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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
Terminal and the Bloomberg Business app. Joining us now to extend some of this conversation, not the last bit, but the bit about foreign exchange in politics, George joins us now, George Sarahvellos of Deutsche Bank. George, Welcome to the program, Sir. This em type dynamic which keeps gripping developed markets over the past I'd say twelve months, maybe even longer, George, How are you explaining that to clients at the moment, Well.
Our views has more to go, it's here to stay.
And I think the critical driver of all of this is that fiscal deficits everywhere are going up.
And of course this was the case for the US over the last two three years.
But the really big shift since the start of the year is if you look at all the countries outside of the US, with the UK being one exception, but everyone's increasing fiscal spending again, Canada, Germany, China's front loading, We're seeing discussions in Japan, and I think it's this global increase in deficits combined sticky inflation that is creating these tensions as far as the discussion goes, well.
George, let's talk about the tension specifically in the United Kingdom. Just yesterday, the pound and British assets get an absolutely whip sword, presumably over the future of Chancellor Reaes, but I wonder if it's something bigger than that. Is it about her future or the inability of this government to consolidate spending.
I think there's two problems on the UK. There's the communication problem and the macro problem. The communication one is that effectively these fiscal rules that are extremely clumsy.
You see, they're dependent on projections.
Which the OBI has five years out, productivity which none believes. And every time you see some shift in guilt yields, the market starts talking about gaps. And I think that just creates a broader problem of instability, and we see that. And then there's the broader macro problem, which I would argue applies just as much to the UK as it does to the US, which is both of these countries are running big twin deficits, and that is why you're
seeing increase vulnerability to negative news. We experienced it in April in the US with a whole Liberation Day back and forth, and now we're seeing a small micro version of that in the UK. But I would say both the UK and the US have those two common denominators, external deficit and internal deficit, and that's going to be causing problems.
There's a big difference though, between the two, and we're watching it in real time as the United Kingdom tries to figure out how to mess their deficit spending and how they plan to cut or not from some of those expenditures. In the United States, Congress just keeps on spending and they're about to pass a bill that increases the deficit over the next ten years by some three
and a half four trillion dollars. Why is the US such a different market when it comes to dynamics and how much the bond market is waking up to this.
So you're absolutely right, the US has had a greater degree of resilience, so to speak.
But I would argue since the start of the year, you're actually seeing.
Convergence, whereby the US is becoming more sensitive to these things. Now, of course, over the last few months the market has calmed down, but let's not forget what happened in April. And I would say a key driver why the market has calmed down is because we've had some downside surprises to inflation, and of course the bond market is most sensitive to those inflation surprises. So let's see what happens
over the next six months. But between the UK and the US, I'm a lot more concerned about the US because if if I look at the shocks hitting the system at the moment in the US, not only do you have the tariff discussion, which everyone is so focused on, but the bigger underlying shock in my view, is the labor market, where you're seeing a very sharp reduction in immigration, which is equivalent to a sharp slow down in growth
and potentially upside surprises to inflation. And that is the worst mix if you're thinking about debt sustainability and the funding of those twin deficits. So the immigration story to me is much bigger than the tariff story as far as the US goes.
So, George, if we could just sort of solidify this parallel, if you see the United States as being a more significant story and frankly a worse story from the United Kingdom, which is experienced a lot experiencing a lot more real time volatility in their markets, what do you think will be a the breaking point and be the consequence for both the dollar and long term yields that have been relatively calm amid this process.
So there's two ways this can get resolved, as you say, neither be a calm way or it can be a disorderly way. The calm way is what we've seen over the last few weeks, where the dollar weakens as the dollar weekends, effectively assets cheapen up, you can draw in those marginal buyers. We also authored the piece talking about a Pennsylvania plan, which effectively I think is being realized.
The US Treasury shortens the issuance of duration, the domestic banks, the pension funds absorbed, the debts of foreigners can disengage.
From the bond market. I think that's the orderly plan.
