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Terminal and the Bloomberg Business app. Sarah Hunt Alpine Saxon would saying this, just when you think you can make a case for a summer cup, in comes the jobs number and takes it off the table. While that noise we all heard is likely the sound of the door closing on July, the inflation numbers will add or detract the evidence being used by the competing Yes, they should and know they shouldn't.
Cams.
Sarah's with us for more. Sarah good wanted to you good morning, Never mind good news, bad news? What was Friday?
What was that? I think it was mixed news?
Right?
So this is you start to have all these discussions about the differences between this survey and that survey, and can we count on this and what's the birth death model doing. I think it just is indicative of the fact that it's a confusing market. And I think that that is on the labor side certainly, and I think that that's part of what's coming into play as we go forward. We started off this monster rally when the FED basically said at the end of last year, or you know, the October of last year.
We're done raising rates.
There's going to be an easing cycle. People built in a ton of easing and now people are looking at maybe taking that away. And I thought that laur Calvalstina's note this morning was really interesting on you know, if we don't get one at all, you've got some weakness in the equity.
Market, and at least it's got thoughts on that.
But before we get there, if the payrolls report slammed the door shut on July, can Wednesday morning reopen it?
Wednesday morning could reopen it because, as a number of people have noted this morning, it's not just the labor market that the FED is looking at. If the inflation really looks like it's come out down. But to your point earlier, the housing market is not getting any better. Rents are not coming down. They're not looking at a whole lot cheaper, at least not in urban areas. So I think it could because you have that discussion of
are we cutting rates or are we normalizing? And obviously the market's going to take any cut as a start of amazing cycle. But if they can do something like the UCV, they would just basically say we're normalizing, but we're hawkishly normalizing and we're not going to cut don't look at this as a cycle. It could certainly open it, but I don't think to July. I think it opens it later in the year.
On the flip side, if we get a hot as an expected CPI print. You were talking about Lori Cavacina's call this idea that if there are no rate cuts this year, it could cause an eight percent decline in the S and P five hundred. What if Judson Wang comes out later this week and says that he has a new development that's going to build robots that do our dishes and take care of our children. Could that totally change any kind of selloff?
Well, I think that there's already been a bifurcation in what a selloff means. Nvidia has not been part of any of that sell off. You've seen other tech sell off in ways that Nvidia has not. There is there's a secular story there that is difficult to say that whatever is going on with the FED is going to
be important for that piece of technology. But there's also a big future element, and I think that that's what people are starting to recognize, is that you have to really go further into the future to try to monetize this unless you're in video and you're selling them the chips right now. So there's a little bit of a thing going on right there where there's a secular story in one part of technology, but a market story in the rest of technology.
And do you believe that we're currently at rates that could cause the market story to gain legs if we stay here, for example, in the market I'm not just talking about FED funds rate that that could really crimp how people understand forward looking profits for a lot of the companies in the other ninety three four hundred and ninety three.
Interestingly enough, I think it's almost less about profits as what it does to things like the housing market, which is still pretty stagnant, and what it does to people who have been waiting for a chance to refinance. Because the idea was we're going to hike, We're going to go very high, then we're going to come down quickly.
That's not happening. So there's a lot of extent going on in some of the fixed income markets, and I think that whether or not the stresses start to be a part there, I'm less worried about the larger cash rich companies on whether or not higher five percent versus four point seventy five or four fifty makes a big difference. But if you don't get a cycle coming down, there's a lot of areas where I think that there's some tension and refinancing.
So let's get into it. Places you want to be, places you want to avoid.
What are they well, I think you need to be in the part of the technology sector that's quite clearly throwing off buckets of cash and doing really well in almost any environment. I think it's hard to say that that's a place you want to stay away from. The oil picture just got more difficult for energy, and I think that that's still something that is throwing off a lot of cash, throwing off a lot of dividends. You've
got good buybacks there. Retail's very difficult right now. You've seen a bunch of retailers come out and say, you know, your year sales are not doing that well, and we're kind of worried about the next couple of quarters. So there are areas where it's quite clear that there has been a slowing and there are areas where there may be some acceleration, but the overall economic picture is going to weigh on some of those materials and energy kind
of stocks. Some of the industrials are doing quite well and going to continue to do quite well. It's very pick and choose right now.
