you take us, Janette, thanks you. Big week of central bank decisions coming right up with the Fed very much in focus. The FMC widely expected to keep rates on hold this Wednesday, but set the States for a September rate cup. Joining us now to discuss is James Camp of Eagle Asset Management alongside Zach Griff. It's a credit site, Jent. It's

Yeah, John, we.

Are looking for the Fed to make adjustments to its policy statement to indicate more of a concern in terms of the labor market, or at least dial back their assessment of strength in the labor market and continue to emphasize progress on the inflation front. We expect Sherman Pole to indicate a willingness to cut in September. We don't think he'll be very explicit and saying that they will cut,

James, Of course, we're all much more interested in the one hundred basis points after that. If the risk one hundred basis points after that, what is the destination you think this Fed is heading towards? And what kind of economic regime do you think we're in? The guides that.

Well, good morning, good to be with you.

We're in a reflation regime, right, but the anchoring that we had in the post financial crisis period up to COVID is gone, and we have a new economy, and that new economy has more stubborn inflation and we've written about on shore, We've written about pricing power, We've written about a tighter labor market. I think the FED does cut in September. This is the clearest data that they're

So I don't consider this a FED pivot.

I consider this effect sort of getting back to sort of more normal.

On the funds rate.

But I wouldn't extrapolate this September meeting, which is likely to be at maybe even fifty by points, into a protracted policy adjustment over the next couple of quarters. This is a late twenty twenty five kind of phenomenon where we'll.

See what the terminal rate will actually be, but that number is not immited.

Well, ont a second, James, did you just say that there's a real possibility that the FED will cut by fifty basis points in September.

Yeah.

I do think that's the case, Lisa, because I think that this is going to be the clearest data that they'll have to give them the inflation cover and I think they've wanted to move the last couple of hikes off the table.

So I think this is the window.

This is kind of a little bit of spinballing with the inflation data, but we know if we look at the data series, it's not going to get easier to make the inflation case in the back half of twenty twenty four.

Okay, So this is basically they have an opening. So let's go let's go full.

I mean, Zach, what do you make of that?

Do you think that that's a feasible possibility that the Fed's going to cut by a half a percentage point?

That's not our base case, Lisa, and I think that would perhaps spook the market a little bit and terms of that big of an adjustment when just a couple weeks ago, policy makers were saying they need to see a lot more data in terms of being confident we're sustainably moving back to two percent. So I'd almost think of that as having the same impact as cutting this week, showing the market perhaps there's more to be concerned about.

So that's not our base case.

We do think the FED is going to be easing at a steady clip once they go in September, really trying to bring that policy rate back towards something that looks at least.

A little bit more like neutral.

We think we're coming from a pretty restrictive rate now, which is not what the economy needs. We're seeing signs of slowing, especially in the consumer. We expect that to be a bigger market driver in the second half of this year and into twenty twenty five.

Is that just to be super clear, are you making a growth call here, non inflation coal.

Well, that was a call on growth coming down. We think moving back toward below potential is what you're going to see over the next twelve months. We've had extremely strong growth and still had inflation come down quite a bit. So we think with inflation where it is, the Feds starting to ease, we're already seeing signs that the economy

You've set us up with the market conversation. Let's go there. Let's say on it, Zach. If you're looking for wider spreads. Potentially, where's the ten year what kind of level of credit spreads are you looking for into the growth slow down your expect and is going to trigger quite an easy from this feder reserve.

So we're looking for the ten year to go back to three and a quarter at the end of the first half of twenty twenty five, John, So that's a pretty big move lower from where we are today, and we have investment grade credit spreads going to one hundred and twenty basis points, high yield to four hundred basis points, So not a terribly huge move in terms of spread widening.

This is great because both of you kind of highlight the two sides of the debate right now, and then I think is a wonderful thing to have. James, it seems like you're more constructive. You think that the FED is going to cut for the right reasons. They have an opening to do so to prolong the economic cycles Act.