The disorderly one is if the negative supply shock I was discussing becomes more acute, you get much bigger inflation surprises, and at the same time FED independence gets challenged, and we're seeing that in the background. Well, argue, we're not in the background in the foreground with some of the statements. The reason the market is calm is because inflation is calm.
But if that growth, inflation.
Makes worse since that fiscal dominance question, I think will come back to the fourth very very quickly, and that's where you get at the tipping point disorderly dynamics.
Yeah, George, I'm pleased you corrected yourself because it's certainly not having at a bankground. The President's not being subtle about it at all. George, Thank you, sir. Judge Sara Velos there of Deutsche Bank, Michael Collins apaging fixed income righting the Fed's hands are tied for now, but we still think of Fed fund's rate cut or two a likely by year. Rent Michael joins us now for more. My welcome to the program, sir. Let's talk about these
rate cuts. Are they cutting interest rates? To the Federal Reserve later this year, in your mind, because inflation is coming down, or because this labor market is going to start cracking.
Both Actually, you know, I mean we've been in the camp, Jonathan, as you know that the Fed has really stuck, right, They're going to keep the rate where it is until things change, either in terms of a labor market weekning or this tariff induced inflation not being as bad as feared and maybe being just a one off and seeing inflation really stay kind of in the low twoths here. And I think in both cases, the data are moving
in the right direction, right. They are really supporting the case for a rate cut or two by the end of this year, which, as you've been talking about, is.
Fully priced in.
Mike, do you care about this report that we get in a forty minutes time?
You know, I really think the people were talking about what is the run rate?
What is the steady state level of job gains each month?
And you know, maybe it was you know, we were running at four hundred and two hundred and one hundred. It feels like because of the just the natural slowing in the job market sickles l but also the immigration net immigration effect it feels like that natural steady state of job growth LISA is below one hundred. Now, who knows, maybe it's zero, maybe it's fifty thousand. So I think you're naturally going to see a lower prints on these monthly job gains and don't know if it should spook
to market. The lynchpin is that unemployment rate. Right, you could still have a fully employed labor market with slowing job gains, and I think that's really the conundrum the feedis going to face. They're going to see these slowing jobs numbers and see the labor markets still look fairly tight. The big number today we're looking at really is the
wage gains. And obviously the wage gains have been slowing steadily for a couple of years now, and I think we'll continue to see that as companies, you know, they're not necessarily firing people, they're just pulling back on hiring right now, but wage gains are definitely slowing.
If you don't see inflation as being a persistent feature of this US economy, and if you do see tariffs as not as inflationary as people previously believed, why isn't the thirty year, Why isn't the ten year yield a lot lower in the United States.
Yeah, I think they're just pricing in you know, five rate cut right for the next year or year and a half is what's priced in. That seems very reasonable to us.
Right.
If that happens, then you have a kind of a normal upward sloping term structure.
Right.
So that's that's what's fully priced in, and that seems natural. What is not priced in, Lisa, is the is the downside tail risk.
Right.
What is not priced in in the credit markets, in.
The equity markets, in the vol markets, and arguably to your point, in the in long term rates is a nastier downside surprise where you know, Trump does get his way and the funds rate doesn't go down one hundred bases points, it goes goes down two or three hundred, right, And that is that is a very different world.
That is not what we're expecting.
But again, the markets are signing a really low probability to that, and probably too.
Low, am I just to pick up on that. Let's just focus on risk assets. Let's talk about equities and say, hi, your bonds high, your credit of course you're very familiar with you know, now credit spreads right now two eighty on high yield spreads and grinding even tighter. And what's interesting about that if you take the economic surprise Index something else, you know, Well, but for our audience who might not be familiar, just where is the data coming
in relative to expectations? That's been rolling over since November? It's had a smallest bounce, but ultimately the trend over the last six months not great. So the surprice indexs has been rolling over, the equity market's been going higher, and credit spreads have been grinding tighter. How do you explain that Either we're whistling past the graveyard or the data is just becoming less and less relevant. Which one is it?
Yeah?