You hinted at something that the longer rates stay at these levels, there could be some real credit stresses that percolate into something different. Can you give us a sense walk us through what that looks like. How severe could that look? Is that a credit crunch, is it a sudden plunge, or is it just sort of a slow bleed on economic growth? It just becomes more and more evident over time.
So I think that one of the reasons that you've seen, I mean, there has been some equity volatility, but not the kind of volatility you would expect given some of the things that have gone on with interest rates over the last couple of years. Is that we've had all these government programs that came through in the financial crisis that people now look to to say, you know what, if there's a really big problem with interest rates, there's going to be some sort of program to help them.
Right.
So the whole issue with the banks that started last year where the Fed said okay or Treasury said you can go put us collateral at one hundred cents on the dollar, even though rates have gone up and that collateral may not be worth one hundred cents on the dollar. There are a lot of programs to deal with that. So I don't know that it's as much of a crisis as it would have been in past eras where you didn't have a kind of backstop on some of that. So I don't know where that goes. But you've seen
commercial real estate have problems. You've seen even apartment housing. There's certain parts of the real estate market that are really showing some stress, and those are long assets and a lot of those were financed at times where now if you have to refinance anything, you're looking at a much bigger number, and what you paid for that asset is now problematic relative to where interest rates are. So I think that there's a question of what those assets
are worth. But I also feel like there's an underlying feeling that there will be something if it gets really bad.
So, just to sum this all up, and John was asking what you like and what you don't like. You do like big tech and companies that are just generating bucket loads of cash. Consumer cyclicals are a little bit questionable. How cautious are you given that you just don't have visibility at the time when you also are charged with generating alpha.
Well, it's tough because you have a multiple situation that I mean, if you take that, you know to Peter Cheers point at the top ten STOC thirty five percent of the SMP. But you have a multiple issue in some of the other areas, and I think you have to be careful both about what you pay and what everybody's balance. It looks like, right this comes back to cash. Am I generating cash? Because if you're not, and or if you have any refinancing that you have to do, you.
Have to be quite difficult.
It could be quite difficult, So you have to be careful about that. So I think that you just really need to pay attention to valuations in a way that we really haven't had to in sort of a while, because you just now have more vulnerability on what happens with the rest of the financial picture and what happens with interest rates.
We started this hour and we've been talking about politics, and I could see about the corner of my eye not a gelang twenty five.
Have we got a clue? Well, the next year has in store for us? We do not. How difficult is that? As an investor, it is difficult.
But if also like if you take the politics out of it, and you say how much has the regime changed in terms of what that means for the equity markets, as long as you're not radically changing tax policy or you're radically changing a lot of the tariff policy. I mean, there was supposed to be a big switch when Biden took office about what was going to happen with China. It didn't really switch that much. There may be a change in immigration. That may we'll see what that could
happen to the labor markets. If you get a change in administrations. We don't know enough yet to start trying to figure out how what that playbook looks like. And I think that's going to be very difficult to party.
So do you're short in the time horizon, make really tactical calls or just assume that things carry on as usual and there's no big change.
I think we're always looking for a longer picture, right, We're not very short term traders. We're looking for a longer picture. This goes back to am I generating cash? What does my balance you look like? What is the economy going to? Do you look at the macro picture more because the political picture is going to change and we just don't know how that's.
Going to change.
Sarah, this was great. Sarah Hunt of Amplied Saxon would were a bit of a rookie figh frequency economics rights in this well incoming data will ultimately drive rate moves. Our base case remains that the Fed will make the policy stance lesser strict if this yere in response to a slow in growth and inflation backdop Repeta is with us right now, repeta before we run away with this way can start on Wednesday.