I think there's two There's two financial conditions we have to look at. For you, for large cap big companies, financial conditions are extremely loose. For down market consumer, this is the bottom eighty percent of our income strata. Credit card debt is high, credit card payments are high, and the federal reserve policy has directly impacted those downmarket consumers.

The credit conditions in the capital markets are still loose.

You know, equities at all time lies, the vislow credit spreads is you're the guests just mentioned very tight.

We have a very bifurcated economy, and I think the centers are has to be.

Mindful of the fact that housing affordabilities in forty year lows that the downmarket consumer is under significance train and we saw that with some consumer discretionary earnings this morning.

So I think this is more.

An opportunity to window to kind of get right or closer to where the policy should be. But I will tell you that the inflation data is not going to be constructive in the back half, and they're not going to have this sort of wide open field to begin a real significant easing cycle for the next couple of quarters.

Well, James, so do you agree with Zach that that means probably a wider credit spreads than you could end up seeing. Maybe a little bit And I'm just extrapolating here, putting words in Zach's mouth, he can correct me. But basically potentially a reversal of the small caps and a sort of reversal of just sort of this belief in a cyclical trend.

Do you think that we're going to see that kind of response.

Or do you think that people are going to welcome some sort of adjustment by the FED as allowing that to sort of right size itself to allowing the cycle to continue.

Yeah, I think it's the latter, And I don't think corporate spreads are bound much much wider from here. There's a lot of demand. We know that at peak FED, which we certainly can both agree, I think we're in teak FED. That corporate credit that municipal credit that bonds outperform every time. Go back to nineteen eighty nine, you have five FED tightening cycles, and at peak FED you have great returns to fixed income and you have great returns to dividend dibbit growers.

And as you mentioned, that rotation that.

Began July eleventh with the more benign inflation data into small cap out of megatech that is also boo the dividend trades.

So what we have now is a.

Very generous income market for investors, and we also have a market that will be underproductive for cash.

Cash hields today will not.

Be cash returns over the next twelve months, and clients and investors that have money to invest, the income space looks extremely generous, both on the dividend and on.

The dead side.

Zach, I want to give you the final words. You can use your own words.

Your response, well, I think the huge differentiator here is are you a total return or access return focused investor. We think the next twelve months look very solid from a total return perspective. If you're focused on that access return and that credit spread component, it's a little more difficult, and so overall we do think it is a positive environment for fixed income, but starting to see that spread widening.

Gents, this was great. Zacharrith is a credit sized James Camp of Vego Asset Management, thank you very much, looking ahead to a massive week with the Federal Reserve and all that day to come and right up.

You know, we didn't even get to the quarterly refunding announcement. And you know who is going to talk about that, Zach Griffith. So we'll have to have him back sometime because he was saying espectionally yeah, really significant. He said that actually could be you know market, Look, okay, is.

Zach still there? Can I find out? Is he still there? If we let him go, they're going to find out for you. All right, we can do this in real time, chase the home all right, all right?

We good?

Letting go?

Yes?

You say right now is yeah, I've got it back in you want to forgive it?

Yez?

Just quickly before we let you go and we brought you back on just for this. How important is the quarterly your funding announcement?

We think it's important, but we're not expecting any major changes this week.

I'd be focused on.

What happens this afternoon with the quarterly borrowing estimates. I think that's more likely to surprise the market than what we hear on Wednesday morning. But that's going to be huge. There's a lot of focus on it now. It's something I've focused on for many years. I'm surprised to see how much it's in the market overall, no change. We're not expecting that to outweigh the shift in monetary policy and the economic landscape which pulls yields lower.

Well, that was anti climac Thanks for jumping back, Sack, appreciate it. Thank you, zach Ri. It's there a credit size. This is the Bloomberg Sevenans podcast, bringing you the best in markets, economics, anchia politics. You can watch the show live on bloombag 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 bloom Black Terminal and the Bloombag Business pu