I think it's the whistling past the graveyard for sure. I know Lisa, it's good to see her fired up this morning about this. And you know, the financial conditions is something that you know, not a lot of people are talking about, right.
Yeah.
Could the Fed cut one hundred basis points now? Possibly, maybe that's the right level to be at, frankly, but you know what would happen to financial conditions?
Right?
Would the stock market go up another ten or twenty percent? Would credit spread continue to grind in and that brings in a whole host of other risks to the upside of the economy and the upside of inflation.
Right, This economy has.
Been driven by the upper end of the wealth and income spectrum, which has been driven by this paper wealth effect.
Right. I don't think you want to add fuel to that fire.
And I really believe that's one of the reasons the FED is really hesitant to cut here because they don't want to add add fuel to that fire.
If you think people are whistling past the graveyard bike, what's your highest conviction call right now?
The conviction is that you know, growth is going to moderate a little bit, and recession risk really does look low, right. I Mean, the big theme we've been focused on, Lisa throughout this whole cycle is you know, where are the tipping points in the private sector? You know, yeah, a public sector is a mess. The fiscal situation globally is
a mess. But you know, typically these receptsestions happened, these downside risks happen when you have an over levered housing sector or financial sector, or corporate sector, or consumer sector or mortgage sector and you are not there. This cycle,
we have not had a releveraging of the private sector. Yeah, there are some pockets in lower end consumers where you're seeing bigger increases in debt and leverage, and you're seeing a lot a big increase in personal bankruptcies and small business bankruptcies, which is certainly worrisome, but it's not systemic enough to take the whole economy down with it, right, So we have a pretty strong conviction that that, yeah, it's going to be a slow down the economy, but
this kind of cataclysmic you know, credit risk off, you know, credit crisis is a really low low probability and that's frankly what the markets are running with in pricing.
In my colins, appreciate your time. So my Collin's they have PAGM fixed income just with a surrounded table. Stephanie Roth of Wolf Ray, Sir Stephanie Givmarniic, good morning. You'll first take on this one.
Yeah, I mean this is something that we were kind of warning people about. An environment where the steady state pace of hiring comes down pretty substantially and the unemployer rate starts to fall because we're in an environment where there's a significant detraction from a foreign born population, and that puts down a pressure on the unemployment rate. It reduces the unemployed people, and at the same time it's lowers the steady state pace of hiring.
So one fifty around one fifty now is what two years ago, two fifty, two twenty five.
Granted a lot of a lot of the job games was driven by a government, so I think we have to take that with the grain of salt. If you look at private perils, that was fairly sluggish, and by category it was, you know, kind.
Of slow as well.
So the steady state pace of growth has come down. I would look at it from a private perspective in particular first, and then we're an environment where you're seeing a tightening in parts of the labor market, which is what the signal from the unploy What do you make.
Of the fact that we didn't see hourly earnings significantly rise or rise even as much as people previously expected. It kind of goes to this idea, can we get a decent job's number without really any kind of inflationary impulse.
I think it was the timing of the survey week, So this is something that gets that someone I'm underappreciated when you're when you're forecasting the job, the payroll gains, it tends to be very sensitive to the timing of the survey week, and this time it was earlier in the month, which doesn't capture the fifteenth, which just then tends. Fifteenth tends to be the time where you get pay raises and that type of thing, so that tends to
put downward pressure on the average early earnings number. So we were looking for point two for particularly this reason.
Do you think that this calls into the question the need for the Fed to cut in September?
Yeah, in our base case we have them not cutting, although it's it's a close call. It certainly reduces the odds. Certainly July is off the table, and now the question is, you know, can they still cut in September base cases, they probably don't. But there's a lot more data and this is just one print among many that we're going to be getting by the time we get to September.