We need to start with last Friday.
Do you believe that that job states a Friday morning overstates the strength of the US economy.
The job data show us that this economy is still creating, you know, jobs that are very fast faced. You know, this is something that you know if you look at the underlying trend though, you know, we're not really seeing a breakout either to the upside or downside. But the US economy is still creating a lot of jobs. The it's the household survey where you know, there's a little
bit more of a concern. The unemployment trade ticking up, still very low by historical standards, still you know, in line with where you know the FED marks the longer run rate. But this economy is still very strong. The labor market is very supportive of incomes of households, and we continue to see that.
Numbers if you take them at face value. From Friday, we saw wages increase at a faster paced month of a month so many people expected you say that the data are pointing to little threat of inflation from labor costs.
What gives you that conviction?
You know, if you look at the average hourly earning number, buy on their own. Yes, you know there's an reacceleration. That's you know that we saw in the latest numbers if you look at unit labor costs, and you know these data are extremely volative order to quarter. But if you look at the underlying trend we have seen. If you look at the year and ear changes, we are
seeing a consistent improvement in productivity. And you know, if you look at the revision to the latest numbers on unit labor costs, consist a consistent deceleration at unit labor costs. Also if you look at other numbers, right, I mean we are seeing sort of mixed signals, So I don't want to overreact to one month's number. If our base case is that economic activity is slowing, that demand side of the economy is slowing, especially in the services sector.
If you look at the services spending numbers in the latest two months, that is slower. The problem is that we've seen this before, right, We see a slowdown and then we see rebounds. So what we're looking for is a consistent slowdown. The early numbers are certainly suggesting that, So we're not expecting a reacceleration in economic activity. We've already seen a step down in household spending. It's just a matter of some more evidence. Then the Fed is also looking for the same.
Can you frame how important then CPI is going to be on Wednesday in terms of either supporting your thesis of a gradual slowing but also disinflation versus sort of rejecting.
It, right, I mean the CPI data, We expect them to show what the pc data is showing. Right The inflation is sort of moving sideway. It's really not much of an improvement right now. But what we are seeing is a deceleration, you know, a deflation in goods prices. The services side is where you know, all the problem lies. That's what's boosting prices in you know, the CPI versus PCE. You've got that housing component which is much waightier in the CPI numbers. We do think that that is also
going to come down, but gradually. And we also think that this you know, ex housing component of course, services that is also something that we're watching very carefully. And all indications are if you see services spending you know, sort of moderate, then you would expect that, you know, if as that demand slows, that those price pressures will
also abeate. But if you look at you know, some of the there's conflicting evidence, right, if you look at some of the numbers on travel, on entertainment, you know, those numbers are still there. There's still signaling that there is staying power to the services side. But we do think that we're going to see you know, overcoming a months of moderation. You know. The whole the whole idea is that the US economy continues to grow. The FED has delivered over five hundred and twenty bass points of
tightening without causing a recession. They're going to be careful as they move forward. We think the base case still is that the US economy grows, you know, but it slows down the moreventum de series.
Rabeta appreciate it. Ubita Feruki.
There five frequency economics looking ahead to Wednesday, a FED decision, and the data in the morning. Joining us now is black Rock, Samanda Line. I'm alongside Mark Sandy of Moody's Analystics. Let's set the stage like this. There's two surveys that go into the jobs report, Amanda, you know them, well, two very very different stories.
What was Friday about?
Well, I think just taking a step back, as you note that the overall establishment survey showed really strong momentum. Perhaps that might have been driven by some of the immigration that's coming into the country. The household survey showed a pretty meaningful decline, but that was really in folks that are under the age of twenty five, so it was it was really concentrated. And I think we've spoken
about the bifurcation in the economy in sessions past. I think that's partly what you're seeing there, But in aggregate, as Mike noted, the economy is still chugging along. Even if we expect some deceleration from say we're the Atlanta Fed GDP now is say we end the year at two percent, that's still trend or above trend growth. And I think for us, the shallow rate cutting cycle that we're expecting is really a product of that, because it's not obvious to us that there's urgency for the Fed
to ease. We expect them to normalize, but not really to ease policy.