Stephanie Roth is going to stick with us around the table. The job's number two moments ago one hundred and forty seven thousand, high than expected. The estimate in our survey was one of six The unemployment rate expected a climb to four point three percent, actually dropped to four point
one percent from four point two. Got a bunch of other data as well, because it is Thursday, and it is payrolls Thursday this time around because of the long weekend, so we've got jobless claims as well, and claims came in much lower than expected two thirty three. The estimate was too forty one. We've got Torson slog with us around the table from Apollo Torson. I want to come to you a bit earlier than expected because I want your view on this. You were expecting unemployment to start climbing,
unemployments falling back. What explains that.
I think the key iss you here is the immigration factor, as definitely is mentioning that it is very very important. So Tera Watson, and when the Edelburg estimates now that we are seeing significant decline in the long run payroll growth of closal to around fifty thousand, and the fact that the on enplotment is going down is something that of course is quite surprising.
And the fact that we now have so.
Strong payroll growth even with the decline in the long run steady state for non found payrolls tells you that this was a fairly strong report, and this is a very strong economy, which argues to your point, which is our view, that the fare will only cut once this year simply because rate will stay higher for longer. There is no need, especially not with power At the same time saying that he expects a meaningful rise in inflation over the coming months.
Is it fair to say that this was the goal of the Trump administration, that they wanted to get immigration down, so that even if you have payrolls growth of one hundred to one hundred and fifty k, could actually see the unemployment rate starts to fall.
Exactly because both labor supply is declining when you deport roughly around a million people at an annual rate, and at the same time, labor demand may also eventually slow down. But if it doesn't slow down, then the decline in labor supply on its own will exactly create a report like this one maybe where you have a declining on
employment rate. So it is obviously better than the contents was expected, also better than what we had expected, but it tells you very clearly that the label supply story is playing a very important role at the same time.
It also suggests that the economy or the business environment is much more solid than many people expected as well in terms of hiring, in terms of looking for that, and it's coming without the inflationary impulse that some people were worried about.
Do you think that that's durable?
Well, and that brings us back to the discussion around what is the effect of the trade wall. Terror is not going to have an impact so far, it's remarkable where you have inflation basically to still study and now job GROLs still redtly strong. So in that sense that literally is very little sign of the tradewall having a macroeconomic impact.
At this point, there are going to.
Be people who look at this and say, this might be the last gas before real material weakening. We can't trust these numbers. Max Kuttner's already gone. What do you say to that?
Well, that's why the next few weeks with the earning season will become very very important, because then's where we'll figure out is the pick coming through the python in terms of the terriffs heading eventually earnings Because at the end of the day, we are raising about four hundred
billion dollars in tax revenue at an annual rate. At the moment, total earning for this SMP is about two trillion, so that means that someone needs to pay four hundred billion dollars if tax revenue is going off one hundred million dollars. Is it consumers through higher inflation or is it companies through lower earnings? And we still with this report, of course, have just not seen that yet, so it TechEd to appoint lead is that over the next several weeks.
We'll find out in Q two how did companies actually respond to higher TERFs. Did they respond by passing prices through in the form of high inflation. We'll find that out also very soon, or did they also in this case turn out to actually lower their earnings and say we're going to eat some of the terrorists. And that becomes the main question for marcuts now, namely, what was actually the response to tariffs in the second quarter.
My McKay is back with us for a little bit more. Mike, you've taken a second look at the numbers. What explains the upside surprise?
There's just some hiring in a lot of different categories. The big you're going to laugh at this. The biggest category for hiring was government seventy three thousand additional jobs, but that is almost all in state and local government, a lot of it in state and local education. Seven thousand jobs lost in the federal government. Now, maybe we get a lot more once we get to the fall and some of those people who are getting severance finally leave the labor force. To what you guys have been
talking about. The interesting thing here is that the number of people who are in the labor force foreign born went up this month. Same is true of the people who are in the labor force who are native born, although the overall level of the labor force falls by one hundred and twenty people one hundred and thirty thousand people. So you can see why the unemployment rate went down.