Mark Zandy two very different surveys. From your perspective, would you put more weight on one versus the other? If you're sitting on the fmsay.
The establishment survey, the survey businesses.
I think that's the better measure Meanche's the job market strong, resilient, creating lots of jobs.
The job growth is very broad based. But you can't dismiss the household survey.
In the increase in the unemployment rate, it does indicate that the liver market is really cooling off.
You look under the hood of.
The job market, you know, hiring is weakening or seeing fewer quits, unfield positions or declining number of ten jobs are declining, hours work or declining. So you know, the job market's okay, it's fine, it's moving forward, but it's cooled off. It's you know, exactly where the Fed would want to see the labor market resilient, creating jobs, but you know, not at a point where it's fading inflationary pressures.
Dialing this weird aspect of the jobs report into what we're expecting in terms of CPI On Wednesday, Mark, are we measuring inflation correctly?
Well, yeah, we're measuring it, but there's all kinds of problems with it. I mean, you know, if Barbara King for the day at the Federal Reserve Board and looking at the inflation measures I'd be focused on something that's called the harmonized inflation measure or harmonized CPI or harmonized PCEE. That's everything except owner's equivalent rent. That's a mouthful bute Or is this implicit cost of owning your own home? That is very problematic. You know, I've learned a lot
about this, you know, digging deep into it. It's very problematic. Even when things are going well. The housing market is well functioning, but as you know, the housing market's a mess. We've got a very severe shortage of affordable housing. We have a surfeit of high end housing, and that's a scrambling thing. So if you really want to get a sense of underlying inflation, my view is you use harmonized by the way, that's what's used in the rest of the world, and if you.
Do, it shows that, well, you know, mission accomplished. We're there.
Inflation's back to the FEDS target has been for quite some time.
Amanda picking up on that point, I'm glad that Mark brought up the housing market. We heard this from Sarah Hunt also that this is actually completely skewing a lot of the measures that we're looking at because the housing market's broken, and this is a key aspect of the US economy and input into inflation.
How much are you watching that and.
Sort of using that as a gauge of credit strength more broadly.
Yeah, that's part of the reason why we like to look at the supercore, which is the services x housing. We're looking at a range of metrics when we're looking at the degree of restriction of monetary policy. I think from a pragmatic view, we're not expecting major changes to the Fed's inflation targets or the reaction function. I think they need to get to their target before they even think about kind of re evaluating whether or not these metrics make sense in.
This new cycle.
But from a credit perspective, really we're not seeing a massive degree of restriction across the credit landscape. We're seeing it in pockets, but we're not seeing it widespread. And so there are certain areas where sure borrowers would love to have some rate relief, But is twenty five or fifty basis points going to move the needle for them? Probably not, And it's really the depth of that cutting
cycle that really matters for risk appetite. I think the good news is that most of these corporates are managing this backdrop in a resilient way. It's largely a function of growth. However, if we have a significant slowdown in growth and we have persistently elevated cost of capital, I think that's where we could become much more cautious.
If the sources of finance shifted. We've talked a little bit about this over time. Does that make it more difficult for the Fed's policy to really get to maybe where it needs to go.
They have shifted in the sense that you've seen private credit player bigger role. But even in the syndicated markets, we're seeing significant demand for leverage loans, both from investors and for borrowers to issue there because the demand is so strong. See a low creation is high. There's a lot of technicals are really important in the credit market.
But I think, yes, the sources of financing have kind of helped out a bit, but in general, the tone is just still very strong, and I think part of that is a function of corporates ended this or entered this period from a position of strength. But again, the growth has allowed corporate credit to absorb the higher cost of capital. I think it really hinges on growth. Even on Friday, the yield backup, we saw buying an ig credit right, We saw investors coming into the market when
we had a fifteen basis point backup in yields. So it shows you the strength of that demand is really there. So it's hard to get incredibly negative on corporate credit spreads because even when it tries to sell off, you see either in spreads or in rates that.
The buying comes in market.
It's really difficult to reconcile the conversation we have on Wall Street with the conversation you hear from FOMC officials around the issue with financial conditions. Can you tell us what is the difference between a federates of officials saying financial conditions are tight and people on Wall Street still saying they're easy.
Well, I think they're right where they need to be. You know, if you put into the equity market or the credit spreads, yeah, it feels like conditions are easy, but if you look at bank lending standards and the banking system in general, not so much. You know, credit is much tougher to come by. So the value of the dollar is strong that that's consistent with tight financial conditions. So if you add it all up and you know, fix it up in the pot. It feels like financial
conditions are right where they need to be. So yeah, you can find things that show that they're easy, some things that show that they're tight, but all in you know, it feels so again, the Fed's got financial conditions exactly where they want them at.
This point, though, Mark, how much is this boiling the frog? And this has been sort of one of the questions with the long and variable lags, that you know, we're sort of doing damage under the hood that's suddenly going to come to the fore. And that was the belief earlier this year, is a belief last year and then people abandoned that is that actually things are just fine
and we can live with rates right here. Do you have a sense of which it is, of where the balance of risks is in terms of holding conditions at this level for just a longer period of time.
Yeah, Well, you know, the most likely scenario is the Fed's going to pull this off. Then kind is going to soft land and they'll start cutting rates here pretty soon, and you know things will settle in.
But I do worry that they're holding on.
Here too long. That's too high for too long. You know, the liver market has signs of weakness. I went through a litany of those. The financial system is fragile, it feels to me. I mean, your curve is inverted. You know, short term rates are still above long term rates. That's not, you know, consistent with a well functioning financial system. That you know, it's a very uncomfortable position to be in
for the system. So that you know, I've got this image in my mind and the system as an engine, and it's shaking tremendously under the stress of these higher rates. And so far, you know, it's held together with a little bit of a duct tape and some help from the Reserve and you know, banking regulars. But for how long? And why why would you do this? I mean, I
think mission accomplished. I mean, full employment, four percent, unemployment rate, inflation's back at target properly measured and has been for a long time. So why take the risk? So yeah, I do worry about that scenario. I don't think it's off the table, and I don't think we can take it off.
The table until the Fed starts lowering interest rates.
He wrote about it in the Washington Post and not it's a feed. It's okay to cut interest rates now. So it goes against mock what we had from Bill Dupley who said the FED thinks it's finding inflation. Think again, how would you convince the cash canories of this world this week at a two time mating stack tomorrow won't be the sort of cheake guys site you're wrung.
This is the way I see the world.
Well, there's nothing that's going to convince anybody except data. So we get that CPI report. You know, the consensus is that the core CPI.
Comes in at point three I mean point two five, I think to the second significant digit, and you need, you know, you need some point twos and point twenty fives here over the next couple three months. And I think then you make believers out of folks on the FED that they.
Can they can cut rights.
By the way, point twenty five you analyze that that's just about three percent, a little bit of three that's on the CPI. You you know, make adjustments because the consumer expenditis reflator is constructed differently. You're you're pretty close to you're within spinning distance of target.
And by the way, we're still you know, I get it.
We're slavishly holding this two percent target on the PCEE deflator. You know, I understand the necessary necessity to do that because of the credibility and everything else. But really, at the end of the day, I mean, it's two percent the right number. I think most people would say, no, it's probably higher than that. So why sacrific the economy to the alter of a two percent inflation target if you don't need to.
We've had a similar argument from mohammadal Arian over the last couple of months as well, Mark Rader Caatsa, Mark Andyder of Moody's Analytics, alongside Black Rocks Amandalina. This is the Bloomberg Surveillance 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.
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