Ninety three thousand people went or got employed according to the Household Survey, and two hundred and twenty two thousand lost jobs. But because of the drop in the labor force. There you're seeing a lower unemployment rate. But the labor force doesn't seem to be having been affected by the overall numbers of people who are are being deported. Manufacturing lost seven thousand jobs during the month. Construction gained fifteen
thousand more than anticipated retail trade only two thousand. Now, if we are seeing a slowing in spending that might be showing up there. That might be one of the first ones that we see that is a problem. And Lisa, I checked on you and arts and entertainment hiring was up by twenty thousand. I don't know whether you are arts or entertainment, but you would follow.
That boat, Mike, both yeah, arts and entertainment, Darren.
So right now, you're okay.
All right, thanks, I'm so glad that was the news you need to.
Now, Mike McKay, thank you, sir. Looking at Bonos this morning, Bonyo time by eight or nine basis points at the front end of the curve, off the back of this upside surprise. Once you push that through phone exchange, you get a strong a dollar. You're a dollar right now, negative by about half of one percent one seventeen forty two. Talked about the equity response to that not convincing, still positive though by about two tens to one percent. Talk
about the market. Jeff Rosenberg of Blank Crook jumps on a till to us, Jess, welcome to the program. What announced you too? With this one?
This morning.
You know, Jonathan, I haven't heard you say it yet, but you know, this is a great example of where the first reaction is not necessarily the last reaction.
I think we got to rewrite these headlines, everybody.
This is about the private payrolls and private payrolls disappointed to the downside.
Mike McKee just talked about it. The upside.
Surprise it's government and that may be surprising. Federal government was down. That's not surprising. That's DOGE and the cuts. It's state and local that's very high. If it's education, to me, that sort of sounds like there's a lot of education workers coming back into the job market in June. Now that's a seasonal adjustment effect. So the story here is not the headline the market is reacting to that.
Maybe it's the algos.
Let's get the humans back in the room, back into the trading.
And look through this report.
This is a slow down and a little bit disappointment on the private pay rolls side. You know, you look at private services, it's well below sixty eight thousand, it's well below.
The six month average.
And not like earth shattering here, but this is the slowing in the job market.
That we are expecting the market reaction is trading off of the headline. But I think the story here is much.
More about private payrolls, and that is actually a very different headline.
Now we'll see if the market eventually picks up on that at the end of the day.
Jeffy Right, I always say it, So let's read one fifteen minutes. The first move is not always the right move, So let's wait and see what happens now in the day. There you go, Jeff, I got it out.
Jeff.
Let's talk about what we're saying in private payrolls then, and talk about this move in the market. Would you fight what we're seeing high yield to the front end? Would you fight what we're seeing in the FX market a stronger dollar?
Yeah, I mean that's basically My point is that the initial reaction here may be a bit overstated with regards to repricing.
Now, I agree with you.
I think July may have been overstated to begin with, But I think the broader story year is the slowing in the in the payrolls that we've seen for some time.
I think it's actually confirmed by this report.
And then I want to re emphasize what Torsten just said, because I couldn't agree more that it's really going to be about profit margins and what we learned from corporations. I think you use Torston the pig and the python, that's exactly it.
I mean, we're still waiting for the impact to show up. It's been showing.
Up, and you know, the other story around around payrolls is they've been overstated. And so the big question is is there an underlying weakening here that is a little bit greater than what is anticipating.
I think the story here today of.
Headline versus privates is kind of throwing more confusion in there. The revisions were a surprise to the upside people looking for, you know, the revision story to show up. So that was a little bit stronger than expected. But I think it's really going to be about the corporate reaction here, and it's been as we saw in the Jolt Stata, you know, it's been a pretty stagnant, very you know, benign kind of layoff environment.
We have to see whether or not that is maintained.
But Jeff, isn't this kind of conducive to risk assets? And I say this at a time when you have a potentially stimulative bill coming out of Washington, d C, albeit increasing the deficit. But you have sort of steady, if slowing growth at the same time that you have a FED that is poised to cut race in September and potentially again later this year. Isn't that potentially still okay for everything to continue on the status quo.
Well, yes, in some sense that's the case, but it's already well into the price. So you look at like the performance of cyclicals versus defenses.
For example, you.
Know you're seeing you know, expansionary type moves in the face of that. You know you said slowing, but steady identicize more the slowing. You know, most of the economic data is slowing, and that's what the payroll data here is validating. That's not the end of the world, and it's not saying the sky is falling or there's recession, but this is it is consistent with a mid cycle slowdown.
So there's a little bit of a disconnect between kind of what we're seeing in valuations and what we're seeing in terms of the slowdown.
And that doesn't necessarily you know me and you jump in with bold feet and everything's sky is clear.
You got to take a little bit of caution with respect to what's in the price versus what we're seeing in terms of the macro backdrop.
I Jeff appreciate it. Jeff Rosenberg there of black Rock, the message you sent earlier on about two as ago, which one which is basically the dates or the marketer on two different pages exactly.
And this is partly because the market right now is looking to AI, is looking to different advancements, is looking too good enough, and the economy is looking at a very different backdrop where you have very low hiring and very low firing, and that at some point you have to have a meeting of the two.
Stephanie, you heard, Jeff there the distinction headline payrolls versus private payrolls. You talked about it briefly as well. Two different stories kind of to some.
Extent, the government, the strength and government specifically tied education was probably seasonal. Quirk totally agree with that. The fact that private perils are on the seventies shouldn't be that alarming, though, because we know that the steady state pace of perils growth has come down. We should be concerned if it was stronger than that, because we don't have a labor
force to support it. That if it was running notably above one hundred thousand, you're going to start running into problems with inflationary pressures.
Picking up Telson, You've been making the argument the unemployment will climb, you're expecting it to rise in the months to come. What convince is you with that at the moment?
Well, the problem also with this story, with the data today is that the AI story is just not playing out. So that means that we're not seeing people losing their jobs and the onploiner rate going up because of that fact. The expectation from our side was that there was a slowdown in demand that pushes the unemployment rate higher. But the fact that not even the AI story is showing up here and it really is mainly a story of just a simple decline in labor force participation because we
simply have a smaller labor force. And also the added issue here government employment going forward, if we're not also going to hire more workers for ICE, if we're going to hire generally speaking, at a number of different fronts with a huge budget increase, we could also now begin to spend much more time over the coming months on thinking about what's going on in the private sex time employment numbers relative to the government sect.
You changed your mind then, because you've been talking about stackflation for a while. Later this year, well, it challenge to that right.
So on the inflation side, I mean j Powelin CenTra just a few days ago said again that he expects a meaningful increase in inflation. He said that the congressional hearings. He said that also at the press conference. So we still have If the fit chess says I expect a meaningful increase in inflation, that's something we should take very seriously. So to what Jeff point was exactly that I still think that we're waiting to see what was the corporate
response in the second quarter to terriffs and tariffs. Yes, it may seem like it's behind us uncertainty. It certainly looks better. We can begin to talk about now with this report what that means for July the ninth and the deadline next week. But the conclusion is, if we at least at the moment, still have a question mark around how did companies active response to tariffs, I think it's too early to take the champagne bottle out here and say this is.
All over them, Toss and slot. It's definitely roth to the turview. Thank you, don't pop the champagne just yet. I think we're about twelve days away from numbers from JP Morgan when we start to hear from Corporate America about what the plans are for the next several quarters and beyond.
Yeah, July fifteenth, you start to kick off those bank earnings. Then you see whether it's profit margins or whether they're going to just pass it along to consumers less than the banking sector and more than others. I'm sitting here thinking, how do you price in or how do you factor in slow moving changes that are seismic in monthly data?
And I think this is the reason why everyone's head's just kind of spinning, because you have all these stories that make perfect sense and these theories, but the numbers aren't really catching us.
So what do you do? You get to the beach if you're not already left? All right, I think a lot of people are already left, haven't they. If you're still with us, thank you, take us into the car with you. Mu's journey with Bloomberg TV in the background. This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, angiopolitics. You can watch the show live on Bloomberg TV weekday
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Mm hmm